This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 10. Duplicate agents and slower processes. Another effect must show itself in the technical methods of production. The time-price signals that there are investors ready to wait longer for the same income from a given investment. There are investors willing to divert more present goods into future uses, and to impart to future uses still more of futurity. This adjustment at once begins in the economies of all individuals where time-preference is in accord with the new rate. One mode of adjusting productive processes is to multiply the tools and agents already used. Duplicates are placed wherever it will be most convenient. Where formerly the use of a second agent did not justify its cost of making, now it can be made to earn the smaller income2 needed to balance its capital value.
Another mode is to let the old processes go on a little longer, with no appreciable change in the form of equipment, where this will bring an increase either in quantity or value of product and therefore enough more income to repay the larger period of waiting for its arrival. Unless other possible processes and kinds of tools and machines are already known (have been discovered and invented) duplicating and slow-ing-up are the only two ways of adjusting production to a lower time-price. And nowhere and in no time before the modern period of science and invention (say 1700 a.d.) does there seem to have been any crowd of unemployed processes, waiting, so to speak, just outside the gates of industry. So it might happen that a large fall in the interest rate would not be quickly followed by any noticeable change in the external forms of production, either the machines or the methods. Such a change had to await the slow process of discovery and invention, to occupy this new territory which abstinence had opened up for settlement. Great changes came about by slow adaptations and by accretions of new ideas. The simple truth must not be forgotten that until a better technical process becomes known it can not be adopted even if the rate of interest were to become zero.
2 This is a net income, of course. The new tool yielding less urgent (marginal) uses than the first one, yet requires some shelter and repairs, and has as great or greater liability to rust, decay, go out of style, etc. With the multiplication of like tools, the added units are less often used, and for less urgent purposes, yet the cost of repairs and maintenance grows greater, leaving a smaller net income with each increasing agent (see above, under usance). The more duplicate agents one has, the greater the forethought, punctuality, and watchfulness required to keep them in good condition. If the farmer has but one hoe and one ax, they rarely rust; if a woman has but one dress it can not be eaten by moths. The point of best economic equilibrium, however, is shifted by the change of time-price here under consideration.
§ 11. Lower interest rate stimulating invention. But on the other hand, a fall in the rate of interest (and the conditions of saving it reflects) must give a new stimulus to invention by opening up a new zone of waiting time, or in other words, by embodying a definite offer of investors to back any new method (whether more indirect or not) that can be found by experience to lie between the old standard and the new standard of waiting time. The lower the rate of interest, the greater the change in waiting time that corresponds with a further fall of 1 per cent. When interest falls from 10 per cent to 9, it means a lengthening of the waiting time by only 11/9 years; but when interest falls from 5 to 4, it means a lengthening of the waiting time by full 5 years. With each further fall of 1 per cent in the rate of interest the extension of waiting time goes on at an accelerating rate. At an interest rate of 1 per cent the waiting time would be a hundred years, and at an interest rate of zero (only abstractly conceivable) the waiting time must be infinity. If the interest rate were to fall to 3 and again to 2 per cent it would bring within the range of the economic an almost inconceivable number of technical processes which can not now be used. Viewed in this light, the remarkable outburst of practical invention and of new industrial processes in western Europe (particularly in England) in the eighteenth century, seems to have been partly due to a lower rate of interest (as compared with former centuries) following the more settled conditions, the growth of commerce, of banks, and of more regular investment mar-kets in the financial centers.
This development of invention has been in turn greatly aided by the progress of the pure sciences since the seventeenth century, brought about by investigators in universities and outside, who have continued to heap up a great mass of knowledge of nature from which the practical arts can increasingly draw. To-day it is a matter of common knowledge that there are many better technical ways of doing things in every craft, ways which "do not pay" under present conditions. Many of these lie just outside the border of practical, profitable utilization. A fall in the rate of interest now makes possible the adoption of many technical processes that were formerly too slow in yielding the income on the investment. Partly this means the making of new and better instruments which call for a larger initial outlay to secure a certain income, partly it means the choice of chemical, botanical, mechanical, electrical, or other methods that yield larger results by tying up the equipment for a longer time.3
3 This change is often said to be one "to more time-consuming processes." This phrase is easily misleading. It can not properly refer to the length of the technical process itself, but merely to what we here call the waiting-time for a certain income to mature on a certain investment. One technical process may require only a few days from the isting factors - labor and material resources - are taken up, put into use, before these are reached. The limit is set by the existing rate of time-price, reflected in the rate of interest. As the rate of time-preference in the individual's choice, so the rate of interest in the community, draws a line among the various technical processes analogous to the isothermal line, marking off those that yield incomes at a lower from those that yield at a higher time-rate.5
§ 12. Time-price determining the selection of processes. Take now a situation where there is a prevailing interest rate with its corresponding equilibrium of investment, and consider what is the effect of the discovery of a new method of production known to every one,* and of the invention of a machine that calls for a smaller investment (even after paying royalty to the inventor). Among many new methods and new machines, all degrees of advantage will be found in all varieties and combinations, ranging from those that require actually less equipment, use less material, require less labor for their operation, shorten the time for the process, reduce the number of technical steps, increase the quantity, and improve the quality of the product, to the opposite in each of these respects. Regarding the change from the old to these new methods and machines, two questions occur: (1) What determines where the line is drawn in making these changes from old to new methods? (2) What is the effect of the new methods upon the existing degree of abstinence?
So far as this change is rationally and wisely made, any new method will be adopted that will yield an income falling within the waiting-zone corresponding with the interest rate. Of course all of the extremely advantageous kinds just mentioned would be adopted, and others up to the limit of paying investment. Beyond that lie many processes which are technically possible but not economically possible. All of the ex-making of the first machine to the finishing of the product, it may permit a turnover several times a year (the making of new machines to be rapidly worn out) and yet "not pay," because it is a slow income-yielding process. Whereas a machine, that lasts and a process that goes on for years until the product is ready, may yield income at such a rate that it is economic when interest is very high. (See ch. 21 on the relation of technic to time.) If the term time-consuming be used at all it must be taken in an income-ripening sense, not in a technically productive sense.
* Trade secrets, patents, and temporary monopoly privileges, where the better process is limited to one enterprise or to a few, affect individual profits at first rather than the general economic level.