was the labyrinth for which the earlier economist held, so he thought,
the thread. No matter how dark the passage, he still clung tight to it.
And his thread was his "fundamental equation of value" whereby each
thing and everything is sold (or tends to be sold) under free
competition for exactly its cost of production. There it was; as simple
as A. B. C.; making the cost of everything proportional to the cost of
everything else, and in itself natural and just; explaining and
justifying the variations of wages and salaries on what seems a stern
basis of fact. Here is your selling price as a starting point. Given
that, you can see at once the reason for the wages paid and the full
measure of the payment. To pay more is impossible. To pay less is to
invite a competition that will force the payment of more. Or take, if
you like, the wages as the starting point: there you are
again,--simplicity itself: the selling price will exactly and nicely
correspond to cost. True, a part of the cost concerned will be
represented not by wages, but by cost of materials; but these, on
analysis, dissolve into past wages. Hence the whole process and its
explanation revolves around this simple fundamental equation that
selling value equals the cost of production.
This was the central part of the economic structure. It was the keystone
of the arch. If it holds, all holds. Knock it out and the whole edifice
falls into fragments.
A technical student of the schools would digress here, to the great
confusion of the reader, into a discussion of the controversy in the
economic cloister between the rival schools of economists as to whether
cost governs value or value governs cost. The point needs no discussion
here, but just such fleeting passing mention as may indicate that the
writer is well and wearily conversant with it.
The fundamental equation of the economist, then, is that the value of
everything is proportionate to its cost. It requires no little hardihood
to say that this proposition is a fallacy. It lays one open at once,
most illogically, to the charge of being a socialist. In sober truth it
might as well lay one open to the charge of being an ornithologist. I
will not, therefore, say that the proposition that the value of
everything equals the cost of production is false. I will say that it is
_true_; in fact, that is just as true as that two and two make four:
exactly as true as that, but let it be noted most profoundly, _only as
true as that_. In other words, it is a truism, mere equation in terms,
telling nothing whatever. When I say that two and two make four I find,
after deep thought, that I have really said _nothing_, or nothing that
was not already said at the moment I defined two and defined four. The
new statement that two and two make four adds nothing. So with the
majestic equation of the cost of production. It means, as far as social
application goes, as far as any moral significance or bearing on social
reform and the social outlook goes, _absolutely nothing_. It is not in
itself fallacious; how could it be? But all the social inferences drawn
from it are absolute, complete and malicious fallacies.
Any socialist who says this, is quite right. Where he goes wrong is when
he tries to build up as truth a set of inferences more fallacious and
more malicious still.
But the central economic doctrine of cost can not be shaken by mere
denunciation. Let us examine it and see what is the matter with it. We
restate the equation.
_Under perfectly free competition the value or selling price of
everything equals, or is perpetually tending to equal, the cost of its
production._ This is the proposition itself, and the inferences derived
from it are that there is a "natural price" of everything, and that all
"natural prices" are proportionate to cost and to one another; that all
wages, apart from temporary fluctuations, are derived from, and limited
by, the natural prices paid for the things made: that all payments for
the use of capital (interest) are similarly derived and similarly
limited; and that consequently the whole economic arrangement, by giving
to each person exactly and precisely the fruit of his own labor,
conforms exactly to social justice.
Now the trouble with the main proposition just quoted is that each side
of the equation is used as the measure of the other. In order to show
what natural price is, we add up all the wages that have been paid, and
declare that to be the cost and then say that the cost governs the
price. Then if we are asked why are wages what they are, we turn the
argument backward and say that since the selling price is so and so the
wages that can be paid out of it only amount to such and such. This
explains nothing. It is a mere argument in a circle. It is as if one
tried to explain why one blade of a pair of scissors is four inches long
by saying that it has to be the same length as the other. This is quite
true of either blade if one takes the length of the other for granted,
but as applied to the explanation of the length of the scissors it is
worse than meaningless.
This reasoning may seem to many persons mere casuistry, mere sophistical
juggling with words. After all, they say, there is such a thing as
relative cost, relative difficulty of making things, a difference which
rests upon a physical basis. To make one thing requires a lot of labor
and trouble and much skill: to make another thing requires very little
labor and no skill out of the common. Here then is your basis of value,
obvious and beyond argument. A primitive savage makes a bow and arrow in
a day: it takes him a fortnight to make a bark canoe. On that fact rests
the exchange value between the two. The relative quantity of labor
embodied in each object is the basis of its value.
This line of reasoning has a very convincing sound. It appears in
nearly every book on economic theory from Adam Smith and Ricardo till
to-day. "Labor alone," wrote Smith, "never varying in its own value is
above the ultimate and real standard by which the value of all
commodities can at all times and places be estimated and compared."
But the idea that _quantity of labor governs_ value will not stand
examination for a moment. What is _quantity_ of labor and how is it
measured? As long as we draw our illustrations from primitive life where
one man's work is much the same as another's and where all operations
are simple, we seem easily able to measure and compare. One day is the
same as another and one man about as capable as his fellow. But in the
complexity of modern industrial life such a calculation no longer
applies: the differences of skill, of native ingenuity, and technical
preparation become enormous. The hour's work of a common laborer is not
the same thing as the hour's work of a watchmaker mending a watch, or of
an engineer directing the building of a bridge, or of an architect
drawing a plan. There is no way of reducing these hours to a common
basis. We may think, if we like, that the quantity of labor _ought_ to
be the basis of value and exchange. Such is always the dream of the
socialist. But on a closer view it is shattered like any other dream.
For we have, alas, no means of finding out what the quantity of labor is
and how it can be measured. We cannot measure it in terms of time. We
have no calculus for comparing relative amounts of skill and energy. We
can not measure it by the amount of its contribution to the product, for
that is the very matter that we want to discover.
What the economist does is to slip out of the difficulty altogether by
begging the whole question. He deliberately measures the quantity of
labor _by what is paid for it_. Skilled labor is worth, let us say,
three times as much as common labor; and brain work, speaking broadly,
is worth several times as much again. Hence by adding up all the wages
and salaries paid we get something that seems to indicate the total
quantity of labor, measured not simply in time, but with an allowance
for skill and technical competency. By describing this allowance as a
coefficient we can give our statement a false air of mathematical
certainty and so muddle up the essential question that the truth is lost
from sight like a pea under a thimble. Now you see it and now you don't.
The thing is, in fact, a mere piece of intellectual conjuring. The
conjurer has slipped the phrase, "quantity of labor," up his sleeve, and
when it reappears it has turned into "the expense of hiring labor." This
is a quite different thing. But as both conceptions are related somehow
to the idea of cost, the substitution is never discovered.
On this false basis a vast structure is erected. All prices, provided
that competition is free, are made to appear as the necessary result of
natural forces. They are "natural" or "normal" prices. All wages are
explained, and low wages are exonerated, on what seems to be an
undeniable ground of fact. They are what they are. You may wish them
otherwise, but they are not. As a philanthropist, you may feel sorry
that a humble laborer should work through a long day to receive two
dollars, but as an economist you console yourself with the reflection
that that is all he produces. You may at times, as a sentimentalist,
wonder whether the vast sums drawn as interest on capital are consistent
with social fairness; but if it is shown that interest is simply the
"natural price" of capital representing the actual "productive power" of
the capital, there is nothing further to say. You may have similar
qualms over rent and the rightness and wrongness of it. The enormous
"unearned increment" that accrues for the fortunate owner of land who
toils not neither spins to obtain it, may seem difficult of
justification. But after all, land is only one particular case of
ownership under the one and the same system. The rent for which the
owner can lease it, emerges simply as a consequence of the existing
state of wages and prices. High rent, says the economist, does not make
big prices: it merely follows as a consequence or result of them. Dear
bread is not caused by the high rents paid by tenant farmers for the
land: the train of cause and effect runs in the contrary direction. And
the selling price of land is merely a consequence of its rental value, a
simple case of capitalization of annual return into a present sum. City
land, though it looks different from farm land, is seen in the light of
this same analysis, to earn its rent in just the same way. The high rent
of a Broadway store, says the economist, does not add a single cent to
the price of the things sold in it. It is because prices are what they
are that the rent is and can be paid. Hence on examination the same
canon of social justice that covers and explains prices, wages, and
interest applies with perfect propriety to rent.
Or finally, to take the strongest case of all, one may, as a citizen,
feel apprehension at times at the colossal fortune of a Carnegie or a
Rockefeller. For it does seem passing strange that one human being
should control as property the mass of coin, goods, houses, factories,
land and mines, represented by a billion dollars; stranger still that at
his death he should write upon a piece of paper his commands as to what
his surviving fellow creatures are to do with it. But if it can be
shown to be true that Mr. Rockefeller "made" his fortune in the same
sense that a man makes a log house by felling trees and putting them one
upon another, then the fortune belongs to Mr. Rockefeller in the same
way as the log house belongs to the pioneer. And if the social
inferences that are drawn from the theory of natural liberty and natural
value are correct, the millionaire and the landlord, the plutocrat and
the pioneer, the wage earner and the capitalist, have each all the right
to do what he will with his own. For every man in this just world gets
what is coming to him. He gets what he is worth, and he is worth what he
gets.
But if one knocks out the keystone of the arch in the form of a
proposition that natural value conforms to the cost of production, then
the whole edifice collapses and must be set up again, upon another plan
and on another foundation, stone by stone.
_IV.--Work and Wages_
WAGES and prices, then, if the argument recited in the preceding chapter
of this series holds good, do not under free competition tend towards
social justice. It is not true that every man gets what he produces. It
is not true that enormous salaries represent enormous productive
services and that humble wages correspond to a humble contribution to
the welfare of society. Prices, wages, salaries, interest, rent and
profits do not, if left to themselves, follow the simple law of natural
justice. To think so is an idle dream, the dream of the quietist who may
slumber too long and be roused to a rude awakening or perish, perhaps,
in his sleep. His dream is not so dangerous as the contrasted dream of
the socialist, now threatening to walk abroad in his sleep, but both in
their degree are dreams and nothing more.
The real truth is that prices and wages and all the various payments
from hand to hand in industrial society, are the outcome of a complex of
competing forces that are not based upon justice but upon "economic
strength." To elucidate this it is necessary to plunge into the jungle
of pure economic theory. The way is arduous. There are no flowers upon
the path. And out of this thicket, alas, no two people ever emerge hand
in hand in concord. Yet it is a path that must be traversed. Let us
take, then, as a beginning the very simplest case of the making of a
price. It is the one which is sometimes called in books on economics the
case of an unique monopoly. Suppose that I offer for sale the manuscript
of the Pickwick Papers, or Shakespere's skull, or, for the matter of
that, the skull of John Smith, what is the sum that I shall receive for
it? It is the utmost that any one is willing to give for it. That is all
one can say about it. There is no question here of cost or what I paid
for the article or of anything else except the amount of the
willingness to pay on the part of the highest bidder. It would be
possible, indeed, for a bidder to take the article from me by force. But
this we presume to be prevented by the law, and for this reason we
referred above not to the physical strength, but to the "economic
strength" of the parties to a bargain. By this is meant the relation
that arises out of the condition of the supply and the demand, the
willingness or eagerness, or the sheer necessity, of the buyers and the
sellers. People may offer much because the thing to be acquired is an
absolute necessity without which they perish; a drowning man would sell
all that he had for a life belt. Or they may offer much through the
sheer abundance of their other possessions. A millionaire might offer
more for a life belt as a souvenir than a drowning man could pay for it
to save his life.
Yet out of any particular conjunction between desires on the one hand
and goods or services on the other arises a particular equation of
demand and supply, represented by a particular price. All of this, of
course, is A. B. C., and I am not aware that anybody doubts it.
Now let us make the example a little more elaborate. Suppose that one
single person owned all the food supply of a community isolated from the
outside world. The price which he could exact would be the full measure
of all the possessions of his neighbors up to the point at least where
they would commit suicide rather than pay. True, in such a case as this,
"economic strength" would probably be broken down by the intrusion of
physical violence. But in so far as it held good the price of food would
be based upon it.
Prices such as are indicated here were dismissed by the earlier
economist as mere economic curiosities. John Stuart Mill has something
to say about the price of a "music box in the wilds of Lake Superior,"
which, as he perceived, would not be connected with the expense of
producing it, but might be vastly more or perhaps decidedly less. But
Mill might have said the same thing about the price of a music box,
provided it was properly patented, anywhere at all. For the music box
and Shakespere's skull and the corner in wheat are all merely different
kinds of examples of the things called a monopoly sale.
Now let us change the example a little further. Suppose that the
monopolist has for sale not simply a fixed and definite quantity of a
certain article, but something which he can produce in larger quantities
as desired. At what price will he now sell? If he offers the article at
a very high price only a few people will take it: if he lowers the price
there will be more and more purchasers. His interest seems divided. He
will want to put the price as high as possible so that the profit on
each single article (over what it costs him to produce it) will be as
great as possible. But he will also want to make as many sales as he
possibly can, which will induce him to set the price low enough to bring
in new buyers. But, of course, if he puts the price so low that it only
covers the cost of making the goods his profit is all gone and the mere
multiplicity of sales is no good to him. He must try therefore to find
a point of maximum profit where, having in view both the number of sales
and the profit over cost on each sale the net profit is at its greatest.
This gives us the fundamental law of monopoly price. It is to be noted
that under modern conditions of production the cost of manufacture per
article decreases to a great extent in proportion as a larger and larger
number is produced and thus the widening of the sale lowers the
proportionate cost. In any particular case, therefore, it may turn out
that the price that suits the monopolist's own interest is quite a low
price, one such as to allow for an enormous quantity of sales and a very
low cost of manufacture. This, we say, _may_ be the case. But it is not
so of necessity. In and of itself the monopoly price corresponds to the
monopolist's profit and not to cheapness of sale. The price _may_ be set
far above the cost.
And now notice the peculiar relation that is set up between the
monopolist's production and the satisfaction of human wants. In
proportion as the quantity produced is increased the lower must the
price be set in order to sell the whole output. If the monopolist
insisted on turning out more and more of his goods, the price that
people would give would fall until it barely covered the cost, then till
it was less than cost, then to a mere fraction of the cost and finally
to nothing at all. In other words, if one produces a large enough
quantity of anything it becomes worthless. It loses all its value just
as soon as there is enough of it to satisfy, and over-satisfy the wants
of humanity. Thus if the world produces three and a half billion bushels
of wheat it can be sold, let us say, at two dollars a bushel; but if it
produced twice as much it might well be found that it would only sell
for fifty cents a bushel. The value of the bigger supply as a total
would actually be less than that of the smaller. And if the supply were
big enough it would be worth, in the economic sense, just nothing at
all. This peculiarity is spoken of in economic theory as the paradox of
value. It is referred to in the older books either as an economic
curiosity or as a mere illustration in extreme terms of the relation of
supply to price. Thus in many books the story is related of how the East
India Companies used at times deliberately to destroy a large quantity
of tea in order that by selling a lesser amount they might reap a larger
profit than by selling a greater.
But in reality this paradox of value is the most fundamental proposition
in economic science. Precisely here is found the key to the operation of
the economic society in which we live. The world's production is aimed
at producing "values," not in producing plenty. If by some mad access of
misdirected industry we produced enough and too much of everything, our
whole machinery of buying and selling would break down. This indeed does
happen constantly on a small scale in the familiar phenomenon of
over-production. But in the organization in which we live
over-production tends to check itself at once. If the world's machinery
threatens to produce a too great plenty of any particular thing, then it
turns itself towards producing something else of which there is not yet
enough. This is done quite unconsciously without any philanthropic
intent on the part of the individual producer and without any general
direction in the way of a social command. The machine does it of itself.
When there is _enough_ the wheels slacken and stop. This sounds at first
hearing most admirable. But let it be noted that the "_enough_" here in
question does not mean enough to satisfy human wants. In fact it means
precisely the converse. It means enough _not_ to satisfy them, and to
leave the selling price of the things made at the point of profit.
Let it be observed also that we have hitherto been speaking as if all
things were produced under a monopoly. The objection might at once be
raised that with competitive producers the price will also keep falling
down towards cost and will not be based upon the point of maximum
profit. We shall turn to this objection in a moment. But one or two
other points must be considered before doing so.
In the first place in following out such an argument as the present in
regard to the peculiar shortcomings of the system under which we live,
it is necessary again and again to warn the reader against a hasty
conclusion to the possibilities of altering and amending it. The
socialist reads such criticism as the above with impatient approval.
"Very well," he says, "the whole organization is wrong and works badly.
Now let us abolish it altogether and make a better one." But in doing so
he begs the whole question at issue. The point is, _can_ we make a
better one or must we be content with patching up the old one? Take an
illustration. Scientists tell us that from the point of view of optics
the human eye is a clumsy instrument poorly contrived for its work. A
certain great authority once said that if he had made it he would have
been ashamed of it. This may be true. But the eye unfortunately is all
we have to see by. If we destroy our eyes in the hope of making better
ones we may go blind. The best that we can do is to improve our sight by
adding a pair of spectacles. So it is with the organization of society.
Faulty though it is, it does the work after a certain fashion. We may
apply to it with advantage the spectacles of social reform, but what the
socialist offers us is total blindness. But of this presently.
To return to the argument. Let us consider next what wages the
monopolist in the cases described above will have to pay. We take for
granted that he will only pay as much as he has to. How much will this
be? Clearly enough it will depend altogether on the number of available
working men capable of doing the work in question and the situation in
which they find themselves. It is again a case of relative "economic
strength." The situation may be altogether in favor of the employer or
altogether in favor of the men, or may occupy a middle ground. If the
men are so numerous that there are more of them than are needed for the
work, and if there is no other occupation for them they must accept a
starvation wage. If they are so few in number that they can _all_ be
employed, and if they are so well organized as to act together, they can
in their turn exact any wage up to the point that leaves no profit for
the employer himself at all. Indeed for a short time wages might even
pass this point, the monopolist employer being willing (for various
reasons, all quite obvious) actually to pay more as wages than he gets
as return and to carry on business at a loss for the sake of carrying it
on at all. Clearly, then, wages, as Adam Smith said, "are the result of
a dispute" in which either party must be pushed to the wall. The
employer may have to pay so much that there is nothing or practically
nothing left for himself, or so little that his workmen can just exist
and no more. These are the upward and downward limits of the wages in
the cases described.
It is therefore obvious that if all the industries in the world were
carried on as a series of separate monopolies, there would be exactly
the kind of rivalry or competition of forces represented by the consumer
insisting on paying as little as possible, the producer charging the
most profitable price and paying the lowest wage that he could, and the
wage earner demanding the highest wage that he could get. The
equilibrium would be an unstable one. It would be constantly displaced
and shifted by the movement of all sorts of social forces--by changes of
fashion, by abundance or scarcity of crops, by alterations in the
technique of industry and by the cohesion or the slackening of the
organization of any group of workers. But the balanced forces once
displaced would be seen constantly to come to an equilibrium at a new
point.