25: Static Standards in a Dynamic Society
Any quantitative economic data pertains to the past, and reflects the moment in time in which it was gathered. Meanwhile, economics is dynamic. This is easily witnessed in any active market: the price of goods today is different than it was yesterday, and the price this afternoon is different than it was this morning, as "the price" is the amount agreed upon by the last buyer and seller. The amount of labor or material required to build something last year, or last month, may have been reduced by efficiency improvements.
In times where progress is slow or nonexistent, analyses of the past may have been sufficient to predict the future: market conditions and production technology changed rather little from one day to the next, and while there were variances (such as a drought or a bumper crop) they were generally temporary and conditions returned to normal afterward. In the author's time, as in our own, change was fast and furious and the economic conclusions based on historical data were subject to wider variances and higher risk. It was once assumed that values could be defined as "natural" or "normal," and that the national economy could be protected from the unusual forces that would cause it to sway from its center of gravity. This is clearly a fallacious belief.
There is no static society, nor a static economy. Economists cannot proceed with confidence on the premise that things will be the same in future as they have been in the past. Planning for the future means predicting uncertainties - identifying what changes might occur and what their impact might be on the market. It is not impossible to make accurate predictions, just exceedingly difficult and risky.
There are five general changes that are continually going on:
- Population is changing - Most often, population increases over time
- Capital is changing - Most often, it is accumulating
- Human wants are changing - As capital accumulates, more luxuries are wanted, of more diverse and refined kinds
- Methods of production are changing - They are becoming more efficient
- The modes of organizing labor and capital are changing - They are being applied in different proportions
Not of these changes is unnatural, artificial, or inherently threatening. None of them are being inflicted on some men by the will of others. A static market, however, is unnatural and must be designed, constructed, supported, and propped up - generally by force. And ultimately, resisting change in the economy is as futile as resisting change in the ecology.
He carries on a bit about the absurdity of the desire for static markets. A single farmer cannot hold his own production in place. If he is afflicted with a drought, he cannot make his farm produce as much as it had in the previous season. If he is blessed with a bounty, he may throw the "excess" away - though none are inclined to do so as it profits the produce and consumer alike. And if this cannot be done for a single farm, how foolish the notion that declaration of law and threat of force may do so for an entire nation.
In terms of economics, all five of those changes (and others not listed) have the same net effects: more or less of something is provided with more or less cost/effort. It is the amount that is provided and the price at which it is sold that determines how much wealth is generated to be distributed among the factors of production, in comparison to the amount that is desired and the amount that will be paid for it - which is to say, it is supply sand demand. The value of things, the wages of labor, and the interest of capital are all dependent on these factors as well - but generally in a way that is derived from the supply and demand in the market.
Clark mentions the use of the scientific method in economic studies - to seek situations that are identical except for a change in one factor in order to form a hypothesis about the effect of the single differentiating factor. This is not realistic, as many things are changing in a real-world situation and multiple factors influence one another. It will not therefore yield "laws" of economics, but only principles - we cannot say decisively that "this causes that" with mathematical precision but merely "this tends to influence that" in a qualitative way. We can make predictive models that are not flawlessly accurate, but which are generally indicative of the direction in which an economy will move if certain changes take place.
When a dynamic change affects multiple factors, it may do so synchronously or asynchronously. An increase in the price of a good creates an immediate increase in income for the firm - the entrepreneur will reap a good profit, other entrepreneurs hear of this and wish to enter the market, the demand for supplies and labor increases which improves their profits, and so on. And then, there is the opposite reaction when many new producers enter the next market cycle, the price of the good falls, the profit to entrepreneurs increases, some entrepreneurs exit the market, the demand for supplies and labor decreases and their profits fall, and so on. And this is considering but a single good with a discrete and defined market cycle. Invention of more efficient production technology has a similar effect, as does any change in a dynamic market.
There is also a much broader impact to these changes - as increased spending on one good decreases spending on others. The profits of entrepreneurs, firms, and workers are spent in the market, increasing the demand of other goods, increasing their profits, increasing their demand for labor and supplies, increasing the profits of their workers and suppliers. A seemingly simple change in the market for a single product ripples to affect all producers and consumers of all products.
There is then a mention of intervals. Classical economists largely considered agricultural production, which is done in its season - the crop is sown at a given time and harvested at another and the length of time could not be affected by labor or capital - and even non-agricultural production was often dependent on raw materials from that sector. The present age of industrialization and global distribution provides a constant supply of goods to the market and materials to manufacturers. There is no set time for production to start or for goods to be delivered to the market, so a productive operation can start, stop, or change at any time. And in the present age, the methods of industry are rapidly changing, with innovations that tread upon one another's heels. The tools and process are in constant change.
He chases after a metaphor for a bit, comparing the world economy to the sea. If nothing else changes, drawing a bucket of water from the shoreline in England would lower the sea level on the cost of China (and all over the world) because it's all connected to the same large body of water. Carry the water into a house and pour it down a drain that empties into a river, then to the sea, and the sea level is restored. And with millions of people taking and returning water the world over, the sea level remains fairly stable. And over thousands of years, there is no more or less water in the world for all this drawing and pouring.
(EN: It's rather an interesting metaphor, but there is the potential for misunderstanding: economic activity consists in transforming things into other things, and so it follows that there is no more matter on the planet as a result of economic activity - but there is greater wealth because the material has been transformed into useful forms. A house built two hundred years ago still stands to provide shelter, hence value that is preserved for as long as it stands.)
In the dynamic view of economics, capital is always in motion. The static perspective may note that there is a mass of capital in the hands of the entrepreneur when a product has been sold, but the dynamic perspective recognizes that this capital will be returned to the system - paid to laborers, suppliers, investors, and so on, and then each party who receives capital will spend it on other things. Some portion of the profit from the sale of a shirt is paid to the tailor, who gives it to the butcher when he buys his evening meal, who gives it to the herdsman when he buys livestock for the next day's slaughter, who gives it to the farmer to buy feed for his herd, and so on.
Capital is only temporarily in the hands of any specific individual, and the measurement of that capital in that moment in time is less meaningful than the observation of its flow through various parties. In the long run, no-one keeps their capital. Money hoarded will eventually be spent. Value is only lost to society when unused goods lose their usefulness - food spoils, something useful is broken or wears out, goods are lost in a fire, etc.
Dynamic theory also recognizes the evolution of wealth distribution: where there is a gain in the overall revenue of a given product, it is kept by the entrepreneur - and this premium is often necessary to entice him to take the risk of entering into a new venture. If the situation persists, the premium is distributed proportionately to the contributors of capital and labor to maintain their participation. So one may say that labors are not getting their fair share today, their wages will increase over time. Once cannot force evolution without inflicting damage.
However, many of the observations and principles of static law are entirely operative under dynamic conditions. The static theorist may speculate that an increase of working population will lead to a decrease in wages, and they dynamic theorist will observe that this occurs - but will also consider that lowering wages lowers the cost of production, that more population means more consumers, etc. It is also impossible for there to be a sudden increase in the working population of one market without a corresponding decrease in the working population of another market, and the corresponding effects on wages, prices, and demand in the market from which the "new" workers departed.
He then considers that rapid movements of capital are far more common - as it is much easier to move a large amount of money from one place to another than it is to move a large number of people. Just as with labor, there is a ripple effect as new capital in a market increases productivity and lowers the interest rate, increases the quantity of goods and lowers prices, etc. Likewise, the influx of capital to one market generally means the removal of capital from another (or from a previous time in the same market).
Inventions and innovations function in a similar manner, in that they enable more goods to be produced with equal or less labor and capital. While they do not have a direct counter-effect (making one producer more efficient does not make other producers less efficient, though it may run them out of business in time), they do tend to negate the market for older technologies (the emergence of the tractor ended the market for the horse-drawn plow).
Clark also mentions "the creation of a new want," which itself is a problematic concept: consumers may choose a different product to serve their needs (abandoning an old product), or they may choose a different fashion of clothing (purchasing from one tailor instead of another). This behavior shifts revenue from one provider to another (unless the same firm creates the substituted good) much in the same way as it would shift revenue when the same product were purchased from a different supplier.
It becomes a bit more vague in the contrast between "new wants" and "old wants" from the consumer's perspective. However, consumers have more wants than budget and have to choose among them. Their basic necessities are generally consistent (though the customer may choose beef rather than pork for nourishment), but their conveniences and luxuries can be highly inconsistent (a person may be entertained by a musical performance one month, a play the next, an a circus the next). And again, the revenue shifts from one supplier to another, hence the demand for the factors of production (labor and capital) are also changed.
In all, "dynamic influences largely neutralize each other" over time. Consumers change from one product to another , labor and capital move from one firm or industry to another, and even a dramatic change to the quantity of labor and capital balance out. It is like a slash agitates the surface of a pond but for a time until it returns to a placid state or, to return to the earlier metaphor, the movement of water from one lake to another does not increase or decrease the amount of water in the world. It is the limited perspective of considering one thing at one point in time that makes it seem that anything is amiss.
Most changes in the marketplace take place more gradually and over a longer period of time: a new discovery takes time to make its way into production, and even a change in consumer tastes begins slowly with a few before spreading to the larger population. Producers are attuned to the changes, or if they are not their failure to predict and adjust harms their own returns - but because change spreads slowly the harm is not sudden or catastrophic.
There is a brief and oblique consideration of when change is pushed through the market (suppliers provide something the market was not aware of and it catches on) or pulled through the market (customers demand something suppliers had not predicted and vendors are compelled to provide it), which ultimately ends with the notion that it really doesn't matter where the change originates. Changes that enable producers to furnish the market with an increased supply of a good does not necessarily guarantee that it will be purchased. The general tendency of most products is that more will be demanded at a lower price, but only to a certain degree and bounded by a definite limit. (EN: The market for salt us often used as an example - it is already very cheap, and cheapening it further does not induce customers to purchase more of it.)
There is some consideration of whether there exists a "standard" state of the world economy, as this is very often implied when the effect of changes are considered. For example, it is observed that a producer who discovers a new technique or technology gains a brief advantage over his competitors, until they also discover and implement this new technique, at which point the playing field is leveled. But the market does not return to "normal" as the new technique allows for an increased quantity of the good to be manufactured, decreasing its price, and even when supply balances out against demand, there will be a need for less labor to produce the new amount of goods. Those laborers shed by one industry find occupations in another, increasing the supply of other goods, and so on. Ultimately there is no standard or normal state for an economy, as it is forever dynamic and cannot be held still.