X. Invention

CHAPTER X INVENTION § 1 EVERY range of choice is of necessity a range of choice among knoum options; consequently the range of choice will change as human knowledge is enlarged and increased through invention and discovery. In the matter of trans portation, man originally had no choice but to walk. Afterward, when he learned how to domesticate animals, the use of horses for riding purposes opened a new and more rapid method of locomotion. Still later, owing chiefly to the invention of the wheel, the use of vehicles drawn by horses was introduced, then the construction of rails on which vehicles should run brought a fourth method. And now, with modern technical knowledge, each of the foregoing options is split up into a number of subordinate options; there is the possibility of street transit by sur face, elevated, or subway transportation, and the surface transit may be by railway, trolley, automobile, vehicles of various kinds, bicycle, or the primeval method of walking.

When a new invention thus enlarges the range of choice, the new options introduced may be effectual or ineffectual, - generally the latter. The great majority of patents do not pay the cost of procuring them. The reason for this is that when it comes to exploiting the new option, the rate of expected return on cost is found to be less than the rate of interest. Where the opposite is true the invention is effectual, and leads not only to a change in the range of options, but also to a change in the selection among them. When inventions thus result in a new option-in other words, when it h~ profitable to exploit them, - the effect 198 SEC. 2] INVENrmI 199 ,...... ';17_,_ ··",'time, to reduce the immediate income stream of the community, for the sake of increasing the re moter income-stream. The deferred increase is expected to yield a return on the immediate sacrifice at a rate some times far greater than the rate of interest. But this high rate of return on sacrifice to the exploiter of the newly dis covered method of utilizing capital does not by itself fix the rate of interest at that level. On the contrary, the va~~ property is immediatelyreadjusted~r ~be nIDf. conditions.__ Those who are first to enter the new I field, Of, in the slang of business, "come in on the ground floor," will obtain a return on their investment far greater than the rate of interest. But they will immediately value their property in accordance with its expected productivity, and the rate of interest on loan contracts will be but sli~1y raised. The effe.ct in raising interest comes merely \ "

from ,the shifting forward of the income-stream, which leaves the immediate / income smaller than before, but compensates for this by a still greater increase afterwards. ' For, as we have seen, when an income..stream is of ascending type, the rate of interest, for contracts connecting the periods of scarce income and those of plentiful in come, tends to be high. § 2 But, although the effect of the invention is to tilt social income into the ascending form, the individual who ex ploits the process may, by the methods of borrowing and lending or buying and selling already explained, rectify his distorted income curve. He may, if he desires, restore his income curve to the very same time-shape that it had before his investment in the new enterprise. In this case it will be higher than before, all along the line. Thus, if his original income curve were AB in Figure 24, and the exploitation of the new invention required, for a certain period, a sacrifice tilting his income curve to the 200 THE RATE OF INTEREST [CHAP.X position of the dotted line A"CB", he might, by borrowing, obtain the income A'B,' which has the shape of his original income curve AB, but exceeds it all along the line. Thus, the final effect of the investment is to enlarge the income of the investor. Provided he can borrow against the antici pated returns, not only need he not suffer any temporary PlI Al----~ .13' B X' - --...._-----------------FIG. 24.

reduction in income from the necessity of investing in his new enterprise, but he may even be enabled to enjoy a larger income from the outset. But if those who exploit the new invention make little or no sacrifices in their immediate income, others must; and these are they whose savings meet the cost of exploi tation. Since the invention will more than repay this cost (whether or not to those who incur it does not matter), the effect will be to decrease immediate and increase remote income for society as a whole. Borrowing and lending merely distribute the pressure upon those most willing to bear it; but the effect is necessarily, for society, to cause a temporary depression followed by an ascent of the income-stream, and therefore to increase somewhat the SEC. 3] INVENTION 201 rate of timepreference and the rate of interest. The inven tions of Watt and others, which led to the present railway system, are cases in point. They caused the income-stream of society, from being fairly uniform, to assume a rapidly ascending form. The earliest investors were compelled to make great sacrifices, and afterwards, when the fruits of their labors began to come in, they were often foregone for the sake of yet greater and more remote returns.

Throughout the period of railroad building, social income has been a series of investment, return, and partial re investment, and a curve which would depict· .the actual income enjoyed would show it to be sharply ascending. Numerous. other inventions have cooperated to this end. A whole series of new appliances have followed the discovery of el~ctr!city. The eleva~or. and the s~eel skeleton;! ..... I have revolutlOll1Zedthe art of bmldmg. IIrw~(A-L) ,I In consequence of the ascending t,jme-sba,pe of the in-t-~ ,~ come-stream, the rate of interest has been kept up. It is ~ ~ . not sufficient, therefore, to. say with Rae, that the high rates If.. .. +eI I of return on sacrifice offered by the new inventions have ~7) I directly raised the rate of interest. These. very. high re- .I ~ -:t~ 1 I . ~v" I turns were secured only by a few. They are out of propor-I tion to the rates of interest ruling on loans, or the rates of interest realized to the ordinary investor. These latter are the rates of interest in the true sense of the word, and they were raised for the ordinary investor, because he was called to the aid of those who were in a position to secure the exceptionally high returns, and had, therefore, temporarily, to sacrificeincome. The result is a general rise in the rate of interest, and in consequence a revaluation of investment securities, and, in fact, of all capital. The value of capital sinks as the rate of interest rises, assuming that the value of the income from the capital remains the same.

§ 3 This revaluation applies also to the very capital in which the new invention or discovery is embodied. If it is found 202 THE RATE OF INTEREST [CHAP. X that a million dollars invested m. newly discovered gold mine will result in a yield of ten millions a year, that "mine will no longer sell for its cost, but for a sum far above it. It is the relation of the income to the new value of the mine, and not its relation to the old value, which will reflect the true rate of interest. So, also, a new machine may at first return an enormous rate of profit on its cost, - far higher than the rate of interest; but soon the price of the machine in relation to the value of its services will be adjusted to the rate of interest. The same principle holds of all new enterprises. The original investors in The Bell Telephone Company realized returns far beyond the interest on their investment; but the present investor pays a price for Bell Telephone stock commensurate with its dividends.

The effect of a new invention on the rate of interest is therefore registered, not by the original rate of return on sacrifice to the lucky "insiders," but by the rate realized to the investor who comes in later and invests at market prices. These prices, in the case of successful inventions, will be far in excess of the cost. New devices will also cause a revaluation of the older ones which they have displaced, but in this case the new values are lower than before. The buzz saw rendered nearly valueless the mill plants equipped in the older methods, and the band saw had the same effect with reference to the buzz saw. Hand looms and presses became junk or curi osities after the advent of steam looms and presses, and the first forms of the latter have in turn been superseded. The reasons for these reductions in value are simple. Each new process produces a larger supply of the particular kind of service rendered. The price of this service -e.g.

sawing or printing - is reduced, and consequently the capitalized value of the given amount of such service which can be expected from the older devices is reduced, and often so far reduced as to make the reproduction or even the repair of these older instruments wholly unprofitable.

SlGo.4] INVENTION § 4 203 The subject of the economiceffectof invention,and par ticularly. of its effect upon ,the rate of interest, has been' fully treated by John Rae, and to him the reader of this book is referred for extended study.l There is one point, however, which Rae apparently did not observe, certainly did not emphasize, and that is the temporarynature of the effect of invention ·in raising the rate of interest. The effect in raising interest lasts only so long as·lthe result ing income-stream is sufficiently distorted in time-shape to be of a decidedly ascending type. This period may be calledthe period of investment or exploitation, during which society is sacrificing present income, or, as it is inaccurately called, "investing capital." Society, instead of confining its productive energies to the old channels and obtaining a relatively immediate return in enjoyable income, as by producing food products, clothing, etc., directs its labor to great engineering enterprises such as constructing tunnels, subways, water works, and irrigation systems, that is, to instruments which cannot begin to contribute a return in inenjoyable income for many years. In contemplation, future income, during this period, is relatively plentiful, and in consequence of these "great expectations," the rate of interest will be high.

Later, however, there will come a time when the income stream ceases to ascend, when all the necessary investment has been completed, when no further exploitation is possible, and when it is only necessary to keep up the newly con structed capital at a constant level. When this period is reached, the after effect of the. invention will be felt. Society will then have a larger income-stream than before, but no longer an ascending one. A mere increase in the size of the income-stream, while its shape remains constant, has the effect, as we have seen, not of increasing, but of somewhat decreasing the rate of timepreference. ConI The SociologicalTheory 01 Capital.

204 THE RATE OF INTEREST [CHAP. X sequently the after effect of all inventions and discoveries is not to increase but to decrease the rate of interest. Thus, the railway inventions have led to a half century of invest ment in railways, during which the income-stream of society has been constantly on the increase. To~day, however, the limit of steam railway investment has been nearly reached in some places, and in others the rapidity of investment is perceptibly slackened. Railroads have been a~: . :.' . ,: outlet for the investment of savings, and have tended to supply for them a good return. As the necessity for new railroads becomes less, this outlet diminishes, and the rate of interest falls. But while the after effect of an old invention is to reduce the rate of interest, it may, of course, be true that new in ventions will be made rapidly enough to neutralize this tendency. It is only when there is a cessation in the world's output of new inventions that the rate of interest is thus apt to fall back, but whenever invention is active it rises.

It thus rises and falls according as the introduction or the exploitation of inventions is active or inactive. The same principles apply not only to invention in the narrower mechanical sense, but also to scientific and geo graphical discoveries. The unearthing of a new bed of ore, as in Cripple Creek, Alaska, or South Mrica, has as its <-!- ,~mediate effect the necessity for a considerable depression ~:I..~.. the immediate income-stream of those who desire to ?wb~ Itl exploit the new territory, but offers the prospect of very ~ .fl ~_"A great increase in the future; consequently, the rate of in ~ ,. ~d. ~_ terest in such instances tends to be very high. Mter the fr'"""£.1,p. period of exploitation, however, the income curve ceases ~-£: to rise and begins to fall. Thereupon the rate of preference ~'~ for present over future income assumes the opposite ten dency, and the rate of interest declines.

§ 5 It has not been the purpose of this chapter to investigate the general effect of inventions, but merely their effect on SEC. 5] INVENTION 205 the rate of interest. Before leaving the subject, however, it'should at least be stated that invention is the basis of progress in civilization. The inventions of fire, the alpha bet, and the means of utilizing power - first of animals, then, of wind and water, then of steam and electricity and their manifold applications, especially to transportation and communication, have made it possible for the earth to support its increasing population, and deferred the Malthusian pressure upon the means of subsistence; they have made possible the stable existence of great political units such as the United States; and they have given op portunity for the presentation, diffusion, and increase of knowledge in all its forms of art, literature, and science.

And thus it happens that invention is self-perpetuating. For not only has science sprung from inventions such as the printing press, the telegraph, and specific scientific instru ments for observation, like microscopes and telescopes, or for measuremen ts,like chronographs, balances, and microme ters; but modern science is now in turn yielding, new inventions. Helmholz's researches in sound led to the telephone; Maxwell's and Hertz's researches on ethereal waves led to wireless telegraphy. Nations like the United States and Germany will lead in civilization by taking the greatest advantage of this self-propagating principle of invention; and nations like China, which give it the'least attention, will lag behind. The conditions for the most rapid multiplication of in ventions are: (1) personal efficiency,dependent on breeding, hygienic habits, and the education (both general and tech nical) of the faculties; and for this the Greek motto" a sane mind in a sane body" is in point; wherefore Galton seems to show that in Greece genius was far more com mon than in modern civilization; (2) the ease of diffusion of knowledge; (3) the size of the population within which the diffusion occurs, -the larger the population the greater being the number of inventive geniuses, the greater their incentive, and the wider their sphere of influence; (4) the 206 THE RATE OF INTEREST [CUAP.X encouragement of invention through patent protection, and more especially through the early discovery and ap proval of genius. Inventors are at once the rarest and most precious flower of the country. Too often they are crushed by the obstacles of poverty, prejudice, or ridicule.

While this is less so to-day than in the days of Roger Bacon or Galileo, it still requires far too much time for the Edisons or the Burbanks to get their start. The decades in which these rare brains are doing their wonderful work are at most few, and it is worth many millions of money for their countrymen to set them to work early. As Huxley says, it should be the business of any educational system to seek out the genius and train him for the service of his fellows; for whether he will or not, the inventor cannot keep the benefits of his invention to himself. In fact, it is seldom that he can get even a small share of the benefits. The citizens of the world at large are the beneficiaries, and being themselves not sufficiently clever to invent, they should at least be sufficiently alive to their own in.. terest to subsidize the one man in a million who can.