THE PRINCIPLES OF ECONOMICS
WITH APPLICATIONS TO PRACTICAL PROBLEMS
BY
FRANK A. FETTER, PH.D.
PROFESSOR OF POLITICAL ECONOMY AND FINANCE,
CORNELL UNIVERSITY
NEW YORK
THE CENTURY CO.
1904
Copyright, 1904, by
THE CENTURY CO.
THE DEVINNE PRESS
TO THE STUDENTS
OF THREE UNIVERSITIES
--INDIANA, STANFORD, AND CORNELL--
FOR WHOM, WITH WHOM, AND BY WHOSE AID
THIS BOOK CAME TO BE WRITTEN
CONTENTS
PART I
PAGE
THE VALUE OF MATERIAL THINGS 1-169
DIVISION A--WANTS AND PRESENT GOODS
CHAPTER
1 THE NATURE AND PURPOSE OF POLITICAL ECONOMY: NAME
AND DEFINITION; PLACE OF ECONOMICS AMONG THE
SOCIAL SCIENCES; THE RELATION OF ECONOMICS TO
PRACTICAL AFFAIRS 3
2 ECONOMIC MOTIVES: MATERIAL WANTS, THE PRIMARY
ECONOMIC MOTIVES; DESIRES FOR NON-MATERIAL ENDS,
AS SECONDARY ECONOMIC MOTIVES 9
3 WEALTH AND WELFARE: THE RELATION OF MEN AND
MATERIAL THINGS TO ECONOMIC WELFARE; SOME IMPORTANT
ECONOMIC CONCEPTS CONNECTED WITH WEALTH
AND WELFARE 15
4 THE NATURE OF DEMAND: THE COMPARISON OF GOODS
IN MAN'S THOUGHT; DEMAND FOR GOODS GROWS OUT
OF SUBJECTIVE COMPARISONS 21
5 EXCHANGE IN A MARKET: EXCHANGE OF GOODS RESULTING
FROM DEMAND; BARTER UNDER SIMPLE CONDITIONS;
PRICE IN A MARKET 30
6 PSYCHIC INCOME: INCOME AS A FLOW OF GOODS; INCOME
AS A SERIES OF GRATIFICATIONS 39
DIVISION B--WEALTH AND RENT
7 WEALTH AND ITS DIRECT USES: THE GRADES OF RELATION
OF INDIRECT GOODS TO GRATIFICATION; CONDITIONS OF
ECONOMIC WEALTH 46
8 THE RENTING CONTRACT: NATURE AND DEFINITION OF
RENT; THE HISTORY OF CONTRACT RENT AND CHANGES
IN IT 53
9 THE LAW OF DIMINISHING RETURNS: DEFINITION OF THE
CONCEPT OF (ECONOMIC) DIMINISHING RETURNS; OTHER
MEANINGS OF THE PHRASE "DIMINISHING RETURNS";
DEVELOPMENT OF THE CONCEPT OF DIMINISHING RETURNS 61
10 THE THEORY OF RENT: THE MARKET VALUE OF THE
USUFRUCT: DIFFERENTIAL ADVANTAGES IN CONSUMPTION
GOODS; DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS 73
11 REPAIR, DEPRECIATION, AND DESTRUCTION OF WEALTH:
RELATION TO ITS SALE AND RENT: REPAIR OF RENT-BEARING
AGENTS; DEPRECIATION IN RENT-EARNING
POWER OF AGENTS KEPT IN REPAIR; DESTRUCTION OF
NATURAL STORES OF MATERIAL 81
12 INCREASE OF RENT-BEARERS AND OF RENTS: EFFORTS OF
MEN TO INCREASE PRODUCTS AND RENT-BEARERS;
EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS
OF INDIRECT AGENTS 90
DIVISION C--CAPITALIZATION AND TIME-VALUE
13 MONEY AS A TOOL IN EXCHANGE: ORIGIN OF THE USE OF
MONEY; NATURE OF THE USE OF MONEY; THE VALUE OF
TYPICAL MONEY 98
14 THE MONEY ECONOMY AND THE CONCEPT OF CAPITAL: THE
BARTER ECONOMY AND ITS DECLINE; THE CONCEPT OF
CAPITAL IN MODERN BUSINESS 108
15 THE CAPITALIZATION OF ALL FORMS OF RENT: THE PURCHASE
OF RENT-CHARGES AS AN EXAMPLE OF CAPITALIZATION;
CAPITALIZATION INVOLVED IN THE EVALUATING
OF INDIRECT AGENTS; THE INCREASING ROLE OF CAPITALIZATION
IN MODERN INDUSTRY 118
16 INTEREST ON MONEY LOANS: VARIOUS FORMS OF CONTRACT
INTEREST; THE MOTIVE FOR PAYING INTEREST 131
17 THE THEORY OF TIME-VALUE: DEFINITION AND SCOPE
OF TIME-VALUE; THE ADJUSTMENT OF THE RATE OF TIME-DISCOUNT 141
18 RELATIVELY FIXED AND RELATIVELY INCREASABLE FORMS
OF CAPITAL: HOW VARIOUS FORMS OF CAPITAL MAY
BE INCREASED; SOCIAL SIGNIFICANCE OF THESE DIFFERENCES 152
19 SAVING AND PRODUCTION AS AFFECTED BY THE RATE OF
INTEREST: SAVING AS AFFECTED BY THE INTEREST RATE;
CONDITIONS FAVORABLE TO SAVING; INFLUENCE OF THE
INTEREST RATE ON METHODS OF PRODUCTION 159
PART II
THE VALUE OF HUMAN SERVICES 171-355
DIVISION A--LABOR AND WAGES
20 LABOR AND CLASSES OF LABORERS: RELATION OF LABOR
TO WEALTH; VARIETIES OF TALENTS AND OF ABILITIES
IN MEN 173
21 THE SUPPLY OF LABOR: WHAT IS A DOCTRINE OF POPULATION?
POPULATION IN HUMAN SOCIETY; CURRENT ASPECT
OF THE POPULATION PROBLEM 184
22 CONDITIONS FOR EFFICIENT LABOR: OBJECTIVE PHYSICAL
CONDITIONS; SOCIAL CONDITIONS FAVORING EFFICIENCY;
DIVISION OF LABOR 195
23 THE LAW OF WAGES: NATURE OF WAGES AND THE WAGES
PROBLEM; THE DIFFERENT MODES OF EARNING WAGES;
WAGES AS EXEMPLIFYING THE GENERAL LAW OF VALUE 205
24 THE RELATION OF LABOR TO VALUE: RELATION OF RENT
TO WAGES, RELATION OF TIME-VALUE TO WAGES; THE
RELATION OF LABOR TO VALUE 215
25 THE WAGE SYSTEM AND ITS RESULTS: SYSTEMS OF LABOR;
THE WAGE SYSTEM AS IT IS; PROGRESS OF THE MASSES
UNDER THE WAGE SYSTEM 226
26 MACHINERY AND LABOR: EXTENT OF THE USE OF MACHINERY;
EFFECT OF MACHINERY ON THE WELFARE AND WAGES
OF THE MASSES 236
27 TRADE-UNIONS: THE OBJECTS OF TRADE-UNIONS; THE
METHODS OF TRADE-UNIONS; COMBINATION AND WAGES 245
DIVISION B--ENTERPRISE AND PROFITS
28 PRODUCTION AND THE COMBINATION OF THE FACTORS: THE
NATURE OF PRODUCTION; COMBINATION OF THE FACTORS 257
29 BUSINESS ORGANIZATION AND THE ENTERPRISER'S FUNCTION:
THE DIRECTION OF INDUSTRY; QUALITIES OF A BUSINESS
ORGANIZER; THE SELECTION OF ABILITY 265
30 COST OF PRODUCTION: COST OF PRODUCTION FROM THE ENTERPRISER'S
POINT OF VIEW; COST OF PRODUCTION FROM
THE ECONOMIST'S STANDPOINT 273
31 THE LAW OF PROFITS: MEANING OF TERMS; THE TYPICAL
ENTERPRISER'S SERVICES REVIEWED; STATEMENT OF THE
LAW OF PROFITS 282
32 PROFIT-SHARING, PRODUCERS' AND CONSUMERS' COÖPERATION:
PROFIT-SHARING; PRODUCERS' COÖPERATION; CONSUMERS'
COÖPERATION 292
33 MONOPOLY PROFITS: NATURE OF MONOPOLY; KINDS OF
MONOPOLY; THE FIXING OF A MONOPOLY PRICE 302
34 GROWTH OF TRUSTS AND COMBINATIONS IN THE UNITED
STATES: GROWTH OF LARGE INDUSTRY IN THE UNITED
STATES; ADVANTAGES OF LARGE PRODUCTION; CAUSES
OF INDUSTRIAL COMBINATIONS 312
35 EFFECT OF TRUSTS ON PRICES: HOW TRUSTS MIGHT
AFFECT PRICES; HOW TRUSTS HAVE AFFECTED PRICES 323
36 GAMBLING, SPECULATION, AND PROMOTERS' PROFITS: GAMBLING
VS. INSURANCE; THE SPECULATOR AS A RISK TAKER;
PROMOTER'S AND TRUSTEE'S PROFITS 333
37 CRISES AND INDUSTRIAL DEPRESSIONS: DEFINITION AND
DESCRIPTION OF CRISES; CRISES IN THE NINETEENTH
CENTURY; VARIOUS EXPLANATIONS OF CRISES 345
PART III
THE SOCIAL ASPECTS OF VALUE 357-563
DIVISION A--RELATION OF PRIVATE INCOME
TO SOCIAL WELFARE
38 PRIVATE PROPERTY AND INHERITANCE: IMPERSONAL AND
PERSONAL SHARES OF INCOME; THE ORIGIN OF PRIVATE
PROPERTY; LIMITATIONS OF THE RIGHT OF PRIVATE
PROPERTY 359
39 INCOME AND SOCIAL SERVICE: INCOME FROM PROPERTY;
INCOME FROM PERSONAL SERVICES 370
40 WASTE AND LUXURY: WASTE OF WEALTH; LUXURY 381
41 REACTION OF CONSUMPTION ON PRODUCTION: REACTION
UPON MATERIAL PRODUCTIVE AGENTS; REACTION UPON
THE EFFICIENCY OF THE WORKERS; EFFECTS ON THE
ABIDING WELFARE OF THE CONSUMER 392
42 DISTRIBUTION OF THE SOCIAL INCOME: THE NATURE OF
PERSONAL DISTRIBUTION; METHODS OF PERSONAL DISTRIBUTION 402
43 SURVEY OF THE THEORY OF VALUE: REVIEW OF THE PLAN
FOLLOWED; RELATION OF VALUE THEORIES TO SOCIAL
REFORMS; INTERRELATION OF ECONOMIC AGENTS 412
DIVISION B--RELATION OF THE STATE TO INDUSTRY
44 FREE COMPETITION AND STATE ACTION: COMPETITION AND
CUSTOM; ECONOMIC HARMONY THROUGH COMPETITION;
SOCIAL LIMITING OF COMPETITION 422
45 USE, COINAGE, AND VALUE OF MONEY: THE PRECIOUS
METALS AS MONEY; THE QUANTITY THEORY OF MONEY 431
46 TOKEN COINAGE AND GOVERNMENT PAPER MONEY: LIGHT-WEIGHT
COINS; PAPER MONEY EXPERIMENTS; THEORIES
OF POLITICAL MONEY 443
47 THE STANDARD OF DEFERRED PAYMENTS: FUNCTION OF THE
STANDARD; INTERNATIONAL BIMETALLISM; THE FREE-SILVER
MOVEMENT IN AMERICA 453
48 BANKING AND CREDIT: FUNCTIONS OF A BANK; TYPICAL
BANK MONEY; BANKS OF THE UNITED STATES TO-DAY 462
49 TAXATION IN ITS RELATION TO VALUE: PURPOSES OF TAXATION;
FORMS OF TAXATION; PRINCIPLES AND PRACTICE 471
50 THE GENERAL THEORY OF INTERNATIONAL TRADE: INTERNATIONAL
TRADE AS A CASE OF EXCHANGE; THEORY OF
FOREIGN EXCHANGES OF MONEY; REAL BENEFITS OF
FOREIGN TRADE 480
51 THE PROTECTIVE TARIFF: THE NATURE AND CLAIMS OF
PROTECTION; THE REASONABLE MEASURE OF JUSTIFICATION
OF PROTECTION; VALUES AS AFFECTED BY PROTECTION 491
52 OTHER PROTECTIVE SOCIAL AND LABOR LEGISLATION:
SOCIAL LEGISLATION; LABOR LEGISLATION 504
53 PUBLIC OWNERSHIP OF INDUSTRY: EXAMPLES OF PUBLIC
OWNERSHIP; ECONOMIC ASPECTS OF PUBLIC OWNERSHIP 514
54 RAILROADS AND INDUSTRY: TRANSPORTATION AS A FORM OF
PRODUCTION; THE RAILROAD AS A CARRIER; DISCRIMINATION
IN RATES ON RAILROADS 525
55 THE PUBLIC NATURE OF RAILROADS: PUBLIC PRIVILEGES
OF RAILROAD CORPORATIONS; POLITICAL AND ECONOMIC
POWER OF RAILROAD MANAGERS; COMMISSIONS TO CONTROL
RAILROADS 534
56 PUBLIC POLICY AS TO CONTROL OF INDUSTRY: STATE
REGULATION OF CORPORATE INDUSTRY; DIFFICULTIES OF
PUBLIC CONTROL OF INDUSTRY; TREND OF POLICY AS TO
PUBLIC INDUSTRIAL ACTIVITY 544
57 FUTURE TREND OF VALUES: PAST AND PRESENT OF ECONOMIC
SOCIETY; THE ECONOMIC FUTURE OF SOCIETY 555
QUESTIONS AND CRITICAL NOTES 565
INDEX 595
PREFACE
This book had its beginning ten years ago in a series of brief
discussions supplementing a text used in the class-room. Their purpose
was to amend certain theoretical views even then generally questioned by
economists, and to present most recent opinions on some other questions.
These critical comments evolved into a course of lectures following an
original outline, and were at length reduced to manuscript in the form
of a stenographic report made from day to day in the class-room. The
propositions printed in italics were dictated to the class, to give the
key-note to the main divisions of the argument. Repeated revisions have
shortened the text, cut out many digressions and illustrations, and
remedied many of the faults both of thought and of expression; but no
effort has been made to conceal or alter the original and essential
character of the simple, informal, class-room talks by teacher to
student. To this origin are traceable many conversational phrases and
local illustrations, and the occasional use of the personal form of
address.
The lectures, at the outset, sought to give merely a summary of widely
accepted economic theory, not to offer any contribution to the subject.
While they were in progress, however, special studies in the evolution
of the economic concepts were pursued, and the manuscript of a book on
that more special subject was carried well toward completion. That work,
which it is hoped some time to complete, was, for several reasons, put
aside while the present text was preparing for publication. The economic
theories of the present transition period show many discordant
elements, yet the author felt that his attempt to unify the statement
of principles, in an elementary text explaining modern problems, and
consistent in its various parts, helped to reveal to him both
difficulties and possible solutions in the more special theoretical
field. The unforeseen outcome of these varied studies is an elementary
text embodying a new conception of the theory of distribution, an
outline of which will be found in Chapter Forty-three. It is, in brief,
a consistently subjective analysis of the relations of goods to wants,
in place of the admixture of objective and subjective distinctions found
in the traditional conceptions of rent, interest, and price.
The beginning of the systematic study of economics, like the first steps
in a language, is difficult because of the entire strangeness of the
thought, and it is not to be hoped that any pedagogic device can do away
with the need of strenuous thinking by the student. The aim, however, in
the development of this theory of distribution, has been to proceed by
gradual steps, as in a series of geometrical propositions, from the
simple and familiar acts and experiences of the individual's every-day
life, through the more complex relations, to the most complex,
practical, economic problems of the day. The hope has long been
entertained by economists that a conception of the whole problem of
value would be attained that would coördinate and unify the various
"laws,"--those of rent, wages, interest, etc. This solution has here
been sought by a development of recent theories, the unit of the complex
problem of value being the simplest, immediate, temporary gratification.
Possibly some teachers will observe and regret the almost entire absence
of critical discussions of controverted points in theory, which make up
so large a part of some of the older texts. The more positive manner of
presentation has been purposely adopted, and only such reference is made
to conflicting views as is needed to guard the student against
misunderstanding in his further reading. The author would not have it
thought that he doubts the disciplinary value of economic theory or its
scientific worth for more advanced students, for, on the contrary, he
believes in it, perhaps to an extreme degree; but, for his own part, he
has become convinced of the unwisdom of carrying on these subtle
controversies in classes of beginners. The inherent difficulties of the
subject are great enough, without the creation of new ones.
The fifty-seven chapters represent the work of the typical college
course in elementary economics, allowing two chapters a week, and a
third meeting weekly for review and for the discussion of questions,
exercises, and reports. The subject is so large that the text is, in
many places, hardly more than a suggestive outline. In class-room work
it should be supplemented by other sources of information, such as
personal observation by the students (many of the questions following
the text serving to stimulate the attention); visits to local
industries; interchange of opinions; examples given by the teacher;
study and discussion, in the light of the principles stated in the text,
of some such problems as are suggested in the appended list of
questions; collateral reading; the preparation of exercises and the use
of statistical material from the census, labor reports, etc.; history
and description of industries; history of the growth of economic ideas.
Suggestions, from teachers, of changes that will make the text more
useful in their classes, will be thankfully received by the author.
Lack of space makes it impossible to mention by name the many sources to
which the writer is indebted. Special acknowledgment, however, is
gratefully made to C. H. Hull, of Cornell University; to E. W. Kemmerer,
now of the Philippine Treasury Department, and to U. G. Weatherly, of
Indiana University, who have read large portions of the manuscript, and
have made many valuable suggestions; to W. M. Daniels, of Princeton
University, who has read every page of the copy, and to whom are due the
greatest obligations for his numerous and able criticisms both of the
argument and of the expression; to R. C. Brooks, now of Swarthmore
College, for a number of the questions in the appended list, and for
helpful comments given while the course was developing; and to R. F.
Hoxie and to A. C. Muhse, whose thoughtful reading of the proof has
eliminated many errors. For the defects remaining, not these friendly
critics, but the author alone, should be held accountable.
No book on economics can to-day satisfy everybody--"Or even anybody,"
adds a friend. But with this book may go the hope that what has been
written with love of truth and of democracy may serve, in its small way,
both to further sound economic reasoning and to extend among American
citizens a better understanding of the economic problems set for this
generation to solve.
FRANK A. FETTER.
Ithaca, N. Y., August, 1904.
THE PRINCIPLES OF ECONOMICS
PART I
DIVISION A--WANTS AND PRESENT GOODS
CHAPTER I
THE NATURE AND PURPOSE OF POLITICAL ECONOMY
§ I. NAME AND DEFINITION
[Sidenote: Verbal definition of economics]
1. _Economics, or political economy, may be defined, briefly, as the
study of men earning a living; or, more fully, as the study of the
material world and of the activities and mutual relations of men, so far
as all these are the objective conditions to gratifying desires._ To
define, means to mark off the limits of a subject, to tell what
questions are or are not included within it. The ideas of most persons
on this subject are vague, yet it would be very desirable if the student
could approach this study with an exact understanding of the nature of
the questions with which it deals. Until a subject has been studied,
however, a definition in mere words cannot greatly aid in marking it off
clearly in our thought. The essential thing for the student is to see
clearly the central purpose of the study, not to decide at once all of
the puzzling cases.
[Sidenote: Natural sciences deal with material things]
2. _A definition that suggests clear and familiar thoughts to the
student seem at first much more difficult to get in any social science
than in the natural sciences._ These deal with concrete, material things
which we are accustomed to see, handle, and measure. If a mere child is
told that botany is a study in which he may learn about flowers, trees,
and plants, the answer is fairly satisfying, for he at once thinks of
many things of that kind. When, in like manner zoölogy is defined as the
study of animals, or geology as the study of rocks and the earth, the
words call up memories of many familiar objects. Even so difficult and
foreign-looking a word as ichthyology seems to be made clear by the
statement that it is the name of the study in which one learns about
fish. It is true that there may be some misunderstanding as to the way
in which these subjects are studied, for botany is not in the main to
teach how to cultivate plants in the garden, nor ichthyology how to
catch fish or to propagate them in a pond. But the main purpose of these
studies is clear at the outset from these simple definitions. Indeed, as
the study is pursued, and knowledge widens to take in the manifold and
various forms of life, the boundaries of the special sciences become not
more but less sharp and definite.
[Sidenote: Economics studies some social acts and relations]
Political economy, on the other hand, as one of the social sciences,
which deal with men and their relations in society, seems to be a very
much more complex thought to get hold of. We are tempted to say that it
deals with less familiar things; but the truth may be, as a thoughtful
friend suggests, that the simple social acts and relations are more
familiar to our thought than are lions, palm-trees, or even horses.
Every hour in the streets or stores, one may witness thousands of acts,
such as bargains, labor, payments, that are the subject-matter of
economic science. Their very familiarity may cause men to overlook their
deeper meaning.
Many other definitions have been given of political economy. It has been
called the science of wealth, or the science of exchanges. Evidently
there are various ways in which wealth may be considered or exchanges
made. The particular aspects that are dealt with in political economy
will be made clear by considering two other questions, the place of
economics among the social sciences and the relation of economics to
practical affairs.
§ II. PLACE OF ECONOMICS AMONG THE SOCIAL SCIENCES
[Sidenote: Economics contrasted with the natural sciences]
1. _Political economy, as one of the social sciences, may be contrasted
with the natural sciences, which deal with material things and their
mutual relations, while it deals with one aspect of men's life in
society, namely, the earning of a living, or the use of wealth._ It is
true that political economy also has to do with plants and animals and
the earth--in fact, with all of those things which are the
subject-matter of the natural sciences; but it has to do with them only
in so far as they are related to man's welfare and affect his estimate
of the value of things; only in so far as they are related to the one
central subject of economic interest, the earning of a living.
[Sidenote: Character of the social sciences]
2. _The social sciences deal with men and their relations with each
other._ The word "social" comes from the Latin socius, meaning a fellow,
comrade, companion, associate. As men living together have to do with
each other in a great many different ways, and enter into a great many
different relations, there arise a great many different social problems.
Each of the social sciences attempts to study man in some one important
aspect--that is, to view these relations from some one standpoint.
Man's acts, his life, and his motives are so complex that it is not
surprising that there has been less definiteness in the thought of the
social sciences, and that they have advanced less rapidly toward
exactness in their conclusions, than have the natural sciences. This
complexity also explains the discouragement of the beginner in the early
lessons in this subject. Usually the greatest difficulties appear in the
first few weeks of its study. The thought is more abstract than in
natural science; it requires a different, I will not say higher, kind of
ability than does mathematics. But little by little the strangeness of
the language and ideas disappears; the bare definitions become clothed
with the facts of observation and recalled experiences; and soon the
"economic" acts and relations of men in society come to be as real and
as interesting to the student as are the materials in the natural world
about him--often, indeed, more interesting.
[Sidenote: Economics, politics, law, and ethics]
3. _Political economy is related to all the other social sciences, it
being the study of certain of men's relations, while politics, law, and
ethics have to do with other relations or with relations under a
different aspect._ Politics treats of the form and working of government
and is mainly concerned with the question of power or control of the
individual's actions and liberty. Law treats of the precepts and
regulations in accordance with which the actions of men are limited by
the state, and the contracts into which they have seen fit to enter are
interpreted. Ethics treats the question of right or wrong, studies the
moral aspects of men's acts and relations. The attempt just made to
distinguish between the fields occupied by the various social sciences
betrays at once the fundamental unity existing among them. The acts of
men are closely related in their lives, but they may be looked at from
different sides. The central thought in economics is the business
relation, the relation of men in exchanging their services or material
wealth. In pursuing economic inquiries we come into contact with
political, legal, and ethical considerations, all of which must be
recognized before a final practical answer can be given to any question.
Nevertheless the province of economics is limited. It is because of the
feebleness of our mental power that we divide and subdivide these
complex questions and try to answer certain parts before we seek to
answer the whole. When we attempt this final and more difficult task, we
should rise to the standpoint of the social philosopher.
§ III. THE RELATION OF ECONOMICS TO PRACTICAL AFFAIRS
[Sidenote: Economics is first a science]
1. _The ideal of political economy here set forth is that it should be a
science, a search for truth, a systematized body of knowledge, arriving
at a statement of the laws to which economic actions conform._ It is not
the advocacy of any particular policy or idea, but if it arrives at any
conclusions, any truths, these cannot fail to affect the practical
action of men.
[Sidenote: But it touches many practical interests]
Political economy, because defined as the science of wealth, has been
described by some as a gospel of Mammon. It is hardly necessary to
refute such a misconception. Political economy is not the science of
wealth-getting for the individual. Its study is not primarily for the
selfish ends and interest of the individual. (Certainly some of its
lessons may be of practical value to men in active business) for many
economic "principles" are but the general statement of those ideas that
have been approved by the experience of business men, of statesmen, and
of the masses of men. Some of its lessons must have educational value in
practical business, for political economy is not dreamed out by the
closet philosopher, but more and more it is the attempt to describe the
interests and the action of the practical world in which men must live.
Many men are working together to develop its study--those who collect
statistics and facts bearing on all kinds of practical affairs, and
those who search through the records of the past for illustrations of
experiments and experiences that may help us in our life to-day.
[Sidenote: Economic study needed in a democracy]
2. _But, in the main, the study of political economy is a social study
for social ends and not a selfish study for individual advantage._ The
name political economy was first suggested in France when the government
was monarchical and despotic in the extreme. As domestic economy
indicates a set of rules or principles to guide wisely the action of
the housekeeper or the owner of an estate, so political economy was
first thought of as a set of rules or principles to guide the king and
his counselors in the control of the state. The term has continued to
bear something of that suggestion in it, though of late the term
"economics," as being broader and less likely to be confused with
politics, has very generally come into use. But in the degree in which
unlimited monarchy has given way to the rule of the people, the
conception of political economy has been modified. In a democracy there
is need for a general diffusion of knowledge. The power now rests not
with the king and a few counselors, but in the last resort with the
people, and therefore the people must be acquainted with the experience
of the past, must have all possible systematic knowledge to enlighten
public policy and to guide legislation.
[Sidenote: Is of growing interest and influence]
Moreover, with the growth of the modern state, with the interest
increasing importance of business, and of industrial and commercial
interests, as compared with changes of dynasty or the personal rivalries
of rulers, economic questions have grown in relative importance. In our
own country, particularly since the subjects of slavery and of States'
rights ceased to absorb the attention of our people, economic questions
have pushed rapidly into the foreground. Indeed, it has of late been
more clearly seen that many of the older political questions, such as
the American Revolution and slavery, formerly discussed almost entirely
in their political and constitutional aspects, were at bottom questions
of economic rivalry and of economic welfare. The remarkable increase in
the attention given to this study in colleges and universities in the
last twenty years is but the index of the greatly increased interest and
attention felt in it by citizens generally.
To sum up, it may be said that in the study of political economy we are
seeking the reason, connection, and relations in the great multitude of
acts arising out of the dependence of desires on the world of things and
men.
CHAPTER 2
ECONOMIC MOTIVES
§ I. MATERIAL WANTS, THE PRIMARY ECONOMIC MOTIVES
[Sidenote: Feeling urges to economic actions]
1. _A logical explanation of industry must begin with a discussion of
the nature of wants, for the purpose of industry is to gratify wants._
An economic want may be defined as a feeling of incompleteness, because
of the lack of a part of the outer world or of some change in it. Often
the question asked when one first sees a moving trolley car or
automobile or bicycle is: What makes it go? The first question to ask in
the part of the study of economic society here undertaken is: What is
its motive force? Without an answer to that question one cannot hope to
understand the ceaseless and varied activities of men occupied in the
making of a living. The question merits long and careful study, but the
general answer is so simple that it seems almost self-evident: The
motive force in economics is found in the feelings of men. It is men's
desire to make use of men and things about them which calls forth all
the manifold phenomena studied in economics.
[Sidenote: Animal species shaped by their environment]
2. _Wants among animals depend on the environment; that is to say, the
utmost that creatures of a lower order than man can do is to take things
as they find them._ The imagination and intelligence of animals are not
developed enough to lead them to desire much beyond that which is
ordinarily to be obtained. And so the environment shapes and affects the
animal. The fish is fitted to live in the water and thrives there, and
we must believe, enjoys living there. The horse and the cow like best
the food of the fields, and so each species of animal, in order to
survive in the severe struggle for existence, has been forced to fit
itself to the conditions in which it lives. After the animal has been
thus fitted, its desire is for those things normally to be found in its
surroundings. So different animals desire or want different things, but
always it is the environment that determines the want, and not the want
that determines the environment.
[Sidenote: Simple wants of primitive men]
3. _In simpler human societies, wants are mostly confined to physical
necessities; that is, in the earlier stages of society, man's wants are
very much like those of the animals._ Man bends his energies to securing
the things necessary to survival. He feels the pangs of hunger and he
strives to secure food. He feels the need of companionship, for it is
only through association and mutual help that men, so weak as compared
with many kinds of animals, are able to resist the enemies which beset
them. He needs clothing to protect him against the harsher climates of
the lands to which he moves. For the same purpose, to protect himself
against the cold and rain, he needs a shelter, a cave, a wigwam, or a
hut; for a house is but a larger dress.
[Sidenote: Manifold wants in civilized society]
4. _In human society, wants develop and transform the world._ In the
rudest societies of which there is any record, savages are found with
wants developed in a great number of directions beyond the wants of any
animals. Man is not a passive victim of circumstances; his wants are not
determined solely by his environment; his desires soar beyond the things
about him. As men become more the masters of circumstances, their
desires anticipate mere physical wants; they seek a more varied food of
finer flavor and more delicately prepared. Dress is not limited by
physical comfort, for one of the earliest of the esthetic wants to
develop is the love of personal ornament. The rude hut or communal lodge
to protect against rain and cold becomes a home. Out of the earlier rude
companionship develop the noblest sentiments of friendship and family
life. Seeking to gratify the senses and the love of action, men develop
esthetic tastes, the love of the beautiful in sound, in form, in taste,
in color, in motion. And finally, as the imagination and intellect
develop, there grow up the various forms of intellectual pleasures--the
love of reading, of study, of travel, and of thought.
The various wants of man are sometimes classified as necessities,
comforts, and luxuries, but all economists take care to emphasize that
these terms have only relative meanings which, in the rapidly changing
conditions of modern life, are changing constantly. The comforts of one
generation, or of one country, become the necessities in another; and
luxuries becoming comforts, are looked upon finally as necessities. And
as the desires grow, they more and more alter the world. Man has changed
the face of the earth; he has affected its climate, its fertility, its
beauty, because, either for better or for worse, his desires have
impressed themselves upon the world about him.
[Sidenote: Wants must precede wealth]
5. _In human society the growth of wants is necessary to progress._ From
the earliest times teachers of morals have argued for simplicity of life
and against the development of refinements. We do not now raise the
moral question, but there is no doubt that the economic effect of
developing wants is in the main to impel to greater effort. They are the
mainspring of economic progress. In recent discussion of the control of
the tropics, the too great contentedness of tropical peoples has been
brought out prominently. Some one has said that if a colony of New
England school-teachers and Presbyterian deacons should settle in the
tropics, their descendants would, in a single generation, be wearing
breech-clouts and going to cock-fights on Sunday. Certain it is that the
energy and ambition of the temperate zone are hard to maintain in warmer
lands. The negro's content with hard conditions, so often counted as a
virtue, is one of the difficulties in the way of solving the race
problem in our South to-day. Booker T. Washington, and others who are
laboring for the elevation of the American negroes, would try first to
make them discontented with the one-room cabins, in which hundreds of
thousands of families live. If only the desire for a two- or three-room
cabin can be aroused, experience shows that family life and industrial
qualities may be improved in many other ways.
[Sidenote: But impossible hopes lessen gratifications]
Not only in America, but in most civilized lands to-day, is seen a rapid
growth of wants in the working-classes. The incomes and the standard of
living have become increasing, but not so fast as have the desires of
the working-classes. Regret has been expressed by some that the workers
of Europe are becoming "declassed." Increasing wages, it is said, bring
not welfare, but unhappiness, to the complaining masses. If discontent
with one's lot goes beyond a moderate degree, if it is more than the
desire to better one's lot by personal efforts, if it becomes an unhappy
longing for the impossible, then indeed it may be a misfortune. But a
moderate ambition to better one's condition is the "divine discontent"
absolutely indispensable if energy and enterprise are to be called into
being.
[Sidenote: Wants grow refined as wealth advances]
It is a suggestive fact that civilized man, equipped with all of the
inventions and the advantages of science, spends more hours of effort in
gaining a livelihood than does the savage with his almost unaided hands.
Activity is dependent not on bare physical necessity, but on developed
wants--in the economic sense of the term. Such social institutions as
property and inheritance owe their origin and their justification to
their average effect on the motives to activity. If society is to
develop, if progress is to continue, human wants--not of the grosser
sort, but ever more refined--must continue to emerge and urge men to
action.
§ II. DESIRES FOR NON-MATERIAL ENDS, AS SECONDARY ECONOMIC MOTIVES
[Sidenote: The real man in economics]
1. _The spiritual nature of man must not be ignored in economic
reasoning._ There has been much and just criticism of the earlier
writers and of their conclusions because so little account was taken by
them of any but the motive of self-interest in economic affairs.
Generally it was assumed that men knew their own interest, and sought in
a very unsympathetic way those things which would gratify their material
wants. Thus man in economic reasoning was made an abstraction, differing
from real men in his lack of manifold spiritual and social elements.
[Sidenote: Desires for the non-material may become economic motives]
2. _The main classes of non-material wants that are secondarily economic
are fear of temporal punishment; sentiments of moral and religious duty;
pride, honor, and fear of disgrace; and pleasure in work for itself, for
social approval, or for a social result._ The first is best illustrated
by slavery, where the slave is not impelled to seek wealth for his own
welfare, but is driven by punishment to perform the task. The object is
to create within the mind of the slave a motive that will take the place
of the ordinary economic motive. The feeling of religious or moral duty
leads men to act often in direct opposition to the usual economic
motive. The taboo is faithfully observed by the members of a savage
tribe who suffer as a result the severest hardships. A religious
injunction prevents the use of food that would save from starvation.
Pride, either of family or of calling; the soldier's honor leading him
to sacrifice not only his future but his life; the love of social
approval, holding men to the most disagreeable tasks--these illustrate
how strongly social sentiments oppose the narrower motive of immediate
self-interest as generally thought of. Pleasure in work for work's sake,
and pride in the result, may act as motives quite as strong in some
cases as desire for the product that can be used. And even where this
does not change the kind of work done, it comes in to influence the
interest and earnestness with which the work is performed.
[Sidenote: Economists must overlook no influence on value]
3. _Whatever motive in man's complex nature makes him desire things more
or less, becomes for the time, and in so far, an economic motive._ These
various social and spiritual motives sometimes work positively, in the
direction of magnifying man's desire for things; sometimes negatively,
to diminish it. If we are to understand economic action, we must take
men as they are. A religious motive that leads men to refrain from the
eating of meat or to eat fish in preference on certain days, is a fact
which the economist has but to accept, for it is sure to affect the
value of meat and fish at that place and time. Moral convictions,
whatever be their origin, whether due to the teaching of parents, to
unconscious influences, or to native temperament, may be quite as
effective as the pangs of hunger in determining what men desire.
Therefore, while these various motives are primarily social or moral or
religious, they may be said to be secondarily economic motives, and they
may become in certain cases the most important influences of which the
economist must take account.
CHAPTER 3
WEALTH AND WELFARE
§ I. THE RELATION OF MEN AND MATERIAL THINGS TO ECONOMIC WELFARE
[Sidenote: Man is the center of economic reasoning]
1. _The gratifying of economic wants depends on things outside of the
man who feels the wants._ Man is to himself the center of the world. He
groups things and estimates things with reference to their bearing on
his desires, be these what are called selfish or unselfish. If we were
discussing the economics of an inferior species of animals, things would
be grouped in a very different way. But economics being the study of
man's welfare, everything must be judged from his standpoint, and things
are or are not of economic importance according as they have relation to
his wants and satisfactions. Things needful for any of the lower animals
are spoken of as "ministering to welfare" in the economic sense only in
case these animals are useful to men. Examples are the mulberry-tree on
which the silkworm feeds, the flower visited by the honey-bee. In the
same view some men are seen to minister to the welfare of other men and
therefore bear the same relation for the moment to the welfare of the
others as do material things. In any case we study man's welfare as
affected by the world which surrounds him.
[Sidenote: Physical nature is an unchangeable fact]
2. _Material things and natural forces differ in kind and nature._ This
is an axiom which we must take as a basis for reasoning in economics.
Things have certain physical qualities quite apart from any action or
influence of man. They are operated on by mechanical laws; the force of
gravitation causes them to fall at a certain rate under given
conditions. They differ in specific gravity, reflect the rays of light,
absorb or transmit heat. All these things are for man ultimate physical
facts, but unless he knows these facts he cannot take full advantage of
the favorable qualities of things or weigh properly their importance to
his welfare. Things differ in a multitude of ways in their chemical
qualities. Niter, charcoal, and saltpeter, combined in certain
proportions, give certain reactions; different combinations give various
results. Solids combine to form gases, and liquids unite to form solids,
and these qualities and reactions of material things are for man
ultimate truths of chemistry. Likewise many things have certain
physiological effects. Sunshine acts on living bodies, whether plant,
animal, or man, in certain ways. Some plants are nourishing to man,
others are poisonous. If man were not on the earth, things would have
the same physical and chemical qualities, mechanical laws would be the
same as at present so far as we can conclude. Man cannot change the
nature of things; but he can acquaint himself with that nature and then
put the things into the relations where a given result will follow.
[Sidenote: But economics has to do with psychological effects]
3. _As a result of these differences, things have different relations to
wants._ These various qualities, physical, chemical, physiological, are
important in an economic sense only as they produce psychological
effects, that is, as they affect the feelings and judgments of men. We
come to some general thoughts which it will be well to define.
[Sidenote: Some definitions]
Gratification is the feeling that results when a want has been met.
Feelings are hard to define in words; the best definition is found in
the experience of each individual. We can only say, therefore, that
gratification is the attainment of desire, the fulfilment of wants. The
word that has usually been employed in this sense in economic discussion
is "satisfaction"; but by its derivation and general usage satisfaction
means "the complete or full gratification" of a desire, and this meaning
is quite inconsistent with the thought in many connections in which the
word is used. We shall therefore prefer here the word gratification, and
its corresponding verb, gratify.
Wealth is the collective term for those things which are felt to be
related to the gratification of wants. The word is applied in economic
discussion to any part of those things, no matter how small. We shall
have occasion later to define and discuss this term more fully.
Welfare, in an immediate or narrow sense, is the same as gratification
of the moment; in a broader sense, it means the abiding condition of
well-being. We have here a distinction very much like that often made
between pleasure and happiness. If we think of only the present moment,
welfare is the absence of pain, and the presence of the pleasureable
feeling; but if we consider a longer period in a man's life or his
entire lifetime, it is seen that many things that afford a momentary
gratification do not minister to his ultimate, or abiding, welfare.
Moralists and philosophers often have dwelt on this contrast. The
difference is illustrated by the thoughtlessness and impulsiveness of a
child or savage as contrasted with the more rational life of those with
foresight and patience.
[Sidenote: Economics first studies wealth]
Wealth, in the general economic sense, is judged with reference to
gratification rather than with reference to abiding welfare. It is the
first duty of the economist not to preach what should be, but to
understand things as they are. He must, in studying the problem of
value, recognize any motive that leads men to attach importance to acts
and things. He will therefore take account of abiding welfare and of
immediate gratification to exactly the degree that men in general do,
and the sad fact is that the present impulse rules a large part of the
acts of men. Whether tobacco or alcohol or morphine minister to the
abiding happiness of those who use them does not alter the immediate
fact that here and now they are sought and an importance is attached to
them because of their power to gratify an immediate desire.
[Sidenote: Then wealth and welfare]
5. _In studying the question of social prosperity, however, we must rise
to the standpoint of the social philosopher and consider the more
abiding effects of wealth._ Wants may be developed and made rational,
and the permanent prosperity of a community depends upon this result.
Any species of animal that continued regularly to enjoy that which
weakens the health and strength would become extinct. Any society or
individual that continues to derive gratification, to seek its pleasure,
in ways that do not, on the average, minister to permanent welfare,
sinks in the struggle of life and gives way to those men or nations that
have a sounder and healthier adjustment of wants and welfare. We touch
here, therefore, on the edge of the great problems of morals, and while
we must recognize the contrast that often exists in the life of any
particular man between his "pleasures" and his health and happiness, we
see that there is a reason why, on the whole, and in the long run, these
two cannot remain far apart. The old proverbs, "Be virtuous and you will
be happy," "Honesty is the best policy," and "Virtue is its own reward,"
have a sound basis in the age-long experience of the world. Cynics or
jesters may easily disprove these truths in a multitude of particular
cases.
[Sidenote: Freemen are not economic wealth]
6. _Wealth does not include such personal qualities as honesty,
integrity, good health._ Some economists speak of these as "internal
goods," but it is far better not to speak of free men or of their
qualities as wealth. Many difficulties arise from such a use of the term
in practical discussion. One of the most important of all distinctions
to maintain in economics is that between material things and men. Only
in the case of human slavery may persons be counted as economic wealth.
It is a different thing, however, to consider human services as wealth
of an ephemeral kind at the moment they are rendered. We are, thus
merely recognizing that men may bear at the given moment the same
relation to our wants as do material things.
§ II. SOME IMPORTANT ECONOMIC CONCEPTS CONNECTED WITH WEALTH AND WELFARE
[Sidenote: Popular meaning of useful]
1. _Utility, in its broadest usage, is the general capability that
things have of ministering to human well being._ The term is evidently
one without any scientific precision. It expresses only a general or
average impression that we have in reference to the relation of a class
of goods to human wants. Every one would agree to the statement that
"water is useful," thinking of the fact that it is indispensable to life
and that it ministers to life in a multitude of ways. But what of water
in one's cellar, water soaking one's clothes on a cold day, water
breaking through the walls of a mountain reservoir and carrying death
and destruction in its path? The poison that is doing what we at the
moment desire, we call useful; that doing what we would prevent, we call
harmful. Noxious weeds become "useful" by the discovery of some new
process by which they can be worked into other forms, though they may
still continue to be noxious in many a farmer's fields. The utility of
anything, therefore, is seen to be of a relative and limited nature. The
term "utility" in popular speech is very inexact. It can be employed in
economic discussion only when carefully modified and defined.
[Sidenote: Kinds of goods]
2. _Goods consist of all those things objective to the user which have a
beneficial relation to human wants._ They fall into several classes. We
may first distinguish between free and economic goods. Free goods are
things that exist in superfluity, that is, in quantities sufficient not
only to gratify, but to satisfy all the wants that may depend on them.
Economic goods are things so limited in quantity that all of the wants
to which they could minister are not satisfied. The whole thought of
economy begins with scarcity; indeed, even the conception of free goods
is hardly possible until some limitation of wants is experienced.
Practical economics is the study of the best way to employ things to
secure the highest amount of gratification. The problem itself arises
out of the fact that many things are used up before all wants dependent
on them are completely satisfied.
A distinction is often made between consumption and production goods, or
it may be better to say immediate and intermediate goods. Consumption
goods are those things which are immediately at the point of gratifying
man's desires. Production goods are those things which are not yet ready
to gratify desires; some of them, being merely means of securing
consumption goods, never will themselves immediately gratify desire.
[Sidenote: Value is utility given precision]
3. _Value, in the narrow personal sense, may be defined as the
importance attributed to a good by a man._ The vagueness and inexactness
of the word "utility," or the word "good," disappears when we reach the
word "value." It is not a usual relation or a vague degree of benefit
sometimes present and sometimes absent, but it refers to a particular
thing, person, time, and condition. Value is in the closest relation
with wants, and in this narrow sense depends on the individual's
estimate. From the meeting and comparison of the estimates of
individuals, arise market values or prices, which are the central object
of study in economics.
CHAPTER 4
THE NATURE OF DEMAND
§ I. THE COMPARISON OF GOODS IN MAN'S THOUGHT
[Sidenote: Wants and goods must be constantly adjusted]
1. _As wants differ in kind and degree, so goods differ in their power
to gratify wants._ This general and simple statement unites the leading
thoughts of the two chapters preceding. Confirmation of its truth may be
found in observation and experience. The purpose of this chapter is to
show how, starting from the general nature of wants and the nature of
goods, we can arrive at an explanation of the exchange of goods.
Recognizing the simple but fundamental fact stated at the opening of
this paragraph, an exchange may be seen to be a rational and a logical
result when men are living together in society.
[Sidenote: Ripe and unripe goods]
2. _Immediately enjoyable goods are the first objective things whose
value is to be explained._ Goods come into relation with wants in a
multitude of ways. Some things will not gratify a want until after the
lapse of a long time, as ice cut in December and stored for summer use.
Other things will never themselves directly gratify a want, but will be
of help in getting things that do; such are the young fruit trees
planted in the orchard, and the hammer that will be used to drive nails
in a house that will shelter men. Still other things are gratifying
wants at this moment, or are ready for use and will be used up in a very
short time; examples of such are the food on the table and in the
pantry, and the cigar in the pocket. All these things are called goods,
because of their beneficial relation to man's desires, but the relation
is very immediate in some cases, very remote in others. The value of all
goods is to be explained, but the explanation will be more or less
complex according to the directness or indirectness of their relation
with wants. As it is the power of goods to gratify wants that alone
causes value to be attributed to them, those goods which are ripest,
which are ready to gratify wants, are nearest to the source of an
explanation. The value of unripe enjoyments must be traced to some
expected gratification as its cause or basis. In order to attack the
difficulties one by one we will, therefore, in the following discussion,
deal first with this class of ripe, consumable goods, as food, personal
services, enjoyments of any sort that are immediately available. The
explanation of these cases of value must precede that of cases in which
the relation to wants is less obvious and direct.
[Sidenote: The law of diminishing utility]
3. _As the amount of any good increases, after a certain point the
gratification that the added portions afford decreases._ This is called
the law of the diminishing utility of goods or of the decreasing
gratification afforded by goods. The reason for the truth of this
proposition is found in the very nature of man and his nervous
organization. Any stimulus to the nerves, however pleasant at first,
becomes painful when long continued or increased unduly. The trumpet too
distant at first for the ear to distinguish its notes, may swell to
pleasing tones as it approaches, until at length its volume and its din
may become absolutely painful. If we were to express the degree of
gratification by a curve, we should see the curve rising gradually to a
maximum, and then falling somewhat suddenly and becoming a negative
quantity, when pain, not pleasure, resulted. The same change could be
illustrated by any sensation or by any of men's activities.
The proposition must be understood as applying to the gratification
resulting from each added portion of the sensation. There is a maximum
point in the gratification afforded by any nerve-stimulus. A man coming
in from the winter's storm and holding out his hands before the fire,
feels an intense pleasure in the grateful warmth; a few moments later,
the same heat becomes unpleasant. In winter we wish for a moderation of
the temperature; on the sultry days of summer, we think of a cool breeze
as the most to be desired of all things. Whether the temperature rises
or falls, there is a point beyond which the change is no longer an
addition to, but a subtraction from, pleasure. A man, however hungry at
first, may be made miserable if forced to eat beyond his capacity. Each
added portion of the good consumed contributes to the gratification up
to a certain point. The sum of these pleasurable sensations may be
called the total gratification, which finally reaches satisfaction or
fullness. Then begins what may be called in algebraic phrase a "negative
gratification" which, if it becomes large enough, will make the total
gratification a negative quantity. Each added portion, dose or increment
beyond a certain point reduces thus the welfare of the user. One may
have too much of a good thing.
[Sidenote: The marginal utility]
4. _Marginal utility is the gratification afforded by the added portion
of the good._ The marginal dose, increment, or portion is that which may
be logically considered as coming last in the case of any good or group
of goods divisible into small parts. In considering the strict theory of
the case, in order to get at the principle involved, the doses may be
spoken of as infinitesimally small. The marginal utility expresses the
importance that men attach to one unit of this kind of goods under the
particular circumstances at the moment existing, and not under certain
conceivable conditions which do not in fact exist or need to be taken
into account by the persons affected. The marginal unit of a homogeneous
supply cannot be considered to have a greater utility than any other
unit at the moment, and therefore the product of the marginal utility by
the number of units, gives the total measure of importance of the supply
then and there, and this is the value.
The value of goods, as has been indicated, is the measure of the
dependence felt by men on a portion of the outer world, as the condition
of gratifying their wants. From the very nature of wants, which reside
in feelings, a dependence that is not felt, a relation between things
and gratification that is not recognized, can have no influence on
value. Now, it is at this margin of supply that dependence is felt. Men
do not concern themselves about that which they have in
superfluity--unless, indeed, the excess causes them some discomfort. It
is well that they do not, for a wise direction of effort can only take
place when men think mainly of their need of things that they want, and
want most, and direct their efforts toward securing them.
[Sidenote: From marginal utility to value]
The diminishing utility of successive portions (doses or increments, as
they are called) may be represented by a curve of utility.
[Illustration: _Scale of Supply_]
The diagram is constructed on the hypothesis that a tenth unit of a
certain good would have a utility expressed as 36; a fifteenth unit of
30, etc., and that the value of the whole supply is estimated according
to these marginal units. Of course if the conditions were that "all or
none" was to be taken, the result would be different.
Unit of Supply Marginal Utility Value of Whole Supply
10 36 360
15 30 450
20 25 500
30 19 570
40 15 600
50 10 500
60 5 300
This diagram is frequently used, and it is important to guard against
some misunderstandings. The marginal unit of any given supply--for
example, ten units--is not any particular unit, it is any one of the ten
units. In the presence of nine units of the good the person or persons
find all the various wants that are dependent on that good gratified to
such a degree that the tenth unit has an importance expressed by 36. But
as this last or marginal unit of supply may be used for any of the
purposes, the importance of each and every unit likewise will be
expressed by 36. Any one of the units, when once present is, in a
logical sense, a marginal unit. When, however, it is a question of
increasing the supply, some one unit may properly be looked upon as
marginal. The dependence felt by men on the whole group is the product
of the units by the marginal utility. As the number of units increases,
the marginal utility decreases, until at length it may reach zero, and
the total value would be nothing. A point of maximum value evidently
will be found somewhere between the two extremes.
[Sidenote: Only one marginal utility at one moment]
Note carefully that on the one diagram are represented a large number of
marginal utilities which never exist at one and the same moment. At any
one moment there is a given number of units and there is but one
marginal utility, and this is the same for each of the units. It is
quite erroneous to say that when there are 30 units the utility of the
tenth unit is 36; of the twentieth, 25; of the thirtieth, 19. It is
equally incorrect to say that when there are 60 units the "total
utility" is equal to the area between the right angle and the curve
a-g, while the value is equal to the rectangle below and to the left of
the point g. The curve from a-g but marks the height of marginal
utilities that have no existence when the supply is 30. The "total
utility," often spoken of in this connection, if it has any existence
certainly cannot be calculated. The diagram must be understood as
representing indicatively at any given moment but one marginal utility,
the same for every unit of like goods. The other perpendicular lines are
expressed in the conditional mood; they are what the marginal utility
would be were the numbers of units different.
[Sidenote: Changing feelings changes utility]
5. _Since goods possess utility only as they gratify wants, it follows
that if wants change, the utility changes._ Utility does not rest
unchanging in the goods as something "intrinsic," but it depends on the
relation of goods to men. This truth, unrecognized for many centuries,
is now seen to be fundamental to the whole problem of value. The
portions of a good added later do not appeal to the same man as the
earlier portions. The man has been changed by what he has enjoyed. In
changing his feelings, goods have also changed his wants. Hence, the
added portions of the good are changed in respect to their utility or
power to gratify a man's wants. Though physically and chemically,
_i.e._, in every material way, they are exactly like the earlier
portions, they cannot have the same want-gratifying power until he again
changes, for they are not in the presence of the same feelings.
Wants are constantly shifting; different kinds of goods are compared in
man's thought and arranged on a scale at every moment according to their
felt utility. An increase in the amount of a good will drop the marginal
utility of the added portions down the scale of usefulness for the next
moment. When we rise in the morning, we want our breakfast; the
breakfast eaten, another breakfast does not appeal to us. Our tasks
done, we take a boat-ride or go golfing; then, appetite returning, we
are tempted to our dinner. And thus from hour to hour wants are
gratified, are altered and are shifted, until, wearied with the day's
labor and pastimes, we go to rest. In a well-ordered life, in an
advanced economic society, the means for gratifying our wants as they
arise are provided in advance. The changing series of desires is met by
a changing series of goods. Life has been defined as a constant
adjustment of inner relations to outer conditions. Economic life is
therefore like physical life, a constant adjustment; and this adjustment
of goods but reflects the shifting and adjustment of feelings.
[Sidenote: Choice is constantly shifting]
6. _The substitution of goods in men's thought is the shifting of the
choice from a good that does not give the highest gratification
economically possible at the time, to another good that does._ The
shifting that takes place on the scale of gratification makes it
necessary for man to shift constantly his choice of goods. This again is
the problem of "economy." Waste results when goods continue to be used
to secure a lower degree of gratification, if they might be used to
secure a higher. The change of choice may be because of a change in the
man, or because of a change in the quality or the quantity of the goods;
or because of a change in the ratio at which the goods can be secured.
§ II. DEMAND FOR GOODS GROWS OUT OF SUBJECTIVE COMPARISONS
[Sidenote: Desire may become demand]
1. _Demand is desire for goods united with the power to give something
in exchange._ An example frequently given to show the difference between
desire and demand is the hungry boy looking longingly at the sweetmeats
in the confectioner's window. He represents desire, but not until the
kind-hearted gentleman gives him a nickel does he represent effective
demand. Desire, therefore, must be united with power to give something
in exchange before it can be called demand. It must be for something
that is attainable; yearning for something beyond reach, sighing for the
moon, is desire that never can become effective demand.
[Sidenote: Demand the Social expression of shifting choice]
2. _Demand is the social aspect of the individual man's comparison of
utilities._ It is the expression of the man's wish to substitute some of
his goods for some one else's goods in order to get a higher
satisfaction. This comparison is often made between two goods owned in
different quantities. When men are constantly comparing things in their
own possession, it is a short step to compare their goods with their
neighbor's.
Demand for consumption goods is thus the manifestation of the man's
desire to redistribute his enjoyments. In demand for goods men virtually
say: "Part of what I have I am ready to give for part of what you have."
The strength of their desire is expressed by the amount of their offer.
When he makes this comparison and this offer, man enters into a social,
economic relation with his fellows.
[Sidenote: The limit of the exchanger's demand]
3. _The law of individual demand is: The trader will reduce his stock of
a particular good to the point where its marginal utility equals that of
the alternative goods._ The greater the divergence in his estimates of
the marginal utilities of two goods, the more ready is he to trade the
lower utility for the higher one. Exchange is but the effort to adjust
goods to wants in the best way. The less useful (marginally viewed) is
traded for the more useful. The greater the difference, in the one
trader's judgment, between the marginal utilities of the two goods, the
greater is the maladjustment, and the greater, therefore, is the motive
to seek readjustment by means of exchange. As the quantity of the good
parted with declines, its marginal utility increases; and as more of the
other good is acquired, its marginal utility declines. The marginal
utility of the two exchangeable units must come to equilibrium in the
individual's judgment. At this point demand ceases, not because an
additional unit of the one good could afford no gratification, but
because it would afford less gratification than the other good in which
demand must be expressed to be effectual.
[Sidenote: The Demand curve]
4. _Demand thus varies at different ratios of exchange between goods,
and may be expressed graphically by a demand curve._ This would show for
any one man the decline of the marginal utility of each added portion of
a good, and these individual demand curves may be united into a demand
curve for a group of men. The demand curve expresses graphically what a
man would be willing to pay at each particular stage in the increase of
goods. We have here come to the very threshold of the subject of markets
and exchange.
[Sidenote: Elasticity of demand]
5. _Elasticity of demand, in the case of any good, expresses the degree
in which a change in its ratio to other goods will increase the demand._
Elasticity varies for different classes of men according to their wealth
and to the cost of the goods. If strawberries are a dollar a box in the
city market, a slight fall in the price, say to seventy-five cents, will
increase the demand but slightly. But if the price is fifteen cents and
falls to ten, the increase in the demand will be marked, for the number
of consumers to whom a difference of five cents is important is then
very great. The demand for the staples is comparatively inelastic. A
certain amount of simple food is necessary to support life; an increase
in its price will not quickly check the demand. On the other hand, if
the price of staple foods falls, no very great increase will take place
in the demand.
CHAPTER 5
EXCHANGE IN A MARKET
§ I. EXCHANGE OF GOODS RESULTING FROM DEMAND
[Sidenote: Reciprocal demand becomes exchange]
1. _Exchange in the usual economic sense is the transfer of two goods by
two owners, each of whom deems the good taken more than a
value-equivalent for the one given._ The comparison of goods that has
been discussed above is a kind of exchange. When a person chooses one
thing rather than another, one form of gratification may be said to be
mentally exchanged for another. This is exchange in that person's mind,
or subjective exchange. But the word "exchange" as usually employed
means an exchange of goods between persons. It is objective exchange,
and when the word is used without modification, it is to be understood
in the objective sense. In the last chapter were analyzed the motives of
the individual man. Robinson Crusoe on his desert island would in very
many ways be acted upon by the same motives in reference to economic
goods that men are in society. Yet, it is exchange in society and the
complicated problems arising from this transfer of goods from person to
person that constitute nearly the whole of the subject-matter of
political economy.
Exchange is seen to arise out of the differences in the situations of
men with reference to goods. The different subjective valuations give
rise to demand, and demand leads to exchange. In early societies
differences in natural products were the most usual causes of exchange.
Salt, though so essential to life, is found in few places. The metals
early became indispensable for weapons of defense or for the chase, and
were sought far and wide. Rare shells, feathers, jewels, and the
precious metals appealed in early times to a universal desire for
ornament. Products like these are the objects of a rude sort of exchange
in the first simple efforts made to adjust possessions to wants. Within
the tribe, differences in the skill and ability of men to produce arrow
heads or weapons or ornaments, bring about the exchange of goods.
[Sidenote: Mutual advantage in exchange]
2. _The advantage of exchange consists in the raising of the
want-gratifying power of goods to both parties._ It generally was
assumed by medieval thinkers that if one party to an exchange gained,
the other must lose. The mistaken idea prevailed that value is something
fixed in the good, and unchangeable. Where the exchange is voluntary
(and only that kind is here being considered), it is mutual advantages
which make the exchange rational. Many false conclusions on practical
questions still result from a failure to grasp this simple truth. It
follows from this that the act of exchange is itself useful, for goods
having a small importance to men are given a higher importance by being
brought into better relations with wants. Merchants, peddlers, traders,
and common carriers of all sorts, therefore, are adding to the utility
of goods. This idea has been only slowly apprehended, but is now one of
the least disputed propositions in economics.
[Sidenote: Demand is supply in another aspect]
3. _Barter is the exchange of goods without the use of money._ Either
one of the goods traded in cases of barter may be considered as sold,
and either one as bought, according as the matter is looked at from the
standpoint of the one or the other party to the exchange. Demand,
therefore, is supply, and supply is demand when the point of view is
shifted from one party to another. The fisherman's demand for venison is
expressed in terms of fish; the hunter's demand for fish is expressed in
terms of venison. But to the fisherman the venison is the supply offered
to him. The term "marginal utility" of a good, therefore, does not
refer merely to the demand of the consumer; for it expresses by a single
phrase the idea both of demand and of supply. The utility of the goods
composing the supply is expressed in terms of the goods that represent
demand and vice versa. The only way in which man can give definite,
concrete, numerical expression to his desire for goods is to state it in
terms of other goods. In expressing numerically, in terms of other
objects, an estimate of the utility of an apple, a horse or a house, one
inevitably gives expression to a ratio of exchange; demand for one good
is the offer of another good.
§ II. BARTER UNDER SIMPLE CONDITIONS
[Sidenote: In isolated exchange the price is not economically fixed]
1. _In isolated exchange, where only two traders engage in barter, their
estimates give respectively the upper and the lower figures of the ratio
at which the trade can take place._ Let us recall the fact that a
difference in the _relative_ estimates that men place on goods is the
first essential of exchange. Those estimates may be expressed in a
ratio; we may say that A will give four apples for one orange, would be
glad to give fewer, but will not give more; while B will give one orange
for three apples, would be glad to get more apples, but will not take
fewer. The outside limits of the ratio at which the exchange must take
place will, therefore, be one orange for three or four apples.
A, seller of apples, offers 4 (or fewer) apples for 1 orange.
B, buyer of apples, demands 3 (or more) apples for 1 orange.
There is, in entirely isolated exchange, therefore, a lack of
definiteness in the price, much depending on what Adam Smith called the
"higgling of the market." In the old-time American horse trade much
depended on "bluff"; in such cases it was as important to be able to
judge character as to judge horses. A thorough analysis of the trade,
however, would probably show that the bargain is concluded at a point
which exactly balances the hopes of gain and fears of loss of one of the
parties.
[Sidenote: Competitive bidding narrows the limits of price]
2. _Where one-sided competition exists, the ratio of the exchange will
be somewhere between the estimates of the two buyers most eager for the
last portion offered_. By competition is here meant the independent
seeking of the same thing at one time by two or more persons. Where
there is one market price paid by a number of buyers, it may be that no
two of the subjective estimates are alike; the exchange value may differ
from all of their estimates, and yet must correspond closely to two.
Auction sales well illustrate the principle. If there is one ax to be
sold and ten possible buyers for an ax, and there is no combination
among them, the bidding will go on until the estimate of the buyer next
to the most eager, has been reached. The most eager buyer can then
secure the ax by bidding just a little above his next competitor. But if
there are ten axes and ten buyers who know that there will be ten axes
offered, the more eager buyers will refuse to bid much above the less
eager ones. A shrewd auctioneer, therefore, often conceals the fact that
there is more than one of an article, and having sold it off, brings out
a second or a third one of the same kind, thus keeping the buyers in
ignorance of the supply and getting somewhere near the estimate of the
most eager buyer in each case. Advertisements of "a limited supply,"
"the last chance," "positively the last appearance," are meant to
stimulate the demand of the patrons, and to lead them to buy at once. In
general, therefore, where competition exists on one side, price is fixed
with greater definiteness than in isolated exchange. Not so much depends
on shrewd bargaining, on bluff, or on the stubbornness of an individual.
Far more depends on forces outside the control of any one man. The
bidders are impelled by self-interest to outbid their competitors, and
thus the limits within which the market price must fall are narrowly
fixed.
[Sidenote: Buyers fix price of perishable goods]
If things already brought to market must be sold at any price that can
be secured, the buyers may be said to fix the price. This does not mean
that they can buy it for any sum that they wish, but it means that when
each one is trying to get it as cheap as possible, their bids finally
determine how much it will sell for. In such cases, therefore, the
competition is for the moment one-sided.
If a part of the supply can be withdrawn and kept without great loss,
this will be done if the price is low. Strawberries, fish, and meat may
be sold Saturday night at any price that will secure purchasers, but
every thing that can be kept with little or no depreciation will be
withheld from sale for a time. It may even be of advantage to the seller
to destroy a part of the supply, when the increased price of the smaller
amount will give a larger total.
[Sidenote: The margin of advantage and the marginal pair]
3. _Where two-sided competition exists, the bidding goes on until a
price is reached where the least eager seller and the least eager buyer
have the narrowest possible motive to exchange_. As the market ratio
varies from those in the minds of the individuals when they come to the
market, there is left a considerable margin to some and a very small one
to others. This difference between the market value and the ratio of
exchange at which any given individual would continue to exchange for
the good may be called the _margin of advantage_. Moreover, the buyers
will have a margin and the sellers a margin, and as that margin narrows
there is less and less motive to continue the exchange until, finally,
the margin disappearing, the buyer or seller, withdrawing from the
market, ceases to be an exchanger, at least for that particular part of
the goods.
The least eager buyer and the least eager seller may be called the
_marginal pair_. They are the buyer and the seller respectively having
the narrowest margin of advantage. Their outside estimates are nearest
to the market ratio. If the market ratio shifts slightly in either
direction, one of them will drop out of the exchange. It is evident that
a buyer who is taking ten units may be on the margin with reference to
the tenth unit, and yet may continue to be one of the most eager buyers
to secure one unit. Thus, the marginal buyer is to be thought of as that
person who, logically considered, is the least eager, or on the margin,
with reference to a particular unit of supply, however eager he may be
with reference to any other unit of supply. It would be well to recall
here the discussion of the nature of wants and the variation in the
intensity of demand.
[Illustration: _Units of Goods_]
[Sidenote: Market values built on individual estimates]
4. _Market values are built up on subjective valuations._ The idea of
market values, therefore, is that of the want-gratifying power of goods
as expressed in terms of other goods, where there are various buyers and
sellers. They are not an average of the subjective valuations, nor are
they made up of the extremes. They correspond closely with the
subjective estimates of two of the exchangers. The other parties to the
exchange are willing to accept the market ratio, for it offers them more
inducements than it does to either one of the marginal pair.
§ III. PRICE IN A MARKET
[Sidenote: One price in a market]
1. _A market is a body of buyers and sellers in such close business
relations that the actual price conforms closely to the valuation of the
marginal pair._ The word "price" which we have used, may be defined as
value expressed in terms of some commonly exchanged commodity. The term
is used more broadly of anything given in exchange. The very terms of
this definition imply that there can be but one price in a market. This
is a somewhat abstract but a useful economic proposition. Very often
within sound of each other's voices traders are paying different prices
for a good. On the occasion of a break in the stock-market, excited
traders within ten feet of each other make bids that differ by thousands
of dollars. Retail and wholesale merchants may be purchasing goods in
the same room at the same time at very different prices. But within a
group of buyers and sellers where competition is approximately complete,
price is fixed with some degree of exactness. The more nearly the actual
conditions approach to the ideal of a market, the less are prices fixed
by higgling, and the more impersonal they become, the buyers and sellers
being compelled to adjust their bids to the needs of the market, and not
being able to vary them greatly one way or the other.
[Sidenote: The earlier markets]
2. _Markets are steadily widening through the improvement of means of
communication and transportation._ The earliest markets were established
on the borders between tribes, villages or nations as a common ground
where strangers met to trade. At such markets were brought together from
sparsely settled districts a comparatively large number of merchants and
customers. Buyers had the opportunity of wide selection both in kind and
quality, and the sellers found a large body of customers gathered at one
point. Throughout the Middle Ages purchases were made by the more
prosperous husbandmen in great quantities once a year at the fairs or
markets. As both the buyers and sellers came from widely separated
places, there was, in most respects, no combination, and the conditions
of a competitive market were present.
[Sidenote: The growth of markets]
The number of buyers and sellers that can constitute a single market is
limited both directly and indirectly by the means of transportation. A
dense population cannot usually be maintained without easy means of
transportation to bring in a large supply of food, and to carry back
manufactured goods great distances. The remarkable growth in the means
of commerce since the application of steam to water traffic, and the
invention of the railroad, have made it possible for goods to be
gathered from most distant points. A market implies a common
understanding among traders. Modern means of communication such as
newspapers, post-offices, telegraph and cable, trade bulletins,
commercial travelers, the consular service, and many forms of special
agencies, are diffusing information widely. As a result of these
changes, there has been a widening of the village-market to the markets
of the province, of the nation, and finally of the world. While a part
of every one's purchases continues to be made in the neighborhood, a
greater and greater portion of the total business is done by traders who
are widely separated and who are indeed members of the world market.
Various articles produced in the same locality may seek different
markets. The market for wheat may be in Liverpool, while that for fruit
and eggs is in the village near the farm-house. If a given product of
any community is sold in different markets, the net prices secured must
be very nearly equal.
[Sidenote: The conceptions normal and market price]
3. _Normal price is spoken of in contrast to market price when the
actual market price results from exceptional circumstances and probably
will not be maintained._ The term "normal price," much used in economic
discussion, is the price which, apart from exceptional conditions, is
expected to prevail, and to which actual prices seem constantly
striving to adjust themselves. As actual prices are nearly always
either more or less than so-called normal price, and only momentarily
ever correspond with it, the term "normal" would appear to be something
of a misnomer. Moreover, as the circumstances of production change, this
normal price itself is altered so that what is normal one day may be
quite abnormal the next. The thought of "normal price" is an abstract
one, but despite the inaptness of the word it is not without some
practical validity. In determining whether he shall continue to produce
certain goods, the business man is practically guided by his view of
normal price. An example of departure from normal price as above
defined, is found in the price of food when an expected ship has failed
to arrive at a port with its cargo of grain. A scarcity amounting almost
to famine might thus exist in a seaboard city, and the market price
would rise; but as this would be due to an accident and would afford a
larger gain than usual to those who happened to have a supply of grain,
men would say that the market price was above the normal price. The
arrival of the expected ship would cause the market price to return to
the normal.
[Sidenote: Review of the argument]
In review, we see that the market value of goods grows out of the
different personal estimates made by men. Market value itself being a
complex and difficult problem, it can be mastered only by dividing it.
First, therefore, must be studied the more general and obvious motives
of men, the nature of wants and their effects on man's subjective
estimates. The same simple motives that influence the subjective
valuations made by individual men, may be traced to the conditions of
the complicated market. It is their workings that are seen in the
obscurest problems of market price.
CHAPTER 6
PSYCHIC INCOME
§ I. INCOME AS A FLOW OF GOODS
[Sidenote: The recurrence of wants]
1. _Satisfaction and gratification being only temporary conditions,
economic wants appear in more or less regularly recurring series._
Impressions are short lived, sensations are temporary, wants that have
been satisfied recur. Wants recur for the same reason that they first
arose. No impression on the nerves or on the senses is lasting. Man's
senses were developed for the purpose of bringing him into relation with
the outer world, of enabling him to survive in his struggle with the
forces of nature. So, when a good has been enjoyed, the utility to that
person of that thing or service for that particular moment, falls, it
may be even to zero. To keep wants satisfied is impossible; we cannot do
next year's reading or next week's eating now; we cannot live the life
of to-morrow. The best results in reading or eating come from taking the
right amount day by day. But it is a need in the life of men that wants
should recur after a time, otherwise there would be no motive for
action.
[Sidenote: Series of wants and series of goods]
2. _The economic ideal is that this series of recurring wants should be
met by a corresponding series of goods._ It is evident that if a series
or succession of goods varies, at different times, moments, and
conditions, in its power to gratify wants, the closer the correspondence
between the two series, that of wants and that of goods, the greater
will be the total of gratification. We may liken man's life to a journey
in which the supplies of food are gotten at the stations. If any one of
these supplies fails, the traveler suffers the pangs of hunger, and if
two or three supplies are at one point, they do not serve the needs of
man so well as if distributed along the way. This constant inflow of
goods is one of the fundamental needs of life. The savage dimly
understands this need. Even the birds and the beasts adjust their lives
to it either by travel or by toil. The spring and autumn migrations to
new feeding grounds are the attempts of the bird to gratify this series
of wants as they arise. The ant, the bee, and the squirrel anticipate,
and work to fill their storehouses against the days of need.
[Sidenote: Social and private incomes]
3. _Objective income consists of the additional sums of goods acquired
by individuals or by society during the income period._ The term
national or social income may be contrasted with individual or private
income in the objective sense. The nature of the acquisition of
objective incomes may, in some cases, be different if viewed from the
social and individual standpoints. Society, as a whole, may be said to
acquire income only when goods are produced; individuals may acquire
income by gift, bequest, theft, or other modes of transfer from other
individuals. In many cases the two kinds of income, however, agree, the
objective income of society being the algebraic sum of the goods
acquired or parted with by all the individuals.
We should not understand that either social or private objective incomes
include only material goods, for many utilities and labor services that
never take on a material or money expression are included in either
case. Indeed, we are close here to the conception of psychic income
which is to be developed more fully.
[Sidenote: Money income]
Income of money is not often the same as income of things. Usually many
of these subtler utilities are overlooked and omitted from the
recognized money income. In this day the use of money is so common that
we are sometimes led to ignore the value of things to which the money
expression is not given. The money income is merely the money
expression of the value of currently acquired goods, and it is the only
medium through which such varied sources of gratification can be
compared.
[Sidenote: Gross and net income]
4. _Income in the logical sense must be a net addition, but the term
gross income is not without popular and practical meaning._ Gross income
is sometimes spoken of in the sense of total receipts, as the total of
goods secured; net income is the remainder after deducting expenditures
and after replacing the goods employed to secure the income. In order to
produce some goods technically, men make use of other goods. While they
are storing up a supply of wood or coal it may be looked upon as the
income, but they may burn it to help grow hothouse plants. While they
gather flowers with one hand, they destroy fuel with the other. Only the
net increase in value can be accounted income in the second period. The
goods that come into a man's possession in any period are of many sorts:
to get some he has destroyed many previously existing goods; while to
get others he has not needed to use up the accumulations of the past or
to mortgage the future. The one kind is gross, the other net income.
[Sidenote: Wealth and income]
5. _An income of consumption goods is a part of wealth, but not the
whole of it._ The consumption goods, the "present goods" at the moment
available, are the essential part of wealth for the moment's enjoyment.
The only essential and immediate conditions of a series of
gratifications is a regular series of consumption goods. But many things
existing which could be used to secure a gratification are not in fact
treated as consumption goods. A crop of corn is not all income. In a
time of famine it could be used, but seed-corn was saved from last year,
and some must be kept for next year. This is a part of wealth, but not
of "present goods" as we understand the term.
[Sidenote: Some goods never can become enjoyable goods]
Further, in the economic world there is much wealth that never can
gratify any want directly; many forms of wealth never can be consumption
goods. It is true that everything called wealth is expected to
contribute sooner or later in some way to the sum of gratifications. It
is for that reason it is called wealth. It is, however, a mere figure of
speech to say indirect want-gratifiers become want-gratifying goods. For
example, the engine transporting a load of coal is indirectly gratifying
wants; if it is transporting a train-load of passengers, the
gratification is direct. A machine making cloth for next year is
gratifying wants only in a metaphorical sense. A field used to produce
food is not a direct want-gratifier until it is transformed into a
residence site, a playground, or a tennis-court.
It is necessary therefore to recognize the distinction between present
and future incomes. The value of the mass of wealth in possession and
yielding income, rests in large part upon its power of contributing to
income in some future period. Thus, any durable good may be looked upon
as embodying a series of incomes ranging from present to future in
varying degrees. This will be fully considered under the subject of
capital.
[Sidenote: Income from wealth and from labor]
6. _Incomes are called funded or unfunded according to the sources from
which they are derived._ Funded income arises from the possession of
wealth or of claims on wealth, such as lands, railroad stocks,
government bonds, etc. The income is "funded" because it corresponds to
an abiding fund of wealth. The income arising from current labor is
unfunded, because there is no permanent fund of accumulated wealth
corresponding to it.
The idea of regularity connected with funded income is not essential to
the idea of income in general, _i.e._, we cannot refuse to call a thing
income because it occurs only this year. If it is part of the sum of
goods that flows in, that is newly available for the man's use, it is
income. But funded income is the more abiding, for income from wages
stops when the man dies or fails to perform his work, while the income
from wealth continues after he ceases to be active. Thus, families with
equal incomes may differ greatly in wealth, the one depending entirely
on salaries, the other on rents.
§ II. INCOME AS A SERIES OF GRATIFICATIONS
[Sidenote: Gratification the test of psychic income]
[Sidenote: All sources of income are productive]
1. _The value of consumption goods is derived from the pleasurable
psychic impressions which they aid to produce, and these psychic effects
constitute the psychic income._ The objective income is sometimes called
the "real" income, but certainly it is not income in the most essential
sense. Things outside of men cannot be feelings, they can only call out
or occasion feeling, and it is the attainment of pleasurable conditions
in mind or soul that is the aim of all economic activity. Material
income and immaterial income are both related to and reducible to
psychic income. Some portions at least of the objective incomes of goods
are continually by use becoming subjective incomes of enjoyment. Men
talk of material income as consisting of bushels of wheat, head of
cattle, etc., and of immaterial income as the uses that durable goods
yield directly or that men perform for each other, _e.g._, those of the
singer, physician, teacher, judge--all services that do not take on
material form. There was a long-standing dispute in economic literature
regarding the difference between productive and unproductive labor.
Productive labor was said to be that which embodied itself in abiding
material form. The distinction led to some peculiar puzzles and
paradoxes. The bartender mixing drinks, adds to the value of those
ingredients; in a minute that value is dissipated. According to the
distinction in question, he is a productive laborer because his services
are embodied in material form, whereas the lecturer is regarded as an
unproductive laborer because the results of his labor are not embodied
in material form. But whether or not the service has for a moment
embodied itself in material form is of no essential economic import. The
presence of the waiter is as essential to the well-served dinner as are
the polished silver and china, or as the well-cooked food. The
distinction in question is not now made by economists, all labor that
contributes to value being regarded as productive. But a similar
distinction is inconsistently preserved by many writers in the case of
material things. A building used as a factory is called productive, but
used by the owner as a dwelling it is called unproductive because the
service it renders does not appear in material form. But the use of the
house, or that of land for a school ground or campus, secures a certain
gratification, an immaterial good. Consistency requires that the
services of men and the use of material things be judged by their
psychic results, the question whether the service takes on a material or
an immaterial form being disregarded.
[Sidenote: All wealth is logically related to psychic income]
2. _Only those things and actions that are in some causal relation to
gratifications can have value to man._ This proposition of theory is
demonstrated every hour in practical life. The business man always is
trying to trace a causal relation between things that do not and cannot
themselves directly satisfy wants, and things that do. The vineyard has
no value to Tantalus, unable to reach its fruit. A captive, chained to a
rock, attaches value only to the things within his reach. Men living in
savagery and ignorance starve amid the possibilities of plenty. Chained
by their ignorance and improvidence to a little spot of earth, they do
not see clearly, either in time or space, the economic relations about
them.
[Sidenote: Values of things distant in time]
3. _Man's foresight and knowledge enable him to think of many periods at
once, and thus his felt dependence on goods extends over a series of
future productive agents._ In order to simplify the problem, we have
spoken of the economic man as living only in and for the moment. If he
had no more knowledge, memory, or imagination than is necessary to
compare goods here, only present goods could have value to him. Even the
higher animals, and much more the savages, rise above that level of
improvidence. With increased intelligence the economic life of man
expands, and he attaches importance to things which at the present
moment have not, and cannot have, the slightest influence on his
immediate gratification. The extension of man's view works a momentous
change in his economic estimates. Of the thousands of forms of matter in
the world, only a comparatively few ever will make an immediate
gratifying impression on man's senses. But many of them are so connected
in his thought by chains of association with pleasures or uses, that
almost instinctively and most intensely he attaches an importance to
them. In most cases it would require close thought to see that the
service attributed directly to them was but a reflection of that
performed by some other good. Thus, more and more, the estimates placed
by men on goods come to depend on knowledge and foresight, and not on
immediate impressions and feelings.
[Sidenote: Goods related in varying degrees to psychic income]
4. _Things are causally related in varying degrees to the psychic
income, and have value only as their relation is known and felt._ The
explanation of value is not complete till value has been traced back to
its source in gratification. Often the complex nature of the problem is
ignored. If one discusses the trading of a bushel of grain, to be used
by a hungry man for food, for a sheep to be kept for breeding, or for
wool to be made into cloth next year, he may overlook the difference in
the grade of wants compared. In this case, a gratification of the
present moment is compared with a gratification of a very different kind
at a future time. The problem involved is complex because of differences
in time, in place, and in the nature of the want-gratifiers. The student
should endeavor to reduce the problem of value to its simplest form by
considering first the exchange, at the present moment, of immediately
enjoyable goods. The logical starting-point in the theory of value is in
those goods that are in closest touch with feeling, and on this basis
may be built up an explanation of values in which reason and forethought
have a greater part. Starting from the proposition that psychic income
is the foundation of all values, we shall go on, however, to trace
causes that give value to all the physical agents, and to the most
indirect of want-gratifiers.
DIVISION B--WEALTH AND RENT
CHAPTER 7
WEALTH AND ITS INDIRECT USES
§ I. THE GRADES OF RELATION OF INDIRECT GOODS TO GRATIFICATION
[Sidenote: Technical rank of agents]
1. _Goods may be ranked according to their technical relation to wants._
The technical rank of goods (sometimes spoken of as the degree of
roundaboutness of the process) signifies the number of steps or
processes that intervene between the agent used and the desired form. If
one wishing the hickory-nut hanging above his head must first pick up a
stick to throw at it, the nut is removed one step from desire. But even
among savages the processes are much more complicated. The Indian with a
crude knife fashions his bow and arrow, fastens the flint and cord which
represent still other processes of industry, and shoots the bird which
satisfies his hunger. In modern conditions the relations are vastly more
complicated; only at the end of a long series do men arrive at the thing
which gratifies their wants.
[Sidenote: Time relations of goods to wants]
2. _Goods may be ranked by their relation to wants in time._ The
relation in respect to time is measured by the period that must elapse
before the utility of an agent results in, is converted into,
gratification. No agent or influence intervening, a thing may yet be
removed a long way from gratification. A tree may not be fitted to bear
fruit for ten years to come. Meantime, there are many other possible
uses for the tree: it may be used for fuel, or to make a canoe with
which to catch fish, or to follow some other indirect method of
production. Evidently the technical and time relations of goods are very
different. The number of steps has no necessary relation to the time. A
number of technical steps may be taken in half an hour, or a process of
a single technical step may last a year. In the mechanic arts the
technical relations are of primary significance, but in economics the
time relations are mainly to be considered.
3. _Economic goods may be classified as immediately enjoyable goods and
durable agents._ Enjoyable goods are goods in a final form, producing
gratification or just ready to give gratification the next moment, as
the cool draft of air made by a fan on a hot day, the cup of coffee
steaming on the table.
[Sidenote: Enjoyable goods and durable agents]
Many goods of just the same form as the foregoing may not be affording
current gratification (except that afforded by thrift and forethought),
but are kept because later they will gratify a more intense want or
gratify a want better. Apples and potatoes are kept in a cellar so that
their use is distributed throughout the winter; cider and wine are kept
till they get a quality that appeals more to the palate. Coal, wood, and
stocks of goods, are thus kept in the form of enjoyable goods, destined
to be physically destroyed when at length they yield a gratification.
Evidently they must be storing up meantime a certain additional utility,
for otherwise there would be no reason why they should be kept for the
future. Such goods as these are sometimes called unripened consumption
goods, but until ripened they bear in part the character of durable
agents.
Abiding sources of economic enjoyments are called durable agents. The
inhabited house is a source of continued gratification in each moment's
shelter it affords; but, further, it is the durable source of a series
of future uses, as yet unripened. The hammer, the hoe, the tree, the
field may all be considered as agents to secure consumption goods. Some
of these are but one step removed from direct gratification, as the hoe
helping the gardener to get food for his own use. Other agents are bound
by many technical links to the ultimate gratification.
[Sidenote: Degrees of durableness]
4. _This classification of goods is abstract, in that it is a
classification, not of concrete goods, but of qualities shared in some
degree by nearly all goods._ Most goods unite in some degree both
characters, but in varying measure. This is, therefore, a continuity
classification, the varying classes of goods grading from those whose
durableness is zero (just at the moment of consumption) to those most
durable, which yield an endless series of uses or products. Yet the
classification is practical, corresponding as it does with thoughts
which men have in the use of goods. By repairs and other methods goods
become, and are looked upon as, durable sources of a series of uses.
It is to be noted further that the enjoyable goods pass over into
psychic income, that is, they are the stream of objective utilities that
is each moment detaching itself as income from the great mass of wealth.
The durable goods are those utilities which for the time remain, not yet
ripened or ready to be converted into psychic income.
§ II. CONDITIONS OF ECONOMIC WEALTH
[Sidenote: Income as affected by climatic conditions]
1. _The bounty and variety of the natural supply of indirect goods in
the material world are the prime conditions of a bountiful income to
society._ The effect of climate on the supply of goods available for man
is complex. Climate is itself a direct source of gratification. As
temperature must be adjusted to man's need, climate satisfies wants
directly. Health, energy, the beauty of noonday woods and of sunlit
clouds are conditioned on the favor of nature. Climate affects, further,
the supply of material economic goods. All the earlier civilizations
arose in warmer countries. But, after man had gained a certain mastery
over the obstacles of nature, he was able to soften the harsher features
of climate, and with better shelter and clothing, with better stocks of
winter food and fuel, the more favorable features of the temperate zone
could be utilized. So civilization moved northward from Egypt and India
to Greece and Rome, to northern Europe and America.
[Sidenote: By natural resources]
Soil conditions for vegetable life determine first the amount and kind
of animal life. Animal life from one point of view is a parasite, living
on the vegetable; it is only the vegetable that has power to assimilate
most inorganic compounds. Water being a need of plant life, the amount
of rainfall is one of the most important conditions of industry. Man,
therefore, depends on the resources of the soil directly or indirectly;
a fertile soil furnishes him either directly a supply of vegetable food,
or indirectly a supply of animal food.
Natural supplies of metals, of coal, and of timber are important
consumption goods, but they are also indirectly the condition for a vast
variety of other goods. The industry that could exist without iron,
copper, and coal would be of a very low grade.
[Sidenote: By flora and fauna]
The variety of flora and fauna, and their fitness for man's needs,
largely condition the possible production. If, in the course of
evolution, it had chanced that wheat and corn, the horse and the cow,
had been crowded out in the struggle for existence, we should have had a
very different civilization. The possibilities of civilization in Peru,
and those of all the Indians on the American continent, were limited for
lack of domestic animals. Animals that are fit for domestication are a
necessary intermediate agent by aid of which man can appropriate and
turn to his use the fertile qualities of the soil.
Not content with the material world about him, even when it is at its
best, man alters it in many ways. He enriches the soil, improves the
varieties of animals, he even in some slight degree affects the
climate, and by the use of a multitude of artificial bits of matter
called tools, works profound changes in the world in which he lives.
[Sidenote: By motion and energy]
2. _A large part of the utility of goods is conditioned on motion and
energy._ It has been said that man's power in production is limited to
moving things. The outer world is to man the sole source of motive
forces. He can bring things together and they produce the result.
Further, it may be said that nearly every kind of utility is conditioned
on motion. It is man's aim to secure a constant inflow of goods. To
secure this either he must move to get the goods, or he must cause goods
to move toward him.
The law of "conservation of energy" helps to explain economic action;
the supply of energy in the universe cannot be increased or diminished,
but may take on new forms. So a limited supply in man's control may take
on various forms and so have different effects on gratifications. One
and the same source of energy may be converted into the different forms
of heat, light, motion, electricity, etc. But there must be some source.
Man's desire is directed to getting force at the right place and in the
right degree. If light or heat is too intense, it causes pain; the glare
of the sun blinds instead of giving keener vision. A moderate force
applied to any of the senses gives the maximum clearness or pleasure.
Man is constantly endeavoring to secure forces from the outer world and
to adjust motion so that it will directly or indirectly best serve his
purposes.
[Sidenote: By food, animals, and fuel]
3. _Among the main sources of power used by men are food, domestic
animals, and fuel._ In eating food man stores up force in his own body.
When he draws the bow he puts force into it to lie latent until
liberated at the right moment. There must be a source of energy likewise
that mental action may go on, and the power of sunbeams, stored for a
time in food, is liberated in the processes of thought.
This first natural mode of liberating energy within their own bodies
does not satisfy the growing needs and aims of men. Such a mode is
"labor," which becomes at times painful and distasteful. In the earliest
societies known, some sorts of domestic animals are found supplementing
man's efforts and acting upon the material world to alter it for man.
The dog joining in the chase guards his master's safety, and helps to
bear his burdens. The draft-beast in the field turns the heavy soil, and
aids in the final harvest. The trained elephant does the work of twenty
men piling logs, loading ships, or carrying burdens.
Man further increases his control over the material world by making
other men do his bidding. Domestic slavery, where wife or child serves
the father of the family, or chattel slavery, where the vanquished toils
for the victor, are all but universal in early communities. Such a
method of increasing one's control over the forces of the world requires
only superior strength, no special intelligence in mechanics, and is
thus one of the first crude devices in a primitive civilization.
Fuel has been, up to the present time, perhaps the most important source
of energy. Fire in the hands of savage man gave him dominion over the
forests and over the metals. In this age of steam the liberation of the
energy of the sun, stored up in coal in ages past, is still the
indispensable condition of our developed industry.
[Sidenote: By the energy in wind and flowing water]
4. _The greatest and most exhaustless reservoirs of power for man's use
are in wind and water._ While the supply of fuel is being used at a
progressive rate and will soon approach exhaustion, there are elsewhere
exhaustless stores of energy awaiting man's command. To make use of the
wind for sailing a boat, only the simplest arrangements are needed; a
windmill fixed at one place requires more ingenuity and machinery. The
energy of the wind is derived from the sun and will last until the sun
loses its heat. If some means can be found for equalizing the flow and
for storing the power of the wind, it may yet become a great agency of
industry. The force of falling water, long used in a petty way by the
old water-mills, is just beginning to be employed on a large scale at
such points as Niagara. Where fuel is high, as on the Pacific coast,
wave motors have been successfully used in a small way, but wave motion
is too irregular to serve well the needs for power. But the constant
motion of the tides offers, at some favored points, a source of power
that will remain as long as the earth revolves upon its axis.
[Sidenote: By the intelligent utilization of all these agencies]
5. _Man studies and compares the durable goods that give him command
over enjoyable goods, and attaches value to them._ Thus energy is found
dissipating itself throughout the world in ways useless to man, and in
places where it cannot serve his purposes. As man grows in power of
control over nature, he seeks to apply these forces in forms and at
places he has selected. If he can arm himself with the energies of mine
and torrent, he can react with giant strength on the material world. He
ceases to accept passively its conditions, and to live on its grudging
gifts; he becomes its fashioner, in a sense its creator. His
intelligence and his wants are most important factors determining what
the form of the physical world about him shall be.
But all the efforts of men in the most developed economy cannot make to
disappear the differences in the quality of goods and agents. Desirable
goods to consume are limited in quantity, and they vary in quality;
hence they have value and some higher than others. Likewise, durable
material agents and sources of power are limited in number and vary in
convenience of location and efficiency. As men seek to gratify their
desires, they attach importance to these agents of power. Each is valued
for its service or its series of services. When anything is seen to
contain a series of uses, it becomes a rent-bearer, and the economic
problem of rent arises, one step more complex than the problem of
valuing simple consumption goods.
CHAPTER 8
THE RENTING CONTRACT
§ I. NATURE AND DEFINITION OF RENT
[Sidenote: Temporary use and permanent possession of agents]
1. _The temporary use of materials and power and their sources is
necessary to bring most enjoyable goods into being._ Indirect goods have
value solely because they help to get direct goods. The apple-tree is
valued because it bears fruit, and the orchard because the trees give
promise of yielding a succession of crops for years to come. There are
thus two problems of value in connection with durable goods: that of the
value of a temporary use for a brief period, as for a year; and that of
the value of a thing itself, the use-bearer, for a long series of years
or in perpetuity. To explain what fixes the value of the temporary use
is the problem of rent; to explain what determines the value of
long-continued use or of permanent control and ownership of a use-bearer
is the problem of capitalization.
[Sidenote: Origin of the term rent]
2. _The term rent is used in a number of senses, which must be carefully
distinguished._ The original meaning of rent was any regular income or
revenue arising from wealth. The word comes from the low Latin _renta_
from _renda_, in turn from _redditus_, that which is given, yielded or
given back, or _rendita_, that which is given or returned. The French
_rendre_ (English render), to give or return that which belongs to one,
is used very early. Chaucer used "rente" as an income. "Cattle had he
enough and rente," cattle probably meaning property (chattels), and
rente income. Rental is a collective term for a number of rents. The
total yield of an estate was called its rental or rent-roll, and a list
of the various sources of income, including all payments from tenants in
money, produce or services, constituted its rental.
[Sidenote: Popular and special meaning of rent]
3. _The popular meaning of rent is the amount paid for the use of
material things which must be returned to the owners after the time of
use agreed upon._ We speak of the rent of a house, boat, etc., using the
word as a synonym for hire. In the European languages the word is used
more frequently in that sense. In the French _la rente_ means the income
from any kind of property; but corporate securities and national bonds
came particularly to be called _les rentes_, because they are a form of
investment yielding a permanent income. The one who has a perpetual
income from bonds or rents is called a _rentier_. In German the term
_Rente_ is used more broadly than in English, as an income of any sort,
_Grundrente_ meaning the rent of land, and _Capitalrente_ the income
usually in England called interest.
A restricted meaning has long been applied by economists to the word:
the income yielded by lands, etc. This was put in contrast with interest
for money and capital, and with wages of labor. This meaning is now
being abandoned by economic students.
A wider meaning recently given to the word by many economists turns on
the supposed relation of some portions of price to cost of production.
Thus, frequent use is made of the expressions: consumer's rent,
producer's rent, buyer's rent, seller's rent, etc. In the well-founded
opinion of some recent critics this usage rests on a mistaken reasoning.
However, in the midst of this wide variety of usage the student must be
forewarned and alert. Doubtless agreement will at length be arrived at.
Meantime, no economist can dictate what meaning is to be attached to the
term, but one may suggest the definition that seems to him most
expedient. Throughout this work we shall endeavor to use the term rent
uniformly and consistently as it is now to be defined.
[Sidenote: The essence of rent]
4. _The essential thought in rent, as we shall use it, is that it is the
value of the usufruct as distinguished from the value of the use-bearer
or thing itself._ The meaning of usufruct is the use of the fruits, or
in legal phrase: "the right of using and enjoying the income of an
estate or other thing belonging to another, without impairing the
substance." The obvious fact is that fruits can be eaten without
destroying the tree, the harvest gathered without destroying the field.
By a metaphor the word in legal discussion is applied to the use of any
product, and we shall employ it, as in common speech, in reference to
one's own goods as well as to the goods of another.
[Sidenote: Rented agents are looked upon as durable]
The qualities whose use gives value are not usually indestructible, but
they are treated as undestroyed. There is a famous phrase used by
Ricardo, "rent is paid for the original and indestructible qualities of
the soil." He said "indestructible," but the word is not apt. There are
many qualities in the fertile field that _must_ be destroyed when it is
used. Every economist since Ricardo's time has recognized this, and many
excuses for the inaccuracy have been given. After every harvest, the
field is less serviceable than before, and if it is to be of the same
grade of efficiency, the fertile elements must be restored. We cannot
assert that Ricardo meant _undestroyed_, for he was not quite clear on
the question. But it is evident that one can count as true income only
that part of the value of product that remains after full repairs have
been made. It is only by a fiction that most indirect agents can be
regarded as indestructible. Things yielding rent are not indestructible,
but generally they are preserved undestroyed.
[Sidenote: True rent a net income]
5. _A distinction must be made between gross and net, or true and false
rent._ Before the usufruct is estimated, allowance must be made for
repairs, depreciation, and for various expenses which absorb a good
portion of the gross product. When this allowance has been made, the
income may be considered as a net sum not due to the sale, or to the
using up of any part of the thing rented. This is the essential thought
in typical rent--that it is the value of the surplus, or net product, of
an economic agent leaving the agent itself unimpaired in efficiency. The
total product is sometimes called the "gross rent," but economic rent is
"net rent." This thought is made clearer by the following discussion.
§ II. THE HISTORY OF CONTRACT RENT AND CHANGES IN IT
[Sidenote: Economic and contract rent distinguished]
1. _Economic rent (likewise called natural, competitive, and sometimes
rack rent) is to be distinguished from contract rent._ Economic rent is
the market value of the usufruct, and contract rent is the amount a man
pays for the use of wealth by virtue of an existing agreement. The one
is impersonal or economic; the other is personal or legal, being fixed
by agreements between persons. The rents usually spoken of are contract
rents.
The two diverge more or less. If the contract has been lately made the
two will be nearly the same. Contracts of long standing often bind the
tenant or borrower to pay either more or less than the present
competitive price. If, after a time, the value of the use is greater
than the contract rent, the tenant is fortunate in having his lease. But
he is the loser if he is bound by lease or agreement to pay rent in a
locality where land has become less valuable.
Economic and contract rent usually diverge also because of the agreement
that the owner, or lender, keep up the repairs and pay the taxes. Here
it is simply the difference between gross and net rent.
Custom may prevent the owner from charging all the usufruct of the agent
is worth. If the contract rent is less than the economic rent, evidently
the borrower enjoys a part of the usufruct, without charge, and to that
degree is in the position of an owner. The usufruct in this case is
divided between the two parties. Such instances were numerous in the
Middle Ages in the renting of land, and still are found in many
countries.
Contract rent is based on economic rent and tends to conform to it
whenever there is competition. The existence of economic rent is the
basis of the agreement to pay contract rent. Prospective hirers of
agents forecast what the use will be worth to them and make their bids
accordingly.
[Sidenote: The renting contract for the use of wealth]
2. _The renting contract is the agreement of a borrower to pay for the
use of a thing and, at the end of the time, to restore it in good
condition or pay for its complete repair._ In practical business it is
necessary to have definite agreements to prevent disputes. Some provide
that one party, some that the other party, shall keep up repairs. The
form of the renting contract is observed by men in estimating the uses
of their own wealth where no contract exists. If they count the gross
product of an agent as rent, it is bad bookkeeping. In many cases it is
necessary, therefore, to follow the form of the renting contract in
order to determine the net yield of indirect goods.
[Sidenote: The renting contract in the middle Ages]
3. _In early stages of industry the use of nearly all wealth is
estimated under the renting contract._ In the lower stages of culture,
in hunting, fishing, or nomadic pastoral tribes, land is not recognized
as wealth to be exchanged or owned. But at a later stage, as in the
Middle Ages in Europe, land and the things pertaining to it, as ditches,
houses, mills, cattle, stock, and the few simple implements, constituted
the larger portion of the wealth. Land was granted to the tenant or serf
in return for services. The contract was pretty strictly drawn and all
items were specified. It was not hard to hold the tenant to his contract
to keep the land in about the same condition. There was a certain
rotation of crops; the tenant was obliged to keep his stock up to
standard; and, moreover, he had a certain interest in the land because
his contract rent (as explained above) was less than the economic rent.
The landlord, therefore, could count pretty surely on the undiminished
power of his land and stock from one year to another.
At that time, truck and barter were the common modes of exchange, and
rents were paid in products and services, not in money. The fruits of
the soil were consumed on the spot instead of being sold as now. Land
was rarely, if ever, sold outright, so that there was no occasion to
estimate its total selling value. It was thought of as a place on which
to live and as a source of livelihood. Its yearly use was all that was
subject to contract, sale, and exchange. Not the land itself but a _rent
charge_ on the land was sold, the term rent charge meaning an annual sum
payable out of the yield of an estate. Many medieval estates were so
tied up by legal conditions that they could not be sold outright; all
that the owner could do was to sell or mortgage the annual rental. Thus,
in the Middle Ages, it was all but universal to look upon most indirect
agents as exchangeable only under the renting contract, as subject to
renting but not to complete transfer and sale.
[Sidenote: The renting contract not convenient in commerce]
4. _As industry developed, the renting contract remained almost wholly
confined to cases of renting lands and houses._ The materials and
appliances needed for manufacture and commerce are so manifold and
varying in quality that the rent-form of contract is very cumbersome and
difficult for exchangers to enforce. If a merchant about to embark on a
trading journey wished to rent a ship and a stock of goods, the renting
contract became most difficult to interpret. He must agree to repay the
loan in goods of the same kind and quality as those received, a contract
most difficult to execute, and giving occasion to costly tests and
countless disagreements. It was much easier for the merchant to get his
loan under the interest contract, _i.e._, a money loan, with which to
buy the goods. With the growth of industry and commerce, wealth
increased in towns, taking many forms, as those of ships, wagons, tools,
and stocks of goods, that could not conveniently be rented.
[Sidenote: The thought of it remains associated with a rural economy]
In England, the country which developed its industrial system earliest,
the idea of rent, therefore, gradually became disassociated almost
entirely from the use or hire of any wealth but land and real property.
Because in the Middle Ages rent was associated almost entirely with
natural resources, they being the only important forms of wealth which
men rented from others, there was fostered the idea that the essential
mark of rent is the connection with natural resources. It is a simple
example of the association of ideas. In the transfer or loan of movable
goods, the rent contract was quite overshadowed by the other form of
contract, that of a money loan. According to this explanation the
essential and primary difference between renting wealth and borrowing
money at interest is not in the kind of wealth whose use is thus
temporarily transferred, but in the nature of the contract. But as forms
of wealth differ in their fitness for transfer under the two forms of
contract, there goes on a competition between them, as a result of which
each becomes associated with certain groups of goods. In the Middle Ages
the renting contract was the dominant form, but it has been
progressively displaced by loans in the money form, and its importance
is still declining.
[Sidenote: Renting contracts most used with land]
5. _The main forms of wealth whose usufruct is still sold under long
renting contracts are land and its more durable improvements._ In
England farms are let under long leases, a very common form being the
thirty-year lease. Under the old, almost fixed, conditions in
agriculture such a lease was equitable, but when prices are rapidly
changing and when new methods are being introduced, it gives rise to
great hardships. About twenty-five years ago, the great fall in the
price of agricultural products brought ruin to many of the tenant
farmers. The land troubles in Ireland have been largely about tenants'
improvements. When the lease expired, the landlord could appropriate all
the improvements that the tenant had made. In America farms are let
usually on shares, and from year to year, but the plan of a money rent
is increasingly followed. The difficulty of getting an equitable
arrangement between landlord and tenant is recognized by all. The
landlord must make the proper repairs or see that they are made; he must
specify in the contract whether the products can be taken away or are to
be fed on the place so that the soil may not be impoverished, and he
must provide for the purchase of other fertilizers. On the other hand,
the tenant under the renting contract has little motive for improvement,
and many occasions for discontent. So in America, far more than in the
older countries, land changes hands by sale, the purchaser going into
debt for it, giving his note and paying interest on the loan rather than
rent for the farm.
[Sidenote: But many other goods are rented]
Many less durable goods are rented for brief periods. Carriages are
rented for the day, bicycles by the week or month. Sewing-machines,
boats, guns, tents, and even diamond engagement rings, yield their joys
under the renting contract. People frequently hesitate between the
renting and the purchase of a piano, and in some cases renting is the
more convenient and desirable way of securing its use. The purchase of a
dress-coat or of a masquerade-suit to be worn but once, involves for
some an excessive and needless sacrifice. For a moderate sum its
temporary use may be had, and it is then returned, little the worse for
wear, to the accommodating clothier.
[Sidenote: Economic rent much wider than the renting contract]
A final word of caution may be given. Economic rent is not confined to
the cases of contract rent. It exists in every case where a more or less
durable agent yields a use that is scarce and desirable. The owner who
uses a thing himself gets the advantage in the product as clearly as if
he collected rent from a borrower. Houses lived in by the owners, house
furnishings, clothing, books, all scarce and durable agents, are
yielding rents in this logical sense. To the economist, therefore, the
problem of economic rent, as one of the grand divisions of the problem
of value, remains of undiminished importance, for in these unceasing
streams of uses emanating from our environment, is found the basis for
the value of all durable wealth.
CHAPTER 9
THE LAW OF DIMINISHING RETURNS
§ I. DEFINITION OF THE CONCEPT OF (ECONOMIC) DIMINISHING RETURNS
[Sidenote: Economic agents contain uses to be obtained only with
progressive difficulty]
1. _The phrase "diminishing returns of industrial agents" is the
expression of the fact that there is an elastic limit to the utility any
indirect good can afford within a given time._ Successive attempts to
get additional services from a thing are usually in part successful, but
each additional service is gained with more difficulty, or a smaller
added service is gained for an equal expenditure of materials or effort.
A book stands many hours untouched on the shelves of the library; but
if, as often happens, two or more persons wish to use it at the same
hour, time and energy are wasted. The book has a potential use during
the twenty-four hours, but all this can be secured only at the cost of
the greatest inconvenience. The greatest net uses, therefore, are seen
to be to the first user and in the first hour, for these uses cost the
least time and trouble. If the members of a family will take turns, one
chair will serve for all of them; but if all are to be able to sit down
together, a chair must be provided for each. Often it will happen that
only one chair is in use, the other nine chairs being valued only for
their potential uses. I knew two young men who owned a dress-coat in
partnership, and as they had different evenings free from business all
went well until both were invited to a reception which both were very
eager to attend.
[Sidenote: This is true of all classes of agents]
Illustrations of this principle may be drawn from every class of durable
goods. The example generally given is that of a field used for
agriculture. It was long ago seen that a larger crop could usually be
obtained on the same area, only with greater effort or expenditure; but
this fact has been thought to be peculiar to the use of land. The
examples given above have been purposely chosen from very different
fields, to show that the truth is a general one: a good that affords a
given service can be made to increase that service, ordinarily, only on
condition that men put forth greater effort, or sacrifice more goods.
The decreased utility is most clearly seen in the diminished effect
which other agents produce when used in connection with the thing. When
several are trying to use the same book, and are wasting time trying to
get it, we often say their study hours are less fruitful because of the
poor library facilities. Again, we speak either of the diminished
returns of the field, or of the labor applied to the field. Either the
particular thing is said to show diminished returns or the other
coöperating agents are said to show them.
[Sidenote: Decreasing technical effectiveness of material things]
2. _As the agents used in connection with a fixed amount of any other
agent (for mechanical, chemical, physiological, psychological, and other
purposes) increase, their objective effectiveness after a given point
decreases._ Objective or technical effectiveness means effectiveness
independent of the thought or estimate of men. It is not the
effectiveness to produce a feeling in men, but to produce results on the
material world. In a mechanism, if one part is increased without
increasing the other parts, a point is reached where it does not add to
the result. If in the building of a bridge the weight of the floor is
increased beyond a certain point, the rest of the bridge being left
unchanged, the bridge is weakened instead of strengthened. If the weight
of the iron in the framework is increased beyond a certain point without
strengthening the piers, the structure is weakened. If the pier is
greatly enlarged, the bridge may not be weakened, but there is an utter
waste of material and effort, and perhaps the main purpose of the
bridge is defeated by the damming up of the stream. A bicycle frame,
like a chain, is no stronger than its weakest part. If the strength of
all parts of the wheel and frame is in equal proportion to the strain
they must bear, added weight to any single part weakens the whole
machine. The development of the modern type of bicycle, by many
experiments, is a good example of the adjustment of materials according
to the principle of technical efficiency.
A variation of the same principle is seen in chemical combinations.
Exact proportions of materials must be used to get a certain result.
Increase of one ingredient will not increase the desired product. Either
the added part is rejected, does not enter at all into the compound, or
it unites to form another and different product.
That the same principle holds good of the psychological effects of
things, we have already fully recognized in discussing wants and
marginal utility. A given amount of a good will affect the senses in a
pleasurable way, but an increase in the amount will not cause a
proportional addition to pleasure of sight, sound, or smell. On the
contrary, such an increase may defeat the object entirely. Here we are
at the threshold of the economic problem, for we have touched on
"feeling."
[Sidenote: Economic diminishing returns relate to value]
3. _The idea of economic diminishing returns arises when man recognizes
these technical facts and their relation to gratification, in his use of
a limited supply of indirect agents._ All economy begins with scarcity.
The varying effects produced by different agents therefore require to be
studied or the sum or direct goods of enjoyment will not be as great as
is possible. Waste will take place. A bridge will have its maximum use
with a minimum outlay when the parts are in a certain proportion. Beyond
that point, the increase of any part may add something to the usefulness
of the bridge, but the agents must be taken from some other and greater
use.
The thought of economic diminishing returns always has reference to
value. If a particular kind and amount of a certain material is used in
varying combinations with other agents, the value of the added product
will not always be in the same proportion to the value of the added
agent. The bridge-builder must consider not only what the added material
will add to strength, but what it will cost, and whether the result will
justify this expense. So the economic problem of diminishing returns is
more complicated than the mechanical one, for it contains not only the
technical but other factors.
[Sidenote: The marginal utility in goods]
If the value of the product increases less rapidly than the cost of the
agents successively added to secure it, a point must at length be
reached where the value of the added agents and of the additional
product just balance; this is called the point of marginal utility.
If a certain value in labor, fertilizer, or material, be applied to an
acre of land, it may be more than recovered in the value of the product.
Further applications give a product increased not in equal proportion to
the former yield, and so on till the value of the last-added agent just
balances that of the added product. This is the best adjustment
possible, and beyond this point there will be a deficit in value. Just
where the equilibrium is found at any time is the margin of cultivation.
The term "cultivation" is taken from agriculture but must be understood
in the broader sense of utilization, as the principle is not confined to
the case of land or agriculture, but applies as well to the use of
furniture, books, clothing, horses, or any other indirect agents.
[Sidenote: Meaning of intensive margin of utilization]
[Sidenote: The extensive margin of utilization]
4. _There are two margins, the intensive and the extensive._ The margin
of utilization in the case of a single piece of wealth is called the
intensive margin. Any form of indirect wealth, anything kept to use, may
be considered as containing a series of uses. Using one thing more and
more while uniting other things with it, is using it more intensively.
Getting more use out of the book by effort, out of the farm by applying
more fertilizer, out of the house by putting more people into it, is
intensive utilization. The earlier uses come easily, naturally; the
later ones are gotten with increasing difficulty.
When a number of agents are of different qualities, the point between
the one last used and the next unused is the extensive margin of
utilization. The best agents that are available are naturally used
first, but as they are more intensively used there is increasing
inconvenience. Then recourse must be made to the inferior agents, whose
first uses, however, are greater than the later, intensive uses, of the
better grades. When the step is made to the use of agents that were
before unused because inferior, it is extending the margin of
utilization. The intensive margin of use is in the particular thing; the
extensive margin of use lies outside of this.
[Illustration: _Extensive Grades of Uses_]
The relation of the two margins may be shown in a simple diagram. Let
the better grades of indirect agents be represented by longer
rectangles, the upper parts of which represent the more accessible, more
easily secured utilities. Each agent consists of many strata of uses.
The best uses are grades a, b, and c, in M; but after M has been
utilized intensively down to d, N will begin to be utilized at its
highest point. When utilization goes down to f, O comes into use, and so
on. Therefore it will be seen that until the intensive margin takes in
d, M is on the extreme margin of utilization, and N is just outside it;
when the intensive margin falls to g and h, P is inside the extensive
margin, and Q is just outside.
[Sidenote: Equilibrium of the two margins]
The marginal utility or effectiveness of added agents tends to be equal
on the intensive and the extensive margins. This is simply a case of the
substitution of goods in the use of indirect agents. If the value of the
added product in the use of a particular good decreases, a point finally
is reached where it is better to transfer the outlay to another agent,
to change from intensive to extensive utilization, to go over to the use
of another field or of another machine not so good. The effectiveness of
the labor or capital that men have to apply is being compared constantly
in the two cases, and to the extent that this comparison is perfect the
effectiveness of the agents tends to be equal on the margin in the two
applications.
§ II. OTHER MEANINGS OF THE PHRASE "DIMINISHING RETURNS"
[Sidenote: Does not mean declining prosperity]
1. _The phrase diminishing returns is sometimes taken as meaning merely
a decrease in prosperity._ Many ideas are connected with this phrase. It
is not self-explanatory. It suggests various thoughts according to
context and these have not failed to give rise to different uses. The
student must be cautious if he is to think clearly about it. If
population declines, or industry changes from one place to another, or
from one kind of goods to another, it is sometimes said that returns are
diminishing in the deserted district.
[Sidenote: Nor exhaustion of the soil]
2. _A more common misuse of the term is to apply it to the exhaustion of
the soil._ If the soil of a district has been robbed of its fertile
qualities and smaller crops are raised than was the case fifty years
before, it is said to be a case of of the increased difficulty in the
extraction of natural stores in mining. The veins near the surface being
mined first, later the galleries must be cut deeper and greater expense
incurred to get the stores. But the conditions here are very different
from those we have considered under diminishing returns. Mines are used
not under the renting contract, but under the royalty contract, which
permits and contemplates a progressive using up of the limited stores of
natural resources.
[Sidenote: Fallacious contract between manufacture and agriculture]
[Sidenote: All industries if limited as to one factor, as area, show
diminishing returns]
3. _Manufactures are often said to show increasing returns in contrast
with agriculture as an industry of decreasing returns._ There is here an
inconsistent shifting of thought. Agriculture is thought of as limited
to a certain area of ground, whereon evidently diminishing returns will
take place. But the fixed limit of ground-space is not thought of in
connection with manufactures. Taking the same view of manufactures,
commerce, education, etc., that is, assuming each industry to be
confined to limited area of ground, each is seen to be subject to
diminishing returns. Some ground-space is one of the essentials to carry
on any business. If the attempt is made to accumulate a large library in
one small room, a point is reached where much energy is wasted in trying
to find the books. In a university the psychical product, education, may
be limited by the need of space. The school-room, laboratory, or college
class-room could be used at midnight, it is true, but not conveniently;
and as students increase, buildings must be added. The same is true of
any industry. We cannot conveniently increase the business of a
lumber-yard without a larger yard-space, or of a factory without a
larger floor-space. But the added space may be gotten by spreading
horizontally or piling up perpendicularly. A ten-story building on an
acre lot represents ten acres of floor-space. Putting up higher
buildings is an expansion in area by the more intensive utilization of
the land. Devices like elevators, and more compact appliances, make
possible an increasing business in manufacture, trade, or commerce upon
the same area of land. All industries, if looked at consistently from
this standpoint, are subject to the same condition, though it is true
this will make itself felt in varying degrees in different lines of
industry. In agriculture some similar devices are possible by the use of
greenhouses, but it is true that in it, on account of the need of sun,
light, and air, the limits of space are more quickly felt, and are less
elastic than in most other industries. The difference, however, is one
of degree, and not of kind. Higher factories, larger stores, enable
manufacturers to adapt themselves to the law as applied to the surface
of land, but not to escape its operations. Neither the law of
gravitation nor the law of diminishing returns is violated or broken
when materials are lifted to build the upper stories. Both "laws" are at
work, even when the building is rising from the ground. Men are merely
adapting their conduct to the conditions imposed by gravitation and
diminishing returns.
[Sidenote: Confused with the question of large production]
Manufactures usually are thought of as enlarging by increase of the
amount of capital employed, without limitation as to the area covered.
But even here a limit is reached in the amount of capital that can be
employed at any one location because of the difficulty of widening the
market. The question, however, is one of the advantages of large
production with large capital, not of the increasing use of a limited
area of land. If manufactures and agriculture are to be compared with
reference to their economic nature, it is essential to clear thinking
that both be looked at with reference to the same conditions, and from
the same point of view.
[Sidenote: Technical confused with historical diminishing returns]
4. _Technical diminishing returns are often confused with historical
diminishing returns._ The principle of technical diminishing returns is
that at any given moment the uses obtainable from any indirect agent
cannot be indefinitely increased without increasing difficulty.
Historical diminishing returns occur when, in fact, human effort is less
bountifully rewarded in a later period than in an earlier one. If
to-day a day's labor in agriculture produced less than fifty years ago,
historical diminishing returns would have occurred. In fact, labor is
more bountifully rewarded in agriculture than fifty years ago, yet it is
true to-day that there are few fields or appliances which, if used more
intensively with the prevailing prices of labor and material, would not
show a diminishing return to the additional capital applied. Therefore,
in the historical sense, increasing returns have prevailed, yet at every
moment it has been necessary to apply resources under the guidance of
the principle of diminishing returns.
§ III. DEVELOPMENT OF THE CONCEPT OF DIMINISHING RETURNS
[Sidenote: Recognition of diminishing returns to land]
1. _The law of "diminishing returns" was first recognized and expressed
with reference to the use of land in agriculture._ There are several
evident reasons why this occurred. It is obvious to every farmer and
gardener that he cannot indefinitely increase his crop, that two men
cannot always produce twice as much as one man, and that in general the
product does not always vary in proportion to the labor and materials
applied. Moreover, the food supply is a fundamental factor in industry
and in the welfare of states. The limit to the supply of food on a given
area, cultivated by a given method, early appeared and became a serious
practical problem.
The circumstances in Europe in the eighteenth century drew attention to
the subject. Population was increasing, and the pressure for food was
strong. While all the forms of industry most common in cities were
increasing, and the wealth of the cities was growing, poverty was
increasing among the peasantry. Especially was this true in England
during the Napoleonic wars, 1793-1815, owing to exceptional conditions.
The food-supply from abroad was cut off, and when the English farmers,
tempted by the high prices, took poorer land into cultivation, and
sought to get larger crops from their older fields, a great
object-lesson was presented on the principle of diminishing returns in
agriculture.
[Sidenote: This confused with historical diminishing returns]
2. _This truth of diminishing returns in agriculture was confused with
the thought of historical diminishing returns._ Circumstances of the
time led to the belief that because of lack of food misery must continue
among the masses of men. It was thought inevitable that the population
would continue to increase and food become more scarce. The idea of
diminishing returns became thus a prophecy of what would happen, a
social philosophy, that affected the thought of men on every practical
social question.
[Sidenote: The principle applies to land in all of its uses]
3. _The application of the principle of diminishing returns was soon
broadened to include land in other than agricultural uses._ This was a
natural and inevitable extension of the thought. It was evident that an
unlimited use could not be made of a limited area of land, in any
industry whatever. There is no explanation of rent of business sites,
residences, lots, wharves, waterfalls, etc., unless account is taken of
diminishing returns. If it were possible to do an unlimited amount of
business upon a limited area of land, it would never get more scarce and
could never rise in value. The idea of diminishing returns came
properly, therefore, to be applied to land in all its uses. It is true,
however, that the relatively large areas needed in agriculture make the
phenomenon of diminishing returns much more striking in it than in most
other industries.
[Sidenote: And to all indirect agents]
4. "Diminishing returns" should be broadly applied to all wealth having
indirect uses. The argument for this view may take both a negative and a
positive form. Why should we say that the principle applies to land and
not to cases of other industrial agents? Why in the case of a waterfall
and not in the case of the water-wheel? Why in the case of the field and
not in the case of the trees in the field? Are they not all scarce and
desirable goods yielding a limited supply of uses?
Positively it can be argued that the concept of diminishing returns is
indispensable to a reasonable explanation of the value of any indirect
agents. Anything that could afford an infinite series of uses at once
would be an infinite supply. If an infinite number of uses could be
gotten out of one hammer in all places at once, it would pound all the
nails in the world. One wagon, one acre of land, one ax, one book of
each kind, would serve for all men, and duplicates would be valueless.
But in the case of every material thing there is a limit of convenient
and economic use.
[Sidenote: Diminishing returns related to diminishing gratification]
5. _Diminishing returns of indirect agents is a special case of the
universal law of the diminishing utility of goods._ Diminishing returns
have to do with indirect goods, while diminishing gratification has to
do with direct or consumption goods. They are two species or aspects of
the same general principle. If the supply of certain indirect agents is
increased, thereby increasing consumption goods, the utility of the
indirect agents per unit diminishes. In such a case a diminishing return
is the reflection, back to the indirect good, of the diminishing utility
of the direct goods it helps to secure. Any indirect agent, added to a
fixed amount of other agents with which it is technically used, is
credited with a diminished utility, just as an additional supply of
enjoyable goods, coming to meet a fixed demand, falls in value.
The concept of technical diminishing returns has reference to a limited
period of time. Though a definite agent may have bound up in it a long
series of uses, these cannot be secured at the moment. If a rent-bearer,
such as a fruit-tree, were permanent, and men could wait through
eternity for its yield, they would get an infinite yield of fruit. But
in any finite period, there can be only a limited yield.
[Sidenote: The basal law of economics]
The concept of diminishing returns is one aspect of the great economic
law of proportionality, that is, it is one expression of the
fundamental, axiomatic truth, that there is a best or proper adjustment
of means and ends. It is, therefore, the central and essential thought
in political economy. On it depend all important conclusions with
reference to the value of indirect goods. Out of it grow the important
economic theories of rent and capitalization.
CHAPTER 10
THE THEORY OF RENT: THE MARKET VALUE OF THE USUFRUCT
§ I. DIFFERENTIAL ADVANTAGES IN CONSUMPTION GOODS
[Sidenote: Connection between gratification, rents, and value of wealth]
1. _Both rent and the value of durable wealth are based on the value of
the fruits or products yielded by the wealth._ Gratification, afforded
directly or indirectly, is the basis of all values. The relation of most
kinds of wealth to wants is indirect; but gratification thus afforded
indirectly is none the less the basis on which the usufruct of wealth is
estimated. Men find the logical or causal connection between direct
goods, or final product, and indirect goods, or agents.
To explain the value of the durable wealth, or rent-bearer, a still
farther step in thought must be taken. The value of the rent-bearer is
based on the series of rents which it affords. To explain how these
rents are added to give the value of the indirect agents is the task of
a theory of capitalization. This being the relation, a change in the
value of the product changes the rent, and this in turn changes the
value of the rent-bearer. The theory of rent, therefore, has to begin
with a review of the valuation of enjoyable goods.
[Sidenote: Effect of scarcity on utility of uniform goods]
2. _In a group of consumption goods, all of the same quality, the
marginal utility declines as the quantity increases._ If the quantity of
an article capable of ministering to man's wants is very limited, its
value is high. If the supply of something of uniform quality, for which
there is no substitute, is scanty, the value is estimated without
reference to any other grade. If a fishing tribe caught very few fish,
but these were all equally good, and if no other food were to be had,
fish would have a high ratio of exchange with every other kind of goods.
If the quantity increases, the value of each unit of the whole supply
falls, as the importance attributed to its parts declines. If an Indian
hunting-party met with unusual success, the value of buffalo meat
declined. If there is a remarkable potato crop, potatoes fall in value.
[Sidenote: Relation of different grades of consumption goods]
3. _In a series of consumption goods of different qualities, the lower
grades acquire value only as scarcity increases in the higher grades._
If difference in quality between two grades of apples is marked and
there is a superabundant supply of the best grade, no importance is
attached to the poorer. But if the better grade becomes scarce, the
appetite for the poorer grade increases, and finally it, too, will be
consumed. In some years the small, knotty apples are allowed to rot on
the ground; in other years they are gathered and are sold at good
prices. But if there is an abrupt difference in quality, and hence in
the marginal utility of the two grades, the value of the better goods
may rise considerably before there is any recourse to the poorer. If the
differences in quality are very slight, the presence of the lower grades
has the effect of limiting the increase of value of the higher grades.
Practically in almost all kinds of goods there are gradations in
quality. Complete uniformity is of the rarest occurrence. When did one
ever see a basket of peaches that were all of the same size, ripeness,
color, flavor, and perfection? If the step from the higher to the lower
grade is very slight, resort is immediately made to the next lower
grade, some of which is substituted for the higher.
There is an independent reason for the value of each grade of goods;
each grade would have value if there were none of the other, but they
mutually affect each other's value when they exist, side by side, in the
same market. The marginal utility of each is lessened by the presence of
the other. And thus, two or ten grades constitute for many purposes a
single supply as they shade into each other or are merged by
substitution.
[Illustration: _Grades of Consumption Goods by Quality_]
[Sidenote: Free goods are on the margin of utilization]
4. _Goods of the lowest grades, having no marginal utility, are free
goods._ This is a simple truth, but it has important bearings. There may
be said to be an "extensive margin of utilization" of many consumption
goods. The poorer grades of apples, rotting on the ground, the
multitudes of waste things not valued, are on the margin of utilization.
When a lower grade is used, the margin is extended. The value of goods
is measured upward from the margin of utilization, but this is simply to
say that their value is measured from zero upward.
Likewise, there is an intensive marginal utility in consumption goods.
As the better grade of apples becomes more scarce, they will be used
more sparingly and kept to satisfy only the intenser wants. The
superiority of some consumption goods, either in quantity or quality,
often is exactly analogous to the "differential advantage" spoken of by
economists in the case of productive agents. The differential advantage
of the highest grade over the grade of free goods, whose value is zero,
evidently is the whole value of the highest grade.
§ II. DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS
[Sidenote: Differential advantage of agents in the quality of their
products]
1. _Rent varies with the quality of the products yielded by agents,
other things being equal._ Let us take first a simple case where the
agent is the sole condition of the product. If there is but one tree
bearing a certain luscious fruit, or but one spring yielding a mineral
water, the rent of the tree or spring being equal to the value of the
products must vary as the quality of the products varies. If two or more
trees are standing side by side, they will be compared with regard to
the difference in the quality of their fruits. If two fields differ in
quality, greater importance will be attached to the field capable of
producing the better grade or variety of fruit or product. A peculiar
mineral quality in the soil may impart to wine a choice flavor that can
at once be recognized by experts; while other fields, distant but a few
rods, cannot by any effort be made to produce wine of the same rare
quality. There is said to be a marked difference in the success of
vineyards lying only a short distance apart on the shores of the larger
lakes of New York. Nearness to the water moderates the temperature,
often prevents frosts, and hence insures the ripening and quality of the
fruit. In the Santa Clara valley, as in other parts of California, there
is a frostless belt, sharply marked off from the lands where it is
unsafe to attempt to cultivate the delicate orange-tree and other
semi-tropical plants. In manifold ways differences in geological
formation affect the use of land and the success of many industries. On
one side of a little creek is limestone land, on the other shale, the
limestone producing a crop larger and of better quality. When the
peculiar nature of the one field is found to be the cause of the
exceptional quality of its fruits, the difference in value is attributed
to it.
[Sidenote: The lower grade limits the value of the higher grade]
If there is but one grade of agent, it is, of course, valued without
reference to any lower grade. The effect of the presence of lower grades
of agents is to lower the value of the higher, inasmuch as the lower
grades are substituted for the higher. There may be at first enough of
the higher grade of agents to produce all the fruit wanted of the better
quality. If, then, there is an increasing demand, and the additional
yield can be secured only with greater effort, the value of the product
will rise. The presence of poorer grades, however, checks that rise,
because use can be shifted to them. The value of grade one is not high
because grades two, three, and four, which are worse than it, are
available, but because they are not of better quality than they are.
Poor as they are, their presence reduces somewhat the intensity of
demand for the best grade. Indirect agents, therefore, are seen to be
subject to just the same comparisons, substitutions, and estimates, when
their value is considered, as are direct consumption goods.
[Sidenote: Differential advantage of agents in the amount of their
products]
2. _The rents of two agents differ as do the quantities of goods yielded
by them, other things being equal._ In the case just considered, the
quantity remained the same while the quality differed; now is to be
considered the case where the quantity differs while the quality remains
the same. It is possible that one grade of agents is "poorer" because it
produces less fruit, not fruit of poorer quality. Consider first the
static problem. If both agents yield fruits exactly alike, the value of
equal units at the same place and time must be equal, and the usufructs
would vary in just proportion with the quantity of product. Now consider
the dynamic problem. If the desire for that fruit increases, rent would
grow as scarcity became more felt. The agents yielding, under the
prevailing conditions, the largest product, would first be used; later,
the poorer agents. The possibility of resorting to the poorer agents
would keep the better from rising so high.
[Illustration: _Grades of Agents by amount of Product of Uniform
Quality_]
[Sidenote: Complementary agents unite to form a product]
3. _When two agents are necessary to secure a product, the value
attributed to each is influenced by competing uses._ The thought of one
agent independently producing a certain product is far too simple to
correspond with reality. Two or more agents unite to produce a single
product, and each agent at the same time can be used for acquiring other
products. Complex as the problem appears, it is solved according to the
principle of marginal utility at every moment in every market. The
different uses, figuratively speaking, bid for an agent, and thus its
marginal utility is determined just as is the price of a good by the
bidding of buyers. Indeed, it is the bidding of buyers, indirectly. The
more urgent the use, the higher the bid. The felt importance is
reflected from the consumption goods that are sought, to the agent that
will aid to get them. Two or more agents that are mutually needed for
the acquiring of a product are complementary goods. A complementary
agent may be either other material agents or labor.
[Sidenote: Complementary agents used intensively show diminishing
returns]
When labor is applied to an agent, either to improve the Quality or to
increase the quantity, it is subject to the law of diminishing returns.
In the effort to increase the quantity of products, labor is applied
first more intensively to the better agents. If it meets with
resistance, if returns diminish, it is transferred to any of the poorer
agents that have in them uses of as high grade as those still in the
better agent. The superior effectiveness of the earlier over the later
units of the added agent is called the "differential advantage" of the
two fixed agents. The result of a day's labor applied to a field may be
represented by 100, a second day's labor by 90 (it being only ninety per
cent, as effectual), a third day's labor by 75; but it is more usual to
say that the first field produces 10 more than the second and 25 more
than the third, the second 15 more than the third. To the agent fixed in
supply is attributed the difference in the effectiveness of the agent
that is applied.
[Sidenote: The relentless extensive margin of agents]
4. _The marginal uses of indirect goods are free uses._ Here again is
noted the close parallelism in the process of evaluating direct and
indirect goods. There is an extensive margin in the use of an indirect
agent, a point in the gradation from the better to the poorer agents
where the materials and forces are left unused and have no value. Land
beyond that point is free. Outworn goods in manifold forms, old
pictures, old machines, having no longer charms even for a rummage sale,
form a no-rent margin of wealth. On every hand a great multitude of
things unused and worthless differ by only a shade from things that
still are used and valued. Every rubbish-heap, rag-bag, junk-shop, and
garret contains things once prized, now lingering on the margin of
utilization.
There is also in agents an intensive margin, beyond which are certain
unexploited uses in the things that we already have. This is a more
subtle thought, but it has been already discussed in connection with
diminishing returns. These potential uses in agents, uses which in the
existing conditions lie outside the margin of utilization, of course
have no value. We have noted that there is an equilibrium between these
two margins. Rent is measured from a zero point of utility either in a
good, or in other poorer grades of goods.
A corollary of this proposition is that there is a limit to the rental
that anything can yield under any given condition. Below the present
margin of utility of any goods there exist great quantities of free
goods, unused goods, or unexploited uses. It is only uses above this
margin that yield rent. Rent is the difference between the value of the
better grades and the value of the free goods. It is therefore due to
the limitation in the supply of indirect agents of the better quality,
or to the scarcity of the more effective uses in those agents.
[Sidenote: Restatement of rent, economic and contract]
[Sidenote: Economic rent is primary]
5. _Rent may be redefined as the value of the scarce uses of wealth
within a given period._ Rent is the felt importance of the usufructs of
agents in securing gratification. It is measured by the marginal utility
of any particular grade of agents in securing products. These
definitions and the discussion throughout this chapter applies to
economic rather than to contract rent. In fixing and agreeing on
contract rent, men are seeking to estimate the importance of indirect
goods, the importance that an agent will have in getting a product. They
are bidding for the use of things, and what they bid is contract rent.
Contract rent is based on the existence of economic rent. Economic rent
does not depend on contract rent, but on the differences in the
effectiveness of agents to secure a given product. If there were not
differences in the product, and no limits to the supply of indirect
agents, rent could not exist; it would be inconceivable. But these
differences existing, economic rent inevitably arises, for men cannot
keep from attaching value to the things that affect their desires.
Contract rent in turn appears wherever the use of wealth becomes an
object of exchange and agreement between men in a free society.
CHAPTER 11
REPAIR, DEPRECIATION, AND DESTRUCTION OF WEALTH: RELATION TO ITS SALE
AND RENT
§ I. REPAIR OF RENT-BEARING AGENTS
[Sidenote: The necessity of repairing nearly all economic agents]
1. _The continued rent of indirect agents is dependent on the continual
repair of certain parts necessary for their efficiency._ All earthly
things wear out or decay. Whenever man's hand is withheld, nature takes
possession of his work, regardless of his purposes. Dust gathers on
unused clothes, and moths burrow in them. Shut up a house, and windows
are shattered, roofs leak, and vermin swarm. To close a factory is to
hasten the time when buildings and machinery will be piled upon the
rubbish heap. The most magnificent and solid works of man have crumbled
under the finger of time. The earth is strewn with ruins of gigantic
engineering works, aqueducts, canals, temples, and monuments, whose
restoration would be no less a task than was their first building.
Everywhere vigilance and repairs are the conditions of continued uses of
wealth. Some works of nature, such as waterfalls, may appear to have a
continued use without repair, but they bear rent only when used with
other things that must be constantly mended. A certain amount of labor
on the banks of the mill-stream, and certain repairs on the dam, the
water-wheel, and the gates are necessary. By a fiction in business
contracts the waterfall may be dealt with apart from those conditions to
its use, and may be rented, as a field is, with the agreement that the
tenant keep up the repairs.
The efficiency of land as mere standing-room usually does not seem to be
dependent on repairs. But here again the land yields rent in connection
with other rent-bearing agents (such as houses and other agents above
ground), which must be repaired. Standing-room on land is not a complete
indirect agent; it is but one of the conditions for carrying on an
industry, and even it often requires repairs to make it usable. Ranging
from these extreme cases of stableness and durability, indirect agents
vary to the extremes of fragility and ephemeralness.
[Sidenote: The fertile lands of large regions have lost their
usefulness]
2. _Most of the qualities that contribute to make land fertile in
agriculture being destructible, the constant repair of tilled land is
necessary to its continued fertility._ If any things could be said to be
indestructible, they would be some of the works of nature. In a sense,
all matter is indestructible. Man cannot annihilate it, he can simply
change its condition. But in economic discussion it is the value of
things that is being considered, and from this point of view everything
is in some degree destructible. The effects of bad husbandry are
everywhere apparent, and in many regions fertile fields have been
physically and economically destroyed. In Asia, lands that once
supported millions, perhaps hundreds of millions, of population are now
deserts. Egypt, for a time reduced to a semi-desert condition, has only
in the past century been restored to a certain extent by the use of new
methods and a return to the old ones. Many of the areas that were the
granaries of Rome can now hardly support a sparse, half-starving
population. The lands, or at any rate, the elements that gave them
value, have been destroyed.
[Sidenote: Wearing out of some American lands]
Even in young America may be seen the effect of a failure to keep land
in repair. As the new rich lands of the West were opened up, the old
lands in the East were allowed to wear out, and many of them were
abandoned. On the new lands in turn the same methods were followed,
using up the first rich store of fertility with no attempt to keep up
the quality of the soil. This may have been the best policy for the
time; it would not have been economical to employ Old World methods of
intensive husbandry when such rich extensive areas were being opened up.
But the process was one destructive of natural resources. As settlement
moved westward, great forests fell in ashes, and the soil was robbed of
the fertile elements which it had taken centuries for nature to store
up.
[Sidenote: Wearing out of the parts the railroad]
3. _The machinery and appliances used in transportation and
manufacturing are all perishable in varying degrees._ Take as an example
the great agency for transportation, the railway. The roadbed, which is
but the natural soil excavated or filled to a better grade, is the most
permanent part; yet every frost weakens, every rain undermines, a
portion of it. Earthquake, landslide, and flood fill up the ditches, or
tear down the embankments. Constant work is needed to keep it fit and
safe for use. Above this is the track, slightly less permanent, more
frequently changed. The ties rot, and even the rails of steel must be at
times replaced. The rolling-stock is still less durable, and the
different parts vary in length of life. It is said that the wheel-tires
are renewed four times, the boiler three times, and the paint seven
times, before a locomotive is entirely worn out. The oil used in the
wheel, which is a necessary part of the running machine, has to be
applied every day.
[Sidenote: Depreciation of manufacturing appliances]
There is a great difference in the length of life of manufacturing
appliances. The building is fairly durable; yet an average
depreciation-rate of one and one half per cent. a year must be allowed
to offset a reduction in its value of over fifty per cent, in thirty
years. Machinery differs greatly in durability; well-made, substantial
machinery depreciates about five per cent. yearly. The engines and
boilers depreciate more rapidly than the running gear; the loose tools
have to be replaced every second to fourth year; while the materials
consumed in the industry must be repaired and replaced at every
repetition of the process of manufacture. If a factory is to be
maintained in its efficiency in accordance with the terms of the
renting contract, and is to continue its renting power, everything about
it must be from time to time repaired and replaced.
[Sidenote: Neglect of repairs often has evil effects]
4. _Neglect or postponement of repairs must cause a falling off of the
rent-earning power._ The neglect of repairs may have different results
in the factory. The neglect of one kind simply reduces present rental
while not preventing the future restoration of the plant to its full
efficiency. If certain necessary tools wear out and are not replaced,
the factory as a whole will be less efficient. Each part of the entire
outfit being needed in due proportion, the loss in rental will
correspond not merely to the lost efficiency of the missing tools, but
to the crippled efficiency of the remaining appliances. Failure to apply
seed to the land causes the land as a whole to be useless for that
year's crop. In other cases, neglect of repairs increases the expenses
of repairs and cuts off future rental. The adages, "A stitch in time
saves nine," and "An ounce of prevention is worth a pound of cure," must
be acted upon in every industry. The neglect to repair a roof causes
damage to an amount many times the cost of a new roof. Failure to
replace a bolt costing five cents may result in the rack and ruin of a
machine worth many dollars. A handful of earth on a dike may save a
whole country from destruction.
[Sidenote: But sometimes is economical]
Neglect of repairs may be economical, however, when outer conditions
have first reduced the demand for the agent and consequently the rental.
When the line of travel changes, it does not pay to keep an old hotel up
to the same state of repair as when it had a great patronage. Old
factories sometimes may better be allowed to depreciate while the price
of repairs is invested in more prosperous industries. In a declining
neighborhood the houses fall into decay, the owners seeing that "it
would not pay" to keep them up.
§ II. DEPRECIATION IN RENT-EARNING POWER OF AGENTS KEPT IN REPAIR
[Sidenote: Repairs can not always prevent ultimate decay of agents]
1. _Even where repairs are thoroughly kept up and present rent is
undiminished, future rents may be decreasing because of natural decay._
Changes go on in the substance of things which cannot be prevented by
any attention to repairs. The wood in a framework will decay, the metals
crystallize. There is also an unpreventable wear of parts that cannot be
replaced without replacing the whole machine. It is the aim of the
modern manufacturers to make machines like the wonderful one-horse shay,
every part of equal durability. The development in America of the system
of "interchangable parts" has greatly simplified and cheapened repairs,
and has lengthened the working life of machines; nevertheless their lot
is the scrap-heap at last. This general depreciation appears to be
nearly avoided in large factories where there is serial replacement of
the parts, but occasionally some invention or some improvement of
process necessitates an almost completely new equipment. An old man once
said to me: "I have lived in this house forty years: it was well built,
has been repainted regularly, has never been allowed to leak a drop, and
it is as good as it ever was. I see no reason why it could not be kept
to eternity if always kept in repair." But the same could not be said of
the house now. In general, there is finally a termination of the
rent-earning power of wealth, and the whole has to be replaced.
[Sidenote: Technical changes destroy the uses of agents]
2. _A change in inventions and processes may reduce the rent of agents,
independently of their material condition._ Rent is dependent on the
indirect relation of things to wants; that relation may be changed if
some other agent is found fitted to serve these wants more directly. Not
only do the materials of houses change, but fashion and engineering
skill change, making the old mansions cheerless and inconvenient, and
affecting their rent-earning power. At every moment, in a progressive
society, many rent-earning agents are being thrown out of use. The
machinery in flour-mills has been almost completely changed, parts of it
repeatedly, while the roller process has been substituted for the old
millstones. Water-power, because of its uncertainty, has been replaced
in many places by steam-power, and in many places steam-power in turn,
has been rivaled by water-power since the improvements in the generation
and transmission of electricity. A change in the process of making paper
threw out of use much machinery that was only in part saved by its
removal and adaptation to the making of coarser grades of paper. Many
minor inventions in the iron industry, still more the invention of the
Bessemer process, threw out of use great numbers of the old appliances.
[Sidenote: Industrial circumstances affect the uses of agents]
3. _A change in the outer conditions that give occasion to the use of
agents may cause depreciation._ The exhaustion of materials on which
machinery is employed may reduce its usefulness. A sawmill located in
the midst of a forest has a high-earning power while the forest lasts,
but when the forest is cut off the mill itself declines in value. Unless
it can be removed to another forest and thus have its earning power
renewed, it will have the value only of scrap-iron; it has become an
indirect agent in the wrong place. Oil-boring machinery where a rich
supply of oil is found has a high rental for a time, but when the
oil-fields give out the machinery falls in value, being worth more or
less than the cost of transporting it according as the next oil-field is
near or far. Changes in fashions, calling for different kinds of
products, cause a depreciation in the value of the old agents. Coarse
salt, evaporated by the sun, was used by our fathers, but the finer
product of the steam process is driving out the product of the old solar
plants. As homespun went out of use, much machinery still in good
physical condition was cast aside. Changes in transportation work
revolutions in industrial methods. Many prosperous small forges on the
country roads of Pennsylvania became valueless after the building of
the railroads. New forges were built at favored points where materials
and products could be shipped by rail.
[Sidenote: Various grades of efficiency in rent-bearers]
4. _The agents employed in any industry range from the more efficient,
high rent, down to the less efficient, low rent, grades in a more or
less regular series._ It follows that as these changes are going on, the
place of agents on the scale of efficiency is constantly shifting. The
various agents represent all grades of efficiency. One depreciates,
possibly is restored later and takes a high place, and again depreciates
until finally it is thrown out of use. One loom embodies the latest
improvements and corresponds to the most fertile field; another can
still be made to yield a little rent; the use of a third results in
certain loss. A great mass of no-rent agents lie just below the margin
of utilization in every industry. Some of these are permanently
abandoned; some will be taken back into use when business conditions
improve. When the iron industry is dull, many forges are out of blast;
but when iron is again in demand, there is a gradual taking up of the
abandoned forges, factories, and machines as they are brought within the
margin of profitable utilization. Many agents not actually earning a
rent, may become rent-earning through a change in business conditions.
§ III. DESTRUCTION OF NATURAL STORES OF MATERIALS
[Sidenote: Destruction of the American forests]
1. _A large part of industry is now conducted without regard to the
preservation of the source of income._ A striking example of this is the
use, or rather the destruction, of the American forests. In the last
century the demand for lumber grew rapidly both on account of domestic
needs and of the needs of the older countries. Great quantities of wood
have been used and still greater quantities wasted, trees being girdled,
the ground burned over, the timber destroyed in any way that would clear
the soil--timber which to-day would be of far more value than is the
cleared land on which it stood. Considering present needs and
conditions, the labor seems to have been worse than wasted.
[Sidenote: Effects on value of timber]
The direct effect of this destruction of the supply has been the
increase in the value of timber. To the settlers much of the timber was
worse than useless; they paid and labored to get rid of it; now the
supplies of lumber must be sought on the very margins of our territory:
Florida, Maine, northern Michigan and Wisconsin, Washington, and Oregon.
The supplies in Washington and Oregon are almost unavailable in the
Eastern states on account of the cost of transportation. Professor
Marsh, thirty years ago, strikingly characterized the policy that has
been pursued: "We are breaking up the foundation timbers and the
wainscoting of the house in which we live in order to boil our mess of
pottage."
[Sidenote: Physical effects]
The indirect effects of these changes are fully as great as the direct
ones. Forests greatly affect climate, temperature, and soil; they
influence the humidity. They equalize the flow of streams, moderate
floods, and by preventing the washing down of the rich soil, keep the
mountain sides from becoming bare and sterile rocks. So, within the last
two decades, the people in America have begun to think of forestry. Its
purpose is to restore the forests to the condition of permanent
rent-earners, to make the mountains yield not a temporary supply, but a
perpetual crop of timber.
[Sidenote: Possible exhaustion of the coal-supply]
2. _The extraction of coal and other mineral deposits reduces for future
generations a supply already limited._ The coal deposits in the earth
have only recently been drawn upon. A small city like Ithaca probably
uses to-day a greater quantity of coal than was used in all Europe two
centuries ago. The large deposits of coal and their early development in
England long gave a great advantage to English industry over that of
other countries. In England, however, has first been felt the fear of
the exhaustion of the coal-supply. Professor Jevons, in 1861, sounded
the note of alarm; he prophesied that because the coal deposits of
America were many times as great as those of England, industrial
supremacy must inevitably pass to America. Already the supremacy in coal
and iron production has passed to America, and that in textiles soon
will come. In England the accessible supply of coal is limited, deeper
shafts must be sunk, and the coal gotten with greater difficulty and at
greater expense. Coal has risen in price in England within the last few
years, and will continue to rise in the future. The coal deposits of
America are thirty-seven times as great as those of England, but even
these will soon be exhausted. And yet on the part of all except the coal
trust, there appears in America a thoughtless disregard for the future.
Supplies of copper, iron, and lead in favored positions are likewise
limited, and are being rapidly centered in the hands of great companies.
The increasing demand for these products insures a steadily rising
income from their annual use. The value of the mines, being based on the
series of incomes they will yield, may increase while their unused
treasures dwindle in quantity.
[Sidenote: Many natural resources are being rapidly exhausted]
3. _The exhaustion of natural stores of material is due to civilization,
but it threatens to put an end to industrial progress._ The savage does
not go deep enough to use up permanently the world in which he lives. He
uses the fruits that he finds, and those fruits are, almost without
exception, renewed the next year. The only mines that were worked out in
ancient times were gold and silver mines, while the mines of useful
metals were touched but lightly. Within the last century the earth's
crust has been exploited with startling rapidity. Scientific knowledge
and mechanical improvement have combined to unlock the storehouses of
the geologic ages. At the ever-increasing rate of their use, many
important materials must be exhausted in the not far distant future.
While it is probable that substitutes will be discovered for many of
them, the outlook in some directions has little promise. To treat
terminable incomes, exhaustible sources of supply, as permanent sources
of income, leads alike to unsound theory and to reckless practice.
CHAPTER 12
INCREASE OF RENT-BEARERS AND OF RENTS
§ I. EFFORTS OF MEN TO INCREASE PRODUCTS AND RENT-BEARERS
[Sidenote: Desire for better agents impels men to improvements]
1. _While man destroys some agents of production he multiplies many
others._ We have noted many kinds of depreciation, destruction, and
wearing out of wealth; but the normal thing in a healthy society is an
increase, on the whole, of rent-bearers. The increase of rents is due to
two causes: changes in the agents by which they become more efficient
technically, or more numerous; and changes taking place outside of the
agents, affecting the utility of the products. The first of these will
be considered in this section.
The increase of the efficiency of agents is usually the aim of the
individual producer, and thus is brought about an increase of the stock
of wealth. In some cases, however, improvements such as the dredging of
harbors or as the protecting of forests, are made by men collectively
through the agency of governments. Somewhere, however, the desire for
these changes must arise in the minds of individuals. Increase of most
things involves "cost" or sacrifice, in the psychological sense; that
is, man must strive, perhaps suffer, to get a certain result. This end,
therefore, must be in itself desirable, and social organization must be
such as to present a motive to the men to make the needed effort.
[Sidenote: Improvements by adaptation of natural resources]
2. _Rent-bearers may be increased in quantity and improved in quality by
the adaptation of natural resources to man's purposes._ To get food, men
use the tracts of land that under the conditions give the largest
product. Other tracts less fertile, or for some reason less available,
are ditched, tiled, and diked, and fertilizers are carried up steep
hillsides to make a soil upon the very crags. In commerce and
transportation, new ways are opened by canals, railroads, and tunnels.
An isthmian canal will raise the efficiency of ships plying between New
York and San Francisco, enabling them to carry a greater amount of
freight within a year. The tolls will represent to the users an
expenditure only partially offsetting the increased efficiency of the
agents of transportation. By the building of wharves, the dredging of
harbors, and by many other methods, indirect agents are constantly
growing in number and efficiency.
[Sidenote: Machinery is an adaptation of natural resources]
3. _Rent-bearers may be increased by inventions and improvements that
make machines stronger, quicker, and better._ This proposition is not
logically different from the preceding. A machine is an arrangement of
material things through which force may be indirectly applied to move
matter. No fast line divides machinery as regards form, purpose, or
cause of value, from the artificially improved natural agents that we
have been discussing. Just as a field is drained, plowed, and cultivated
to fit it better to yield a crop, so is the iron ore shaped into a form
called a machine, better fitted to cut, carve, and weave as man wills.
Machines are merely adaptations of natural resources.
[Sidenote: Bettering quality of agents]
Increase in machinery may be either in quality or quantity. The two
causes have in most cases the same result. If the quality or efficiency
of looms is doubled, it is as if their number had grown in like
proportion. In its economic function the beast of burden may not
illogically be classed with inanimate machines. The horses in America
have been remarkably improved of recent years by the importation of
thoroughbred stock from Europe. Ten or fifteen years ago the number of
horses in the United States was found to have decreased, and there was
much comment on this evidence of a declining industry. It was not at
once recognized that there was embodied in horse-flesh more horse-power
than ever before, as a single Norman horse has the strength of several
Mexican mustangs. Numbers alone are not the measure of efficiency.
[Sidenote: Increasing number and better grouping of agents]
4. _The increase of wealth and the betterment of environment go on as
well through the increase in the number of appliances and through their
improved arrangement, as through changes in their kind._ A machine is an
adjustment of various natural agents to each other so as to make a more
efficient agent, and machines in turn may be adjusted as parts of a
larger system of production. The ideal of the modern factory system is
so to arrange the machinery that no bit of material will make an
unnecessary motion. The log, once started through the mill, is carried
automatically from one machine to another until it emerges as a roll of
paper or as a box of tooth-picks, ready for use. In an American
watch-factory one man tends twelve or fifteen automatic machines. A
small brass rod is fed automatically to the machine; a piece is cut off,
is picked up by a human-like metal hand; is put into a lathe, and
shifted or held firmly while it goes through fifteen or twenty
processes; and then is dropped into a box where it is ready for the
"assembling" of the watch. As the machinery improves, factories making
allied products are grouped to make a system still more efficient.
As the number of agents increases they are distributed so as to be where
most useful to the owner. A man having two umbrellas keeps one at his
office and the other at home; a student having two books of the same
kind keeps one at his room and the other at the university; a farmer
having two hoes keeps one at the barn and the other in a distant field,
and by this distribution the agents are increased in efficiency.
[Sidenote: A larger and better environment]
The aim of a progressive society is to enlarge the environment, and
constantly to adapt it better to the service of wants. This is done
largely by mechanical agents, which capture the natural forces of the
world, put them into the right place at the right time, and make them do
the right thing, or which group and relate the materials of the world
in the right ways. Some of the groupings in the chemical and physical
world that do not fit man's purposes may be made to do so. The world in
this way becomes more and more a great workshop, better and better
adjusted to man's wants.
[Sidenote: Increasing some rent-bearers reduces the rents of others]
5. _The betterment of the environment of society in some directions
reduces the rent of other parts._ The wish of the individual is to raise
his own rent-bearers in efficiency, but in doing that he affects the
agents owned and controlled by others. The ideal from a social
standpoint is to increase not rent but the welfare of society, and this
is not always the ideal of individuals seeking their own interest.
However, as the efficiency of some agents rises, it becomes unnecessary
and unprofitable to use the less fertile fields; they cease to be
rent-bearers, and the rent of the richer fields falls under the
influence of the new supply of products. Some inventions suddenly
increase the efficiency of free goods to such a degree that the less
efficient rented agents are thrown out of use, and the margin of
utilization is moved to a higher plane than it was on before. Improved
types of machinery more or less rapidly displace the older, less
efficient types, which, therefore, more or less completely lose their
rent-bearing power long before they are physically worn out. When
improvements in agriculture that are applicable to a considerable area
of land take place, and the product thus is increased and cheapened, the
poorer land is abandoned. Inventions and improvements thus gradually
becoming common property, increase the free goods and free uses not
bearing rent and open to every one. One who improves the quality of a
machine or the economy of a process may thus unintentionally injure some
of the owners of low-rent agents, while unintentionally increasing the
welfare of the mass of men for whom the margin of utilization is thus
lifted.
§ II. EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS OF INDIRECT AGENTS
[Sidenote: Effect of decrease of the competing agents]
1. _Changes in the number and kind of competing resources may raise the
rents of particular agents._ Rents may increase without increase in the
quantity or number of a particular group of agents or without change in
their technical efficiency. As changes in the conditions of society may
reduce rents, so other changes may increase them. Agents of the same
kind may diminish in number, either absolutely or relatively. If some of
the competing machines are destroyed, the rents of the machines that
remain rise, while if new supplies are found, either in nature or by
improved industrial processes, the rents of the older agents fall.
[Sidenote: Effect of new uses for agents]
2. _The discovery of new uses for agents or for their products raises
their rents._ Farm land of the poorest kind often is found to contain
valuable mineral deposits. Such a lucky find has lifted the mortgage
from a farm in eastern Pennsylvania, from which, in two or three years,
has been taken feldspar exceeding in value the agricultural products of
the same land in the last fifty years. The discovery of building stone,
coal, natural gas, or oil land may make the annual rent (or royalty) of
land tenfold its former total value. Fitness to produce nettles is not
ordinarily a virtue in land, but the discovery that certain fields
produce a superior quality of the nettle used for heckling cloth, causes
them to take on a new value. A mineral spring, because of the supposed
or proved healing properties of its waters, may be as good as a mine to
the owner. Peculiar fitness for the cultivation of celery may convert
marsh land into a substantial source of income.
Social changes are constantly causing agents to shift from lower to
higher uses. As population grows and groups about new industries, farm
land is used for residence lots, and in turn for business purposes.
Rents therefore rise, and this rise is reflected in the higher selling
value of the land. If a new demand arises for the product of any
machine, its rent rises, although it may continue to turn out the same
product as measured by number or quantity. For, if consumers increase, a
given supply of agents becomes relatively smaller than before.
[Sidenote: Sudden variations in demand]
3. _A rise in rents due to social changes may be relatively permanent or
temporary._ Business conditions sometimes change quickly. An urgent
demand for special machinery raises quickly its rent and value. It is
said that lace machinery is sometimes thrown out of use for several
years, until a sudden renewal of the demand for lace causes the rental
to equal, in two years, more than the original cost. At such times the
value of factories increases greatly, but after a few years of
prosperity business again collapses. Such prosperous periods are the
opportunity of the business man and of the promoter to sell the factory
at its highest price. Machinery adapted only for a special product will
not sell as readily when less needed for its special use, as that which,
like a turning-lathe, can be used for many purposes; but the more
special the appliances needed for a certain product, the higher, more
abnormal will be their temporary value when they are suddenly needed.
Land near the site of an exposition takes on a very great value and
again falls after the exposition is over. During the Boer War horses and
mules rose in price in the United States on account of British
purchases.
[Sidenote: Cause efforts to increase the supply of agents]
A rise in the value of any agent at once causes an attempt to duplicate
it or to find a substitute for it; this attempt, if successful, puts a
check or sets a limit to the rise. In this search for new devices the
man who can see most quickly and clearly has a key to wealth. Some kinds
of agents, as rare minerals or tools that can be produced only by highly
skilled labor, cannot be increased rapidly in number and remain high in
price for a long period; and favorably located building sites illustrate
the same principle. In some cases, it is true, the demand may be due to
some temporary cause, as in a period of unsound land speculation, but
usually the growing value of location is due to a steady and abiding
change in population or business.
[Sidenote: Franchises guard the growing rents from the influence of
substitution]
4. _Such public utilities as are guarded from competition by franchises,
often rise in rental with increase in population._ The leading classes
of public utilities referred to are waterworks, gas-works,
street-railways, ferries, and wharves. This evidently is only a special
illustration of the principle just stated, where it is not easy to find
a substitute for certain agents. Public franchises entitle the owners to
special, sometimes exclusive, privileges, and protect them legally from
competition. Not all franchises are valuable; many street-railways are
unfortunate ventures, the earnings being insufficient to pay expenses,
to say nothing of interest on the investment. But when they pay greatly,
their high value is due to the impossibility of competition. The cars,
mules, dynamos, steam-engines, and other agents combined to furnish
transportation, have a special earning power because other similar
agents are forbidden to be used in that market.
[Sidenote: Various kinds of "unearned increments"]
5. _Industry abounds with cases of unearned increments of value due to
accidental and social causes raising the rents of wealth._ The term
unearned increment may be defined as an increase in rents (or value) of
agents, due to something other than the efforts or merits of the owner;
in fact, it is that of which we have been speaking. In some cases
powerful or wealthy men can bring about social changes in entirely
legitimate ways. The owner of a large factory, moving it into the
country, may buy up surrounding land and found a city, converting
pasture lands and corn-fields into valuable building lots. Again, social
changes are produced immorally, if not illegitimately, when wealthy men
or influential politicians cause laws to be passed which inure to their
advantage but which may ruin many other citizens.
[Sidenote: Also many chances of loss]
In most cases, however, social changes are impersonally caused. The
individual owner who profits by them is powerless to affect the result.
He can only adapt his conduct in some measure so as to reap an
advantage. He can strive to increase the number and quality and to get
control of such agents as he foresees will yield higher rents. In making
such a forecast there is chance of loss as well as of gain. The term
"unearned increment" has been frequently used in recent years. It is
often assumed to be a peculiar thing, sharply in contrast to other
changes in value. The foregoing hasty review may serve to suggest how
manifold and complex are the instances of it, and what an important part
it plays in modern industry.
DIVISION C--CAPITALIZATION AND TIME-VALUE
CHAPTER 13
MONEY AS A TOOL IN EXCHANGE
§ I. ORIGIN OF THE USE OF MONEY
[Sidenote: The consideration of money can no longer be postponed]
1. _The exchange of goods by barter is extremely difficult in most
cases._ Thus far we have not considered the subject of money and have so
far as possible avoided even the use of the term. Value in economics
does not depend on money, and is not necessarily connected with it.
Things can be compared in their utility, their importance to our welfare
can be estimated, without the use of money. Many problems of economics
can be discussed pretty thoroughly and solved without the use of the
word money or any term of similar meaning. But to-day it is impossible
to go very far in the discussion of economic questions without using the
concept of money, which is interwoven with every practical and
theoretical problem in economics. We have delayed to the farthest limit
the formal recognition of the subject; but we are now approaching the
question of capital and interest, and it is no longer possible to avoid
a preliminary consideration of the money concept.
[Sidenote: Exact measurement of utilities is not possible without some
medium of exchange]
In considering the problem of exchange of consumption goods, we have
assumed that it is possible to weigh small differences in the marginal
utility of goods, and that such differences have influence on exchange.
Now in exchange by barter such a small estimate is impossible. In barter
things are exchanged directly for each other in kind. If the two things
do not chance to coincide in value, the exchange cannot be completed. An
equivalent must be found, or a multiple, if the marginal utility of two
goods is to be equalized for either party by exchange. As in most cases
this adjustment must be very incomplete, many exchanges that otherwise
would be advantageous cannot take place. In the earlier stages of
development, this careful estimate of value is not found. Children do
not make it. The typical trade of the small boy is a "trade even";
Johnny exchanges his gingerbread for Jimmie's jack-knife. It marks an
epoch in the industrial development of the boy when he begins to keep
store with pins, and no longer trades candy for apples, but both for
pins, which have become the medium of exchange in his boy world. He then
can express values in much more exact terms. In our society most
children begin early to grow familiar with this conception; but
travelers find some savage tribes still in the earlier childish stage of
development, unable to grasp the thought of a general medium of
exchange. When, through lack of a medium of exchange, there is a failure
to adjust utilities, there is a loss of the possible advantage in each
defeated exchange. There is a further waste of time and of vain efforts
to find something that will be accepted in exchange, and the loss
offsets a large part of the gain even when the barter is effected.
[Sidenote: Money is found to serve as a general medium of exchange]
2. _Some kind of enjoyable good in general use comes to be money, that
is, to be accepted as a medium of exchange._ The difficulties just
mentioned are met by the use of a medium of exchange. A medium of
exchange is simply one kind of wealth which is taken, not for itself,
but to pass along, in the belief that it will enable the taker to
gratify his wants and distribute his purchasing power in a more
effective way. Money is an "invention" in that it is a means of exchange
that came into use independently in a great number of communities. It
is not an invention in the sense of a mechanical device suddenly hit
upon, but rather in the sense of a social custom that grows as its
convenience is tested by practice. Money is used, in some degree,
everywhere except in the most primitive tribes. Historically viewed, the
money first used in any community is seen in every case to be a
commodity capable of giving immediate gratification, a direct good in
immediate use. It then gradually comes to be used as money, which is an
indirect agent. Still later, when the money habit is well established, a
kind of material having no utility except as a medium of exchange may
come to be used.
[Sidenote: Qualities of the primitive money]
3. _Money in its origin is that good which best unites the qualities
that make it easy to sell, to carry, to know, to keep, to divide, and
unite._ It is evident that if some one commodity is gradually to take on
this use as a medium of exchange there will be a choice; some things
will be better fitted than others. First, this thing must have the
quality of salability, or marketability. In the channels of exchange it
is taken not because it is wanted for itself, but because it will help
to get something else that is wanted. To be sure of a ready sale in a
primitive community it must, however, be something that is generally
desired. Food and clothing, which supply the fundamental physical needs,
are the most generally used and desired of all goods. But they do not
have the second quality of a good money material, that of great value in
small bulk, transportability. Food is bulky. The carrying of a venison
or of a bag of wheat on one's back a short distance requires an effort
as great as that for the procuring of the food. Furs, however, have this
quality in a high measure, united with other qualities of money, as is
shown by their general use in the exchanges of northern tribes. Thirdly,
a thing must be recognizable; counterfeits must be easily avoided, and
the quality must be easy to test: this is the quality of cognizability.
The love of ornament is universal in human societies, and gives value to
many materials combining in a high degree the qualities thus far named.
Fourthly, the money material, when taken in exchange, must remain
without loss of quality, perhaps for long periods, until it can be
exchanged again. Food does not answer to this requirement, being organic
and perishable. But some of the metals, having value in small bulk,
salability, cognizability, and durability, step by step displaced other
forms of money. Finally, money must be made of a material easy to divide
and unite. It is a great convenience in small transactions to be able to
represent a fractional value by a small coin. The money material thus,
likewise, is easily shifted to and from its money use. It is a very poor
money that has not this quality, yet a thing may serve for money in
larger transactions without it. Cattle, slaves, and land have been thus
used, although they answer in a very rough way these fundamental
requirements of the money material.
[Sidenote: Industrial changes affect the convenience of certain money
forms]
4. _The changing material and industrial conditions of society change
the kind of money that is used._ The money use, as has just been shown,
is a resultant of a number of different motives in men. Things that have
the highest claim to fitness for money with a people at one stage of
development would have a low claim at another. As each of these stages
is passed, the thing used as money either increases or decreases in its
fitness. The final choice depends on the resultant of all the
advantages. The use of a material may become more general or less so.
Shells used for ornament in poor communities cease to be so used in a
higher state of advancement, and thus their salability ceases. Furs,
used at some stage of development as money in all northern climes, cease
to be generally marketable when the fur-bearing animals are nearly
killed off and the fur trade declines. Tobacco was at one time in
Virginia a great staple. Merchants were always ready to take it, and its
market price was known by all; but as it ceased to be the almost
exclusive product of the province, it lost the knowableness and
marketability it had before. In agricultural and pastoral communities
where every one had a share in the pasture, cattle were a fairly
convenient form of money, but to-day would be a most inconvenient one; a
city merchant exchanging goods for Poland China pigs and Texas steers
would envy the proverbial owner of a white elephant.
[Sidenote: The proved fitness of gold and silver as money]
The value of the money material may fall so greatly as a result of
greater production, as in the case of iron, tin, copper, that it becomes
unsuitable. Again, as wealth grows, as exchanges increase, as the use of
money develops, as commerce extends to more distant lands, the heavier,
less precious metals fail to serve the money need, especially in the
larger transactions. Thus, in a sense, different commodities compete,
each trying to prove its fitness to be a medium of exchange; but only
one, or two, or three at the most, can at one time hold such a place.
Silver and gold, step by step, often making little progress in a
century, have displaced other commodities, and are the staple and
dominant forms of money in the world to-day. Every community has
witnessed some stage of this evolution. Now nations are divided into two
great groups, silver- and gold-using, in accordance with the metals they
use as standards. The gold-using countries are the most advanced
industrially, requiring the most valuable money metal. Many countries
have passed in the last century from the silver to the gold standard,
and in an intermediate period have tried to use both standards. The
Asiatic and South American countries mainly use silver, while most of
those in North America and Europe use gold.
While industrial changes thus affect the choice of money, in turn money
reacts upon the other industrial conditions. If a new and more
convenient material is found, or the value of the money metal changes to
a degree that affects the generalness of its use, industry is greatly
affected. The discovery of mines in America brought into Europe, in the
sixteenth century, a great supply of the precious metals, and this
change in the use of money reacted powerfully on industry. Money being
itself one of the most important of the industrial conditions, is
affected by and in turn affects all others.
§ II. NATURE OF THE USE OF MONEY
[Sidenote: Money is an indirect agent, a tool to effect exchanges]
1. _Money in all its money uses is an indirect agent, to be judged just
as other indirect agents are._ The key to this section is the thought
that the function of money is to serve as an indirect agent. Money is
often, by a figure of speech, called a tool. Literally a tool is a bit
of material which, taken in the hand, is used to apply force to other
things, to shape them or move them. Figuratively, this is just what
money does. A man takes it in his hand not to get enjoyment out of it,
but to apply force, to move something, and that which he moves is the
other commodity. Adam Smith aptly likened money to the road and wagons
that transport goods, thus gratifying wants by putting things into a
more convenient place. Money is only one of a multitude of forms of
wealth. It is not even the most "valuable"; it has value just as other
indirect agents have. The loss caused by taking away an indirect agent
entirely is greater than the benefit usually attributed to it. Its
utility in the extremest conditions is greater than its marginal utility
under ordinary conditions. Food is not credited in the market with
enormous value, but if starvation threatened, all else would be given
for food. In a like manner, each individual values money according to
the importance of the marginal service it renders, but the marginal
service is far from measuring the loss that would be caused by the
entire disuse of money. In a society without money, industrial processes
would be very different, and exchange would be hampered in almost
inconceivable ways. It is true, therefore, that money is an economic
factor of high importance, but it is not so indispensable as many other
factors to which far less value is attributed.
[Sidenote: Why a poor community lacks money]
A poor community has little money because it cannot afford more; it
gets along with less money than is convenient just as it gets along with
fewer indirect agents of every other kind than it could use. Pioneers in
a poor community where the average wealth is low, cannot afford to keep
a large number of wagons, plows, good roads, or school-houses. If the
community were wealthy enough it would have more of these and of other
things, and great as is the convenience of money, poorer communities
have to do with little of it. It is, therefore, a confusion of cause and
effect for poor communities to imagine that their poverty is due to lack
of money.
[Sidenote: The use of money as a common denominator]
2. _Out of its use as a medium of exchange comes the use of money as a
common denominator of values._ Money serves as a "common denominator,"
for, as all other things can be expressed in terms of money, through it
the value of other things can be compared. The other things can be
expressed in money because they are constantly exchanged for it. All
things being compared with money, can in turn be compared with each
other. Some consider this service as a common denominator to be the
primary and most important function of money. Sometimes a money of
account is found, which is not in use as a medium of exchange. Cattle
and slaves have served as money of account while not used as a medium of
exchange in larger transactions. Money of account is used, as the
shilling in New York, which for a century has not been in use at all as
a medium of exchange. It is, however, only apparently a denominator of
value; the shilling represents five fourths of ten cents. The actual
standard is the dollar; the shilling is only a habitual form of speech
and is mentally reduced to terms of the money in use. A decimal system
is a great convenience in the use of money as a common denominator, but
not indispensable. It is a striking fact that England, until a few years
ago the greatest industrial nation, still uses a money unit requiring
cumbrous calculations.
[Sidenote: Money used as a storehouse for saving.]
3. _Other uses of money are as a storehouse of saving and as a standard
of deferred payments. These uses grow out of those before mentioned._
The standard of deferred payments is the unit of value in which debts
are agreed to be paid later. It is evidently most convenient, and
therefore almost inevitable, that the common denominator in which all
values are expressed from day to day should continue to be taken as the
value unit when the completion of the exchange is delayed a day, a
month, or a year. This will be more fully discussed at a later stage of
our study.
The use of money as a storehouse of saving was more common formerly than
it is now, when better ways than the hoarding of money are found for
"laying up for a rainy day." In some measure, however, money is hourly
serving this use, which is still an important one. Money kept to be used
to-morrow or five years hence is a storehouse of value for twenty-four
hours or for five years. In either case it is being kept to complete at
a later time its use as a medium of exchange. A thing ceases to be
money, logically viewed, the moment its owner keeps it without the
purpose that it shall be spent ultimately. The typical miser is a man
who has lost his reason as regards the money use. Money must be deemed,
therefore, to perform the same essential service as a storehouse of
saving that it does as a medium of exchange. In either case it is to be
kept only to the moment when it will afford the maximum of pleasure.
§ III. THE VALUE OF TYPICAL MONEY
[Sidenote: The money use is added to other uses]
1. _The money use, historically considered, is a new use added to a
good, and increases the demand for that good._ The history of any
particular kind of money may be traced back to a point where it was not
money, since which the money use has been added gradually to the other
uses. The value of the material later to become money is determined, as
is that of any good, according to its marginal utility in all possible
applications. No new theory is required to explain the value of this
same commodity as it gradually acquires the added use of a medium of
exchange. The new use influences demand for the thing just as do the
other uses. What is here said must be understood as applying to typical
money, which is at the same time a commodity having other uses. Other
things that are not typical money come later to be used as money, under
legal regulations.
[Sidenote: The other uses continue, slightly modified by the money use]
2. _A good that comes to be used as money continues to have a commodity
use along with the money use._ When a thing is wanted for some quality
that gives immediate gratification to the user, the explanation of its
value is simple. Ornaments, shells, feathers, food can be seen to have a
direct want-gratifying power. The money use is one that works no
physical or visible change in goods, and to many minds it appears so
different from other utilities that it remains quite mysterious and
incomprehensible. To persons accustomed to thinking on problems of
value, this case appears to be no more difficult than that of anything
else having two or more uses. Cows are used for milk, for meat, and as
beasts of burden. Each of these uses is logically independent as a cause
of value, yet all are mutually related, the values of cattle being
determined by the consideration of all their uses united into one scale
of diminishing utility.
[Sidenote: Money yields a series of rents which are the basis of its
value]
3. _The uses of money make it a rent-bearing form of wealth._ The rent
that money yields is in the form of convenience and economy. This is
sometimes rendered directly as psychic income, as in enabling the
traveler to buy his dinner, for the money thus yields gratification just
as does the carriage in which he rides. One may go for a day to the
seashore without a parasol and suffer from heat, or without money and
suffer from hunger. In every case where money is retained for a time in
possession, there is expected from it a usufruct as great as, or greater
than, can be secured from anything else for which it can be exchanged.
This usufruct is a net surplus, or income, yielded by a sum of money
undiminished in amount up to the moment it is spent, but meantime
increasing in the gratification it will help to secure. In many cases in
practical business money yields gratification only indirectly, as the
objective contract rent received as interest for borrowed money in
business uses, or as economic rent when the use of money in business
enables one to secure a larger income. Because money yields a rent men
make the sacrifice involved in keeping a stock of it on hand. On this
rent is based that part of the value of money that is derived from its
money use. As the use of money as a standard of deferred payment, or
basis of commercial obligations, does not require that it be owned by
the parties writing the contract, this use of money is a free good, a
sort of social by-product of the medium of exchange. When money is in
use in a community, any person may draw up contracts in terms of money,
borrowing and lending, buying and selling wealth, later to be repaid in
other wealth or services expressed in the circulating medium.
[Sidenote: The general use of money is characteristic of this age]
4. _Money may be defined as a generally accepted material means of
payment and medium of exchange._ This, its primary and essential
function, may appear to be less important as new modes of balancing
accounts of wealth are devised. But its functions as a common
denominator of values and as a standard of deferred payment are
increasingly important in an advancing society. It is this expression of
the value of all other things in terms of money which may well be deemed
the essential characteristic of the capitalistic age. In earlier periods
wealth was thought of and expressed in concrete terms; now it is
expressed in money. The general use of money affects men's ways of
looking at wealth and speaking of it. Without appreciating the nature
and function of money, it is impossible to grasp the significance of
capital in modern industry, the consideration of which we are now to
enter upon.
CHAPTER 14
THE MONEY ECONOMY AND THE CONCEPT OF CAPITAL
§ I. THE BARTER ECONOMY AND ITS DECLINE
[Sidenote: Various points of view of the students regarding money]
1. _The use of money prevails in very different degrees in various parts
of the United States._ The members of this class, representing nearly
every state and territory in the Union, have lived amid very diverse
industrial conditions. Some know best the country where conditions are
similar to those of a hundred years ago; some, the villages where may be
seen the handicrafts and the small general store. Others know better the
cities with their varied industries; while doubtless still others,
through family relations, know of the methods of great wholesale
business, perhaps even of the larger commerce and foreign trade. Methods
differ in the different lines of business, and according as a man is a
farmer, a merchant, or a banker, he has different ideas as to the use of
money and of the part it plays in modern industry. You come to this
study with different experiences and preconceptions; as a result every
statement produces a somewhat different impression on each of you. This
is true in general of the statements made in political economy; but it
is most strikingly true in the discussions of money. A city boy rarely
sees a case of barter; whereas in many parts of the West and Southwest,
and in the mountainous districts of the East, a large part of the
business is carried on in this way. Town and city in New York state
differ in this respect, but hardly more than do the rural districts of
the different sections of our country. Banks are very numerous in the
East, are few in the Northwest, and still fewer in the South. Men can
understand each other better in a discussion if they are conscious of
the fact that they do not instinctively take the same point of view.
[Sidenote: Countries differ in their use of money]
2. _The extent to which, on an average, money is used in different
countries of the world, differs widely._ Statements in political economy
must be guarded; few of them can be taken as universally true. As the
different parts of one country may be contrasted, so may the different
countries. The use of money in Siberia would be much less than that in
Moscow and St. Petersburg, and again the average use in Western Russia
is doubtless less than that in Austria. In Austria the money use is less
developed than in Germany. While there is now little difference between
Germany and France in this respect, France for a long time was the more
developed industrially and made greater use of money.
There is greater use of money in the cities of the outlying countries
than in the rural districts. In the cities of Mexico banks and credit
agencies are employed as in the American cities. The rural districts are
more backward and make far less use of money than is the case in the
United States. The great ports of China are provided with all the
facilities of modern banking. In the great cities of India one can get a
bank draft that will be paid in any part of the world. But go a very
little way out of the cities of China and India, and conditions greatly
change; money is far less used and principally as a storehouse of
saving.
[Sidenote: Slight use of money in the Middle Ages]
3. _In a historical view the European nations are seen to begin with a
barter economy and to pass through great changes as regards the use of
money._ Here the view shifts from a comparison of different nations at
the same moment to a comparison of the same nation through a period of
centuries. To understand, even in a measure, what is about them men must
know out of what it grows. In the early Middle Ages money was used
chiefly in cities, and there only to a limited extent. Almost
universally a "barter economy" prevailed, or, as it has been called, a
"natural economy," a term taken from the German "Naturalien," which
means natural products, enjoyable things, as opposed to money. Natural
economy, therefore, means that condition of society in which things are
exchanged in kind. In the Middle Ages land was the great and dominant
form of wealth. The prince himself was dependent on land for his income.
The conquering chief or invader took possession of the land and parceled
it out to his followers, and they in turn to their vassals. The income
of the rulers was in the form of "Naturalien" (wheat, chickens, eggs),
the kind and amount of which was fixed by contract or by immemorial
usage. The landlord had land as his wealth and income-getter; the tenant
received the use of the land in payment for his labor.
[Sidenote: Land, the main form of wealth, was rented without the use of
money]
The condition of the serf appears to have been, under these
circumstances, inevitably connected with the "barter economy" as applied
to the renting of land. A farm cannot be moved, and in medieval
conditions its products mainly had to be used on the spot. If the serf
was to use and enjoy the land, he had to stay upon it. Having no money
he had to pay in labor or in products, for its usufruct. In those times
the powerful man, politically, was also a wealthy man whose wealth
consisted of landed estates. Between the landlord and the serf existed a
lasting relation, inherited rather than voluntary, but similar in its
conditions to the renting contract. The villein had the use of the
stock, pastures, fields, woodlands, provided he kept them undiminished
and undestroyed to transmit to his children. Under such conditions there
was great fixity of economic relations. While in some respects this was
a happy condition, it had its disadvantages. The renting contract, in
connection with a fixed rotation of crops and some communal modes of
cultivation, hindered improvements. The more intelligent cultivator
could not change his methods for the better. It may be seen not only
that the use of money on a medieval manor was slight, but that the
conditions for the growth of the money habit were most unfavorable. The
terms of agricultural contracts, the modes of speech, the habits and
thought of the mass of the people, were therefore determined by the
conditions of the barter economy. A change in these respects was slowly
worked by forces originating outside, in a very different industrial
environment.
[Sidenote: Contrast between city wealth and feudal estates in the Middle
Ages]
4. _With the growth of cities developed a new class of wealthy men and a
new view of wealth._ The student of history knows of the conflict that
grew up during the Middle Ages between the cities and the landed
aristocracy. It found its cause in economic conditions. There were
obvious differences between the wealth of the feudal landlords, and the
wealth that grew up in cities. One must be used mostly on the spot, the
other can be moved. The fruits of one are perishable for the most part;
the fruits of the other can be kept for a longer period. The methods of
agriculture are exceptionally stable; production by handicraftsmen is
dependent on the peculiar skill of the workman, giving greater room for
invention and a premium on skill. The one industry may be carried on by
servile labor; the other can be efficiently followed only by free
workers having the ambition to excel.
[Sidenote: Money thus more used in city trade]
The use of money grew up in the city. The density of population made it
easy, the growth of wealth made it possible, and the nature of the
exchanges made it necessary. Whereas the relation of landlord and serf
under the renting contract continues from year to year, the relation of
the buyer and seller of shoes, hats, etc., in the city, is temporary,
these things forming only a part of man's economic needs. Barter with a
particular individual is much more inconvenient if exchange is only
occasional than where the contract is a continuing one, and there is an
annual balancing and settlement of accounts. So, as city industry and
commerce grew the use of money increased, both in small neighborhood
trade and in the larger transactions with distant countries; and thus
the business methods of the cities grew into sharper contrast with those
of the rural districts.
[Sidenote: Money loaned and borrowed in cities]
5. _The loan and hire of wealth in medieval cities came to be expressed
as a money loan._ The loan of money and of other wealth expressed in
terms of money, began in the cities. The use of money and the expression
of the value of things in terms of money was common there throughout the
Middle Ages. Moreover, as the movable forms of wealth multiplied, the
agreement to return borrowed wealth in kind became impossible in cities;
the loan in terms of money became the only practicable thing. A merchant
embarking on a trading expedition must have such a number and variety of
goods, that he finds it both very difficult to rent them and wasteful in
time to enumerate them and return them in like kind. It therefore became
usual to make a loan either of the things expressed in terms of money,
or of money with which to buy the things, thereby reducing to a single,
simple, easily interpreted contract, the indebtedness which the
borrowing of a thousand different things occasioned.
[Sidenote: The medieval opposition to loans at interest]
Such a contract differed not in economic purpose, but only in form and
terms of obligation, from the renting of wealth. The church writers,
however, got much confused in regard to the nature of money loans. They
did not see that it was _things_ which the merchant wished to borrow.
They did not see that the money loan was simply a more convenient mode
of transferring the use of wealth from one person to another. The
moralists and lawmakers of that day said: Money is unfruitful, therefore
taking interest for it is robbery. We cannot follow here the controversy
as to the justice of interest on money which involved other ideas than
those mentioned, but even to the present time traces of the old fallacy
may be seen more or less plainly in the economic theory as well of
conservative writers as of the socialistic opponents of interest. The
principal sum expressed in the loan contract was called the capital sum,
from _caput_, head, and the amount paid for its use was first called
usury, money for the use. How the word interest came to take its place,
and the word usury came to mean _excessive_ interest is one of the most
interesting chapters in economic history. The term capital then came to
be connected with city wealth, with movable forms of wealth, with things
supposed to be peculiarly "the product of labor"; and interest was
assumed to be connected only with this capital. The term rent on the
other hand was connected especially with the use of land. The connection
was a historical accident, but it has had an important influence on
economic theory.
[Sidenote: Rivalry of the commercial and landholding classes in Europe]
6. _The owners of city wealth and of country landed estates often were
opposed as well in social and political as in economic affairs._ The
practical economic questions of the Middle Ages and the practical
political questions largely turned on these two groups of interests. The
men of wealth in the cities, the merchants and manufacturers, often were
found opposed to the landed aristocracy. This social division between
the commercial and agricultural classes doubtless helped to strengthen
the prejudgment as to the nature of the two kinds of wealth. Indeed, in
view of the situation, it may have been in a measure justifiable and
expedient to contrast the thought of city wealth, which has come to be
called capital, with that of landed wealth. But even if it were, it is
now misleading and erroneous to continue the use of such concepts in a
new country and in our modern conditions.
[Sidenote: Land continues to be rented while city wealth is borrowed in
money form]
Indeed, for centuries the sharper features of the contrast have been
steadily softened. The money economy of the city gradually spread to the
rural districts, but never entirely displaced barter, which lingers
everywhere. Important steps toward a money economy were the commuting of
forced or customary labor of the serfs into a money payment to the lord,
and at the same time the substitution of money payments for payments in
kind (use of lands, specified goods, etc.) to the peasants. Thus arose a
free peasant class receiving wages. But land continued to be rented and
landed estates to be hereditary throughout Europe. As they did not pass
from hand to hand as a commercial or marketable form of wealth, their
value was rarely, if ever, expressed in terms of money and as a ratio to
the rent they bore. The result was the fixing of the erroneous idea that
agricultural wealth is essentially different in the character of its
service and yield from wealth used in manufactures. One phase of the
error was the idea held by the physiocratic writers and by Adam Smith
that in agriculture "nature labors along with man," while in manufacture
"nature does nothing, man does all." This view was corrected by later
critics (Buchanan, Ricardo, and others), but the main portion of the
fallacy persisted in the supposed contrast between the characters of the
services performed by natural resources and by artificially produced
wealth.
§ II. THE CONCEPT OF CAPITAL IN MODERN BUSINESS
[Sidenote: Extension of the use of the money loan and of the capital
concept]
1. _The development of the use of money and credit has led to the
expression of the value of all indirect agents, without distinction, in
terms of money._ This is a capitalistic age. The development of a class
of money-lenders has led to a transfer of all sorts of wealth from
owners to users by means of money. As in medieval Europe city wealth was
bought and sold, and measured and expressed, so in twentieth century
America are the farm, the waterfall, and the mine. Every purchase with
money owned or borrowed is to-day called an investment of capital. To
invest means to clothe, and an investment of capital is clothing money
in any kind of wealth, whether it be a ship, a factory, or a farm.
Interest on money is the contractual form in which more and more the use
of wealth is paid for. The borrower does not ask the wealthy man to buy
for him a factory and to rent it to him. It is not impossible for the
transaction to take that form; but in practice it is inconvenient. The
capital concept, the expression of wealth in the form of money, spreads
over almost the whole face of the economic world. In promissory notes,
mortgages, capital stock, bonds, and many other forms, are expressed the
obligations of borrowers bound to pay regularly a sum called interest
for the use of the multifarious wealth they have chosen to employ.
[Sidenote: Definition of capital]
2. _Capital to-day may be defined as economic wealth expressed in terms
of the general unit of value._ In economic discussion new conditions
must be recognized and an attempt made to adapt definitions to the
language and needs of practical life. By this definition, capital, at
any given moment of time, includes all economic goods in existence, when
they are thought of in terms of their value. But things have different
durations, some are parts of the capital of the world only for an
instant, others for a week, a month, or years. Most capital is composed
of things durable in a large degree.
It has been seen above that there is no reason for keeping things unless
they will increase in value, that is, unless a rental is logically
attributable to them. Everything kept for a day, a month, a year, is
kept because thus it will continually give off uses or by accumulating
them it will become more useful. Hence, when interest is defined as the
payment for the use of capital, it is connected with all wealth that is
expressed in the capital form. In practical business and in theoretical
discussion this is the idea of capital that alone can be consistently
followed. Capital is the value equivalent of a sum of money "invested,"
"clothed" in forms of wealth purchased and exchanged. Wealth has become
fluid in modern times; it was crystallized in medieval times. Under the
new conditions, wealth, expressed in the mobile form of capital, flows
into the most distant corners of the industrial world.
[Sidenote: Distinction between money and capital]
3. _Capital must not be identified with money although it is expressed
in terms of money._ While money and capital are not identical, neither
are they opposite or mutually contradictory. Money is but one species
of the genus capital. It is a particularly durable form when industry as
a whole is considered, a particularly fleeting form in the individual's
possession, and a particularly important, though not necessarily the
most important, form in its social significance. The things composing
capital are concrete things, scarce forms of wealth, some of which are
yielding gratification at the present moment, or are destined to do so
at some future moment; others of which are not themselves giving direct
gratification, but are indirect agents for the gratifying of wants. To
this latter group belongs money.
The caution contained in this proposition may appear to some to be
superfluous, but it is most needed. The mind is so prone to identify
things that are expressed currently by the same words. The ease with
which money and capital are thus confused has led to various popular
fallacies on practical economic questions.
[Sidenote: Contractual interest and rent involve a difference of
business procedure]
4. _Renting wealth and borrowing capital have the same economic purpose,
but the capital contract presents certain peculiar features._ In the
interest contract for the loan of capital the interest always is and
must be expressed in money; the capital sum must be expressed as value;
and the interest rate expresses the relation between these two values.
In each of these features the interest contract is in contrast with the
renting contract. While the rent itself may or may not be expressed in
terms of money, the value of the rented wealth is not so expressed, and
there is no rent-rate expressing the relation between the two values.
[Sidenote: The wealth concept and the capital concept contrasted]
As here presented, the essence of the capital concept is in the mode or
form of expression of wealth, not in the physical nature, the origin of
its value, or any peculiarity in the kind of wealth; the content of the
concept is limited only by man's thought of wealth, every good becoming
capital when it is capitalized, that is, when the totality of its uses
is expressed as a present sum of values. The difference between the
wealth concept and the capital concept is therefore subjective, not
objective; it is a difference in the mode of man's thought regarding
wealth. The rent contract and the interest contract are modes of
borrowing and lending which reflect this difference of conception. In
their effort to express more exactly to themselves and to others the
relative felt importance of their environment, men take in turn
different points of view, and use different modes of expression. The
most developed and exact of these devices for the social expression of
valuations, which became possible only with a money economy and widened
markets, is the capital concept, whose nature has been analyzed here.
[Sidenote: The capital concept now prevalent]
Summarizing the thought of this chapter, it may be said that the capital
concept has gradually developed with industry, and is now the most
widely prevailing mode of expressing the quantity of wealth. It is used
in the discussion of all the most important problems of modern industry.
The questions of income from wealth, of trusts and corporations, nearly
all that is most notable in the development of modern industry, require
the use of the capital concept. Yet (returning to the thought with which
this chapter started) in many of the outlying districts other modes of
looking upon wealth are employed. References to modern industry must be
understood usually as applying to the most developed capitalistic
conditions.
CHAPTER 15
THE CAPITALIZATION OF ALL FORMS OF RENT
§ I. THE PURCHASE OF RENT-CHARGES AS AN EXAMPLE OF CAPITALIZATION
[Sidenote: The nature and sale of rent-charges]
1. _From the twelfth to the sixteenth centuries the sale and purchase of
rent-charges was the most general form of borrowing and lending wealth._
A rent-charge in the Middle Ages was a definite income that was to be
paid out of the rents of an estate, business house, manor, etc. The
property was said to be "charged" with the payment of that income, and
some estates were passed on for generations from father to son charged
with a certain rent. It was thus possible for the owner of money to buy
a rent-charge, either one that had been created a generation before, or
a new one created by some landowner for the especial purpose of
borrowing money to go on a crusade or of improving his estate or of
investing in other business. The transaction took this form: the
purchaser of the rent-charge paid a sum of money, called the capital
sum, and obtained in return a rent-paper entitling him to receive
permanently a given income. The house or land was security for the debt.
The seller gave up the right to the rent as it came in year by year, and
received in return a capital sum in hand. Generally he had the right to
repay the sum whenever he wished and thus extinguish the rent-charge.
Logically viewed, the purchaser bought an equitable part of the income,
therefore an equitable part of that rent-bearing wealth. In effect it
was just like a loan except that the purchaser of the rent-charge could
not demand the repayment of his money. He could, however, sell the
rent-charge when he wished to get his capital out. Gradually it became
usual to sell and transfer rent-papers just as is done to-day with
mortgages and bonds. Rent-papers thus came in the fifteenth century to
be negotiable paper in somewhat general use. There was a rise and fall
of the value of the rent-paper with changes in the demand for investment
in rent-charges or with changes in the security.
[Sidenote: Rent-charges were a convenient investment in medieval cities]
2. _The sale of rent-charges grew out of an industrial need of the
exchange of safe permanent incomes for larger sums of wealth._ The
custom of the purchase of rent-charges grew up in the cities. The
increasing wealth of cities, the growth of commerce and enterprise,
caused rent-charges to be sold by the owners of houses and real estate
in the cities, and the custom spread to the country. It is an instance
of the way income became more fluid in the cities during the Middle
Ages. This kind of loan contrasted strikingly in the Middle Ages with
those loans made commonly by reckless kings, prodigal nobles, and
distressed peasants to secure consumption goods. Merchants needed large
amounts of wealth for their growing enterprises, and they felt that if
they could get a capital sum down they could make it earn more than the
rent-charge. A perpetual income of one hundred units was therefore
exchanged for a sum at the moment of twenty or twenty-five times that
amount. As the wealth of the cities increased, there were some men who
wished to retire from active business, and there were widows and
children with property which they could not manage directly. Such
persons either could not afford to take the risks of active business, or
could not judge of them, and they formed a class of lenders or investors
seeking some safe income. Between the two classes of active merchants
and capitalist lenders, each of whom saw his own advantage and followed
it, the practice of buying and selling rent-charges thus grew up.
[Sidenote: Rent-charges were not forbidden by the church]
The practice was allowed by the church, though interest and the lending
of money were forbidden. The loan was substantially a loan of capital
and the rent-charge was substantially interest, but in the eyes of the
church moralists there was a marked difference, in that the obligation
to the purchaser of the rent-charge was secured by a permanent and
substantial form of wealth, and the contract usually was favorable to
the borrowers. In its origin the practice was not merely an evasion of
the law against usury, but a convenient form of contract. It doubtless
came, however, to be used as a means of evading the law of the church
against usury, and thus became an entering wedge for the general use of
money loans.
[Sidenote: The market value of rent-charges reflects the exchange ratio
between present and future money incomes]
3. _Rent-charges had a market-value, varying with time and place, and
expressed as a number of years' purchase of the rent-charge._ The
sellers of rent-charges were influenced by many motives: a lord wished
to build a castle, or go on a crusade; a farmer wished to improve his
estate; a merchant wished to embark on larger ventures. Opportunities
thus opened in the cities for men of wealth to get a fixed income for a
payment of ready money. In the cities, the buyers seeking a fixed income
would bid down, or bid up, the value of the rent-charges, which thus
came to have a quotable market value. In time, greater and greater
amounts were paid by the investors in return for the guarantee of a
given income. In rural districts the value of the charges was low, that
is, the capital sum was but ten or twelve times the value of the annual
rent-charge; while in the cities it rose to twenty and even twenty-five
times the annual rent-charge.
A memento of this practice, probably, is the manner in which the price
paid for land is spoken of still in England and the continental
countries in a phrase quite unfamiliar to American ears, as a certain
number of "years' purchase." If an estate is sold for twenty times the
annual net rental it is said to be sold at twenty "years' purchase."
This does not mean that the rental for twenty years only is sold, but
that the rental _in perpetuity_ is sold for twenty times the annual
rent; that is, the land is sold outright for twenty years' rent paid at
once. The estate is looked upon primarily as yielding a fixed income;
the value of the permanent possession of the estate is thought of as a
certain number of times the value of the income secured. "Years'
purchase" means, therefore, the length of time required for the income
to amount to the purchasing price.
This attains the thought of the present value of the estate, or capital
sum in it, though the capital sum is thought of as a multiple of the
income, instead of the income being calculated as a percentage of the
capital value. Now at the rate of "ten years' purchase" an investment of
money in land affords an annual interest of ten per cent., as each year
the rental is one tenth of the original investment; twelve years'
purchase yields eight and one third per cent., twenty years' purchase,
five per cent., and twenty-five years' purchase, four per cent. Increase
in the number of years' purchase corresponds to a decrease in the rate
of interest which the original investment of money, the capital sum, is
expected to yield. This is equally true whether the investment be in the
legal form of a purchase of the fee-simple of land, or in that of the
purchase of a rent-charge. We are brought to this conclusion: that the
present value of the rents in perpetuity, of any given wealth, is the
capital value of the wealth; and that the reciprocal of the number of
years' purchase is the rate of interest that an investment is expected
to yield.
[Sidenote: Purchase and sale of rent-charges gives way to more modern
contracts]
4. _The sale of rent-charges has gradually given place to the modern
form of money loan._ The conditions of the contract in the sale of
rent-charges were gradually changed for greater convenience. When the
purchaser (the lender) was given the right to require repayment of the
capital sum at the end of a specified time, the transaction was brought
still closer to an ordinary loan. In this form, the sale of rent-charges
is still found in southern Germany, but the greater simplicity of the
money loan, and of the sale outright, has led to the almost total disuse
of the older form of transaction.
The purchase of rent-charges was long looked upon as a very different
thing from the loan of money, but to modern eyes it is not, and the old
distinctions between the moralities of the two kinds of income appear
now mainly quibbles, justified in a slight degree by certain social
facts of the time. The rise of industry led to different ideas on the
lending of money; the prejudice against it weakened in large classes of
the population, especially in Protestant countries, and its use rapidly
spread. Not until 1830 did a decision of Rome remove all disapproval on
the part of the church. Rent-charges are instructive now as showing the
mode in which rents began to be capitalized in earlier centuries.
§ II. CAPITALIZATION INVOLVED IN THE EVALUATING OF INDIRECT AGENTS
[Sidenote: The capital value of durable wealth is the sum of its
expected rents]
1. _The buying of any indirect agent is practically the purchasing of a
"rent-charge."_ To account rationally for the market value of anything,
its importance must be traced back to "gratification." We have examined
and accepted the proposition that if a good is not affording enjoyment
at the present moment it is kept because it will yield a rent until it
is used. If it is never to afford direct enjoyment, if it is never to
mature physically into the class of enjoyable goods, the explanation for
its value must be found in the fact that it is capable of yielding a
series of rents of enjoyable goods. In the last analysis the value of
anything must be found in its power of affording psychic income, a
series of psychic rents. Now when such a durable income is bought
outright, what is the basis on which its value is estimated? What other
than the rents it will afford? Exactly as did the purchasers of a
medieval rent-charge, the buyer of the durable wealth pays a definite
sum in return for the right to enjoy a series of future rents. As was
the case with rent-charges, however, the amount paid will be less than
the full matured value of the rents. A long series, even a perpetual
series, may be exchanged for no more than ten, twenty, or twenty-five
annual rents. While therefore the selling value of the good is the sum
of the values of the rents, it evidently is that sum discounted.
Immediately, when we have reached this point in the reasoning, our
proposition must suggest itself as self-evidently true in this form: the
value of any good is the sum of the entire series of rents it contains,
discounted, at _some_ rate, to their present worth. What determines the
rate of discount is a question that will call later for a fuller
explanation.
[Sidenote: Capital value is not primary]
2. _There are two modes of approach to the problem of interest: one from
the side of income (rents); the other, from the side of the bearer
(capital)._ The rate of interest expresses a relation between two
values, the value of the income and the value of the sum loaned, whether
it consists of money or of other wealth expressed in terms of money; But
which of these values is primary in a study of the causes of value?
Which is the base from which the other is derived by multiplying at the
rate expressing their ratio? The answer to this question cannot be a
matter of indifference to the economic theorist. Universally heretofore
the study of interest has been approached from the side of capital. A
capital sum was said to be invested and to earn a certain interest, that
is, per cent., of that sum. The usage of speaking of the investment of
capital as a sum given, and of "interest on capital" predisposes the
mind to this view.
[Sidenote: Expected rents are primary, and capital value is the "years'
purchase"]
But the approach from the side of income has been shown to be in some
important cases the historical origin of the rate of interest, and we
need but reconsider reasoning that has gone before to see that this is
the logical order in all cases. Rent, or income, is a link in the chain
of value, connecting gratification or psychic income, consumption goods,
rent or usufruct value, and finally capital value. To one keeping in
mind the logical cause of value, it becomes inconceivable that capital
value could precede income, a view possible only when a fragment of the
problem is seen. This being true, the mere mention of a capital sum
implies the interest problem, and assumes the interest rate. The capital
is of that amount because the anticipated incomes, discounted at some
rate, equal that sum. The capital sum is a certain number of years'
purchase of the series of rents which can be secured by the use of
wealth in various industries. The owner of a number of dollars (or of an
amount of other wealth expressed in dollars) has open to him various
investments. The value of any wealth is due to the possibility of
deriving incomes from it. If, however, the expected income fails to be
realized, the capital loses its value, or it is revalued on the basis of
the new rents. The investment is then said to be a losing one. Thus, at
each stage in the valuation of capital, before it is invested and at
every moment thereafter when the valuation is readjusted to the rents
realized or expected, rents are logically primary, the source from which
the capital sum is derived.
[Sidenote: The rate of capitalization of rents is not fixed merely in
commerce]
3. _The capitalization of comparatively safe permanent incomes from real
estate contains within itself all the factors for the independent
determination of the interest rate, and is not to be explained merely by
reference to "the prevailing rate of interest" in other investments._
The value of land usually is explained simply as the capitalizing of its
rents at "the prevailing rate of interest." The rate is assumed to be
fixed by conditions in manufacturing and commerce, and if five per cent,
can be gotten there the capitalist would never buy land unless
investment in it were made equally attractive. The cause of the rate
thus is supposed to rest outside the transaction itself, the exchange of
land for other capital seeking investment. The economic student is safe
in assuming always that explanations of this sort are fallacious. The
cause of value in any one exchange or any one industry is not thus to be
juggled and shifted into another industry. It is true that the values of
goods are so wonderfully interrelated by substitution that as the price
of fresh beef will affect that of salt mackerel, so the capitalization
rate of machinery affects that of land; but the influence is not from
one side only, it is mutual. When anything has value, it must have in
itself an independent cause of value.
[Sidenote: The exchange of any present and future rents results in a
rate of time discount]
It can not be otherwise in the particular problem of value called
capitalization. The first task of scientific study is to state clearly
the nature of the problem. In this case it is seen to be the exchange of
a present sum of wealth for a series of future rents. Whenever there are
income-bearers and buyers and sellers of them, there are the conditions
required for the determination of the market rate at which those future
incomes shall be discounted. Manufactures and commerce have no peculiar
relation to this process. By a flight of scientific imagination we might
assume that the stock of indirect agents in the world consisted only of
natural food producers, and that this stock and its yield were
absolutely unchangeable by man's will or efforts. Each man in such case
would have to stand with hands tied, and take the fruits as they
matured. Even in such a case there would be capitalization and a rate of
discount on future rents. The fruit-tree (that is, the whole future
series of fruits) would bear a certain relation to one year's yield; the
field would bear a certain relation to its crop. Wherever there are
buyers and sellers of more or less durable agents of it matters not what
kind or origin, there are present the elements and causes for the fixing
of a rate of time discount.
[Sidenote: Capitalization of a perpetual uniform series of rents;]
4. _In practical business may be seen innumerable instances of the
capitalization of both permanent and limited series of incomes._ The
simplest case is the capitalization of an unvarying and supposedly
perpetual series of rents. Whatever the rate of time discount
prevailing, rents infinitely distant become infinitesimally small when
discount is compounded. The present rent is worth most, next year's
less, and so on in a decreasing series.
[Sidenote: Of a probably increasing series of rents;]
But social changes alter rental values, and so far as these changes are
foreseen, these anticipated or expected rents are made the basis for
present capitalization. Investors and owners alike may foresee that a
piece of land used only for agriculture will, within a few years, be
taken up for city lots, or will be needed for a factory or as the site
of a railroad station. The capitalized value would not in this case be
based upon a series of uniform rents each of the amount yielded annually
now, but on the progressive series expected. In some cases the physical
output of an agent may decline while the price of the product increases.
Modern foresters foresee that the selling price of the timber will be
greater twenty-five years from now than it is to-day, and they therefore
estimate the rental value of the forest on the basis of the future
price, thus justifying expenditure that would be unwise if present
prices were to continue.
[Sidenote: And of a declining or fluctuating series of rents]
Again the expected series of incomes may be declining, as the royalties
(not typical rents) secured from mines. If the income is expected
steadily to fall, and to disappear at the end of the twenty-fifth year,
the value of the mine would be the capitalized sum of a limited and
degressive series of incomes.
[Sidenote: Mode of fixing the rate of time discount in practical
business]
Every exchange of a durable agent involves an estimate, rough and
imperfect it may be, of that agent's future. The practical men, however,
who are thus fixing the "capital value" of goods, are usually only dimly
conscious of the logical nature of the process. In fact the process goes
on in a way much less analytical and conscious, much more empirical,
than this analysis would indicate. Most men simply buy as cheap as they
can the agents which at the price they believe will add most to their
income. The future changes are only roughly, not accurately estimated.
The shrewd bargainer is the one who foresees more clearly than his
fellows the complex changes to come. Other men blindly follow. The
ability and the inability to foresee such changes make men rich and
poor. In all this bidding for capital the logical basis of the value is
the series of rents. When the agent is bought outright, the very
concluding of the bargain fixes a relation between the expected value of
the income and the value of the capital invested. In other words, the
exchange of durable agents virtually wraps up in them a net income,
which it is expected will unfold year by year when rents mature and are
secured. At the moment of the investment, the expected rents are
expressed as a percentage of the capital sum.
§ III. THE INCREASING ROLE OF CAPITALIZATION IN MODERN INDUSTRY
[Sidenote: As exchange increases capitalization of goods becomes more
usual]
1. _Where a system of exchange is highly developed, things are looked
upon as capital yielding an objective income rather than as wealth
yielding immediate means of enjoyment._ In the old organization of
industry most men got most of their living from the things they raised
or made. At the present time goods are gotten in the most indirect ways;
men seek wealth because it will yield them an objective or money income,
knowing that if they can get the income, they can get other things by
exchange. In business to-day, wherever there is a rental, it is
capitalized, has a market value, is bought and sold. Men compete in the
purchase of income-yielding agents. There is a continual contest in
judgment among investors to secure the largest rent for the smallest
outlay. On the other hand, the owners of any rental strive to secure the
largest capitalization for it that they can. In this market for capital
it is money rents that are exchanged as an indirect means of arriving at
gratifications.
[Sidenote: Various kinds of corporation securities put expected incomes
in salable form]
2. _The issue of capital stock is the putting of the incomes of wealth
into marketable form._ Stock companies, or corporations, are business
enterprises which issue stock, or certificates of a share in their
wealth and income. Doubtless the convenience of the sale and transfer of
invested capital by the use of stock, has been one of several reasons
for the large increase of this form of organization during the past
century. Originally the stock of a company taken collectively
represented all the capital invested, and each share entitled the owner
to a given portion of the total income earned. The shares were issued in
regular denominations in terms of money, and this amount expressed on
the face of the stock remained fixed. But as a business proves more or
less profitable, the value of a share of its income rises and falls
regardless of the original amount of stock issued. At once there is a
divergence between the nominal or face value and the market value of the
stock. The nominal value is relatively permanent, the same year after
year; it may increase by further issues, but rarely is it decreased. But
when stock is the only form of claim on the earnings that is issued, the
fluctuations of the market value of the stock record the real value of
the business, that is, the capital value of the rents it is expected to
yield. But in present practice there are several forms (of which stock
is but one) in which an investor may buy a share in the earnings of a
business. Bonds usually do not give their owner a vote in the management
or make him in the technical legal sense a part owner in the business.
Bonds representing money loaned to a company, and entitling their holder
to regular interest payments, are nearest in form to the medieval
rent-charge. Next stands preferred stock, which entitles the owners to
share first in the dividends, if there are any; and finally the common
stock, which gets a share only when the other claims are satisfied. By
the multiplication and further variation of these readily salable claims
on industrial incomes, the needs and desires of investors are met more
fully and with greater precision.
[Sidenote: Any continuing income can be capitalized]
3. _Men seek to convert into marketable capital any increase of income
in their wealth or business._ A man who invests a given capital sum in
machines, buildings, and materials buys them, as others do, at prices
that represent their usual, or market, earning power. If he succeeds
exceptionally in his business, he makes the capital earn more than the
rents on which it was capitalized. The same material wealth becomes
worth more because of the reputation of his products, and therefore the
trade-mark and good-will of the business can be capitalized. In this
sense a good name can be sold, and is at least as much to be desired,
even in a mercenary age, as great riches. Likewise, social changes, new
needs, the growth of population, increase the net income of wealth, or
the rents of a business. The basis of capital value is income, and
whatever be its cause, political or economic, material income can and
will be capitalized and added to the market value of the privilege,
wealth, or industry on which the income is conditioned.
[Sidenote: The capitalizing of franchises for public-service
corporations]
Notable cases of this sort arise in connection with public franchises.
If a street-railway or a gas-company is given the exclusive right to
operate in a given locality, any income above average interest on the
investment is capitalized either in the higher price of the stock or in
additional stock issued without the addition of any material to the
plant. If the franchise is unlimited, the income may be capitalized as
practically perpetual; if the franchise is limited, and is to expire in
thirty or forty years, only the limited series of privileged incomes can
ordinarily be capitalized. When, however, the managers are able to exert
influence enough to have the franchise extended, and the investors
believe in the skill of the managers and perhaps in their power to bribe
the legislators, the value of the stock continues higher than it could
usually be under a limited franchise. Such circumstances becloud the
question whether the exceptional income arising under the franchise
should go to the public or to the company. Granted, however, that the
company is entitled to the income, the burden of proof is on those who
object to the capitalizing of the income as is done in every other
business.
[Sidenote: Some difficulties in the capitalization of corporate incomes]
4. _The manipulation of dividends and the resulting changes in
capitalization open up great opportunities for the dishonest increase of
private fortunes._ A great change in the market value of stock is made
by a comparatively small change in the income it regularly affords, for
if the prevailing rate of interest on money loans is five per cent.,
each dollar of dividends is capitalized at $20. It might seem that the
dividend would be declared if earned, otherwise not. The matter is not
so simple and impersonal, however. The control of corporations is vested
in the hands of a small group of directors who have both the opportunity
and the temptation to withhold dividends when they are earned, to pay
them with borrowed money if unearned, and in either case to keep the
stockholders and the public in ignorance of the real condition and
earning power of the business. The stocks can, by this manipulation of
dividends, be made a lottery for the legitimate investor, a trap for the
unwary, and a source of unrighteous gain by men recreant to their
trusts.
In this way it may be seen that an earning power not known to bidders in
the market does not enter into capitalization; a fictitious earning
power, however, is capitalized so long as the investors continue to be
deceived. Instances of this kind present problems not only of private
morality, but of the preservation of free industrial institutions. The
solution of these problems would perhaps be hastened if the a economic
nature of capitalization were more clearly understood. Capital value in
modern industry is everywhere the expression of the serial rents of
wealth, discounted at a prevailing rate of time discount.
CHAPTER 16
INTEREST ON MONEY LOANS
§ I. VARIOUS FORMS OF CONTRACT INTEREST
[Sidenote: Distinction between contract interest and time-value]
1. _Interest, the amount paid according to contract by one person to
another for credit given in terms of money, is but one expression of a
larger problem, that of the difference in present worth of goods at two
periods of time._ This larger problem appears under several forms:
first, as a difference in value, due to time, where there is no money
expression (to be considered in the following chapter); second, in
discount on a money loan for a short, definite time; third, in a
long-time money loan at a fixed rate of interest; fourth, in a credit
loan--that is, the sale of the thing on credit in terms of money.
The last three cases involve interest more or less clearly.
Time-discount, as will be more fully explained, is the basis of
interest. The interest may be greater or less than the time-discount in
the goods, owing to miscalculation on the part of the borrower or to an
unforeseen change in the conditions. Men bid for the use of wealth with
the intention of repaying it at some future time, and the interest they
agree to pay is based on their estimate of the discount of future rents,
which they think is involved in the present valuations of the goods.
Time-discount is involved in goods, however, in numberless cases where
there is no contract interest. Even a Robinson Crusoe must recognize in
his consumption goods and in his various indirect agents differences in
value at different periods of time, of which he must take account.
[Sidenote: Risk and expenses to the money-lender]
2. _Gross interest must be distinguished from net interest._ The forms
of wealth yielding incomes are so mutable, and are used under such
complicated conditions, that both in theoretical discussion and in
practice much care is needed to distinguish between the yield
attributable to the income-bearer, and that attributable to other wealth
or services used in connection with it. That the sum paid as interest on
a loan contains other elements is recognized constantly in practice. As
in the case of contract-rent allowance must be made for repairs and
depreciation, so in the case of contract-interest allowance must be made
for risk, or the average loss occurring in the industry. Money loaned in
hazardous ventures must yield a higher rate of interest. Likewise
capital used by the owner in a hazardous venture must frequently earn
very high returns (not all logically interest) to offset the losses that
are likely to occur.
The lender must also, in estimating net interest, count the cost of
placing, supervising, and collecting the loan. A pawnbroker lends only
small sums and spends much time and effort to keep at interest a
moderate capital. Five thousand dollars loaned in sums averaging ten
dollars represents five hundred transactions, and yet if placed at five
per cent, it yields but two hundred and fifty dollars a year. While,
therefore, the borrower of a small sum estimates the economic interest
(or anticipated gain in income) even higher than the oppressively high
contract-interest he may be forced to pay, the lender must credit a
large part of the gross interest to the labor he expends in carrying on
the business.
[Sidenote: Short-time loans by discounting of commercial paper]
3. _The most usual form of short-time loan is that made by a bank or
broker to business men on security of commercial paper._ By commercial
paper is meant promissory notes given by customers of the merchants,
bills of lading for goods that have been shipped to their customers, and
various other evidences of indebtedness that may be offered the banks
for discount. When goods have been sold on time (as thirty, sixty, or
ninety days) the seller has the choice between letting the time expire
and collecting the bills direct from the customers, and discounting the
bills for ready money at the bank. According to the conditions and needs
of the particular business, either method may be chosen. In most
industries there is need for larger capital at the seasons when the
product is put upon the market. The merchant or manufacturer plans his
business in the expectation of an average rate of discount at such
times, and if it chances that the discount rates are abnormally high, he
has no choice but to go on borrowing and paying the high interest out of
the expected profits of his business. This risk of a change in the
interest rate is one of many chances he has to run.
[Sidenote: Long-time loans by purchase of mortgages, bonds, and stocks]
4. _Most debts in modern times are outstanding for a term of years and
represent the lender's purchase of a claim on the earnings of some
productive enterprise._ The simplest forms of long-time loans are those
made on the security of real estate, which is mortgaged to the lender
for the term of the debt. Usually the debtor is obliged to pay the
interest either annually or semi-annually, and often, but not always, is
permitted to reduce the principal by partial payments. These real-estate
mortgages rest on the security of the particular mortgaged wealth, and,
unlike most short-time loans in bank, are not personal obligations
resting on the general credit of the borrower. Most other long-time
debts share this character of being non-personal; if payment is
defaulted, only the particular wealth can be sold for payment, not the
general wealth of the borrower. Corporation bonds, issued by railroads
and other large stock companies, have increased greatly in number in
recent years. They yield an income fixed in advance, and are secured
usually by mortgage on the entire property of the corporation issuing
them. The income of some special kinds of "preferred stocks" is so
guaranteed as to make them for investors substantially the same as
bonds. Another large class of long-time loans are those made by
national, state, and local governments. Tens of billions of dollars of
public debts are now outstanding, held by private investors in every
walk of life.
The contract in the case of each kind of these loans provides for a
fixed term after which the borrower must repay or renew, and for a fixed
rate on the nominal or par value of the loan. Nearly all the securities
(bonds, certificates, evidences of indebtedness) are salable at a market
rate. It is therefore the income that is fixed, the selling price (or
capital value) fluctuating above or below the nominal sum except just at
the moment when it is payable. The long-time loan thus is very similar
in its economic character to the old-time rent-charge.
[Sidenote: The cost of credit to the improvident buyer]
5. _The sale of goods on credit is a mode of lending and involves
interest in a disguised form._ In some cases merchants will not sell
cheaper for cash than for credit, for fear of offending their main body
of credit customers; but this is exceptional, as there are good reasons
why such a difference should be made. The credit sale usually involves
interest, and often at a very high rate. In many stores there are two
appreciably different prices, one for "slow pay," the other for "spot
cash." If a bill paid at the end of the month is five per cent. more
than the cash price, the difference is equal to sixty per cent. per
annum for the privilege of postponing payment. Such a rate of interest
is paid only by the improvident, but that is a large class ranging from
factory workers to college students. The cash discounts allowed by
merchants clearly express the time difference. On fifty to one hundred
dollars of outstanding bills, many perfectly honest persons are paying
interest at the rate of seventy-five per cent. per annum. The merchant
is forced to make this difference because he must seek not only to earn
interest on the capital thus invested, but to recover the costs of
bookkeeping and collections, and the risk and loss of unpaid bills. The
discounts allowed by manufacturers and wholesale houses measure in the
same way the difference between cash and credit sales. Not unusual is a
discount of "six per cent, in ten days, five per cent, in thirty, or
sixty net." The buyer allowing his bills to run for two months (six per
cent, for sixty days) pays thirty-six per cent, per annum for the use of
that money. The difference is so great that it is impossible to carry on
in this way a large business against strong competition. Such purchases
on credit frequently are made, however, by dealers in small towns.
[Sidenote: Evasion of legal rate of interest]
6. _Interest is often concealed under other forms which increase the
apparent rate._ This fact is well shown in the ways by which usury laws
fixing the legal rate of interest are evaded. A simple method is for the
lender to charge a commission for making the loan, or, if it is a bank,
to charge for a pretended cost of exchange to bring the money from some
other city. Sometimes the borrower is required to keep larger deposits
with the bank than he voluntarily would. Needing $5000, he is compelled
to borrow $10,000 and to pay interest on twice as much as he is
permitted to use. Again the borrower, in periods of unusual demand for
money, is forced to make a long loan instead of a short one. When a one
month's loan at ten per cent, would meet his need, he is forced to
borrow for twelve months at six per cent., during ten months of which
time four or five per cent, is the prevailing rate. In these and other
ways the real rate, or burden of the loan, is made different from that
which is expressed.
§ II. THE MOTIVE FOR PAYING INTEREST
[Sidenote: Money borrowed to buy consumption goods]
1. _Interest for loans to obtain consumption goods is paid because they
are felt to have greater importance at the moment than an equal amount
(either of goods or of money) will have in the future._ A sudden stress
of misfortune may impart to a thing at the moment far more than its
usual value. One standing face to face with starvation cannot be worse
off a year hence; often there is good ground to hope that if the present
misfortune can be relieved, the future better fortune will make it
possible to repay a loan with interest. In other cases, the object of a
loan of consumption goods is to increase the future earning-power of the
borrower. When the student borrows money that represents to him food,
clothing, text-books, tuition, and other expenses incidental to a course
in college, the expenditure is intended to increase the effectiveness of
the worker. When he borrows he has little earning-power, but with that
faith in himself which makes the young American so interesting, he
pictures himself four years later, sheepskin in hand, drawing a
munificent salary with which he can easily satisfy the most exacting
Shylock. Such an expenditure is sometimes called "an investment of
capital," but it should be called a consumption loan--nevertheless in
many cases a loan wisely made. To call this an investment of capital is
to confuse man, the end of production, with material means.
Sometimes this higher estimate of the present good is unwise, viewed in
the light of wider experience. Goods that meet momentary desire make an
exaggerated appeal to untrained minds. The child, the spendthrift, the
savage, cannot properly estimate the relative values of present and
future. The improvident sometimes lightly agree to pay an exorbitant
interest for an immediate consumption loan, making a ruinous difference
between present and future gratifications.
[Sidenote: Money borrowed to buy indirect agents]
2. _Interest on indirect agents is paid as a more or less indirect means
of securing gratification._ This can be clearly seen when durable agents
are hired that produce gratification directly. A carriage bought with
borrowed capital and used for the pleasure of the borrower is expected
to afford a utility greater than that to be gotten by the amount of the
interest in any other way. A spade bought with borrowed capital and used
to cultivate the owner's garden is expected to add products of greater
value than the interest.
But how is it in case the agent is used to gratify persons other than
the owner? The music-teacher who buys a piano on credit expects to
increase his earnings by a sum greater than the interest he has to pay.
If the addition to his earnings exceeds the interest charge, it is
because he has found a use for the borrowed capital greater than that on
the basis of which it was capitalized in the market. The amount of the
interest is secured through the pleasures and services the piano affords
to the patrons of the teacher. In the most complex cases of the
borrowing and use of indirect agents, there is ultimately this same
basis for the interest: enjoyment afforded by the use of capital in the
particular period. To the borrower, what the capital makes possible is
an addition to his income as great as, or greater than, the prevailing
interest. Most loans in our society are now of this sort. Money is
borrowed to invest in business, to get better machinery or a larger
stock; with this capital is secured a better or larger product, and the
product finally being sold at a profit, the business man is at a point
where he can satisfy his wants without encroaching on his capital.
Logically, therefore, the consumer of the product pays the interest in
the price, and the final consumer's enjoyment must be deemed the logical
source of the money interest. The borrower's motive for paying interest
on these indirect goods evidently is his hope of profit through
realizing a greater money rent than he has contracted to pay for their
use.
[Sidenote: The special case of money borrowed to pay debts]
3. _The money market in which short-time loans are made is peculiar in
that the money frequently is borrowed to pay debts, not for investment._
In beginning the discussion of interest, it always is remarked that it
is not money, but capital, that is borrowed and loaned. This caution
against the superficial errors that so easily beset the popular
discussion of interest is much needed, but it is well to note a peculiar
case which is apparently in contradiction to this statement. The usual
method by which money is loaned in the great industrial centers is
called discount, which is the exchange of a certain sum of money for a
note or other credit paper of a larger amount, the interest thus being
taken out in advance. Much borrowing in the form of discount is for the
same purpose as other borrowing--to acquire control of more productive
agents, to embark on new enterprises. The peculiarity of the discount
money-market is that an unusual number of loans are made to meet
contracts that have already been made. There is always a great mass of
outstanding obligations, and merchants are compelled to renew these
loans on penalty of bankruptcy. This market for short-time loans is not
connected closely with the general market for loanable capital. When the
need is for ready money, other concrete capital cannot flow in to meet
it. This special money demand, therefore, in time of greater or less
stress, may fluctuate rapidly, and the interest rate be temporarily
higher or lower than the rate on long-time loans. This case is similar
to that where two markets, as a retail and a wholesale one, exist side
by side, but slowly exerting a mutual influence.
[Sidenote: Productive borrowers seek a profit on their investments]
4. _In the long-time money loan the money generally is borrowed first
merely as a medium of exchange to get control of indirect agents._ The
borrower of a long-time money loan for productive purposes is always
seeking to gain by investing the money in wealth that will yield an
income larger than the interest he must pay. The borrower, therefore,
invests in view of the rate of interest, of the market price of the
goods in which he plans to invest, and of the probable chances for
earning profits in the business. This case, where certain goods whose
price is known are approximately selected before the money is borrowed
for investment, is the type of loan to be kept most usually in mind in
economic discussion.
Evidently the price of these goods, to control which is the real object
of the loan, is merely the sum of the expected rents they will yield,
capitalized at the prevailing rate of time-discount. The borrower
expects either to make these particular goods earn rents larger than
those on the basis of which they have been capitalized, or to transfer
them to an economy where goods are capitalized at a higher rate than he
is paying. The income yielded by these goods, if the borrower's
expectation is fulfilled, is but the difference between present and
future rents that has been wrapped up in their capitalization. As time
elapses and the rents emerge in wisely chosen investments, the borrower
has a surplus large enough to pay the contract interest. It appears,
therefore, that the motive of the borrower is to get control of future
rents at prices that already involve, in their capitalization, a rate of
discount somewhat greater than the interest he contracts to pay.
[Sidenote: The developed market for money loans]
5. _The rate of contract interest on money loans is adjusted at each
moment in the money market by the bidding for money loans._ This is a
true statement only if it is understood in a somewhat superficial sense.
No error connected with interest is, however, more crude than the view
that the interest rate is in any broad sense due to the quantity of
money. Some loans are made apart from the general market, by private
agreement between borrower and lender; but in nearly every such case the
rate agreed upon is seen to be closely related to that of the general
market to which either borrower or lender can resort if he wishes. The
greater number of borrowers and lenders of money have a range of choice
in their bargaining. The interest rate in modern developed money markets
is that rate which brings to equilibrium the demand for money loans and
the money capital available within the period. If the ready, loanable
money in private hands, in banks, in insurance-company reserves, &c.,
increases, a lower rate must be offered to borrowers; if the supply
decreases, a higher rate will be quoted. In the one case, more men
borrow; in the other, fewer borrow and more seek to lend. Thus a rate
results, but a rate that is closely connected with larger set of
facts--those, indeed, which determine in the long run the rate of
capitalization in the community.
[Sidenote: Every person is a buyer or a seller of present goods]
6. _The individual must adjust his business dealings to the market rate
of interest._ The market rate is fixed by the bidding of individuals,
and every one has something to do with fixing it. In a multitude of
minutely small ways, as present and future goods are compared by men,
the rate of interest is affected positively or negatively. But for
practical purposes the individual, counting for little in the midst of
millions, must look upon the interest rate as beyond his influence.
Therefore, while the rate is determined by each to some degree, all that
any one does is to buy or sell present goods, borrow or lend capital,
use up or save wealth, according as his own estimate of time-value is
less or more than the market rate. In fact, the estimates of individuals
diverge constantly from the market rate, but are brought into harmony by
their actions with reference both to money loans and to the use and
valuation of the various forms of wealth. A Robinson Crusoe working on
his island and valuing future goods relatively to present goods higher
than before, consumes less; or, valuing them lower, consumes more. The
business man who values indirect agents above the market rate borrows,
and if he miscalculates and fails to make them earn the expected rent,
he loses. In this experimental way many other acts are influenced by the
prevailing interest rate and in turn affect it, thus aiding to formulate
society's estimate of the value of present as compared with future
rents.
CHAPTER 17
THE THEORY OF TIME-VALUE
§ I. DEFINITION AND SCOPE OF TIME-VALUE
[Sidenote: The simplest cases of time-value]
1. _Time-value is the difference between the values of things at
different times._ Things differ in value according to form, place,
quality of goods, and according to the feelings of men, and--not least
important factor--according to time. The simplest and clearest case of
time-value is the difference noticeable in the same thing at different
moments. Is this good worth more now or next week? Shall this apple be
eaten now or next winter? These questions can be answered only after
comparing the marginal utilities which differ according to the varying
conditions of the two periods.
All the other cases of time-value can, by the practical device of
substituting other goods of equivalent value, be reduced to the typical
case of comparison of the same thing at different times. The comparison
may be between very similar things, the one consumed being replaced by a
duplicate. An apple borrowed now may be returned next year in the form
of one of the same size and quality. The essential thing in this
comparison is not physical identity, but equivalence in size, sort, and
quality at the two periods. This is borrowing under the renting
contract.
[Sidenote: Time-value in the case of different kinds of gratifications]
But two or more quite different things may be expressed in terms of
another thing and so be made comparable. Money becomes the value-unit
through which different things may be reduced to the same terms for
comparison. With this mode of expressing the value-equivalence of
various goods, the interest contract first becomes possible, money (the
standard of deferred payments) being the thing exchanged (possibly only
in name) at two periods of time. What is really compared are various
gratifications which may be produced by very different material things
or services. In its last analysis comparison of values at different
periods of time must be a comparison of psychic incomes, of two sums of
gratification. The comparison of the value of a bushel of apples with
that of a barrel of potatoes or a suit of clothes at the same moment
appears simple enough. When all are expressed in terms of money, the
comparison of each with its value-equivalent at a later date becomes
easy. The simplicity and obviousness of time-value in the case of money
loans at interest led men at first to recognize that phase of the
problem exclusively, and later the term "interest," not without much
confusion of thought, was given a wider significance. Let us now see how
large a part of the whole problem of time-value is outside of the money
loan.
[Sidenote: Time-value is involved in capitalization of land]
2. _The problem of time-value is quite separable from the concepts of
money and capital, though usually connected with them in practice and
theory._ It is true that the problem of time-value was first clearly
recognized in connection with money and a formally expressed capital
sum. Misled by this fact, and taking a very narrow view, writers
seventy-five years ago recognized but dimly the problem of time-value in
connection with the valuation of the incomes derived from land. It is
true, as has been shown above, that the mere putting of an estimate on a
durable good such as land involves the process of capitalization, which
in turn implies a comparison of the values of the rents expected at
different periods. Diminishing returns in the use of agents involves a
loss of time to secure the usufructs emerging. The relation of these
facts was not clearly seen until of late.
The phenomenon of time-value as above defined may be seen to be broader
even than that of capitalization. The difference in the value of the
successive rents of wealth must have been recognized and in some degree
measured before there was any conscious calculation of capital value.
Differences in value due to time are everywhere. The problem of
time-value often is present where money is not even spoken of or thought
of. Money no more causes this time-difference in value than balances
cause weight.
[Sidenote: Time-value is taken account of in the keeping up of repairs]
3. _The problem of time-value is involved in repairs and depreciation,
and in the use of consumption goods._ It is possible, as we have seen,
to increase the sum available for present needs, and to encroach upon
the future by postponing repairs on intermediate goods. The balancing of
the cost of repairs against the future income is a never-ending task in
practical business. One making repairs must purchase the needed
materials and labor at a capitalization determined by their expected
earning-power in other industries. If the repairs in question will not
ensure an annual saving as great as this expected rent, they will not be
made. When an industry is declining, it may, for the sake of putting the
capital into a better business, be good policy to let the machinery fall
into bad repair. The problem of time-value is involved in the
application of one's energy to repairing one's own possessions. It is a
thought of wide bearings that numberless minor decisions in every petty
business involve, if they are correctly made, a measuring of the rate of
capitalization.
[Sidenote: And in the choice of enjoyments]
As will be more fully shown in discussing the relation of the prevailing
rate of interest to saving, the recognition of time-value is implied in
the use men make of consumption goods, in their postponement of
enjoyment, in their storing of goods for future use. The varying
gratifications yielded by consumption goods, and their values in
different conditions cannot be explained without taking account of
differences in time. Wherever there can be a choice in the time at
which, and consequently in the conditions under which, a thing can be
used, there is a choice presented between the different values.
Time-value is present even in a period during which no goods continue to
exist, as when a good is consumed at a moment of greater need, to be
replaced at a time when less valuable. If an apple is borrowed on the
promise to return an apple and a peach at the end of a year, the peach
represents the time-difference in value but in the meantime there has
been no apple in existence. It is only in a figurative sense that it may
be said that interest is paid on that "capital." Interest is paid
because of a difference in want-gratifying power, but during the
interval there is no material capital.
[Sidenote: Prodigality and vice involve a high discount of future
happiness]
4. _The problem of time-value is involved in much foolish pleasure, in
prodigality, and in vice._ Economics touches frequently on the borders
of ethics. If there were to be formulated an economics of personal
conduct, it surely would give a large place to the comparison between
present and future pleasures. Forethought, or prudence, is the virtue of
recognizing not only future dangers to be avoided, but the greater
future joys to be gained in exchange for present pleasures. The reckless
and the prodigal underestimate the future and barter all to gratify the
moment's impulse. The drinker exchanges the hopes of worthy life for the
exhilaration of the spree. Indulgence in social pleasures, if secured at
the price of lost sleep, weakened health, and debauched character, are
loans from the future made by youthful prodigals at usurious interest.
If no one ever paid more than a moderate rate of interest for the
gratification of his present whims and impulses, most hospitals,
drug-stores, and medical colleges would close, and half, if not all, the
prisons would be empty.
Indeed, time difference in value is a universal phenomenon of life and
conduct. Contract interest is but one phenomenal form of time-value, and
this in turn is but one phase of value. This section may serve to
suggest how much more varied and pervasive the fact of time-value is
than has usually been recognized in popular or economic discussion of
the subject of interest.
§ II. THE ADJUSTMENT OF THE RATE OF TIME-DISCOUNT
[Sidenote: The exchange value of present and future goods]
1. _The fixing of the discount on future goods is, in its essentials,
like the fixing of the market price of consumption goods._ This problem
appears to be one of the most difficult in economic theory; but reduced
to its simplest terms, it is an aspect of exchange value, and its
ultimate explanation must be found in a comparison of psychic incomes.
There must be noted the conditions of demand and supply, the interplay
and final equilibrium of the two forces. The declining and marginal
utility to the two parties to exchange must be carefully analyzed. One
who can do these things is prepared to find the answer to the problem of
time-value. Whenever a group of buyers and sellers meet, a ratio of
exchange commonly will be arrived at. The ratio of exchange between
buyers and sellers of present and future rents likewise is fixed at the
estimates of a "marginal pair," at which point the amount offered and
taken comes to equilibrium, for at that point no motive exists for any
one to change sides.
[Sidenote: The peculiar nature of the exchange in the case of
time-value]
[Sidenote: Several reasons why this is not easily recognized]
2. _Time-value as the premium rate on present goods is unlike the
ordinary market price, of goods only in the special nature of the
utilities exchanged._ The one peculiar need in the theory of this
subject is a clear understanding on this point. The goods exchanged, or
compared, are direct and indirect goods, or present and future goods,
or, more generally speaking, two goods or groups of goods unequally
distant in time from present enjoyment. What are sold in a case such as
capitalization, involving an estimate of time-value, are present goods
or gratifications; what are bought are future gratifications, or
indirect agents which stand for, typify, or make possible, future
gratifications. Practically every man in a market acts on the knowledge
of what the exchange of direct and indirect goods means; yet abstractly
stated, the thought seems at first difficult. In valuing any durable
good, the theory of time-value is implied. Every time a machine, a
house, a book, a field, is bought, the distinction between direct and
indirect goods is acted upon, for a choice has been made between present
enjoyment and future provision. Anything that endures is an indirect
good and implies in its valuation a premium rate on present goods.
The real nature of the exchange in time-valuation is made unclear by the
uncertainty of life, leading men to work on to provide against
possibility of mishaps; for the most part the world's treasures never
afford to their temporary owners the gratification that they typify, or
could give. The nature of this exchange is made unclear also by habit,
under the influence of which the exchange in so many cases is not
carefully thought out, is not the result of a close comparison of the
utilities of goods in present and future moments. The real nature of
this exchange is made unclear by the indirect, or induced, gratification
derived from wealth. Wealth gives to its owner power, prestige, the
esteem of his fellows, and pride in evidences of success and growing
prosperity. Its very possession creates a new need and imparts to it
another utility, that of insuring against the misery of a declining
fortune one who has enjoyed wealth and power. Men make the greatest
efforts up to the last moment of life to retain wealth that they will
enjoy only in this subtle and indirect way. Thus every motive that leads
men to postpone present enjoyment makes them bidders for indirect agents
and for future goods, and helps to determine the market rate of premium
on the present, and of discount on the future.
[Sidenote: The scarcity of present gratifications]
3. _There being a limited number of indirect agents, their limited
powers in a given period limit the supply of present goods._ The
principle is familiar that value is always connected with relative
scarcity. Now the desire for the present goods is indefinitely large. If
the right kind and quality could be had at will, an enormously greater
amount of present goods would be used. But the present goods are
dependent on indirect agents. The psychic income of a civilized
community is dependent on a favorable and extremely refined environment:
houses, libraries, theaters, the agencies of travel, as well as the
sources supplying the more material needs. These indirect agents, even
in the richest community, are limited in variety, in quality, and in
number.
[Sidenote: The total of future uses in vastly greater]
But if indirect agents could produce an indefinitely large product at
any given moment, the supply of present goods could be indefinitely
increased. The supply of utilities, therefore, is limited by
"diminishing returns" in the use of agents, making their maximum yield
depend upon the lapse of time. The uses any given material can yield in
a limited period have an absolute limit: an acre of land with the most
perfect cultivation cannot feed the world; but remove the limit of time,
wait an eternity, and the acre would yield an infinite crop. The
economic return of a given agent in a given period is reached much
sooner than the technical return. If agents are forced to yield more
bountifully, it is at the sacrifice of utilities in other agents, and a
point of maximum net yield is found in any given period. Here also the
lapse of time is the condition of the increase of the net utilities
derivable from limited agents.
[Sidenote: The choice open to the investor of money]
4. _The rate of capitalization of income and the rate of contract
interest on money capital tend to unite into a single market rate._ A
person wishing to exchange present goods or income for future goods may
buy an income-bearer at its capitalized value, or he may create a new
rent-bearer. Having saved a sum of money, either he may purchase a
factory known to be profitable; or he may hire the services of men and
unite them with materials and machinery to create a new industry or a
new form of income-bearer; or he may loan his money to others to make
either kind of purchase. In any one of the three cases it is evident
that capitalization (that is, the discounting of future rents in goods)
is the primary and important fact making possible the emergence of a
surplus, or net yield, over and above the value of the capital. The
expected uses contained not only in whole industrial establishments, but
in the particular materials and agents united to form new agents, are
purchased at their capitalized value; that is, the future uses have been
discounted and have entered into the price of the goods as less than
they will be when realized as actual rents. This is the crucial point in
the theory either of contract interest or of time value; for to explain
the rate of interest as due to the process of "producing" capital agents
out of other materials, is to beg the question involved. The surplus
yielded by capital above its cost is but the realization of a net income
made possible by the discounting of future rents.
[Sidenote: The choice open to the borrower of wealth]
A person wishing to make an exchange of the opposite kind to that
described may sell his wealth for money; he may exchange for present
enjoyable goods his income at its capitalized value; or he may use up
what he has, let it depreciate, fail to make repairs, convert it to
various consumption purposes, and thus invade his earning power. When
the interest rate is five per cent., the sacrifice of any unit of
regular income permits the spending of twenty times that amount for
present enjoyment. The advantages of these various methods tend to
equilibrium. If the owners of developed productive agents hold them at
too high a capitalized value, investors will apply their efforts and
savings to duplicating these forms of wealth. If, in turn, any of the
minor factors, as materials or uses of goods, are overvalued
(overcapitalized) it will appear ultimately in a check in the demand for
them at these prices, and in a reduction in the demand for money loans.
As it is possible for any investor and for any borrower to choose among
these investments and loans, there is practically but one rate, the rate
which expresses the general ratio of exchange between present and future
income. Owners and investors take the line of least resistance, get the
most they can for their money, and choose whatever form is most
advantageous. The interrelations between the various interest rates are
therefore close and constant. The market rate of interest thus extends
over all forms of wealth and pervades every phase of business. The value
of every durable agent is fixed with reference to a prevailing interest
rate, through the discounting to their present worth of all the incomes
it is believed to contain.
[Sidenote: A sacrifice sale involves a high rate of interest]
5. _Where goods are sold at forced sale or sacrifice, it is equivalent
to a contract loan at a high rate of interest._ Market values being
dependent upon market conditions, the offer of goods at a given moment
may not find the usual or normal number of buyers or the usual demand.
Just such conditions are most likely to exist at the times when business
men feel an unusual need of money. Two courses are open to them in this
emergency, either to borrow the money at a very high rate of interest,
holding the goods for better prices, or to sell the goods under the
unfavorable conditions. The end of both courses is the same--to get
ready money; and the methods are not essentially unlike--the exchange of
greater future values for present values. The sacrifice sale thus
reveals the merchant's high estimate of the interest rate. The purchaser
of some kinds of property in times of depression is securing them at a
lower capitalization than they will later have. The rise in value may be
foreseen as well by seller as by buyer, but the low capitalization
reflects the high interest rate temporarily obtaining. A. T. Stewart is
said to have laid the foundation of his fortune when, being out of debt
himself, he bought up the bankrupt stocks of his competitors in a great
financial panic. The high contract interest at such times is but the
reflection of the high premium on present purchasing power. Here then is
another mode in which the prevailing rate of interest on money loans is
kept in close harmony with the rate of time valuation.
[Sidenote: Interrelations of the money interest rate and of
time-discount]
6. _The rate of contract interest on safe long-time loans registers
pretty nearly the prevailing rate of time-discount in the community._
There are of course different capital markets, and the estimates put
upon next year's income as compared with this year's is very different
in Montana, New York, and London. Because of the friction in the
transfer of investments from one locality to another, these differences
may persist indefinitely; but within each capital market the interest on
any particular loan must, for reasons readily seen, tend to conform
pretty closely to the prevailing rate. Various groups of men living in
the same community have, however, varying estimates of time-value. The
increase of safe long-time bonds issued by strong corporations and by
wealthy nations as, for example, the New York Central Railroad, and the
government of Great Britain, gives a large number of choice investments
where the element of risk is almost entirely absent. Various agencies
have developed for making the loans, that is, for bringing the borrower
and lender together with the minimum of trouble and expense. Other
efficient, but somewhat more costly, agencies for bringing together the
owners of loanable capital and men wishing to use capital are
savings-banks, building and loan associations, insurance companies
issuing endowment policies, and mortgage-investment companies of many
kinds. While on the one side of the bidding are thousands of lenders
offering to exchange ready money for assured incomes, on the other are
thousand of borrowers offering to exchange the promise of assured
incomes for ready money. If either of these classes got far out of touch
with the prevailing rate of capitalization, to which all the valuations
are adjusted, that class would lose greatly.
[Sidenote: Relations between the concepts of rent, interest, and
time-value]
7. _All the net usufructs actually yielded by wealth are rents; economic
time-discount is never a realized income; it is merely a calculation
form, or anticipation of the difference between present and future
gratifications._ There has been much discussion as to what should be the
relations in thought between rent and interest. Space permits here only
an indication of the view on this question involved in the foregoing
treatment. Rent, as the term is here applied, includes all the net
productivity attributable to the ownership and use of capital, whether
the yield be in economic form (in an increment of value) or in
contractual form. Even contract money-interest must be looked upon as a
species of the genus contract rent, the peculiarity in the money loan
being merely that the thing which it is agreed to return is a certain
number of units of the standard money.
The term "interest," first applied in the Middle Ages to a payment for
the use of a money loan, came to be used more broadly by the earlier
economists as the income attributable to those goods which generally
were bought and sold in terms of money. In other words, interest was
supposed (though erroneously) to be uniquely connected with the
particular production instruments to which the term capital was narrowly
and mistakenly confined. Still more to add to the confusion, the term
interest was about this same time identified with the broad problem of
time-value. The terminology has remained ever since in this stage of
arrested development. Our suggestion is to retain the word interest in
its original meaning, still almost universal in business circles, of a
contractual payment on money loans, applying the term time-value (for
lack of a better word) to the subtler economic problem.
[Sidenote: Rent and time-value are essentially different phrases of the
value problem]
Time-value is here understood to be that all-pervading difference in the
values of uses and gratifications of wealth at different points of time.
A comparison of the value of momently appearing uses of wealth is the
rent problem. Here are, therefore, very different aspects of the value
problem. The rent conception is earlier grasped by men, is nearer in
point of logic; the concept of time-value has only recently been clearly
recognized. If men lived only in the moment, they would be concerned
only with rent; living in the future also, they are constantly
regulating their acts with reference to time-value.
CHAPTER 18
RELATIVELY FIXED AND RELATIVELY INCREASABLE FORMS OF CAPITAL
§ I. HOW VARIOUS FORMS OF CAPITAL MAY BE INCREASED
[Sidenote: The older and the modern way of viewing wealth]
1. _Men seek to increase income by increasing capital._ Men may strive
to increase their rents without expressing the rent-bearer in terms of
capital. Peasant owners and small proprietors, toiling fondly on their
little estates, seeking steadily a larger crop, a larger income,
accomplish wonders in bringing waste land to a high state of
cultivation. Working on the soil that is at once their livelihood and
their home, they do not consciously reckon the value of the labor they
are putting upon it. No money can buy that which to them is beyond
price. But, in our money economy, efforts are largely directed toward
the increase of the capital sum. Investment takes the form of putting in
a sum of money in the hope of getting an income bearing a certain
relation to it. The first thought is of the value of the wealth
invested, which has been carefully measured and expressed in dollars and
cents. Wealth looked at in the older way was valued for what it did
immediately for its owner, for its concrete fruits; looked at in the
modern way, it is valued as a marketable income-bearer readily
convertible into a multitude of other forms. Thus investments come to be
thought of in terms of general purchasing power, from which it is
expected to realize an income of a given percentage.
[Sidenote: Free goods of unlimited supply]
[Sidenote: Beginning of scarcity of common materials]
2. _There are some classes of goods that can be increased without any
noticeable increase in difficulty._ The extremest examples are
undiminished goods such as air, sea-water, the water of large rivers.
These are free goods because, however much is used, the supply is
immediately renewed. But they are undiminished only in a relative sense
and in reference to present need. The water in the Western rivers long
flowed on, undiminished by the uses made of it. But progressing
civilization required more water for cities, for mining, and for
irrigation, and now states and corporations are going to law over these
formerly undiminished free goods. Some kinds of goods are produced from
such very common materials that it might seem possible, by the
substitution of agents, to produce an unlimited supply. How can bricks
be limited in number, being made as they are from one of the commonest
materials on the earth's surface? But the largest clay banks are limited
in size; a large proportion of the places where bricks are needed are
not near a supply of clay of good quality; and after a brick-yard has
been used for a time there is increasing difficulty in getting out the
material. While, therefore, bricks are scarce and hard to get from the
outset in some places, the scarcity grows more marked in many places at
first well supplied. If materials are scarce in any degree, their
continued use for one purpose increases their scarcity in all other
uses. Economic goods are goods having value; value implies scarcity, and
an increasing demand means inevitably a higher value at some point. This
is true of clay, stone, water, and the commonest kinds of labor.
[Sidenote: No scarce goods can be indefinitely increased]
It has long been customary for economists to talk of economic goods that
could be increased indefinitely (meaning infinitely or, in any event,
without any limit ever appreciable to man) without any increase in the
cost or scarcity. This class of goods was considered to be very large.
There is no such class of economic goods; it is evidently impossible
that there should be. If they are already "scarce," increasing demand
must make them scarcer. There are, however, some goods that practically
can be increased with so little difficulty that their limitation is not
of great social importance. Progress, population, prosperity, are not
primarily conditioned on their amount; limitation will be felt far
earlier elsewhere. They are at one end of the scale; they are the
relatively increasable goods.
[Sidenote: The products of land are increased at a given time and place
at increasing cost]
3. _There is a large class of goods whose increase is seen to be gained
with increasing difficulty._ This is seen most clearly in the
diminishing returns from land. In the attempt to get some food-products
in greater quantity from a given area at a given time, increasing
difficulty is met with at once. This attempt continued for a series of
years results in historical diminishing returns, as was strikingly
illustrated in English experience during the Napoleonic wars, when wheat
rose in value because of the greater difficulty of producing the larger
supply needed. Some replenishing agents will restore themselves if given
time; the forest will grow up if left untouched by man; the field will
recover its fertile quality if allowed to lie fallow. But this
self-replenishing of agents is a slow process, and time is costly. Man
therefore tries in other ways to force more uses out of goods, until
checked by the increasing difficulty. The goods subject to "the law of
increasing cost," as it was called formerly, were considered to be a
peculiar class comprising only a small portion of wealth. But it can now
be seen that the law may apply ultimately, though in differing degrees,
to every kind of economic goods. Indeed, the principle just discussed is
no more than one phase of the law of economic diminishing returns, which
has a universal application to the realm of values.
[Sidenote: Agents most nearly fixed in amount are somewhat increasable]
4. _There is a class of goods, natural agents and stores of materials
which appears to be relatively fixed in quantity or which is increasable
only with much difficulty._ The first part of this proposition expresses
mildly the thought that long obtained among economists: it was said that
the supply of certain things was absolutely fixed, the chief of these
being land used for agriculture. The idea as held by Malthus and
Ricardo was modified by John Stuart Mill in somewhat inconsistent ways.
Land, it was said, is a thing which "man cannot make," therefore its
supply is fixed. The second part of the opening proposition expresses
the view here held: the supply of no important class of goods is
absolutely fixed, in any reasonable sense. Most, if not all, belong to
the class that is increasable, although it may be with much difficulty.
Even when the exact thing cannot be duplicated, as a bust by an ancient
sculptor or an autograph of a dead author, many substitutes serving the
same or closely related wants, affect and limit the demand, and thus
increase the supply. Men cannot, it is true, increase the stores of
copper in the earth, but they devise new processes to extract it from
ores before worthless, and invent methods of procuring aluminium, which
yields some of the same utilities as copper. Even the supply of land, as
is shown elsewhere, is constantly changing. Thus all kinds of wealth can
be increased in some degree; many kinds in the course of time are very
greatly increased with little or no direct effort, but the supply of all
alike can be secured in larger amount at any given moment only at the
cost of increasing difficulty.
§ II. SOCIAL SIGNIFICANCE OF THESE DIFFERENCES
[Sidenote: Physical amount vs. economic supply]
1. _Not the fixity of the physical amount of agents, but the economic
supply is significant._ There is danger of confusion between these two
ideas. The statement that "land" cannot be created and that therefore
"the supply is fixed" involves a fallacy. The word supply means the
amount that is available at the moment or during the period spoken of.
The land in Greenland is not, and probably never can be, a part of the
supply of land in England. The land in America for centuries was not,
but now has become, for some purposes, a part of the supply in the same
market as the land of England. The question of importance in economic
discussion is not whether the physical material can be brought into
existence, but whether the economic "supply" can be increased. The
existence of coal-mines in Venus or Mars is of no economic importance to
us, but coal-mines on the earth, yet undiscovered, present a potential
supply that at any moment may be realized.
[Sidenote: Discovery enlarges the supply of natural resources]
2. _Discovery of new lands and of new natural deposits continually
enlarges the economic supply of the agents most nearly fixed in physical
amount._ This proposition states a historical fact. Any explanation of
the economic occurrences of the last five centuries or of the immediate
future, that ignores this fact of the increasing supply of many kinds of
land and natural resources in the markets of the civilized world, must
lead to false conclusions. The rate of this movement has been more rapid
in the past century than theretofore, and perhaps more rapid than it
will be henceforward; but that this development will continue in large
measure and for a long period, is not open to question. Undeveloped
areas will be opened to the world, and new geologic realms will be
explored. Yet the notion criticized above is found in all the older
text-books. The idea arose in England in the first quarter of the
nineteenth century when land and food were rapidly rising in price, and
it has vitiated a large part of both the economic theory and the
practical conclusions on this subject.
[Sidenote: The effective supply grows by invention]
3. _Invention, including new modes of transportation and new processes,
increases the economic supply of most scarce goods and provides
substitutes for the others._ Some inventions increase economic supply by
making available the uses in goods that were before unavailable. Subsoil
ploughing annexes to agricultural land new layers of soil that are just
as important as new acres added to the surface. If land could be used
three times as deep, it would be as good for many purposes as if it were
of three times the extent. New trade routes and new means of
transportation add to the supplies available in the older countries as
effectively as if their areas were increased. The building of railroads
in western America had an effect on English rents identical in nature
with that which would have been produced had an equal area of somewhat
less fertile land touching England, risen out of the ocean. Every
country in Europe has repeatedly felt the shock of these great economic
changes which have compelled the recapitalization on a lower plane, of
nearly all kinds of their landed wealth. Where the same agents have not
been multiplied, substitutes have been found that are just as effective
in meeting the economic need. It is the result, the gratification, that
man seeks: any particular good is but the means to an end.
[Sidenote: Production of land by physical change]
4. _Increasing wealth and new labor make possible the increase of the
agents that appear most nearly fixed in supply._ When the need arises
men turn to new enterprises. The reclaiming of land in Holland is a
striking but far from isolated example. Among the larger undertakings of
this kind are the draining of the Haarlem Lake in 1840-58, by which
40,000 acres of rich land were made available, and the draining of the
Zuyder Zee, which is adding 1,300,000 acres. Though there have been many
minor undertakings of the kind, the area reclaimed is relatively small
compared with the whole area of the land in the world used for
agricultural purposes. There are still great areas of fens, swamps, and
marshlands, such as those on the Jersey coast in this country, which
with moderate effort could be reclaimed. While the possibility must be
recognized, the increase of the area of available agricultural land by
means of such physical changes is relatively small.
[Sidenote: And by the work of pioneers]
The work of the pioneer, as a producer of a supply of land, is, however,
of the greatest importance. The pioneer annexes new areas to the
economic world and to the market in which he has lived. This is
recognized of late by writers that perhaps do not fully mark its
significance to economic theory. The work of the explorer and prospector
is that of a producer of mineral resources, and daily market quotations
reflect the changes in "the supply" of these natural stores.
[Sidenote: Successive utilization of various grades of agents]
5. _Limitation of the supply appears first in the better qualities, and
efforts to increase wealth are then directed to making available the
poorer grades._ Great quantities of the poorer grades of wealth, even of
those things that are relatively fixed in supply, lie unused. Great
areas on the edge of civilization still await the pioneer, the
prospector, and the miner. Here is a source of wealth and a field for
enterprise. The growth of society may cause some of the poorer agents in
time to become the best. When men crossed the ocean to settle on
Manhattan Island, it was a wilderness; but the growth of commerce has
caused the land in New York city to become more valuable than that in
London. Changes are still in progress, for of late the smaller ports to
the south have increased their trade at a more rapid pace than New York
has.
[Sidenote: Goods ranged on a scale of increasableness]
The difference in increasableness of the various forms of wealth is of
importance in considering various social questions such as the effects
of an increase of population, and the kinds of taxation most equitable
and most favorable to the progress of society. Account must be taken of
the fact that the number of bricks can be increased more easily than the
amount of land; but there must not be overlooked the possibility of
increase in any of these forms of wealth, nor the limits to the increase
of any one of them. When one wishes to save or increase wealth, he turns
to these great unappropriated fields, unused things or things
imperfectly used, and tries to convert them into effective agents. The
different forms of wealth may be ranged on a scale according to the ease
with which they can be increased by effort. They may therefore be
classed as relatively fixed and relatively increasable. Some natural
resources belong at one end, and some at the other end of this scale. No
hard and fast line divides the different kinds of goods, but the
difference in degree of increasableness is a fact of great social
importance, affecting the direction in which industry can and must
progress.
CHAPTER 19
SAVING AND PRODUCTION AS AFFECTED BY THE RATE OF INTEREST
§ I. SAVING AS AFFECTED BY THE INTEREST RATE
[Sidenote: The interest rate traces the division between present and
future gratifications]
1. _In the case of consumption goods, present marginal uses are often
less than future uses as judged at the present._ The proposition that
future goods sometimes have a greater instead of a less value than
present goods may at first seem to deny the general fact of economic
interest, which is a premium on present over future goods. The
contradiction is only apparent, however, and the proposition is merely a
proper interpretation of the theory of interest. The assertion that
present goods have greater value than future goods, as we have accepted
it, requires two explanations. First, it means that this difference
exists when the two are judged and compared _at the present moment_. The
future use when it matures may be much greater than the present use;
indeed, the very existence of interest depends upon this surplus of
value arising by the lapse of time in the future use. Secondly, the
proposition does not mean that every concrete good, or every use of the
goods, is worth more in the present than in the future; it means merely
that the demand for present goods preponderates so that a market rate in
favor of present possession prevails. In a great many cases a particular
good may have a greater value to be kept for the future than to be used
at present, in which case it is kept, or it is exchanged for something
else having a higher value in the present. But this preference of the
future over the present cannot pass a moderate limit without condemning
the person to present misery, and at length to death. On the other hand
the excessive preference of present over future would lead to the using
up and wearing out of wealth, to the present enjoyment of every possible
resource, on the penalty of future misery. Evidently somewhere between
these two extremes there must be, in each economy, a ratio of exchange
between present and future, which in fact is the interest rate. This
rate applied to utilities traces through each good a line analagous to
the isothermal line on the map, marking off a zone of utilities for the
present and other zones for each period of the future. There is thus a
close relation between saving and the rate of time-discount.
[Sidenote: The less necessary goods are the ones saved]
[Illustration: Present VALUE line]
Let us illustrate by the case of fruit stored in the cellar for future
use. In the fall after the appetite for apples has been gratified up to
a certain point, there still remains a large stock which affords less
gratification if consumed at once than if kept for a time. Thus wood,
food, and clothing are stored in the summer for the winter's need. Even
the animals act on this principle. Squirrels, bees, and ants store up in
the season of superfluity for the season of scarcity. The animals
recognize with their feeble intelligence or by instinct, that a time
will come when these consumption goods will represent greater importance
to their welfare than they do at the moment. It results from the nature
of wants and the principle of diminishing utility that in many cases
some portion of a large supply of present goods must be worth less now
than at a future time. This part, the marginal, less necessary part,
will be left for a future time, and it is to this part that our opening
proposition refers. This is roughly illustrated by the diagram.
Things that cannot be kept, perishable goods, do not permit of this
comparison. But if goods that can be kept continue to be used after
utility has fallen down the scale, their high value for the future is
cast away. Man lives not alone in the present but, in a far greater
measure than do any animals, he lives in the future also. His economic
life and his economic judgment comprehend a great number of periods at
once. With the aid of memory and imagination he forecasts the future,
and compares it with the present. The diminishing utility of goods,
therefore, is modified by this fact that a thing has want-gratifying
power at different periods. Before man uses goods for an inferior
purpose he will ask whether, if they are kept for the future, they will
not gratify a greater want.
[Sidenote: The less valuable rise in value with the lapse of time]
2. _The gradual rise of a consumption good with the lapse of time from
the lower to the higher degree of gratification is the rent it yields._
The difference in value of present and future rents is expressed by the
discount of the future use when it is capitalized at any earlier moment,
and emerges in the rise in value as the thing approaches to the time
when it can render the later use. Next year the unit whose use is
deferred will afford as much gratification as the earlier units do now,
and more than if used at the present moment. The importance of any
present utility is compared with its importance a year later, plus
interest at a rate which expresses the limit to which future uses are
discounted. Anything that makes men feel more the importance of future
uses causes them to value those uses more. But the pressure of present
want is such that a present use of a lower order competes with a future
use of a higher order. Only goods of a lower order, nearer the margin,
are reserved for the future. But just as the possibility of using a
thing for several different purposes at present causes it to be valued
more highly than if it had but one use, so the possibility of reserving
to the future a portion of a stock imparts to every unit a higher
marginal utility.
[Sidenote: Interest is the equalizer of time values]
3. _The saving of present goods for future use is encouraged by the
motive of gaining the interest._ Many consumption goods grow into higher
uses in the hands of the owner, whether he uses them for himself or not.
Ice may be stored in midwinter when it is all but a free good and a
little labor serves to fill the ice-house. Kept until the summer months,
the ice rises in value as the desire for it grows. Likewise the higher
price secured by the owner of a thing kept for sale to others, reflects
the change in utility, and affords practically a rent which is the
motive for investing capital in that business. Any saver or abstainer
puts aside present wants only when the future good, with the addition of
time-value or of money interest, appears as large as the present good.
Interest is therefore the equalizer of the value of things in different
periods. Put into the scale of judgment when present and future are
compared, it helps to balance the disparity in the gratifications given
by economic goods in different periods of time.
[Sidenote: Saving increases and improves economic agents]
4. _The postponement of present wants results in bettering the economic
environment for the future._ Economic environment means simply the
economic conditions in which men live, the stock of wealth, the supply
of useful things with which they are surrounded. This betterment may be
only temporary, only for the immediate future. Like the busy bee or the
prudent ant, one may in summer store the cellar with consumption goods
to be consumed the following winter. But often there is a more lasting
way of improving the economic environment by converting savings into
durable indirect agents. The accumulation of wealth that will yield its
fruits only after years of growth is the record, so to speak, of the
successful competition of forethought with present desires. It means
that the two periods have presented their respective claims and that men
have decided in favor of the future. Saving thus lifts society from
poverty to wealth by the progressive enlargement of the sources of
future utilities.
[Sidenote: The kinds of abstinence]
5. _Abstinence is the faculty of mind that enables present wants to be
subordinated to future wants._ Abstinence may be considered as a
quality, or faculty, of the mind, or as an act resulting from that
quality. There is little danger of confusion in this usage, but it is
well to note the distinction and the fact that the former is the primary
meaning. Abstinence expresses an act of the will, a choice made by man.
It is the guardian of the future, so to speak, against the greediness of
the present. For convenience we may speak of conservative abstinence as
that which keeps men from using up or invading their present stock of
resources, and of cumulative abstinence as that which impels them to add
to that stock. There is no sharp dividing line, no abrupt break, between
these two, yet on the whole they differ. There is a quality of mind very
like the inertia or momentum of physical matter. The inertia of mind
makes men resist stubbornly the reduction of wealth and of inherited
social position; but it requires a more positive quality of mind to add
to wealth at the cost of present sacrifice. Abstinence is embodied in
individuals, never elsewhere, and is found in most varying degrees of
strength. Upon it depends the growth and betterment of man's
environment.
§ II. CONDITIONS FAVORABLE TO SAVING
[Sidenote: Political insecurity discourages saving]
1. _Political security and domestic order are essential to the
development of saving._ As saving results from a comparison of the
future with the present, any lack of certainty regarding the future
decreases the appeal it makes. Men employ roughly the theory of
probabilities in this matter, and count a utility only half as much
when there is but one chance in two of enjoying it. In countries where
there are constant revolutions and border wars, as in Africa and South
America, and in lands where brigandage is common, as in Italy,
Macedonia, and Bulgaria, the motive for saving is cut in two. Oppressive
and irregular taxation kills the motives of providence, and decreases
the appeal made by the future. While the miserable subjects of the state
live from hand to mouth, the very sources of the public revenue
disappear. Improvidence grows upon such a people into a prevailing
national custom; ambition is wanting; industry is the sport of chance;
economic order and economic prosperity are impossible.
[Sidenote: Influence of private property on saving]
2. _Social institutions that give a motive to the individual are
essential to saving._ Among these institutions the most important are
the family and, closely connected with it, the institution of private
property which, in its ideal manifestation, places the responsibility
for economic welfare on the individual or the family. Through it the
state says to men: "Save if you will; the wealth and its fruits shall be
yours. But if you spend and consume all you can, you alone will suffer
the consequences." It is true that the institution of private property
never is found in an ideal form. Dishonest public officials weaken and
defeat its benefits. Every propertyless family marks a failure in its
purpose. Private property is a favorite object of attack by social
reformers, but it never can be safely abolished in a civilized state
until some other incentive is provided, equally effective to make men
subordinate present desires to future welfare. Unless the mass of men
can be greatly changed, property creates the only motive that can induce
saving regularly and on a large scale. It diffuses responsibility for
present consumption. It multiplies the motives for abstinence and thus
increases the welfare of all economic society.
[Sidenote: Safe and paying investments encourage saving]
3. _Opportunity for the investment of small savings favors a spirit of
abstinence._ The institution of small property, peasant proprietorship,
worked powerfully in this direction in many parts of Europe, and the
same effects have resulted in America from the wide diffusion of
property in land. If the decline in the number of small independent
farmers has somewhat weakened this influence in America, in other ways
other agencies are effectively performing the same functions.
Savings-banks, penny banks, building and loan associations,
penny-provident funds, and other convenient means of investing small
sums, encourage men to reduce their tobacco bills, their candy bills,
their saloon bills, and to lay aside for the winter's coal, for the
children's education, for houses, for business investments, or for old
age. Probably no one thing has given a greater stimulus to saving than
has the development of insurance and the endowment policies in
connection with it. While the great modern corporations have destroyed
many of the small business enterprises into which so much of the saving
of the past was put, at the same time the increase of negotiable paper,
of loans, and of stock in joint-stock companies, has opened up other
large fields for investors.
[Sidenote: Changing interest rate in relation to saving]
4. _Variations in the rate of discount of the future react upon the
spirit of saving in various ways._ This very general proposition
requires more detailed discussion. In general, a high rate of interest
gives a large motive to save, for as the discount on the future is
large, so is the reward for waiting. But this favoring motive may be
offset by other unfavorable conditions, and is, in fact, wherever the
high rate continues. In countries backward economically, where war,
brigandage, and political oppression prevail, the rate of interest is
frequently ten and twelve per cent. on the best secured loans. A high
interest rate does not of itself insure a high degree of cumulative
abstinence; it is only one of several factors. But in a new and favored
country like America, a high rate of interest is a strong stimulus to
saving. Again, interest may fall while saving continues at the same or a
greater pace. Ordinarily a fall from six per cent. to five, giving men
a smaller motive for abstinence, would be expected to cause less saving,
yet this is not always the case. Custom and example help to fix a habit
of saving in individuals and cause them to continue saving at a lower
rate of interest. With the growth of wealth, the prevailing ideas as to
the amount needed for a competence change, impelling to greater saving.
The tendency, however, of a fall in the rate of interest is to weaken,
and that of a rise of the rate, other things being equal, is to
strengthen the motive to save. But the influence of the interest rate on
saving is relative to the character of men.
§ III. INFLUENCE OF THE INTEREST RATE ON METHODS OF PRODUCTION
[Sidenote: Saving permits improvement of agents]
1. _The individual saver is enabled to improve the agents that he uses._
The simplest case is presented when means of enjoyment are improved and
made more durable. If Crusoe on his island spends less time and fewer
resources on gratifying his immediate wants, he may improve the quality
of his clothing and the convenience of his house and furniture. By thus
putting his consumption goods into durable instead of temporary forms,
he will increase eventually the sum of utilities enjoyed. Again,
abstinence permits the tools of the laborer to be made more convenient.
If the farmer spends less time in the garden and he and his family live
on plainer food, while he makes a plow, mends a rake, and builds a shed,
he will be enabled thereafter to gather a greater crop with less effort.
[Sidenote: Saving of consumption goods for exchange]
2. _Consumption goods, when saved, may be exchanged for services, and
these may be used to create durable agents._ Various ways are open to
one wishing to increase his stock of durable agents. He may forego
seeking immediate enjoyments while he makes durable agents himself. Or
he may make and save a stock of consumption goods, a surplus supply for
the future, and exchange it for durable agents. Finally, one who has
accumulated consumption goods can always exchange them for the services
of those seeking subsistence and enjoyment; and thus in control of a
labor force, he can direct it toward the production of new forms of
productive agents.
[Sidenote: Money savings are converted into other wealth]
3. _In modern industry, saving frequently takes the form of money, which
is then loaned to productive borrowers._ This is the typical form of
saving in modern industry. As it is more and more the case that income
takes first the form of money, saving most conveniently takes the money
form. The clerk on a salary of $60 a month spends $50 and saves $10
which he lends to a neighbor or deposits in a savings-bank. The borrower
is thus empowered to increase his stock of productive agents in the
measure that the lender has limited his consumption. The complexity of
the process by which money saving becomes embodied through a money loan
in new productive agents should not blind to its real nature. The money
is saved as a means to the exchange of present goods for future income.
Money even in our day is occasionally stored away for future use under
hearthstones or in old stockings and hollow trees, but this is a
primitive and wasteful method, involving the loss of all the additional
rents that its exchange and investment would yield.
If the money saved by the thrifty saver is loaned to a thriftless
borrower, wealth is not increased, but merely changes hands. The
prodigal mortgaging his wealth, spending the money, and living beyond
his income, absorbs the savings of the other. One saves and adds to
wealth, the other consumes it. There is no net increase of goods, but
two individuals have shifted positions; each has gotten his reward of
growing affluence or penury.
The "normal" end, however, of savings and loans is productive. The
borrower, in getting control of purchasing power, aims to put a new
machine where it will be useful, to remove obstacles, and to make
economic agents more effective. Along the border-land of industry the
active and alert borrower seeks out opportunities to make new agents
earn a rental, and having found the opening, turns to the money market
for the means to profit by it.
[Sidenote: Lower interest means higher capitalization]
4. _A fall in the rate of interest normally accompanies an increase in
the mass, efficiency, and valuation of durable economic agents._ A lower
rate of interest means a higher capitalization of all incomes. It is not
that either can be called the cause of the other; rather both are
aspects of the same thing, the interest rate merely registering the
change in capitalization. If the rate of interest has been five per
cent., an income of $100 has been capitalized at $2000. When the rate
falls to four per cent. the income is recapitalized at $2500. All along
the line of investment there is an increase in the value of the durable
economic agents.
[Sidenote: And more complex industrial processes]
[Sidenote: It encourages the increase of fixed charges to reduce cost of
operation]
Another phase of the change is the greater complexity of the processes
of industry. Production becomes technically more complex when interest
falls. Rental, product, and present goods, bear a smaller ratio to the
value of capital, and therefore it becomes advantageous to apply newly
formed capital to uses which before did not justify the investment.
Where formerly the utility of a second tool did not justify its making,
now it can be made to earn the smaller rental needed to balance its
capital value. One form, therefore, which the change takes, is a
multiplication of the tools already used. Things are placed wherever
most convenient. Another form this change takes is the putting of new
links into the chain of technical production. Cost of operation
constantly is compared with fixed charges, the interest with the capital
investment. Expensive improvements on railroads, the straightening of
curves, the tunneling of mountains, the reducing of grades, the
replacement of lighter by heavier rails, have been made possible by a
fall in the rate of interest. A fall in the rate of interest disturbs
the equilibrium that has been arrived at, between the cost of operation,
the amount paid for wages, coal, etc., and the income on permanent
investment. If the rate of interest has been five per cent. and falls
to four per cent. many permanent improvements before unwise become
economical. One thousand dollars paid annually in wages then balanced an
interest charge on a capital investment of $20,000; now it balances the
interest charge on $25,000. It becomes a paying thing for the railroad
to abandon or throw aside an enormous capital represented by the old,
less perfect roadbed, and build a new one alongside of it. The changes
of this kind one sees in traveling on the great and progressive
railroads, reflect in part the growth of traffic, but in part also a
change of the interest rate, making it a net saving to increase the
capital investment in order to reduce the cost of operation per unit of
traffic.
[Sidenote: Diffused benefits of saving]
The benefits of saving viewed broadly are not confined to the owner of
the wealth saved, but are diffused throughout society, in the degree
that they increase and improve the industrial environment, and thus
raise the efficiency of production. Such a change works the same results
as would a magical increase in the fertility of the soil, an improvement
in the richness and accessibility of natural mineral stores, or in the
quantity and quality of artificial appliances.
PART II
THE VALUE OF HUMAN SERVICES
DIVISION A--LABOR AND WAGES
CHAPTER 20
LABOR AND CLASSES OF LABORERS
§ I. RELATION OF LABOR TO WEALTH
[Sidenote: Work and play defined and distinguished]
1. _Labor is any human effort having an aim or purpose outside of
itself._ It is difficult to define satisfactorily the term labor. No
definition will quite mark off all the cases. The efforts put forth by
men may be classified according as they are pleasant in themselves, and
according as they have separable useful results. These two factors
combine to form four groups of actions.
Effort Objective result sought Name of action
1. Pleasurable Not useful Play
2. Pleasurable Useful Labor
3. Painful Useful Labor
4. Painful Not useful No special name
The fourth combination is not found in rational life, for no motive
exists to do a painful act for a useless result. Let us consider the
other three.
[Sidenote: Play]
The first group comprises most of the sports, games, and pastimes found
in every land and time. In the mere putting forth of the powers of mind
and muscle there is a joy felt by children and men of all races, and
this is heightened by companionship, emulation, and even by a spice of
danger. Play is not dependent on a useful objective result later to be
enjoyed, but, like beauty, is its own excuse for being. The tired
student goes out-of-doors to bat the tennis-ball, making no change in
the material world, except to wear out his shoes and to lose the ball,
but finding that hour rich in the joy of life. If properly chosen, play
strengthens and vivifies both soul and body, leaving an afterglow of
health and happiness. The choice of sports and temperance in their
pursuit are among the surest tests of wisdom in men and in societies. A
love of vigorous play no less than the power of sustained work, marks
the dominant and progressive peoples of the earth.
[Sidenote: Labor as pleasure]
Acts in the second group give pleasure and at the same time leave an
objective result. The hunter gets more pleasure if he returns with
well-filled bags of game, but the distinction between the sportsman and
the "pot-hunter" is not hard to find. The one has his joy in the sport,
the other in the material results of the sport. This kind of action
presents some puzzling cases, but in general must be classed as labor,
since labor is to be judged by the objective economic results rather
than by the pleasure of the act itself.
[Sidenote: Labor as sacrifice]
In a third class are the acts that are painful in themselves, that are
done unwillingly, but that leave a pleasurable result. Unfortunately a
large part of the actions of men are of this class, which to most minds
is the typical labor.
[Sidenote: Joy in work is the ideal]
There is thus labor that is pleasurable in itself and labor that is
painful though it leads to a desirable result. The social ideal clearly
is that all human labor should be made pleasurable. Social dreamers love
to picture a day when all shall find for effort a full reward in the
mere doing,--the reward of the artist, of the scholar, of the saint, in
addition to the objective result in economic wealth. Probably we are
slowly nearing this ideal. Not only in the professions and in the
esthetic arts, but in commerce, in mechanics, and in the humblest walks
of life are found men free from envy, rejoicing in their daily tasks.
Such is the normal feeling of the healthy optimist. And yet in every
serious occupation there are numberless moments and occasions when the
spirit flags and only hard necessity holds men to their tasks. The
dilettante does not go far or long or steadily; the real tasks of the
world are done by men that labor, now with joy, now wearily.
[Sidenote: The distinction between men and things]
2. _The agents of production compose two great species, material goods
and human services._ Our discussion of consumption goods, rent, and
interest has been an analysis of the nature and uses of material goods.
We now come to the other great species, human services, which comprise
those acts of men (one's own or other's) that minister to the
gratification of wants. There are also misdirected efforts, and evil
deeds which are "disutilities" to all but the doer.
The distinction between men and things is fundamental in modern economic
discussion where each man is looked upon as free. It is not so clear
where slavery exists and the master looks in the same way upon the
services of his cattle, of his chattel slaves, and of his land. Even in
the freest society, man's services are compared purely as to their
utility, with the uses of other parts of the material world. It is said
that the price of mules at the Pennsylvania mines has been affected by
immigration, because a man and a mule sometimes represent
interchangeable services. But in the study of political economy the
distinction between men and other material things must never be lost
sight of; they are the two fundamental classes of economic agents, the
one being solely a means to an end, the other being an end in itself.
[Sidenote: Rent and wages mutually affect each other]
3. _Labor and material wealth are complementary and indispensable to
each other in most of their uses._ The discussion of material wealth and
its value apart from the subject of labor, of the problem of rent and
interest apart from that of wages, does not imply that this material
wealth would have the same value in real life if labor were absent. As
one field affects the value of another field, and one good, by
substitution, the value of another good, so does labor affect material
wealth. Some material wealth can be used apart from labor, but most of
it must be used in combination with some labor. Rent, therefore, is not
determined in concrete cases apart from men and their services. It is
allowable, however, in abstract analysis, to simplify the question by
leaving out a difficult complication, and thus to set forth more clearly
the logical bearing and effect of a certain factor.
[Sidenote: Certain shares of the product are logically attributed to
each]
Each of two kinds of agents used together affects the utility of the
other, and the value of the product. If neither can be credited with the
whole value, how is any distribution to be made between them? It is not
possible to measure their technical services in the product, but it
usually is possible to gage their marginal utility under particular
conditions. Flour, water, and labor are needed to make biscuits; but
water being a free agent, does not enter into the combination with any
marginal utility. A match also is almost indispensable to start the fire
(and who has not seen the time when he would give far more for a match
than for a bucket of coal), but as things usually are, the match is
credited with a value of a very small fraction of a cent. Again, how is
to be measured the economic service of the tree and of the labor needed
for gathering its fruits? There is here suggested the superficial aspect
of what is known as the problem of complementary values. Where two or
more things are indispensable to a product, how much shall be credited
to each?
[Sidenote: Labor gratifies directly and indirectly]
4. _Human service has the same general relation to wants that material
goods have, affording gratification either directly or indirectly._ It
is axiomatic that to be "economic goods" human efforts like material
goods must afford utilities whose importance is felt. Many services give
pleasure directly and are immediately consumed. A tropical potentate has
an attendant to fan him, and another to carry an umbrella; a humble
citizen is shaved, doctored, sung to, and played for. The gratification
in such cases is directly produced in personal comfort, in the
consciousness of heightened beauty, in the feeling of self-esteem. Value
is thus created and consumed immediately, taking no material form apart
from the consumer.
[Sidenote: Labor embodied for a time in material form]
But the results of most human services may be seen to rest, at least
temporarily, in some material form. Effort is put upon a material thing
to be used later. The work of the waiter in spreading and arranging the
table is not an immediate service, for it is embodied in material form
an hour or two before the meal. The service of cook no less than that of
gardener and butcher, is put into material form before it comes to the
consumer. The woodman fells, cuts up and splits a tree, and piles it at
the door, putting his labor into a utility to be consumed months
afterward. The old economists used to class labor as productive and
unproductive according as it was or was not embodied in material form.
The classing of the services of cook, waiter, valet, etc., as
unproductive seems, even from the old point of view, to have been
inconsistent, and the attempt to distinguish services by any such test
is now wholly given up. Whether the service rests in material form for a
week, a month, a year, or as often happens, for a much longer period, is
not essential. The test of the productiveness of services is not their
embodiment in material form, but their appearance as psychic income,
their ministry to wants. The most varied kinds of human activity may be
unified by this thought in the concept of economic labor.
§ II. VARIETIES OF TALENTS AND OF ABILITIES IN MEN
[Sidenote: Grades of labor are analogous to grades of wealth]
1. _As material things differ in their fitness to gratify wants, so do
men differ in their powers of labor._ The fields, hammers, plows, tools,
and machinery of different kinds and qualities have been seen to grade
off from the best to the poorest. The poorest, discarded or just about
to be discarded, are no-rent agents. The utility felt and recognized in
the better qualities is expressed in the rents they yield. Recognizing
the variety and inequality of human talent, some economists of late
speak of the "rent" of ability, meaning that, like land rent, the
greater utility (and corresponding reward) of some labor as compared
with others, reflects the difference in the quality of agents. But this
expression, though often met in contemporary economic writings, is one
to be avoided because it tends to blur the essential distinction between
human and other agents. Pursuing the same analogy some economists have
talked of capitalizing the worker,--expressing in a lump sum the value
of the man as the present worth of the series of incomes which he may be
expected to earn in his working life. This, also, is to be avoided, for
while possibly it is suggestive in studying some problems, it is on the
whole a misleading analogy, dimming the distinction between free-workers
and owned and exchangeable wealth.
[Sidenote: Physical differences among men]
2. _The physical strength of workers differs according to age,
individual, race, and sex._ Differences due to age are the most obvious.
The child, at first weak, grows toward his maximum of physical strength,
which he attains before his fullest intellectual capacity. The period of
maximum physical working power lasts fifteen to twenty-five years
according to the individual, and then gradually declines as the old
worker approaches again the inefficiency of the child. Mental efficiency
develops more slowly and longer, the highest qualities of judgment and
wisdom being the fruits only of a life rich in experiences. Families and
strains of stock differ notably in physical and mental powers; one
excels in stature, another in development of muscle. The differences
within families are inexplicable, sometimes one brother excelling in one
thing, the other in another. The physically perfect man is a rare
product. Among three thousand students are but two score endowed with
the remarkable combination of lungs, heart, muscle, nerve, and
character, that makes possible the finest athletes. The national and
racial differences in working power, even in the simplest tasks, are
marked but difficult to explain, as so many influences of customs,
habits of life, and varieties of diet modify the result. We cannot tell
how much of the Englishman's great superiority over the East Indiaman is
due to individual, native differences of mind and body, how much to the
social environment in which they have lived. Certainly, though, the
difference is not mainly one in size; in the Chinese War the little
brown men of Japan outmarched all the others. Certainly fiber counts for
more than bulk, and character for more than muscle.
[Sidenote: Comparative strength of men and women]
A difference in the physical strength of the sexes is found in some
degree throughout the world, but it would appear to be far more marked
in civilized than in savage communities. Compare the records at the
Vassar field-games with that of the men in any leading college: in the
hundred-yard dash, fifteen seconds as against ten and a fraction; in the
high jump, forty-eight inches as against six feet and over. The muscular
force of American college women as tested in the Yale and the Oberlin
gymnasiums is but one third that of men, that is, taking all the
students, the weaklings and the little men along with the athletes, and
the women large and small. As to strength of back the average for men is
154 kilograms, for women 54 kilograms; legs, average for men 186,
average for women 76.5; right forearm, average for men 56, average for
women 21.4. This is an abnormal difference. The natural and possible
strength is more nearly attained by men than by women under our social
conditions. Women escape the physical toil which strengthens, but not
the mental strain which kills. Men carry more of the wood, but the women
not less of the worries. A fairer test is applied among peasants in
field-work in France and Germany, where the strength of women is found
to be about two thirds that of men. American women should do and will do
more to attain their natural strength when we attain sounder ideas of
education and saner modes of living.
[Sidenote: Talent and training as factors of efficiency]
3. _Differences in intelligence are a resultant of native talent and
acquired ability._ It is difficult to distinguish these two factors
sharply. Two men sitting side by side in an examination, get the same
grade; one of them has had excellent preparation from childhood, and all
the opportunities that money, travel, and cultured associates can give;
the other, under great difficulties, has prepared in a country district
school with a little coaching now and then, and struggling against great
odds, has at last entered college. The same grade does not mean that
their natural ability or even their efficiency in this particular class,
is equal. Yet the grade is the best expression to be had of their
efficiency in the particular work. Native intelligence shortens the time
needed for preparation in any calling; hastens new methods; decreases
the cost of supervision; saves materials, tools, and time; diminishes
loss from breakage; makes possible the use of finer machinery and better
appliances, and imparts those subtler qualities that distinguish the
best from the mediocre products. Education and native talent are in a
degree interchangeable; one supplements the other. Education increases
adaptability; the trained mind will outstrip the untrained mind of
greater power. It makes direction easier, fits for higher tasks, and
decreases the difficulty of coöperation. Any ability may be helped by
education in the broad and true sense, though a fool cannot be made wise
by training, and though many a potential genius doubtless has been
dwarfed in dusty school-rooms by stupid teachers.
[Sidenote: The moral qualities required in industry]
4. _The moral qualities of the worker are increasingly important as
society grows more complex._ The need of a particular moral quality is
relative to the special task in hand. Honesty is needed in the bank
teller, but he need not spoil a good story. The champion broncho-buster
of Arizona is not a Sunday-school superintendent. So, discipline,
obedience, self-control, regularity, and punctuality are needed, for
more and more in these days business is run by the watch; confidence,
patience, good temper, in fact all the virtues in the calendar are
necessary at some time and place, and most of them are needed all the
time in business. Places may be found in our developed society for those
who are deficient in these qualities (it is fortunate that it is so),
but these are the poorer places. Many men fail to examine the qualities
necessary for success, and do not understand the causes of their own
failure. Blind to their own faults, they are dropped down one notch
after another in the scale of industry, and, equally blind to the
virtues of their successful rivals, they rail against the unjust fates.
[Sidenote: The union of many qualities needed]
5. _Skill and capacity in industrial tasks is a resultant of many
qualities._ The simplest task calls for a combination of force and
judgment,--even the digging of a ditch, the raising of a window, or the
fitting of a stovepipe. For most industrial tasks rarer combinations of
qualities are required. The retail clerk must be neat, punctual, polite,
and long suffering. A confidential clerk must have discretion, judgment,
and other moral qualities in an unusual combination. The substitution of
qualities is possible within limits; a rare quality may make amends for
the lack of a commoner one, and a man may, because of peculiar fitness
in some regards, continue to hold a position for which in other ways he
is little fitted. The rarest and most valued worker is one uniting many
good qualities and fitted to deal with emergencies. The economic
efficiency of the worker often is no stronger than its weakest link. A
strong motive for training is offered by the fact that supplying some
one lacking quality may raise the total efficiency in a remarkable
degree.
[Sidenote: Inequality of talents shown by biologic studies]
6. _Biologic studies have of late made clearer the existence and
continuation of the inequality of talents._ The political philosophy of
the eighteenth century was based on the idea of natural rights and
natural equality. Adam Smith, accepting the prevailing view, discussed
wages on the assumption that all men had equal natural ability. It is
still a favorite assumption of radical social reformers that the natural
ability of all men is equal, and that all the differences in success
result from political injustice. The study of biology of late has made
patent the unending differences that prevail throughout the animate
world. No two members of the same family or species are just alike; no
two pigeons have wings of just the same length. Nature by numberless
devices is experimenting constantly with variations on either side of
the established mean. The accepted fact of biologic evolution rests on
the foundation of inequality in structure and powers, making possible
selection and adaptation. Men in all their qualities of mind and body
display this kaleidescopic variety. In all life there is inequality, and
the whole drama of human history as well as that of biologic evolution
must be meaningless or illusory to the man who does not see this truth.
Accustomed now to this point of view, we as inevitably think of the
natural inequalities in men as did Adam Smith of their equality.
This fact does not force to the conclusion that industrial inequality as
it exists to-day, the great disparity of incomes, correctly or justly
reflects the degree of difference in men's qualities, either native or
acquired. It does not follow that a thousand-dollar income represents
ten times the ability of a hundred dollar one--far from it. But to those
who ignore the inequality of men, the whole problem of industrial
remuneration must remain a mystery. A crude socialism is possible only
to those who are blind to the enormous differences in human capacity.
[Sidenote: Scarcity of labor is essential to wages]
[Sidenote: Unlimited demand for labor]
7. _The scarcity of human services, relative to wants, is the
fundamental fact in the problem of wages._ It is clearly seen that some
qualities of service are scarce. Most women will confess that they
cannot warble as Patti could, most men will admit that they have not the
mercantile ability of John Wanamaker. The man of mediocre capacity
recognizes even through the fog of his self-esteem that there is a
reason for the high value of certain rare services. But it must also be
recognized that the commonest services have value only because they are
scarce. There are many things to be done if there were labor enough to
do them. There is no need to "make work," in the popular sense; it is
here, but labor is lacking to do it. It is true there may be a temporary
superfluity of human labor at a time of an industrial crisis. There is
at all times a superfluity of "useless" human agents whose qualities are
such that they have no net utility. The ignorant, insane, feeble-minded,
vicious, drunken, and debauched, can give to the world only negative
utilities. But services that are in any degree useful are nearly always
in demand, and the higher services are so rare that they are in great
demand. The proverb, "There's always room at the top," is seen to be
true when conditions are thus analyzed. There is a large, though
limited, supply of the commoner kinds of services at the bottom of the
scale, but in every branch of human effort there is a never-ending lack
of that higher qualification and training required for the best
results.
CHAPTER 21
THE SUPPLY OF LABOR
§ I. WHAT IS A DOCTRINE OF POPULATION?
[Sidenote: The employer's and the social view of supply of labor]
1. _The supply of labor means here not the number of workers available
in any one industry, but the number available in the whole field of
industry._ The individual employer thinks of the supply of labor as
consisting of the men seeking employment in his special industry. In
this view it is the demand by the employers that apportions the workers
among the various occupations. The social view of the supply of labor,
however, looks at the whole field. The demand for labor is then seen to
be represented not by human employers, but by resources and agents
presenting opportunities and demanding labor to employ them. The rich
acre, the tool, the machine, all material wealth needing the human touch
to give it a higher utility, represent a demand for labor in this broad
sense. The thought of a supply of labor is therefore relative to that of
the demand embodied in resources. A million men are a great or a small
supply of labor according as they occupy a little island or a large
continent, according as they are equipped with a small or a large supply
of agents.
[Sidenote: Population in relation to resources]
2. _"Supply of labor," as an economic problem, presents a large and
complex case of diminishing returns._ The population of different
countries and of different sections of a country is seen to bear a
general relation to their resources. An unintelligent race with little
wealth and poor machinery is doomed to remain few in numbers. Mountains,
districts poorly watered, the frozen regions of the North, are sparsely
populated because natural resources are lacking. If food production
alone is thought of there are apparent exceptions to this statement, but
there are no absolute contradictions of it. A favored harbor may make
possible a flourishing commerce on a rocky coast; an unfertile soil may
support a large population when great deposits of coal or iron insure by
exchange great food-supplies. Productivity must be measured under modern
conditions by the purchasing power that is possible in the environment.
The connection of wealth and resources with the extent of the population
is in itself a recognition of diminishing returns, of an objective limit
to the number of men that can occupy a certain area and employ a given
stock of agents.
[Sidenote: Equilibrium between numbers of animals of different species]
3. _Each species of the lower animals is seen to have a relatively fixed
habitat limited by its food-supply and by its enemies._ The rocks tell a
story of a slow and steady change that has gone on in the earth and in
the species of animals that inhabit it. History records some rapid
changes due to convulsions of nature or to interference by man with the
natural conditions. But the usual condition is an equilibrium of
numbers, long maintained, though each species appears to have in itself
a capacity for unlimited increase. Why this contradiction? The limit set
by the food-supply is seen in a simple case when herbivorous animals are
placed on an island from which they cannot escape, and where there are
no dogs, wolves, weasels, or foxes. Substantially this experiment was
unintentionally tried on an enormous scale with the rabbit in Australia.
This peculiar and long-isolated continent contained none of the rabbit's
ancient enemies. The rabbits became a pest, devastated great areas, were
hunted, trapped, poisoned, and great numbers of them died of starvation
outside the fences erected to stop their advance. In the imaginary
island they would increase up to the point where starvation would bring
about an equilibrium between the number of animals and the food supply.
The destruction of one kind of animal by another limits numbers in
another way. The number of lions is limited by the number of their prey
in the region where they roam. The number of deer, therefore, is limited
in two ways, by the amount of their food and by the number of lions
which catch the deer. The more numerous the lions, the fewer the deer;
the fewer the deer, the greater the supply of vegetable food; as the
pressure increases on one side, it decreases on the other, until an
equilibrium is reached.
[Sidenote: The surplus of life germs]
Throughout nature each species of animal keeps its customary place,
changing little despite its efforts to increase and to crowd into the
habitat of other species. Even the slow-breeding elephant, with a period
of gestation of three years, and producing one calf at a birth, would
cover the entire earth and leave no standing-room in a few centuries if
every calf born could live to full age. The myriads of frogs born every
spring, the swarms of insects, the countless plants, are struggling to
find a foothold on the crowded earth. Of the vastly greater number of
seeds and embryos, only one in a multitude ever comes or could come to
maturity. Here are the undisputed facts on which rests a biologic
"doctrine of population," so to speak, for the vegetable and lower
animal world. Because of the limited powers of the soil, no form of
life, animal or vegetable, can continue to increase even for a single
generation, without meeting enormous forces of opposition, which destroy
great numbers and set a limit to the increase of the species.
[Sidenote: These facts related to the doctrine of population]
4. _A doctrine of human population is a reasoned explanation of the
causes determining the number of people in the world._ Man in his
economic life is constantly struggling with the problem of the scarcity
of goods. If in any given environment men continue long to increase,
they must, like the lower animals, meet limits in the capacities of the
resources they use. The supply of labor force which is thus brought to
be combined with the material agents must meet with diminishing returns
unless these agents also continue to increase at a like rate. The
relation of population to resources thus presents probably the most
fundamental problem in the realm of economics. It is a problem of great
complexity, bristling with difficulties, and incapable of exact
mathematical treatment; but it is capable of rational study. There is a
great difference between a purely fatalistic view of this question and
the view that is to be reached by a consideration of the motives,
causes, and physical influences at work; It is possible to find some
principles in the chaos of prejudices and contradictions that the
subject presents. The fruit of a century of discussion of the economic,
social, and biologic factors involved, is a rational, if not a final,
doctrine of population.
§ II. POPULATION IN HUMAN SOCIETY
[Sidenote: The biologic stage of human population]
1. _In the earlier stages of human history, population is limited mainly
by biologic factors._ The biologic stage continues so long as there are
no artificial restraints put on the birth-rate, and no deliberate
destruction of offspring for the purposes of limiting the size of the
family. There the limits are all objective; they are found in scantiness
of the food-supply, or in destruction by enemies, animal or human. Each
species has an average or normal birth-rate, great or small. Just why
this varies, why the rabbit produces a score of young in a year, and the
elephant but one in three years, is a question capable of a rational
answer, but it is one for the natural scientist rather than for the
economist. Each species is impelled by instinct to realize this
birth-rate, to bring into existence as many young as possible.
No human society known to us is so primitive that it has not passed this
stage, but many societies have risen but little above it. In most savage
tribes, where starvation, disease, and war are constantly at work, the
difficult task is to maintain the population. Few of those born arrive
at maturity. The custom of the adoption of captives from hostile tribes
is widespread, because the efficiency and even the survival of the tribe
depends upon keeping up its number of warriors.
[Sidenote: War among primitive societies]
2. _War for the possession of limited resources is the first rude social
remedy for an excess of population._ War is the normal condition of most
primitive tribes. Its cause usually appears to be standing feuds and
ancient enmities, but the deeper and abiding cause is the struggle for
hunting-grounds, for pasturage, for natural resources. The rude industry
and economy of hunting, fishing, or pastoral peoples, or of those in the
earlier stages of agriculture, requires a large area for a small
population. Distant excursions and frequent forays, when food fails,
develop rival claims to favored districts, and war is the only
settlement. Fighting under these conditions is an activity of such
economic importance that much of the energy of the tribe must be
strenuously given to it. The ceaseless loss of life in savage wars is
almost incredible to modern minds. The invasion of the Roman Empire by
the Teutonic tribes, the later successive inundations of medieval Europe
by the fierce pastoral tribes from central Asia, are more recent and
familiar examples of the economic and political effects of the increase
of population and of the outgrowing of resources by barbarian peoples.
When the custom arises of capturing enemies and reducing them to slavery
instead of killing them, forces are set into operation to reorganize
society and to create new checks on the growth of population.
[Sidenote: Crude beginnings of volitional control]
3. _Volitional control of population begins by the destruction of
offspring before or after birth._ The population problem ceases to be
simply biologic, and takes on its sociological aspect, when the
awakening intelligence of man first grasps the mystery of birth, and
when the first attempts are made in any way to regulate family relations
or to interfere with the growth of numbers. The student of primitive
peoples finds in the methods applied to prevent the birth of children an
almost inconceivable brutality. The same methods to a large degree
persist in savage communities to-day. Infanticide was generally
practiced in ancient times among peoples of advanced civilization, as,
for example, in Sparta and Rome, where not only deformed and weak
children, but unwelcome ones, commonly were destroyed. The practice, if
not legalized, is at least permitted even to-day by public opinion in
great portions of India, China, and other densely populated districts of
the world. It is one of the dark spots on our own civilization.
[Sidenote: Private property limits population]
[Sidenote: The problem a psychic one]
4. _The pressure of increase of numbers on resources is confined by
individual industry and by private property to special portions of the
population._ A condition of communism, where all the members of the
tribe or family share equally, means that all enjoy together when food
and wealth are abundant, and all starve together when it becomes scarce.
Along with a fierce enmity for other tribes, is found in many early
societies a close approximation to tribal communism. Private property
alters the nature of the struggle for subsistence and of the motives for
limiting population. Society divides into a number of partially
independent classes or family groups, each holding its share of wealth
apart, not in common with the tribe. A society with private property is
like a ship divided into a number of water-tight compartments. In
communistic conditions if population increases, all sink together into
want. The self-interest of those having private property keeps them from
dividing their property, and starvation is confined to the propertyless
members. This acts in two ways: it increases the motive for the
production of wealth; it gives a motive for the limitation of the
consumers of the wealth. A smaller family with larger resources means a
wider margin between numbers and misery. This converts the problem of
population from a material one of a balance of food and physical needs,
to a psychic one of a balance of motives in the minds of men. When this
stage is reached, the extreme objective limit of the birth-rate or of
increase of population is no longer attained in the well-to-do classes,
although it may still continue to be in the less provident.
[Sidenote: Social classes differ in volitional control]
5. _Volitional control is effective in very different degrees in
different families and industrial classes._ The possession of property
is both a sign of forethought and an incentive to it. Concern for the
welfare of children is one of the most powerful motives, especially
after social distinctions become marked. It may become abnormally
strong, leading parents to sacrifice their own welfare or their own
lives foolishly for their children, as is done often in the accumulation
of property. Among the classes with property the provision for the
children depends not only upon the amount of wealth, but upon the number
among whom it is to be divided. It is simple division: wealth the
dividend, number of children the divisor.
Among the poorer classes very different motives operate. After the first
few years the parents' income is increased by the earnings of the
children, both on the farm and in the factory districts if the laws do
not prohibit child labor. Moreover, when the children are grown, their
wages will depend on the general labor market, not upon the number of
their brothers and sisters. So, according as the family income is from
rents or from wages, the motives of the parents differ.
[Sidenote: Motives in volitional control]
Postponement of marriage must be classed as a mode of volitional control
of population. The average age of marriage, both of men and women, is
higher in the classes of greater wealth and ambition than in the poorer
classes. The contrast in this regard between civilized and savage
peoples is likewise noteworthy. The failure to marry, from whatever
cause, is, in the social view of the question, volitional control. It is
rare that the motive is directly and immediately the wish to avoid
parenthood; now it is religious zeal, again it is disappointed
sentiment; here it is conflicting duty, and there it is the individual
selfish wish to retain an undivided income for one's own enjoyment. By
countless strands of motive in the form of sentiments, social
institutions, and interests, the primitive impulses of humanity are
firmly bound; and in varying degrees, in different classes, the enormous
possibilities of reproduction are controlled by human volition.
§ III. CURRENT ASPECT OF THE POPULATION PROBLEM
[Sidenote: The many motives controlling population]
1. _Changes in population are resultants of many forces: those favoring
a high birth-rate and low death-rate, and those limiting births or
survival._ Whether the population on the whole shall grow, stand still,
or diminish, depends upon the relative strength of contending forces
making for life or death. But this control may lose its cruder aspect
and may be waged in the realm of motive. More and more it is volition
that controls in human society the growth of population; less and less
it is the objective limit of the food-supply. Dire need resulting in
ill-health and even in starvation, is still acting in some portions of
society, but less to-day than ever before. The growth of population in
this stage is not "fatalistic," as there is no inevitable tendency to
increase or to decrease. It depends on the interaction of a number of
forces, clearly distinguishable, by which population actually is kept
far within the limits of food resources. Volitional control is not by a
central and unified despotism determining human action, but it is by
motives of the most complex sort, diffused throughout society and acting
upon every member of it.
[Sidenote: The standard of life in Asiatic countries]
2. _The desire to maintain and raise the standard of life is the most
effective motive limiting population in our society._ The phrase
"standard of life" expresses the complex thought of that measure of
necessities, comforts, and luxuries considered by any individual to be
indispensable for himself and his children; that measure which he will
make great sacrifices to secure. This standard differs from land to
land, and from time to time. In the Asiatic countries it is so low that
it touches in large classes the minimum of subsistence. Despite adverse
influences and the uninterrupted series of famines, the population of
India in the last century under English rule increased from two hundred
millions to three hundred millions. Such a population "lets out all the
slack" of income, and never takes up any. The great public works of
irrigation, forestry, and transportation, and the development of
industry under English rule, gave an opportunity for a higher standard
of living; but it was used instead to permit the existence of a greater
number of men in the same old misery. These facts have a bearing upon
the question of Oriental immigration to America. The emigration of
millions of Chinese from their native land would leave no void in their
numbers. Peopling their own land constantly down to their own standard
of living, they have the power, if they are tempted hither in great
numbers, to people this continent also to the same density.
[Sidenote: The American standard]
The American standard of living, while it differs in different classes,
is on the whole the highest found anywhere in the world. The increasing
appeal to individual selfishness in the last twenty-five years, the
greater ease of travel and taste for it, the multiplied and costly
pleasures and pastimes, make children a greater and greater burden. The
abnormal conditions of city life increase the sacrifice required to
support children, and take away a large part of the value of their
services in the home. In the greater cities are whole areas larger than
the city of Ithaca where children are not admitted to the apartment
houses, where no one who has a child can rent rooms. Despite the
increasing incomes of the masses of the population, the number of
childless homes is increasing, and while the standard of comfort grows,
the size of the average family dwindles.
[Sidenote: The decreasing death-rate]
3. _Great improvements in medical and in sanitary science are decreasing
the death-rate and thus partly neutralizing the effects of a lower
birth-rate._ The death-rate in a community is a fairly good index of its
general welfare. The death of a large proportion of the children before
they arrive at maturity indicates poverty or ignorance. The death-rate
in the Middle Ages, especially in cities, was tremendously high, but
during the last hundred years has steadily decreased. The race of man
which, ever since the beginnings of volitional control, probably has had
a smaller death-rate relative to the total number of individuals coming
into existence than has any other species of living creatures, has
to-day a far lower rate than ever before. Even in the most miserable
industrial population where one half the children die before they are
five years old, the death-rate is much less than among the young of the
lion or the eagle.
[Sidenote: The quality of population counts]
4. _Volitional control is acting with the greatest force in the more
capable classes and thus threatens to reduce the quality of the
population._ The quality of population is of more import than its
quantity, alike in its economic, its social, and its ethical results.
The productive force of a population is not measured merely by numbers.
"Who" make up the population at any moment is no more a matter of
indifference than "how many." One new-born child represents a negative
addition to society, unintelligent, incapable, foredoomed to become a
burden; another, with energy, thrift, inventive genius, comes to enrich
and uplift his fellow-men. Quality counts for much.
[Sidenote: Change in the American birth-rate]
The average number of children reaching maturity in the families of the
American colonists was six; the average number to-day in families of
American descent is about two. Since many of these do not live to
maturity, and of those who do survive many do not marry, the stock does
not maintain itself in numbers. Much larger families are found among the
poor whites of the mountains, the foreign population, the rate negroes,
and, in general, in the lower ranks of labor. Forces are at work to
sterilize or reduce in number the more intelligent elements of the
population. The "new woman" movement, tempting into "careers," takes
away from family life many of the women most worthy to become the
mothers of succeeding generations, Self-interest is at war with the
social interest. The individual asks, "Am I bound to sacrifice my
comfort and happiness to the general good?" If this continues, the
result must be a steady decline in the proportion of the population born
of the successful strains of stock, and a steady increase of the
descendants of the mediocre and duller-witted elements.
[Sidenote: Rate of increase in the nineteenth century]
5. _Population increased at an unprecedented rate throughout Christendom
in the nineteenth century, but the pace is now slackening._ The
nineteenth century saw a great increase in the food-supplies available
for Europe. The resources of the American continent were hardly touched
until the great Western movement of population began and new agencies of
transportation brought American fields thousands of miles nearer to
European markets. The improvement of machinery and of other economic
equipment in Europe likewise aided to increase production rapidly.
Population followed, though not with equal step. Europe had a population
of 200,000,000 in 1800, nearly 400,000,000 in 1900. The increase in
England was from 12 to 18 per cent, each decade; it had 8,000,000 in
1800 and 30,000,000 in 1900. The United States had 5,000,000 at the
beginning of the century and 75,000,000 at the close, an increase of
over 30 per cent, each decade. Recently there has been a notable decline
in the rate of increase in all the countries of Europe. France is
already at the stationary stage, and England probably will have reached
it by the middle of the century. The rate of increase by decades has
fallen in America from thirty-three to twenty-four since the Civil War.
Though the movement of the population is still upward, large classes are
stationary or declining in numbers.
[Sidenote: Conclusion]
Population should increase more slowly than wealth and resources if
progress is to go on. It has done so in the past century, and there is
no probability of a too rapid increase in Christendom in the near
future. A stationary or declining population, while not desirable, is
not an impossibility. But this does not destroy the significance of the
fact that there is inherent in humanity a great potential power of
increase, the realization of which would be disastrous, the control of
which is an important and ever-present condition of the social welfare.
CHAPTER 22
CONDITIONS FOR EFFICIENT LABOR
§ I. OBJECTIVE PHYSICAL CONDITIONS
[Sidenote: Subjective and objective factors of efficiency]
1. _The efficiency of labor, in its broadest sense, is its ability to
render services or produce things that minister to welfare._ The
efficiency of labor is a resultant of many influences. In part it
depends on the physical and mental powers of men; in part on things
outside of the worker that either stimulate and strengthen him, or give
him more favorable conditions in which to work. These are respectively
the subjective and the objective factors of efficiency. In its broader
sense, therefore, the phrase "efficiency of labor" implies any and every
influence that makes for a larger and better supply of goods.
[Sidenote: Bounty and goodness of productive agents affect the output of
labor]
2. _The efficiency of labor is limited objectively by the abundance and
quality of material resources._ Material resources include both those
called natural (as the field and its fertile qualities), and those
called artificial (as improvements and machinery). According as these
resources are more or less developed, as labor is employed in a fertile
or a barren field, with a sharp tool or a dull one, with a highly
developed machine or a poor one, the product is more or less. If
resources were much more abundant than at present, many goods now scarce
would become almost, or quite, free. In the last chapter it was shown
that an increase of the labor in a limited area or with a limited supply
of indirect agents results in a decline in the relative bounty of the
environment. A certain part of the result is thought of as due to
material agents, a certain part to labor. "Efficiency of labor" is
thought of in the narrower sense as the part of the product that is
logically attributable to labor,--the laborer's contribution to the
value of the product,--as apart from rent, the part attributable to
material resources.
[Sidenote: Causal relation of wages and efficiency; food]
3. _The laborer's efficiency is greatly affected by the quality of his
food, clothing, and shelter._ Usually workmen that are getting good
wages enjoy abundant food and creature comforts; poorly paid workers go
scantily fed. The question arises: which is cause, which effect? Some
maintain that all that is needed to make workmen more efficient is to
feed them well. In some cases this is probably true. The Porto Ricans
enlisted in the American regular army are reported to have increased at
once in strength, weight, and vigor; the Filipino recruits, thanks to
the American army rations, soon outgrew their uniforms. Some employers
in Europe pay their workmen an extra sum on condition that it is spent
for meat. But if wages increase, it is by no means certain that more or
better food will be bought or if it is that the workmen's powers will be
increased. There is a limit to the benefits of increasing food. There is
some reason to believe that in America great numbers of our people,
perhaps even many manual laborers, would be better off if they bought
simpler and less costly food. The maximum of health and vigor may be
attained with moderate outlay, and beyond that point richer food
doubtless does more harm than good. Poor judgment in the selection of
food is shown in many workers' families, and there is no appreciation of
its influence on health.
[Sidenote: An experiment in feeding]
A few years ago an experiment in the feeding of pigs was tried on the
Cornell farm. Four groups of six pigs each were put in four different
pens and fed four different rations. Though alike in breed and age; the
groups began at once to differ in character. One group squealed more;
another scratched more; another waxed fat faster. Every week they were
weighed, and finally were butchered, hung up, and photographed. At that
same time, at the Elmira Reformatory Mr. Brockway was experimenting on
some criminals of the lower class. They were given daily baths, special
physical exercises, and were fed on a specially bountiful diet.
Scientific philanthropy stopped there, but photographs "before and
after," reproduced in the printed reports, show the great physical
improvement that resulted, and a marked change occurred likewise in
disposition and intelligence. Many laboratory experiments have been made
of late to test the chemical nature and the physiological effects of
foods. It is becoming more fully recognized that the quality and
quantity of food, and the cooking of it, have a great influence on the
economic quality of the worker.
[Sidenote: Clothing]
The effect of the quality and amount of clothing, while of course
varying with the climate, is in general of less practical importance.
Loss of heat and energy, dulling the powers, stiffening the muscles,
causing illness with many trains of evils, make ill-clad workmen
inefficient. The cost of clothing enough for comfort is, however,
comparatively small, the amount spent for ornament is comparatively
high. Even more important in its effects on efficiency is housing. The
conditions in the factory and in the home make for health or for
disease.
[Sidenote: Physical conditions surrounding labor grow worse or better]
4. _The growth of society is, for the average man, making some of the
conditions of efficiency more difficult, others more easy, to secure._
In agricultural and sparse populations fresh air, sunshine, good water,
and unbounded natural playgrounds for children, where they can grow into
strong and efficient manhood, are free goods. As population grows more
dense, these things become more difficult to secure; men are brought
into unnatural conditions, the evils of slum and factory life develop,
and the housing problem appears.
The character of the housing and working places could well be left to
individuals in early times. If the individual chose to live and work in
unsuitable places and under unsanitary conditions, it was usually his
own fault and he bore the consequences. When the unsanitary conditions
about each family are visited upon its neighbors, society must deal with
them. Engineering, sanitary science, and medicine must be directed
against the evils; factory and tenement-house legislation must seek to
make possible a decent life in the cities, the factories, and the homes.
Indeed, in many places the development in these and other directions has
enabled the mass of the workers to enjoy blessings impossible to the
most favored in the past.
§ II. SOCIAL CONDITIONS FAVORING EFFICIENCY
[Sidenote: Government to insure the reward to labor]
1. _The first social condition for the workers' efficiency is political
security._ For the same reason that this condition is favorable to the
growth of capital, it is essential if men are to labor in the present
and for the future. As the framers of the Constitution expressed it, the
function of government is to insure domestic tranquillity, provide for
the common defense, and insure the blessings of liberty to the citizen.
Directness and certainty of reward are more essential than mere size of
reward in insuring action and effort. There must be a close relation
between work and the fruits of work. Political insecurity weakens this
relation and makes the reward dependent on chance.
[Sidenote: Common honesty as a condition to efficient labor]
2. _The prevalence of standards of honesty in private and public
business is a condition to high efficiency._ Corruption in government
has the same effect as political insecurity; in fact, it is but another
form of it. We are accustomed to the thought that in an Asiatic
despotism a worker beginning a task is uncertain whether he will reap
the reward, as public officials may at any moment seize upon the fruits
of his labor. But in our own country similar evils are not entirely
lacking. Assessments often are unfair, and justice sometimes is bought.
Men in high executive positions are able to make or mar the fortunes of
their followers. Sometimes a legislator from a country town goes to the
state capital poor and returns rich. Such things becoming generally
known tend to break down the motives to industry. They breed the notion
that wealth is more dependent on chance or jobbery than on efficient
service. Dishonesty in private business means the use of energy not to
produce wealth, not to add to the sum for all to enjoy, but to get it
from some one else. Public corruption and commercial dishonesty alike
entail on the industrious not only the immediate loss, but the far
greater cost of weakened character, relaxed energy, and decreased
efficiency of labor.
[Sidenote: Effect of caste on efficiency of lower and upper classes]
3. _Custom and social ideals that raise or depress hope and ambition,
affect efficiency._ The institution called caste, which fixes the place
of the worker and makes it impossible to rise out of the social position
in which he is born, and disgraceful to do any work reserved to other
castes, is deadening to energy. It exists in some form throughout the
world, and where it is not called by that name, the same caste spirit is
at work. The European peasants in the Middle Ages lived under the shadow
of it. Where slavery exists the master class at times feels its
hardships. "It is not so hard to live," says the hungry Creole daughter
in "The Grandissimes," "but it is hard to be ladies.... We are compelled
not to make a living. Look at me: I can cook, but I must not cook; I am
skilful with the needle, but I must not take in sewing; I could keep
accounts; I could nurse the sick; but I must not." Nowhere in the world
is there less caste than in America, but it is here. The negro's low
measure of industrial virtues is partly the cause of the prejudice
against him, but in turn doubtless inherited class feeling is in some
measure the cause of his inefficiency. To close to a worker all but the
menial occupations is to take from him the most powerful motives for
effort. The thought is paralyzing. The race problem in America is in
part one of caste sentiment, whatever can or cannot be done about it.
[Sidenote: American democracy and the efficiency of labor]
Democracy makes for the efficiency of American industry not less than
do the great natural resources. If America is to surpass the world in
all the great industrial lines, it will be largely because of her ideas
and institutions. They lead to greater energy and to a faster working
pace in all grades of labor than is found anywhere else in the world.
There is danger that as the West is closed to settlement something of
the spirit of enterprise will be lost. To Western eyes already the young
men in the older East seem to be trammeled by social conventions. In an
older community there is less of hopeful ambition; one's position
depends more on what his fathers achieved; in the new community, more on
what he does himself. If it is true, as wise students declare, that the
frontier has been the nursery of our democratic ideas, we may well ask
what effect the closing of the frontier will have on our national
sentiment and on our material prosperity.
[Sidenote: The balance of advantage between work and leisure]
4. _Custom and national temperament affect the efficiency of labor by
determining the normal period of labor time._ After the bare necessities
of life are provided for, the worker has a wide or narrow margin of
productive energy to use as he pleases. If four hours' work a day would
enable him to live, will he work longer or will he stop? The answer is
determined by the balance of utility and disutility. Will additional
hours of labor yield more gratification than idleness yields? Does the
pain of toil repel more than its fruits attract? The use made of spare
time differs according to climate, race, and temperament. In the tropics
the margin is converted usually into loafing, in the temperate zones
largely into objective forms of enjoyment. Individual differences are
plainly seen when each man labors on his own field. The prudent man, in
the old maxims, makes hay while the sun shines and ploughs deep while
sluggards sleep. In the modern larger organization of industry, working
hours are much the same for all workers in the establishment. Individual
preferences are still expressed, however, in irregularity of employment.
In the South some manufacturers have found that on an average the
negroes will work in a factory not more than five or six hours a day,
working ten hours for four days and lying off two days a week. Such a
standard of working hours is the mark of the primitive stage of wants
and industrial qualities, although a shortening of the hours of manual
labor, as incomes increase above bare subsistence, is in accord with a
rational valuation of leisure. A moderate change in that direction
cannot but increase rather than diminish the efficiency of labor.
§ III. DIVISION OF LABOR
[Sidenote: Division and exchange of labor]
1. _Division of labor is a term expressing that complex arrangement of
industrial society whereby individual workers are enabled to apply
themselves to the production of certain kinds of goods, securing others
by exchange._ The term "division of labor" is simple, but the thought is
a complex one. Its full discussion would cover the whole field of
political economy, but only its most essential aspects can here be
touched upon. Division of labor and exchange are counterparts and
mutually determine each other. Division of labor depends on the extent
of the market, and in turn widens its limits. The number of articles
that any one would care to produce at one time and place depends upon
the opportunity to exchange them. These two aspects of industry thus are
inseparable in thought and practice. The worker finds division of labor
existing as a social institution and, according as he adapts himself to
it wisely or foolishly, it increases more or less his efficiency.
[Sidenote: Division of labor between trades and territories]
2. _Division of labor is primarily between individuals, but appears
between trades, territories, and nations._ In division of labor between
trades, each worker applies himself to the production of some product or
group of products and secures other goods by exchange. A special form of
this is territorial division of labor, arising out of differences in
soil, climate, and natural products, when each community develops in a
high degree some one class of products to exchange in distant or foreign
trade. Division of labor beginning because of such natural differences,
becomes fixed by habit and training, by the advantage of a larger and
regular labor supply, by the economy of nearness to related and
tributary industries, and by the use of waste products where industry is
conducted on a large scaled. The natural advantages in another district
must be large to enable it to start successfully against these acquired
economies, and territorial division of labor thus tends to continue for
long periods when once established.
[Sidenote: Advantages of division of labor]
3. _Division of labor increases efficiency by: (a) increasing skill; (b)
saving time; (c) saving tools and materials; (d) improving quality; (e)
increasing knowledge; (f) stimulating invention; (g) encouraging
enterprise; (h) economizing talent._ There is a tradition that an
ingenious lecturer in one of our universities was accustomed to give to
his class eighty reasons why division of labor was of advantage. It is
none too many, as every reason for the modern, as contrasted with the
primitive, organization of industry should be included. The phrase
division of labor is but a synonym for specialization, a word that
expresses all that is most characteristic of our complex industrial
society. The headings just given may serve, however, to suggest the
leading phases of the subject. Repetition of the same task trains the
muscles, forms a mental habit, and gives the swiftness and deftness of
touch called _skill_. Specialization _saves time_ by making unnecessary
the physical change of place for the worker, the frequent shifting of
tools, and the mental readjustment required for the undertaking of a new
task. Specialization _saves tools_ for, either each kind of work must be
most ineffectively done, or there must be provided for each worker a
complete set of tools which thus will be used rarely and will rust out
rather than wear out. If a few tools are thoroughly used, they yield a
larger income on the investment, and require less care and repairs in
proportion to their uses. In fact this fuller economic use of machinery
and plant where a large product is turned out at one place, is a prime
factor in the advantages of large production, a subject to be treated
elsewhere much more fully than is here possible. By specialization is
made possible a _quality_ of goods never to be secured by the less
skilled efforts of the Jack-of-all trades. The specialist steadily grows
in _knowledge_ of his materials and of the best processes, and he gains
a power of delicate observation and facility in meeting new difficulties
that are impossible when attention is divided among a number of tasks.
By dividing and simplifying processes, specialization _stimulates
invention_. The most complex machines have been developed gradually by
combinations and adaptations of simple tools, and the more a process is
subdivided, the greater is the chance of hitting upon a device to repeat
mechanically the few simple movements. Division of labor increases the
motives of emulation and _enterprise_, by making possible the more exact
comparison of results. It _economizes talent_ by giving to each the
highest task of which he is capable, while fitting the less efficient
workers into the minor places made possible by subdivision. In an
American wagon-factory, a one-armed man operating a machine is turning
out as large a product and earning as high wages as any other employee.
The same advantages of specialization are found with modifying
conditions in educational and professional lines. The marvelous progress
of science in recent years has been made possible by each worker's doing
a few things and doing them well.
[Sidenote: Best adjustment of talent and occupation]
[Sidenote: Choice of a life career]
4. _The individual worker, to attain his highest economic efficiency,
must select from the occupations made possible by division of labor the
one for which his talents are best fitted._ It seems unnecessary to
state this almost axiomatic truth, yet the slight reflection given to
the choice of an occupation by most young people gives to this statement
a very practical bearing. The world is filled with industrial misfits,
"round men in square holes," good carpenters spoiled to make poor
doctors. It so often happens that the natural aptitude of the youth is
the thing last or, in any event, least considered. Unreasoning
imitation, family traditions, parental wishes, class pride, social
prejudice, childish whim, are often decisive of the life career. Happily
in some cases, before too late, the man "finds himself," but too often
the poverty of the family and the obstacles to education preclude the
exercise of intelligent choice. It is of importance to society as well
as to the individual that talent should be discovered in time, that
tasks should be fitted to aptitudes, that each member of society should
attain to his highest efficiency. The approach to this ideal, made
possible by popular education, the decline of caste, the spread of
genuine democracy, the progress of social justice, will increase not
only the workers' efficiency, but society's abiding welfare.
CHAPTER 23
THE LAW OF WAGES
§ I. NATURE OF WAGES AND THE WAGES PROBLEM
[Sidenote: Wages and rent compared and contrasted]
1. _Wage in the broad sense is the income due to labor, in distinction
from that due to the control of material agents._ The uses of material
agents, studied under the subject of rent, are sometimes called
"material services." The adjective refers to the source or bearer of the
use, and does not imply that the service is to be thought of as a
material thing. In its last analysis a service is never a material
thing, but a psychic effect on men and their wants. Material services
and human services are merely specific kinds of the genus services (or
utilities), and it would doubtless be a better usage to speak of labor's
services and wealth's uses. Wages bear the same relation to man's
services that rent does to the material uses of wealth. Wages are more
like rent than like interest in that neither wages nor rent are
expressed as a percentage. While rent is the value of the uses of
things, wages is the value of the services of men. In discussing
interest, wealth is capitalized; but, in discussing wages, men are
thought of as affording utilities for a time, as is wealth under the
renting contract. The resemblance thus is very close between rent and
wages, but not so close between wages and interest.
Despite this interesting analogy, it is not well to speak, as some do,
of "the rent of labor"--as well might one speak of the wages of wealth.
Such a usage only beclouds the distinction between two concepts,
suggesting identity where there are important differences. The aim of
scientific classification is missed when contrasts are thus concealed
under a single term.
[Sidenote: Nature of the law of wages]
2. _A law of wages is a statement of the relation of the general causes
of value to the value of human services._ In real life no one agent is
valued independently of other goods. The felt importance of a good
depends on the degree to which other wants are gratified. If men are
starving, they attach less importance to ornaments; if cold, more
importance to clothing and fuel, being willing to part even with some
needed food to secure them. That is, man's desire for each thing is
affected by his general condition and by the existence of other goods
and wants. A similar relation exists between the values of indirect
agents, and must exist between wages and rent.
We are to discuss the law of wages. An economic law does not state a
command; it is not a political law; it states merely an observed
relation. Things do not need to happen actually according to any law of
wages that can be formulated, but they will happen in the measure that
the assumed conditions exist. The law states a tendency of wages, just
as the law of gravitation states a tendency and does not predict
positively whether a given object will fall at a given moment. The "law
of wages," therefore, is to be understood as a hypothetical statement of
the value that will be attributed to labor under a given set of
conditions.
[Sidenote: Economic wages and contract wages]
3. _Economic wages are the value of human services in the broad sense;
contract wages are the goods paid by one wages man to another according
to an agreement._ In discussing rent and interest, we have become
familiar with this important distinction between economic and contract
values. Economic wages are fundamental, the primary subject of
theoretical study. Contract wages are the wages paid by one man to
another in accordance with an agreement, and may not at this moment
coincide with economic wages. When the contract was made, one party may
have been ignorant or helpless, and have failed to get all he now could;
or meantime the conditions may have changed. But contract wages are
based on economic wages and tend to conform to them. If one person
performs services for another without expecting to receive economic
goods or services in return, it is a gift, not wages. A workman can get
as contract wages the amount of his economic wage if free competition
exists and he acts intelligently. Of course, these are important
conditions.
Real and nominal wages must be distinguished: real wages are the reward
of labor as measured in goods and enjoyments; nominal wages are the
reward expressed in terms of money, whose purchasing power varies from
time to time and from place to place.
[Sidenote: Scarce services gratify wants]
4. _Human services, being one of the conditions of psychic income, bear
the same relation to wants that material goods bear._ As the material
agents that are fitted to gratify wants are scarce, labor is applied to
the outer world to change and adapt it, thus making it answer desire
better. Labor, thus, in many of its applications merely supplements the
bounty of nature. Men have a use to and for each other; they have a
relation to other men's welfare similar to that borne by material
things. The different human actions have all grades of relation to
gratification, from harmful to helpful, just as things have. According
to their relation to this scale services therefore become ranked either
high or low in the estimation of men. Some acts are negative services,
to use the term service in a paradoxical sense; they are things to be
avoided and escaped. Value then is attributed to the services of men
according to their rank in this scale, just as it is to the uses of
agents in the case of rent.
Scarcity is the condition of value in labor, as it is of value in any
good; but scarcity is a relative term. The commonest kinds of labor
would not ordinarily be called scarce, but compared with their possible
desirable uses, they are scarce, and this fact is the key to a large
part of the wage problem. The question is: how and in what degree does
this scarcity cause value to attach to labor?
§ II. THE DIFFERENT MODES OF EARNING WAGES
[Sidenote: The simplest case of economic wages]
1. _The self-employed laborer earns wages in the broad economic sense._
In this sense the isolated workman, Robinson Crusoe on his island, earns
wages, but these wages could not be measured at all exactly. They are a
part of an indivisible income, and there is no way to determine how much
should be attributed to the uses of the wealth employed and how much to
the labor. The independent farmer, producing on his own farm nearly
everything he consumes, may be said to earn wages in the broad sense.
These can, moreover, be estimated, because they can be compared with
what he could get by working for some one else. The farmer, therefore,
attributes a certain part of his income to the farm as rent and a
certain part to his own labor as wages.
[Sidenote: Wages of the self-employed exchanging worker]
2. _The wages of self-employed labor are often simply the value of the
material product it secures by exchange._ Labor has value indirectly
because embodied in products. The worker value of these products is
reflected to the labor which secures them. The wages of the fisherman
day by day, as he follows his vocation, are simply the market value of
the fish he catches day by day. The gold-miner, working with simple
tools in the days of placer-mining, earned wages exactly expressed by
the gold he washed out.
The independent worker with few tools does not think of attributing any
considerable part of his income to his tools. The umbrella-mender's
"kit" is so small that his true wage is little less than his total
receipts. The tinker, the shoemaker, and the tailor, who went from house
to house in the old days, thought only in the vaguest way of marking off
from their incomes a part to be counted as the rent of their little
outfit of tools. Until very recent times the capital invested in tools
commonly was small, and usually was owned by the handworker who thus
received an undivided income, of which wages were by far the larger
part. It was inevitable, therefore, that labor alone should have been
thought of as the cause of the value of goods produced by the artisans
in the towns and cities. This error, small at first, was magnified as
the capital investment of modern industry grew, and it persists in many
fallacious notions that still taint modern economic theory.
[Sidenote: Both impersonal and personal causes of contract wages]
3. _Contract wages, paid by an employer, rest on the same cause of
value, the direct or indirect effect of labor in the gratifying of
wants._ When contract wages come to be spoken of, the personal element
of bargaining between man and man comes in to obscure somewhat the
impersonal causes that are operating. If the fisher and the miner bring
their products to the general markets, the impersonal part of the
problem is uppermost and the wages are recognized to be the market value
of the material products. But if an employer hires a number of workmen,
and the labor of each becomes merged and lost to view in a complex
product, the uncritical mind stops, loses all hold on a guiding
principle of value, and sees only the superficial fact of a personal
bargain between employer and workman. Such a view overlooks the logical
cause of value, and the network of impersonal forces which enwraps and
binds the personal acts.
[Sidenote: A single direct personal service]
To begin with the simplest case: workers often are temporarily employed
to produce for others means of gratification at once consumed. The
barber shaves his patron, the ferryman takes the traveler across the
river, the boy carries a message, the surgeon sets a broken bone. Each
performs a useful service, but produces no long-abiding material result
outside of the beneficiary, and no separable, salable material good.
When each is paid according to the value of the gratification afforded,
the first step is taken toward the regular contract-wage relation
between man and man.
[Sidenote: The continued wage contract for personal services]
In ordinary domestic service the only condition not present in the
cases just given is the more abiding character of the contract relation.
The employer does not hire a coachman each time he wishes to take a
ride, but having summed up the advantages of a coachman's services, he
buys them by the month or the year. The price is determined in the
market for coachmen of the needed ability, qualities ranging from stupid
to bright, from weak to strong, and from drunk to sober. Instead of
buying flowers from day to day, a wealthy man hires a gardener to
cultivate them in a conservatory. The average market price of flowers
influences the wages paid to the gardener, his wages being but the sum
of the values (or of his contribution to the values) of flowers,
well-kept lawn, and garden products. According to the conditions of each
household and of the general market, the one or the other mode of buying
these utilities is the more advantageous.
[Sidenote: Labor employed on products exchanged]
4. _The payment of the laborer to produce goods for exchange is the most
common modern case of wages._ The relation of wages to the value of the
product is in this case more complex, for the employer is directing the
labor to gratifying the wants of others, not his own wants. It is the
desire of prospective customers for the product, and the chance of
exchanging it, that will eventually enable the employer to recover the
amounts paid to laborers. Labor is only one of the elements entering
into the product. Within limits it may be substituted for the other
elements, fewer machines being used and more laborers, or vice versa. No
more will be given for any labor than it is expected to add to the value
of the product. As employers test by experience the contribution of the
marginal labor to the value of the product, labor is constantly compared
with the value of other things.
When industry becomes complex, the connection between the wages and the
value ultimately realized in the product may be broken for a time, but
rarely for a very long time. Because of miscalculations, labor is
employed on things that prove to be quite valueless, and on other
things that have a much greater value than was expected. When months or
years intervene before the value of the labor is realized in the sale of
the product, the employer must forecast the outcome as best he can, and
employ labor only when the wages promise to be recovered. These are
complicating facts, but in any logical view they do not falsify the
principle that wages are determined by their prospective contribution to
the utility of goods.
[Sidenote: Various methods of remuneration, but one general rule]
5. _The wages paid by the various methods of remuneration--as, by time,
by the piece, by premium for output--all conform in a general way to the
economic value of the service._ Many methods are employed to measure the
services of wage workers. If time is used, a general or average output
is assumed, and the workman must come up to that standard if he is to
hold his place. If payment is by the piece, the price per piece must be
enough to make possible the prevailing time-wage to workers of that
grade if the supply is to be maintained in that industry. The
convenience of the different methods of payment varies from industry to
industry, and even from task to task within the same factory, so that
now one, now another method is followed. In any case, however, the aim
is to find some convenient measurement of the rate of labor, and of its
contribution to the value of the product.
§ III. WAGES AS EXEMPLIFYING THE GENERAL LAW OF VALUE
[Sidenote: Ratio of exchange of services adjusted to their marginal
utility]
1. _Each grade of labor is a potential supply of desirable things and
its wage is determined in essentially the same way as if it were an
actual supply._ If all the various psychic goods that labor produces
were spread out before men in visible form, some would be in great
demand, some would exchange in a very unfavorable ratio with others. The
exchange would come to equilibrium at a point where each buyer had
adjusted his supply of enjoyments in the most favorable way, had so
distributed his purchasing power as to get those kinds and amounts of
services which afford him the highest possible sum of enjoyment.
[Sidenote: Differences in wages persist]
In this situation the real wages of some being so much more than those
of others, the low-paid workers will have a motive to change their
occupations. But the various laborers have limited abilities and cannot
change at will and, despite the unfavorable ratio, they may be compelled
to continue at the same work. Just as apples cannot become peaches or
sheep become horses when there is a change in their price, so the
unskilled workman cannot become skilled quickly, if he ever can, and the
possibility of changing occupations within any reasonable period is very
small indeed. Labor is constantly trying to adjust itself, to get into
the better-paid industries. It moves, it emigrates, it seeks training
and education. Especially the workers between the ages of fifteen and
twenty-five choose the callings that promise the highest reward. Within
limits an adjustment is possible, but these limits are not wide and not
quickly shifted, and the wages of labor continue diverse in different
occupations for an indefinite time.
[Sidenote: Various grades of labor and rates of wages]
2. _The term general rate of wages can be used only of a certain grade
of labor and of the rate for the average worker._ Every grade and kind
of ability has its rate of wages. To be sure, it is sometimes convenient
to speak in a broad but inexact way of "a general rate of wages," when
comparing different countries and periods. When it is said that the rate
of wages is higher in America than in England, in England than in
France, in France than in India, the comparison is between men of the
same occupation in the different countries; _e.g._, the unskilled
laborer or the mechanic gets more here than the same grade of laborer
gets in England. There is no such thing as a general rate of wages
extending throughout all industries.
The different grades of ability differ more markedly in wages than do
industries compared as wholes. In the manufacture of cloth all grades
of ability are required, from the highly paid artist and engineer, down
to the roustabout in the yard. The industries of manufacturing,
commerce, and education alike require the coöperation of bookkeepers,
janitors, carpenters, and superintendents. It is easy in most cases to
pass from any grade of occupation in one industry to a corresponding
grade in another industry; but it is difficult to pass from a lower
grade to a higher grade in the same or another industry.
[Sidenote: Equilibrium of services and wages]
Abstractly considered, that is, wherever free competition exists, there
is a constant tendency toward a state of equilibrium; each workman is
moving into the industry where he earns the highest possible amount, and
where he receives just what his fellow-men estimate his importance to
be, judged by the service he performs. Each man's place is determined by
his specific gravity, just as the place of liquids poured into a glass
is determined by their density. There is much reason to believe that
this condition is approached actually in a far greater degree than is
thought by those who come to the question with preconceived notions of
what ought to be, or of what they would like to see. This principle of
the economic wage does not preclude the questioning of the justice of
existing institutions, but it is a guide in the discussion of all
practical problems of wages.
[Sidenote: Wages follow the law of marginal valuation]
3. _The law of wages may be stated thus: in any state of the labor
market the wages of any labor or class of labor is equal to its marginal
contribution--that is, to the value of its products._ Each agent in
industry, whether it be a plough, a horse, or a man, is valued in
connection with other agents, never apart or isolated. It is not the
total service any one of them performs that can be got at; all that can
be got at is the utility attributed to the last unit of supply. Their
marginal contribution determines their importance. Each agent is
considered in combination with other things at a given moment under
existing conditions of supply.
[Sidenote: Wages exemplify the general law of value]
This statement of the law of wages is broad, and appears to be modified
in many ways in practice: by changes in industry, by ignorance on the
part of the worker, by unequal skill in bargaining; but the law of wages
just stated allows for these modifications, and is a guide amid the
complexity of facts, for it gives a place to the influence of trade
unions, caste, and everything else that affects the labor-supply. The
law of wages is but the general law of value, working itself out amid
the special conditions accompanying the gratification of wants by human
effort.
CHAPTER 24
THE RELATION OF LABOR TO VALUE
§ I. RELATION OF RENT TO WAGES
[Sidenote: Concrete conditions of industry must be studied with wages]
1. _The law of wages must be considered in connection with other
far-reaching influences._ One may use the sentence, "the marginal
productivity of labor determines wages," without having a true
understanding of its meaning. Memorizing a definition is only the first
step toward economic reasoning. Till that definition becomes a real
thing in the student's thought it helps him but little. The law of wages
is an abstract statement of the logical relation of wages to utility; it
is not a concrete statement of the industrial conditions in which labor
works, yet these are more nearly in the nature of true causes of value.
The marginal utility is itself determined by forces and conditions
outside of labor that are constantly changing. The more thorough is the
student's knowledge of the actual conditions of industry, the more
correctly he can apprehend the relations of wages to other incomes, and
the more wisely he will apply the abstract law to practical life.
[Sidenote: Productivity of labor and diminishing returns of natural
agents]
2. _The marginal productivity of labor is affected by the relative
abundance and efficiency of natural resources._ If land suddenly becomes
more abundant through the opening up of new continents, the lower grades
of agents are sooner or later abandoned. Labor having more of a choice
as to the place where it is to be used, spreads itself over the better
grades and takes on a greater marginal productivity. The marginal unit
of labor working on better soil than before produces more, and wages
expressed in produce are higher. Ground rent, on the other hand, is less
under these conditions. If, however, the land is fixed in area, and
population increases, no other change taking place, the principle of
diminishing returns applies. The marginal laborers (the last arrivals or
the growing generation) being compelled to work with less efficient
resources on a poorer quality of land, produce less than was the rule
before, and a smaller product therefore is attributed to all the
laborers of that grade. They get lower wages and more goes as rent to
the owners of the land. By shifting of occupations this reduction may be
somewhat moderated and equalized among the workers in other industries.
In both these cases, wages vary more than does the physical amount of
the total product. In the first case, wages are a larger proportion of a
larger product; in the second case, the product is larger (there being
more laborers) but wages are a smaller proportion of it.
[Sidenote: The iron law of wages]
3. _The unwarranted assumption that a disproportionate increase in
population is sure to occur, gave rise to the subsistence theory, or
iron law of wages._ This assumption is now seen not to correspond with
what is occurring in the civilized world. A hundred years ago, however,
when the poorer classes of Europe appeared to be increasing with little
restraint, it was not strange that thinkers should look upon this
increase as inevitable. According to the subsistence theory, the
question of population was simply a question of food; it was believed
that men surely would multiply up to the point where they could not
further increase their numbers, and starvation wages would be the rule.
It was this way of looking at things that gave to political economy the
name of the dismal science. When population is limited in large measure
by volitional means instead of by war, starvation, and other material
means, the problem changes and the error in such a theory of wages
becomes clear.
[Sidenote: The standard of living, and wages]
The "standard of living" theory of wages is a refined form of the
subsistence theory. This theory is that wages must rise to meet the
cost of any standard that the laborers may set, and below which they
will refuse to multiply. This is probably a fragmentary truth, but is
quite inadequate as a theory. A high standard of living and all the
social institutions and customs that aid in keeping the population from
too rapid increase, are factors in determining ultimately the marginal
productivity of labor and, hence, the height of wages. If these
restraining influences suddenly were withdrawn, a reduction of wages
would follow slowly because of the diminishing returns of material
agents. But the standard of living is merely a partial and negative
factor. No limitation of the number of workers can raise wages above
their productive contribution and, in the present state of industry, a
considerable falling off in population might be expected to result in a
loss of enterprise, of coöperation, and of capital. The positive factor
in wages is productivity.
[Sidenote: If labor increases faster than wealth, wages fall]
4. _An increase of population more rapid than that of the artificial
industrial agents would reduce marginal productivity._ Labor makes use
of many kinds of agents besides the so-called natural resources. If
population is stationary while tools are allowed to wear out or if an
increasing population, while opening up a proportionate supply of land
for food, fails to accumulate a proportionate stock of other tools, the
marginal productivity of labor must diminish. Labor would be more
imperfectly equipped with spades, hoes, wagons, horses, cattle,
machinery. These artificial agents help in getting not only manufactured
products, but food products. The equipment of labor must keep pace with
the number of workers or they will be forced to the lower, or less
effective, uses in the tools. On the other hand, the growth of science
and invention, and the growth of wealth faster than the population,
equipping labor as it does with more efficient implements, cause the
marginal productivity of labor to rise, and hence also the wages.
[Sidenote: The wage-fund theory explained]
5. _The "wage-fund theory" was an imperfect perception of this truth
that wages are influenced by the efficiency of the industrial
equipment._ As the subsistence theory took a partial view, looking at
agricultural land alone as the determinant of wages, so the wage-fund
theory looked alone at a portion of the capital in the hands of
employers which was the fund from which wages were paid. The large part
played in discussion by this doctrine and the strong hold it had on
thought is somewhat puzzling now; for if one begins to doubt its entire
truth it is difficult to be quite just to its merits or to state it in a
form that is plausible. The theory was that wages depended on the amount
of capital that, in some way not clearly seen, was set apart by
employers for the payment of wages. The capital making up the fund out
of which wages were supposed to be paid, was only a very small part of
all capital, even in the narrow sense in which that term was then used.
It was assumed that this wage fund, once set aside, was necessarily paid
out to laborers, wages being therefore determined by simple division:
laborers were the divisor, the wage fund the dividend, and the average
wage the result. When the theory is thus baldly expressed, it appears to
begin and end on the surface of the facts; and the wage fund appears to
be rather the arithmetic sum of variously determined payments than, in
any sense, the cause of wages.
[Sidenote: The wage-fund theory a partial truth]
The abler wage-fund theorists did not fail at times to see, though too
dimly, as the determining causes behind the employers' action, certain
other things, such as the material facilities, the desires of consumers,
the capabilities of the workers, and the resulting value of the labor.
The element of truth which still should be recognized in this theory is
that the relation of labor to its equipment influences its efficiency,
and determines the part of the product to be set aside for wages. In
that sense, wages are related to the abstinence of capitalists and to
the supply of "capital," but capital understood not as a special fund of
the employers, but, in a broader sense, as labor's entire environment of
indirect agents.
§ II. RELATION OF TIME-VALUE TO WAGES
[Sidenote: Labor may be near or far, in time, from gratifications]
1. _The services of labor, whether for one's self or others, have a more
or less immediate relation in time to the gratifying of wants._ While
all human efforts to which the term services is applied have a relation
to wants, there is much diversity in their nearness to the gratification
for which they are destined. The process may be technically roundabout,
to use the language of recent economists. One may break a stick from a
tree, pick up a stone and drill a hole in it, catch an animal, cut
thongs, tie the handle to the stone, and use it as a weapon to kill
other animals for food, the first step being taken with the last object
in view. But a still more essential relation we have seen to be the
relation in time. Some things, some goods, are used at once, some after
a long interval; some are durable, others perishable. Labor produces a
song or a glass of lemonade to be consumed on the instant; it is
employed on bridges, monuments, railroads, or interoceanic canals
lasting for centuries. In all these cases the general object sought is
the same though very different intervals of time must elapse before the
gratification matures.
[Sidenote: All future products of labor are discounted to their present
value]
2. _As different periods of time must elapse before services are
enjoyed, the expected value of all products but those immediately
available is discounted in advance._ The services that afford
gratification immediately, and those that afford gratification at a
later time, are judged and compared at one and the same moment. All
economic life centers in the present. This difference in the time of
services surely cannot be ignored. If Robinson Crusoe, at work on his
island with his limited supply of energy, continues to provide for next
year's enjoyment, neglecting the present, present goods become scarce
and their utility rises as compared with the future goods the same labor
secures. To escape inconvenience, and in the extremest case to escape
starvation, Crusoe would be compelled to restore the equilibrium
between the wants of the two periods by shifting his labor back to the
present. So in each little economic group and in our complex society
there is constant rivalry of present and future wants, competing for the
limited present supply of labor. The present says, "Give me your labor
and I will give you the fullest enjoyment." The future says, "I will
give you a greater gratification, but you must wait for it." A given
labor force thus making possible a wide range of choice among present
and future services, labor is distributed according to the prevailing
rate of time-value, which, as we have seen, is approximately expressed
by the rate of interest. If the rate of interest is high, it means that
the present is urgent and will not easily yield to the future. If the
rate is low, it implies that the present is comparatively well provided
for, and that future wants are given more consideration.
[Sidenote: The employer adjusts his labor force to the interest rate]
3. _The employer in hiring labor and producing goods takes account of
these time differences._ In the preceding paragraph has been noted the
influence of time differences in the simplest problem of economic wages.
Interest is likewise taken account of in the bargains between workman
and employer, by which contract wages are fixed. The employer of labor
works subject to a prevailing rate of interest. If he ignores it he must
lose. He should direct a given amount of labor to products that mature
next year only when their expected selling price is greater than that of
products that can be marketed this year. This difference due to time can
no more be ignored than can any other difference in the cost of
products. If the employer keeps the future goods to sell later, they
will normally increase in value as they approach maturity; if he markets
the goods at once, he normally must pass on to the purchaser the benefit
of the discount he has made on their future value. That is to say, it is
not the employer of labor, the purchaser of labor as such, who gains by
discounting the future value of labor; it is the investor of capital
(whether employer or later purchaser) who secures the rent as it
matures.
[Sidenote: The discount of the future value of services is inevitable]
4. _Hence all wages paid for help on products that are remote are based
on the present worth, or discounted value, of the future gratification
to which the labor contributes._ The idea is held in one form or another
by all radical socialistic writers, that the laborer does not get the
full value of his products. In the sense that is here discussed, he does
not. He does not get what the product will sell for in the future. He
gets the probable future value at its present worth, discounted at the
prevailing rate. That part of the employer's gains corresponding to this
discount on labor is economic time-value.
Nor is this discount of future services dependent on a political system
or on private property or on the wage system, as some have assumed. It
is a universal truth. It is in the nature of wants that present and
future should differ. A communistic or socialistic state would have to
take account of this difference, else the whole social economy would be
irrational and there would be no principle by which to apportion in time
the productive forces of the community. Contracts to pay interest and
contracts to pay wages might be forbidden and made criminal by formal
law, but time-value would persist.
[Sidenote: Relations of wages, rent, and time-value]
5. _Wages and rent are coördinate species of the value problem;
time-value is a different kind of problem, bearing to both the other
problems a similar relation._ A close examination of the problems of
rent and wages serves to bring out the close parallelism of these two
forms of income as here defined. Rent is the value of the usufruct of
wealth, wages are the value of the usufruct of labor. The bearer of the
use in one case is material goods, in the other is human agents.
Different in the source of use, they are in large measure alike in the
form of contract, or nature of the calculation. Together rent and wages
comprise the value of all currently arising uses; they are the two
coördinate species of the genus "value of uses." The two groups of uses
are closely interrelated in practice, each acting and reacting on the
value of the other.
Time-value is a different genus of the value problem. Having to do with
time differences, it must be found in connection with every use that is
not immediate, whatever be the bearer of that use. Its application to
rent is more frequent and obvious, as only the uses of material agents
are capitalized, that is, sold in perpetuity. Moreover any service of
labor that is not at once consumed is fixed in material form and appears
thenceforward as wealth whose uses are yielded as rent or as consumption
goods.
§ III. THE RELATION OF LABOR TO VALUE
[Sidenote: Several conditions of value]
1. _Labor is a cause, but only one of the causes of value._ A cause is
some one condition which is seen to be necessary to the existence of a
thing, and usually that condition which brings the thing about, other
things being assumed. In what sense ought a cause of value be spoken of?
In one sense it is in the minds of men--it is their wants; again, looked
at objectively it is in the nature of the good--it is the quality that
fits it to gratify the want. But if both these causes are operative, and
labor is applied to fit goods better to gratify wants, labor appears as
the cause of value. Personal causes are so much more evident, an
explanation through personal causation is so much more satisfying in the
earlier stages of scientific inquiry, that labor long continued to be
looked upon as the one source of value. This erroneous view has never
quite ceased to influence economic thought, and a great deal of effort
has been directed to formulating theories of value based upon it. The
cruder form of the error has now almost disappeared, but in various
little recognized ways it still persists.
[Sidenote: Two phases of economic production]
2. _Economic production is the origin, or genesis, of value finding its
source either in objective things or in services._ The writers of fifty
years ago defined economic production as the application of labor to the
creation of wealth. But as there are two factors in production, man and
material things, so there are two productive sources of value. In some
cases the origin of value is attributable to man's action; in other
cases scarce uses arise in objective things without man's action. Broad
as is this definition of production, it does not include the enjoyment
of free goods, as in the case of the care-free darky basking in the sun.
Anything that, causing a feeling of greater importance to attach to a
thing, changes it from a free good to a scarce good or makes it more
scarce, is a cause of its value. A large rainfall causing a greater crop
of grain may be thought of as producing utility. The regular surplus of
value attributable to the waterfall or to the railroad, is the product
of the material services of wealth. Production through human action is
the more obvious and is the more usually thought of; the part of
material agents must be recognized if the fallacies of the labor theory
of value are to be avoided.
[Sidenote: Labor applied to creating utility]
3. _Human activity is directed to shaping and arranging things so as to
increase their want-gratifying power._ Human and non-human agents are
combined in different proportions in various products. In one thing more
land and machinery are used, in another more labor is used. But either
of these two great classes of agents may touch the vanishing point in
the production of value. While it is true that man's part is the most
striking aspect of production, yet there may be value without labor. The
study of rent puts this abstractly, but in a clear light. In actual
life, however, a part of the value is usually attributable to rent, a
part to labor.
[Sidenote: Value of labor derived from its products]
But in what sense is even this part attributable? Not in the sense that
the labor is the original source of value which imparts that value to
its products. The usufruct of wealth is the basis of rent; the need to
pay rent is not the cause of value in the product. Likewise, product is
the basis of wages, labor is not the origin of value. Labor, like the
forces and qualities of wealth, is the cause of technical changes. These
changes, if favorable, cause the goods to take on a higher value which
is reflected back to the labor. The labor itself has not a
predetermined, ascertainable value, but only a resultant, derived value.
An exception to this statement appears on a superficial view of the
value of labor hired under the wage contract to make a particular
product. The labor having a market value because of a large number of
well-known alternate uses, can be diverted to a particular use only on
condition of a definite payment. Labor here, as viewed by the employer,
appears to have an original value; products, a derived value. But in the
logical view, labor is seen to impart technical qualities to the goods;
in turn, the goods to impart value to the labor. Man hunts throughout
industry for those things to which his labor can be applied usefully. He
foresees in them the changes that will increase the value. It is only as
he has judged rightly that the value taken on by the things is reflected
back to the labor attributed to it.
[Sidenote: No unit of labor to serve as a standard of value]
4. _Labor being of many qualities and receiving many rates of pay, there
is no unit of labor that can be used as a measure of value._ The idea of
finding in a "unit of labor" an objective standard of value to which the
value of all other things could be reduced has been a very attractive
one. This fallacious hope animates every one beginning to think of the
value problem. The thought was so plausibly formulated by Ricardo that
it continued for a long time to be the generally accepted doctrine of
value. Although most writers reject the formal statement of the labor
theory of value, use is frequently made, even now, of the phrase "unit
of labor," suggesting the thought that labor is the standard by which
the value of all goods may be measured. This unit of labor of the
text-books may be seen to be either labor arbitrarily assumed to be of
uniform quality and quantity, as a day of unskilled labor (in that form
quite incomparable as to amount with other qualities), or a given
amount of money invested in labor of different grades at its market
value. It is only by expressing labor in terms of its value that the
various grades of skilled and unskilled labor can be reduced to a
homogeneous unit, which is but a unit of money wages. This should not
deceive us into the belief that in any peculiar sense labor can be used
as a unit of value. It is equally valid and convenient to speak of units
of machinery and of units of land. In terms of capital a factory site
can be expressed as a multiple of a potato patch not less perfectly than
can a sculptor's labor as a multiple of a ditch-digger's.
[Sidenote: Scarcity and utility of labor]
Scarcity of things desired is the one objective condition of value. The
things that labor can produce and the labor to produce them being
scarce, labor takes on a value. All things at last become comparable in
terms of psychic income in each individual's judgment, but as yet
neither in this comparison nor in the market values that are fixed in
exchange, has any absolute standard been found by which the utility of
all goods or the welfare of all men can be measured.
CHAPTER 25
THE WAGE SYSTEM AND ITS RESULTS
§ I. SYSTEMS OF LABOR
[Sidenote: The wage system defined]
[Sidenote: Never the exclusive form of organization]
1. _The wage system is the organization of industry wherein some men,
owning and directing capital, buy at their competitive value the
services of men without capital._ The wage system is a method of
organization never found completely realized. A community made up
entirely of independent small farmers, living each on his little patch
of ground, does not have any essential feature of the wage system. So
long as they continue to be independent small farmers, owners of small
capital, self-employing workers, the wage system does not exist in
complete form. Some men with capital in every community are working for
wages, while others, as independent producers, are their own employers.
Society is not sharply divided into two classes, one controlling all the
working capital, the other quite without resources. The wage system may
be spoken of as prevailing to-day not as the exclusive, but as the
typical, or dominant, form, while side by side or along with it is found
independent production. It is clear that the wages here spoken of are
contract wages. The wage system implies a money contract between
employer and employed. The relation or bond between them is that of a
wage payment.
The wage system cannot be judged properly apart from questions to be
later considered, such as private property and the enterpriser's part in
industry; but some consideration of the subject properly belongs here.
The wage system has become of recent years in America the dominant form
of industry. The theory of wages is applied most frequently in the
discussion of contract wages, and there are certain practical relations
between the results of the wage system and the theory of wages.
[Sidenote: Workers subordinate in early societies]
2. _The wage system, historically considered, is seen not to have
displaced a system of independent labor._ This question should be viewed
in historical perspective. As far back as history can be traced, the
masses of workers have been subordinate. Civilization began with
direction, with obedience to superiors on the part of the mass of men.
Within the family, in the rudest tribes, the women and children were
subject to the will of the stronger, the head of the family. Among the
Aryan races the family system was widened, and the patriarch of the
tribe secured personal obedience and economic service from all members
of the community. Chattel slavery, the typical form of industrial
organization in early tropical civilization, seems to have been one of
the necessary steps to progress from rude conditions; students to-day
incline to view it as an essential stage in the history of the race. But
as conditions changed with industrial development, chattel slavery
became a hindrance to progress, a disadvantage to higher industry.
[Sidenote: Place of the workers in the Middle Ages]
3. _Serfdom for rural labor and many limitations on the workman's
freedom in the towns, were the prevailing conditions in medieval
Europe._ Serfdom was both a political and an economic relation. The serf
was bound to the soil; the lord could command and control him; but the
serf's obligations were pretty well defined. He had to give services,
but in return for them he got something definite in the form of
protection and the use of land. Between the lord and the serf continued
a lifelong contract, which passed by inheritance from father to son, in
the case both of the master and of the serf. In the towns conditions
were better for the skilled workmen, but many things bore heavily on the
mass of the workers shut out from special privileges. There were strict
rules of apprenticeship; gild regulations forbidding the free choice of
a trade or a residence; laws against immigration; settlement laws making
it impossible for poor men to remove from one place to another;
arbitrary regulation of wages, either by the gilds in the towns or by
national councils and parliaments, forbidding the workmen to take the
competitive wages that economic conditions forced the employers to pay;
combination laws forbidding laborers to combine in their own interest.
It is not an attractive picture, but, as far as is possible in a few
words, it is a truthful picture of the conditions that existed before
the coming of the modern system.
[Sidenote: The wage system not the main cause of present evils]
4. _Many continuing limitations on the freedom of the worker are not the
results of the wage system or a part of it, but are opposed to its
complete workings._ The worker's ignorance is a limitation, preventing
the choice of an occupation for which he might naturally be fitted.
Neglect of children by parents is a limitation, preventing industrial
training and the development of qualities that would make it possible
for the child to excel. The faults of human nature cannot be attributed
to any "system"; and if they are remediable, it is by education and
better social opportunity. Trade unions often forbid boys to become
apprentices, and forbid the choice of a trade except under conditions so
exacting that to many they are impossible. Such limitations are made by
the privileged few in their own interest, but they are annoying and
opposed to the interests of the many. The typical wage system would be
one in which all such hindrances were lacking, in which there were no
social or political limitations on free competition except such as would
help in educating and training the worker. The wage system should be
judged by what it is, not by things directly opposed to its spirit.
§ II. THE WAGE SYSTEM AS IT IS
[Sidenote: Merits and faults of the definite wage payment]
1. _Under the wage contract the worker gets in a definite sum at once
the market value of his services._ Under the wage contract the employer
takes the risk as to the future selling price of the product. That he is
the one best prepared to assume the risk will be made clearer in the
discussion of the employer's function. Wage payment, therefore, is a
form of insurance to the workingman; he gets something definite instead
of taking chances he is ill prepared to take. Wage payment is a form of
credit to the laborer whose labor has not yet produced the distant
gratification. The employer advances to the workman the value of the
future gratification, discounting it at the prevailing rate of interest.
The darker side of the wage bargain is that the "cash nexus," as Carlyle
expressed it, is too often the only bond between the parties. When the
wages are paid, the employer considers his obligations discharged. There
is a lack of fellowship and sympathy in it all. Work should be a bond of
communion between men, but as it is, the laborers in some great
factories and their employers live in entirely different worlds. The
great inequality of their condition makes mutual understanding
difficult. They are master and man, "boss" and hireling, not co-workers,
each with a worthy part in the noble tasks of industry.
[Sidenote: Strength and weakness of the worker in competition]
2. _The wage-earner gets the competitive value of his services, securing
in most cases much more than a bare subsistence._ At the present time
competition is in a large measure active among employed as well as among
employers. A believer in the subsistence theory of wages must, under
these conditions, expect wages to fall to the starvation level. But
according to the law of wages here presented, it is to be expected that
wages can and will remain indefinitely above that level, falling or
rising as conditions change. The increase in material wealth of itself
tends to increase the wages of the workman. The laborer, though without
resources and even though not contributing to the increase of capital by
saving, thus shares in the benefit of increasing capital. It is true
that under some conditions the workman is at a disadvantage in making
the wage contract; labor must be applied from day to day or it is lost,
and the laborer must work to live. While this does not determine the
rate of wages in the long run in any occupation nor to any great extent
except among the lowest grades of labor, it does give an advantage for
the moment to the employer, and enables him to exercise at times a harsh
power over the workmen in his immediate neighborhood. A single workman
is thus very often at a disadvantage, but it must not be overlooked that
in a large degree the competition for good workmen is effective between
employers in different trades and in distant localities.
[Sidenote: Wages as affecting the ambition of the worker]
3. _Increase of efficiency due to the sacrifice of parents or to
personal exertion, goes to the individual worker._ The most essential
practical feature in any industrial system is the appeal to the ambition
of each man. This appeal is made where a premium is placed on increasing
efficiency, by insuring to it a higher return. This result is possible
and in large measure is attained under the wage system. Little less
important is the appeal to family affection to make possible by its
sacrifices each worker's best preparation.
An offsetting disadvantage appears in the loss to the laborer in the
decline of his powers. As he gains in wages if he increases in
efficiency, so he loses if his strength fails from accident or in the
course of years. This loss falls upon him, not, as is sometimes said to
have been the case under serfdom or slavery, upon his owner (as if that
secured to the slave immunity from suffering). It is true that in
general under the wage system the worker has no guarantee against loss
of work or, what is equally important, against sudden changes in
industry. He may be, and often is, a victim of invention and of changes
in machinery or industrial processes, by which the masses of men are
the gainers.
[Sidenote: Large liberty of the wage-worker]
4. _Liberty of the worker in his choice of work and outside of working
hours makes for happiness, character, and progress._ Opinion is almost a
unit as to the truth of this statement. The present wage system is the
freest condition for the mass of men that ever has existed. Their
religious, political, and personal convictions, are for the most part
inviolate. There is a true but much misused maxim that liberty has its
dangers. Freedom means freedom to make mistakes. Intelligence and strong
industrial virtues are required to exercise properly a freedom newly
acquired. Thus it is the lowest class of labor that reaps the smallest
advantage from free conditions, and that suffers most from their misuse.
[Sidenote: Limits to the worker's liberty]
The main evil in the wage system is certainly not that the liberty of
the worker is too great, but that it is too small. The sale of labor
involves the obeying of orders during certain hours specified in the
contract. Here again the evil is greatest in the lowest grades of work,
while the great majority of wage-earners are left a large measure of
choice in the time and manner of their work. Where labor is severe and
without joy to the worker, it appears to be little better than a form of
slavery. Contrast the condition of the section hand, cursed and beaten
by a brutal foreman, with that of the wage-earner in the locomotive-cab,
self-respecting, self-directing, and trusted with the safety of property
and lives. The wage system is manifold, it is adaptable. If it holds a
portion of the laborers with a harsh hand, it gives to all a wide
measure of opportunity, and to most a great degree of independence in
their lives. A hasty resort to indiscriminating analogy, as in calling
wage-work "slavery," does not further truth or social justice.
§ III. PROGRESS OF THE MASSES UNDER THE WAGE SYSTEM
[Sidenote: The rise of money wages]
1. _The nineteenth century was a period of great progress for the masses
in America, England, and throughout Europe._ There are differences of
opinion as to the extent of this progress, the way in which it is to be
measured, and the degree to which it is an occasion for congratulation.
There is no longer any dispute as to the actual fact that it has taken
place. Many lines of evidence converge to confirm this one conclusion.
The average money wages in the United States may be represented in 1840
by 87.7, in 1860 by 100, and in 1891 by 161.2. This was the high mark
for a time and a decline followed. Again wages rose from 1897 on, and in
1899 had reached 163.2. They have continued to rise since and in 1903
attained the highest point in the history of our country and therefore
in the history of the world. Another temporary decline undoubtedly will
occur when industrial conditions become less prosperous.
[Sidenote: Changes in real wages]
Real wages, also, the power to purchase goods with labor, are greater
than ever before so far as this can be measured in the price of leading
commodities. The offsetting loss of the free health-giving pleasures of
country life cannot easily be expressed. In England likewise the rise in
money wages has been great. In 1860 it is represented by 100, in 1870 by
113, in 1880 by 125, in 1891 by 140, in the intervals some decline
occurring. For a century in all civilized lands wages have moved in an
ever-rising series of waves. The purchasing power of wages in England
increased ninety per cent, in the thirty years between 1860 and 1891.
Throughout Europe the same general change is seen, going always hand in
hand with new industrial methods and the displacing of the old
agricultural system by the wage system. As the hours of labor have at
the same time been shortened, the workers have gained doubly.
[Sidenote: Need of a broad explanation of rising wages]
2. _This progress is mainly due to the opening up of rich natural
resources and to the development of industrial processes._ Recognized in
some measure by every one, this progress is attributed by different
observers to different causes: in America, by many to the protective
tariff; in England, by many to the freer trade introduced about 1840;
throughout the continent of Europe, to the spread of constitutional
government and free institutions; by trade-unions everywhere, to the
organization of labor. There is, doubtless, under certain conditions,
some portion of truth in each of these claims. But, either separately or
altogether, they fall short of a broad, reasonable, and sufficient
explanation. The two-fold proposition just presented, the justification
for which has been given in preceding chapters, points to a general and
adequate cause.
[Sidenote: The gloomy view as to the wage system was mistaken]
Seventy-five years ago it was thought that, with the increase of
machinery, of factories, of the concentrated control of wealth, and
especially with the wage system, there must go a steady depression in
the welfare of the workingman. This idea was connected with the iron law
of wages. It was believed by some that, whatever the causes of advancing
social income might be, the wage system would rob the wage-earners of
all share in progress. In view of the facts, if it cannot now be
asserted positively that the wage system is the cause of all the gain,
it can be asserted negatively that it is not inconsistent with great
progress on the part of the laboring classes. It might be possible to go
further and to maintain that the organization of industry, under the
wage system and competitive conditions, by its encouragement of
enterprise, energy, and economy, has been an indispensable condition in
the industrial progress which has in turn made possible the rising wages
of labor.
[Sidenote: More workers now in better-paid callings]
3. _The increased proportion of workers in the higher occupations means
a further rise in the average condition of the masses._ A smaller
proportion of workers is now engaged in the low-paid industries than
fifty years ago, and a correspondingly larger proportion is in the
better, or highly paid, industries. Decade by decade the proportion
shifts toward the upper part of the scale. Both in America and in
England (doubtless also in other countries) more men are now engaged in
the higher professions and skilled occupations, a smaller proportion in
the lower occupations. This would raise the average of wages even if the
wages of particular occupations had not risen.
[Sidenote: The masses gain by general social advance]
4. _The diffused advantages of progress mean relatively more to the
masses than to the rich._ In the olden days the poor man was bound to
the spot where he lived, the rich man had his carriage; to-day poor and
rich ride side by side in the trolley car. The introduction of these
cheap methods of enjoyment means relatively more to the poor. Better
medical care, better sanitation, more abundant food, clothing, comfort,
free schools, and libraries have all a part in this movement. The
enormous possibilities in these lines are just beginning to be realized.
The achievements of the last twenty years read like a story from
fairy-land. It tells the leveling up of the conditions enjoyed by the
common man.
[Sidenote: Better social conditions must grow out of the wage system]
[Sidenote: Improvement in the wage system]
5. _Any sound method of improving social conditions must grow out of
experience, not break with it._ Even if things were on the downward
instead of the upward road there would be no excuse for wild
speculation. The only rational way is to find what is good in what is,
and build upon it. There can be no excuse for suggesting a method from
imagination. Projects of social change must be tried by successful
experiment, and gradually fitted to present needs. It is in this way
that the higher forms of life have developed; it is in this way that
social and political institutions have come into being. Things that work
successfully first in a small way are worthy of trial on a larger scale.
The wage system is a favorite object of attack for radical social
reformers. It has many unlovely features and there are many individual
cases of hardship. It may well be asked, What method shall be pursued to
reform it? Its retention, however, is not inconsistent with very great
changes in the present political and economic arrangements. The
impersonal economic forces are working for improvement; but further,
there is a growth of sentiment, an increase in sympathy, a feeling among
men that the "cash nexus" is not the only bond that should unite
different classes, and this sympathy is becoming an economic force,
softening and improving many of the most unlovely features of the modern
wage system.
CHAPTER 26
MACHINERY AND LABOR
§ I. EXTENT OF THE USE OF MACHINERY
[Sidenote: Tools, machines, and power]
1. _A machine is a mechanical device by which power is applied in an
automatically repeated manner, to change the place or form of things._
It is not easy, perhaps not important, to distinguish the machine from
the tool in every case. Tools are portions of matter, such as bone,
wood, iron, which man guides and directs in applying his energy to
things. A machine may be used by the foot, but the hand is the great
tool-using member. In many cases there is a clearly marked distinction
between tool and machine. A simple, single piece that can be taken into
the hand, as a spade, a hammer, a knife, is a tool; a combination of
wheels, levers, pulleys, etc., is a machine. The simplest machine is but
a slight adaptation of the tool, by which power may be applied in an
automatically repeated manner. The drag develops into the cart, a simple
machine. The spinning-stick, a tool used in ancient times, developed
into the Saxon spinning-wheel of the sixteenth century, the form used
when America was colonized. The use of power derived from nature, as
that of wind and water and steam, while not the essential mark of
machines, is the most characteristic feature of their modern
development. Hand-machines, such as the hand-press and the type-writer,
have had important industrial results, but it is the use of power
leading to the concentration of industry and the ownership of machinery
by the employers that has the greatest significance in the modern
economic problem.
[Sidenote: Machinery brought in an industrial revolution]
2. _Machinery of many sorts has long been used, but the "age of
machinery" begins with the eighteenth century._ Inventions, new
machines, and new processes, though not frequent, were not unknown in
the Middle Ages; but no one class of machines took possession of a whole
field of industry and gave rise to a great economic problem by the
displacing of labor. The great industrial changes in the Middle Ages
generally grew out of political changes, or of changes of routes of
trade whereby large industries were disturbed, or of changes in the use
of land through new methods and the bringing into use of land in other
places. The industrial changes in England at the end of the eighteenth
century on the contrary were due mainly to great mechanical inventions.
The development of the textile machines for cotton and wool spinning and
weaving mark the beginning of the movement. Here for the first time were
inventions in such numbers, of such a nature, and under such conditions,
that they were rapidly and widely applied, affecting the lives of a
great number of workers. The steam-engine at the same time opened up the
long line of mechanical inventions by which wood and iron are shaped and
wrought, and the iron industry underwent notable developments. Since
that time, have taken place in all Western countries that rapid
expansion in the use of machines and those notable changes in industrial
organization which distinguish our era from all others.
[Sidenote: Increased use of power]
3. _Machinery is applicable in very different degrees to the different
processes and industries._ Machinery can save much labor in some
directions, little or none in others. It is especially adapted to the
application of power. In the United States, in 1870, in manufactures
alone, two and one third million horse-power were used; in 1900, eleven
and one third million, the increase being five-fold. It is said that in
the world, in 1870, three and one half million horse-power was furnished
by stationary engines, ten millions by locomotives. Probably to-day the
total is four-fold as great.
[Sidenote: Machines can best be used in manufactures]
Machinery is applicable with especial advantage to industries that
change the form of materials easily transported and widely used. There
must be a large output to justify the use of machinery. In 1840 a man's
work in spinning cotton was three hundred and twenty times as effective
as in 1769, in 1855 it was seven hundred times; and though the rate of
improvement is diminishing, to-day the productivity of such labor is
still greater. Similar examples are found in the manufacture of shoes,
and in all varieties of wood- and iron-work. Machinery is most
applicable where there is a compact plant; not so easily where the power
has to be distributed over a wide area, unless a special track can be
provided.
[Sidenote: Not to so great an extent in agriculture]
Machinery, therefore, has affected manufactures much more immediately
and greatly than it has agriculture. It has not as yet, for example,
been found practicable to apply steam to ploughing to any great extent.
As the profitable use of most farm machinery requires a level surface
and a large area given to a single crop, it cannot be used as well east
of the Alleghany Mountains as in the Mississippi Valley, and it is still
uneconomical in large portions of the civilized world. Despite this
difficulty the methods of the farmer of to-day contrast strongly with
those of one hundred or fifty years ago. Planters and seeders, reapers,
harvesters, corn-shellers, hay-loaders, automatic unloading-forks,
elevators, water-power-, steam-, and gasoline-engines allow great
economies. The labor needed to produce food for one hundred people is a
fraction of what it was one hundred years ago. In many other industries
machines are usable only in a slight measure, indirectly, or not at all.
They are of the least assistance in the personal services, and in the
work of the thinker, the teacher, the speaker, and the artist.
§ II. EFFECT OF MACHINERY ON THE WELFARE AND WAGES OF THE MASSES
[Sidenote: Evil of sudden introduction of machinery]
1. _The immediate effect of improved machinery, if suddenly introduced,
is almost always to throw some men out of employment._ Any sudden change
in industry injures men who have become adapted to the work that is
affected. A well-mastered trade, a wage-earning though intangible
possession, may be made suddenly valueless. Men cannot quickly change
their methods of working or their place of work. This is as true of
change brought about by new trade routes or by scientific discoveries
(where machinery does not enter in) as in the case of labor-saving
machines. If machines displace labor rapidly, men who cannot adjust
themselves to the new conditions suffer, and there are always some who
cannot adjust themselves, always some who suffer. It is rarely possible
for a man past middle life to shift over into a new trade where his
efficiency will be as great and his pay as high as in the old. New
methods of puddling iron sent many old men into the poorhouses of
Pennsylvania only a few years ago. Even where the total employment
increases, the individual sometimes suffers. The increased demand
resulting from the cheapening of a product may call for more workers
than were employed before the new machinery came in, and yet some of the
former workmen may be thrown out of employment. The introduction of the
linotype is said to have displaced a large number of hand type-setters,
but to have increased greatly the amount of printing. As the machines
are expensive and cannot be worked properly by men not highly expert,
men past thirty-five years of age have not been allowed to learn their
use.
[Sidenote: Loss falls on the less efficient workers]
The least efficient men in any trade always suffer most. The change
crushes hardest the man at the margin of employment. The more skilled
workman can hasten his pace and still earn a living wage in competition
with a machine, while the less skilled can but drop out entirely,
innocent victims of an economic change, sacrifices to the cause of
industrial progress. Happily such pathetic incidents are relatively not
numerous. Most machinery is introduced in commercial centers, and
gradually spreads to other factories in such a way that most men can
adapt themselves to the change. The effect of machinery must not be
judged by the extreme cases. It was found that there were more
hand-looms in use in England in 1850 than fifty years before, though in
the meantime power-looms had displaced the hand-looms in all the great
factories.
[Sidenote: Error of the "lump of labor" notion]
2. _After time for adjustment, the total sum of employment is as great
as before, but the labor is differently distributed._ The "lump of
labor" idea, as it is called, is widely held, especially among
workingmen. The notion is that there is exactly so much labor
predetermined to be done; therefore, if machines are introduced, there
is that much less for men to do. The logical conclusion easily drawn is
that every machine reduces wages. Few, however, would go on to the
further conclusion that in the aggregate the existing machinery,
like an enormous vampire, is sucking the life-blood of the
working-people,--though traces of such a notion frequently appear.
[Sidenote: Effect of machinery varies in different industries]
If extreme examples are taken, it may be made to appear either that an
increase or that a decrease of employment results from machinery.
Industries grade off from those that are capable of developing a greater
and greater demand, to those at the other extreme that are capable of a
very slight increase, as a result of a lowering of the price. There
seems to be practically no limit to the consumption of textiles,
provided their price falls; the demand for dress alone is indefinitely
expansible. Queen Elizabeth, who had a different dress for every day in
the year, has many potential imitators. There is a constant increase
relatively, as well as absolutely, in the number employed in
transportation, as each census shows; there are more railroad men
relatively than there were stage-drivers and teamsters before the day
of railroads. The number of people now engaged in printing books and
papers is larger by far than in the days when all the books of the world
were written by the old monks in their cloisters. The proportion of
workers in agriculture, on the other hand, is less than it formerly was.
In part this is a change in appearance only, for the farmer once made a
large part of his tools which are now made by workers employed in
manufactures, yet who in a very real way are aiding in agriculture. In
part the change is, however, the effect of the use of machinery and
other improvements in agricultural processes. The amount of raw-food
products required for each hundred persons is quite inelastic. As it
becomes possible to expend more for food, the change is made in quality,
variety, flavor, rather than in quantity. The greater part of the saving
in the cost of food is, however, expended in other products, and the
labor saved in agriculture finds employment in supplying these rising
wants. In other cases also, new industries are made possible as machines
liberate energy from the production of the more necessary goods. At each
census it is necessary to change the schedule of occupations, because
men have adopted callings unknown before.
[Sidenote: Abnormal effect of the new machinery in England]
3. _In some cases the introduction of new machines injures particular
workmen._ The only reason for the use of machinery is to improve the
quality or to lower the price of products. If the workers can do nothing
but blindly pursue the same tasks, it is to be expected that the wages
of hand-labor will fall in a particular trade into which machinery is
suddenly introduced. When, as sometimes happens, employers introduce
machines for the immediate purpose of breaking a strike, the workmen are
convinced that machinery is the enemy of labor.
Because the extensive introduction of machinery in England was at first
accompanied by the unhappy result of a lengthening of the hours of labor
in factories, this result was deemed to be necessary in all other
cases. It was in fact quite abnormal, and has not been seen elsewhere.
The owners of factories wished to keep their machines employed as many
hours as possible; the laboring classes of England, being at the same
time demoralized and depressed by industrial and social influences that
had no logical connection with machinery, had no power to resist this
movement. In all other countries of Europe and in America, where the
introduction of machinery has been more gradual and normal, it has been
followed immediately by a shortening of working hours, as eventually it
was in England also.
[Sidenote: Higher wages logically result from the use of machinery]
4. _Indeed, the economic effect of improved appliances is logically and
inevitably to raise wages._ It has been shown above, in the discussion
of wages, that if the efficiency of machines increases faster than does
the number of workers who use them, the marginal application of labor
stops at the higher uses or services of agents and is not forced to the
lower. The more perfect the economic environment, the higher the incomes
even of those who own no part of the machinery. A part of this benefit
may appear in the form of higher money wages received, a part in the
form of the lower price of things bought. Real wages are the essential
thing, and as a consumer the laborer shares with every other member of
society in the benefits of improved machinery. The benefits resulting
from greater abundance are diffused, and as goods are brought from the
high, or scarcity, end of the scale of value down toward the level of
free goods, everybody gains by the abundance and cheapness.
[Sidenote: Some grades gain more than others]
The general, or average, gain is not to be judged by comparing the
conditions of the lowest grade of society with those of fifty years ago,
for while that grade may have been bettered only a little, it has been
possible for large numbers to rise to higher grades because of the use
of machinery. The physical tasks are to-day much lighter than ever
before, and a larger proportion of society is engaged in industries that
require skill and thought rather than physical labor. That portion of
the work is being more and more shifted upon machines. It is important,
though, to distinguish between classes of workers in judging of the
benefits and evils of machines. A machine is "an iron man," it has been
said, and comes into competition with other men to lower their wages by
outworking and underbidding them. But this iron man can do only
automatic tasks; it is not capable of exercising judgment. Every
intelligent laborer who can adjust, adapt, fit himself for more
intelligent action will rise above the machine and profit by its
presence. But the crude physical labor which can compete only on the
plane of automatic machines, must find its field of employment more and
more hedged in. If the wages of unskilled labor are not depressed, it is
because of the enterprise of others who rise to more skilled employments
and thus reduce the competitors of the lowest rank.
[Sidenote: The growth of factories]
5. _The early effects of the factory system on the health, intelligence,
and morals of the workers often have been bad; but not necessarily the
abiding effects._ Some kinds of machines can be more profitably used
when they are grouped in great factories, and, where this is common, it
is spoken of as the factory system. In the ideal modern factory
(realized in few cases) each smaller machine is a part of a larger
organization of machinery, so perfect that the material goes in at one
end of the building and out at the other without the loss of a single
motion. Factories compel great numbers of laborers to live near each
other and to work together. The sudden crowding together of people into
new social relations is usually bad for morals. Men are moral under the
eyes of their neighbors, acquaintances, and families; habits become
adjusted to right standards, and the temptations in new conditions are
always great. Until of late, engineering science has not been able to
deal with the problems that arise where population is densely crowded,
and the early factories with their surroundings were most unsanitary.
Under the degrading conditions that resulted in some places, especially
in England, the effect of machinery on the intelligence of the workers
was bad. Whether this is its natural result is debatable, but the
factory worker in general does not appear to be less intelligent than
the agricultural worker. The alertness of the city dweller is due
doubtless to social contact more than to the immediate work he does.
This work may or may not be less thought-awakening than work with simple
tools. There is a general improvement along all the lines of
intelligence, morals, and health. The conditions in the cities as
regards health and morals are approaching those of agricultural
communities. While many factory districts are forlorn, there may be seen
around many factories more happy conditions, better buildings, better
sanitation, increased leisure for workers, workmen's clubs, educational
agencies, and many other evidences of civic and social progress.
[Sidenote: Problems of large industry]
6. _The great social consequences flowing from the concentration of
industry and wealth are the most serious problems in the relation of
machinery to labor._ The ownership of tools was widely diffused in
medieval times. It is not yet evident how many can own a share in great
factories, but the control drifts into few hands. It is not yet clear
what social effects great corporations will have on our democratic
institutions. Many problems of large industry remain to be solved in the
near future. The question in the old form, as to the effect of machinery
on labor, is no longer open. It has been clearly answered by experience
and explained by theory: the economic effect of machinery is to lift the
productiveness and efficiency of the average man. The benefits are
unequally distributed, but nearly all share in them to some degree. The
question which the future will have to answer is, What will be the
social and political effects of the great fortunes that have been made
possible by the enormous development of machinery?
CHAPTER 27
TRADE-UNIONS
§ I. THE OBJECTS OF TRADE-UNIONS
[Sidenote: Definition and purposes of trade-unions]
1. _A trade-union is an association of wage-workers for purposes of
mutual information, mutual help, and for the raising of wages._ The term
trade-union is used in a general sense both of combinations of workers
in the same trade, and of men in different trades, though usually the
latter are called _labor_-unions. The "Knights of Labor" is a good
example of the labor-union, the "American Federation of Labor" of a
combination of trade-unions. The Knights of Labor is composed of local
branches to which workers of every class except lawyers and
saloon-keepers are admitted. The Federation of Labor, however, is
composed of chapters, or lodges, that are homogeneous, all the men of
each lodge being in the same trade.
The definition given is broad enough to include the various degrees of
help given and the various methods adopted by trade-unions to accomplish
their objects. Trade-unions are mutual-benefit associations: insurance
against accident, sickness, death, or lack of employment, forms an
important part, and in some cases almost the whole of their work. All
unions in a measure serve their members as employment bureaus, while in
some unions this is a most important feature. Through trade-papers,
correspondence, and personal meetings, information is exchanged
regarding trade conditions, and great mutual service is thus rendered.
But a great deal of the help given is in the more impersonal economic
ways: help to get from the employers better wages, to secure shorter
hours, to improve in various ways the conditions of employment.
[Sidenote: Lack of personal touch between employers and workmen]
2. _The organization of workers has resulted from the separation of the
economic and personal interests of employers and workmen._ The control
of industry has become more concentrated during the age of machinery,
and this has reduced the feeling of economic unity among the different
ranks of industry. There is now to the average workman no possibility of
becoming a master, an employer. The largeness of industry forbids,
moreover, the meeting and personal acquaintance of employer and workman
which were before possible. Misunderstandings grow when men cannot talk
over their differences. The social chasm has widened between the workmen
and the responsible director of industry. As a result of these changes,
the attitude of the employer very often has become that of the buyer of
labor as a mere ware. He has with the mass of his employees no personal
relations whatever. Under these conditions, when the employer feels the
presence of competition, he is more likely to force the lowest wage that
is possible. It is not unusual for the immediate direction of factories
to be intrusted to paid managers, who are responsible to the
stockholders and whose work is judged only by the dividends they succeed
in earning. Many examples might be found where the managers or the
resident owners have wished to pursue a more liberal policy than the
absentee shareholders would permit.
[Sidenote: Lack of personal acquaintance among workers]
3. _The need of organization of labor has grown with the growth of
factories and with the loss of personal touch among the workers._ This
is another aspect of the point just mentioned. The smaller the number of
employers, the easier is it by an understanding to suppress competition
on their side. If there is only one factory of a kind in a town or city,
the employer is able to drive a harder bargain with the worker.
Especially in times of industrial depression is a change of employment
difficult for the laborer; it involves much risk, and loss of time and
money in moving. In the long run competition must be felt even in such
cases. The unfair employer will find his workmen drifting away, his
force reduced in number and quality, and his evil reputation going
abroad among workmen. But there is a great deal of friction in this
adjustment and the loss falls largely upon the workman. In a large
industry, especially, the workers have no personal acquaintance with
each other, nothing to give them a sense of unity and power. In the
old-fashioned shop, with its close association and its interchange of
views, could grow up a strong public opinion; but in the wilderness of a
modern factory the worker may be unknown in name and character to the
man who touches elbows with him. Moreover, in America differences in
nationality and in speech among immigrant workers is often an effective
factor in preventing the assertion of their interests. There is an
analogy (though it is only an analogy) between these conditions and the
political conditions that have led pure democracies to give way to
representative governments. So long as a community is small and men know
each other personally, there may be popular government, but when the
number becomes larger the only way in which public opinion can be
concentrated and made effective is by delegating the functions of
government to representatives.
[Sidenote: Main objects of trade-unions to-day]
4. _The main objects of labor-unions to-day are to improve conditions in
their working places, to maintain or increase wages, and to shorten
working hours._ Better conditions of safety and sanitation in their work
were not the first thought of the unions. The workers, as a result of
habit and ignorance, were strangely unconcerned about this matter.
Reforms in this direction at the outset had to come largely from
sympathetic observers. But since better ideals have been developed,
organized laborers strive to improve the sanitary, moral, and other
conditions in the places of work. Their main object, however, was for a
long time to raise wages, or to resist any decrease. Shorter hours have
been a prime object of recent years, and almost coördinate with that of
higher wages. The eight-hour movement has declined somewhat of late, but
a few years ago it seemed possible that the eight-hour day would become
the rule. This aim has never been lost sight of, however, and now and
then another step is taken toward it. Labor leaders have repeatedly
asserted in recent years, when the two demands have been made together,
that shorter hours were more desirable than increased wages.
§ II. THE METHODS OF TRADE-UNIONS
[Sidenote: Organized labor seeks to prevent competition among workers]
1. _The union's first aim is to get control of all the labor force in
the market, and to minimize competition among workers._ Every labor
federation aims to extend its control to every branch of its trade. A
sense of wrong is one of the strongest forces to bring the workers into
the organization. The appeal to a common interest is effective in times
of great grievance, as it was effective in the dangerous times of the
American Revolution, though failing during the Confederation. The
unwilling are first persuaded, then coerced by threats, by petty
persecutions, by the most cruel of all peaceful weapons, social
ostracism, and finally by personal violence. The "public opinion" and
class feeling fostered among workers by their organization are analogous
to the sense of patriotism and loyalty in the country at large, and at
times displace it, as is seen in the opposition to the militia and to
the maintenance of public order at times of strikes. The individual who
declines to enter the union is denounced as a traitor and made to feel
the scorn of his associates. When all these measures fail, pressure is
brought to bear upon the employer to get him to force the unwilling
workers into the union.
[Sidenote: The union seeks to secure the full competitive wage]
[Sidenote: And as much more as possible]
2. _Its next aim is to use collective in the place of individual
bargaining, to force as much as the competitive wage, and more if
possible._ The term collective bargaining has been much used to describe
bargaining between a group of labor leaders, the delegated
representatives of the workingmen, and a group of employers or
directors. It is sometimes claimed that all the trade-union seeks is to
put the workman on an equality with the employer in bargaining, enabling
him to get all he would if competition were free on both sides. It is
said that organized labor simply prevents the employer from following
the maxim of Napoleon to "divide and conquer," from meeting his
employees one by one and forcing his own terms upon them. But the most
effective argument in organizing the trade-union is that it forces a
higher wage, more than the market would warrant. It is sometimes assumed
by labor leaders that competitive wages would be very low, almost
starvation wages, and anything above that level is credited to the work
of the union; while in other cases where the wages are already large,
the purpose frankly avowed is to limit the labor supply in the
particular trade and to force a monopoly wage by any means possible.
One's opinion of trade-unions is likely to differ according as they work
in one or the other of these ways. The impartial onlooker sympathizes
with the efforts of the trade-unions in so far as they serve merely to
put the workers on an equality with the employers in bargaining. The
public wants to see "fair play," and up to a certain point the union is
merely a device to get fair play. But if the union is a device to defeat
competition, to force artificially high wages, it will be judged
differently. The public readily sees that if the unions force more than
a fair and open market affords, it is rarely at the expense of the
employer; that in the long run it is at the expense of the purchasing
public itself, including the unprivileged workmen shut out from the
monopoly of labor.
[Sidenote: The issue of the closed shop vs. the open shop]
3. _In order to accomplish their ends, the trade-unions seek to control
their employers' business in various ways._ They demand, first, that no
non-union men shall be employed even at union wages; they demand that
the employer shall help them to force his employees into the unions. In
this very usual demand for the "closed shop" or "union shop" the public
can see very little justice. On this point, nearly always, unions
forfeit in a strike the sympathy of the public; yet the unions assert
that it is almost absolutely necessary to gain this point in order to
carry out their objects. If a union and a non-union man work side by
side there are many ways in which the employer may make the union man
suffer. If business slackens, it is likely to be the union man that is
discharged; if any preference is given, it is to the non-union man.
Certainly all will agree that if the unions are to get the strength to
enforce _all_ their demands it is essential that they make good this
claim which leaves the employer almost helpless. Yet it certainly is not
essential to the accomplishing of valuable services for the members of
the union. The educational and mutual-benefit features are attained
without this means; and much experience shows that, if their cause is
strong, the organized men can carry with them a large proportion of the
workers and the sympathy of the public in a contest for higher wages. It
never has seemed to any considerable portion of the public any more
desirable that organized labor through its officers should be able to
dictate to employees, than that employers should crush the workmen. It
is by just this assumption that union advocates beg the question of the
"union shop."
[Sidenote: Other limitations put upon industry by unions]
Further, the unions direct and control the employment of labor, often
limit the number of apprentices in a trade, and assume to determine who
shall enjoy the privilege of learning it. They limit the output, fix the
maximum amount, and forbid the use of labor-saving machinery. Whenever
the unions are charged with these acts, labor leaders either deny the
facts or avoid giving a direct answer, but there is no doubt that the
charge is true in many ways and in many cases. The requirement that each
special kind of work shall be controlled by a special trade, and
disputes between rival trades, for which their jealousies are
responsible, give rise to great annoyance, expense, and loss to
employers and to the entire public.
[Sidenote: The strike and the boycott]
4. _The strike is a threat and a mode of attack to enforce the demands
of the union._ To most newly organized laborers the union appeals mainly
as an instrument for striking, for threatening the employer or for
making him suffer. When a new union is formed, it is nearly always
dedicated by a strike, which is the simultaneous stopping of work by a
number of workers. A strike is intended to force the employer to grant
the wages and conditions demanded. Its effectiveness lies in the injury
which it occasions or threatens in the stopping of machinery, the ruin
of material, the loss of custom, and the failure to complete contracts
undertaken. Its success being dependent on the inability of the employer
to fill the places of the strikers, their energies are bent on
persuading or coercing other workers from taking employment. There are
many ways of coercing workers without personal violence. Public opinion
does much, and probably the severest of all coercive measures is the
social ostracism of the worker. What may be called the endless-chain
boycott is an excommunication, without measure or limit, of the
non-union worker and of every one in any way befriending him or the
employer. So far as in their power lies, the enraged strikers dissolve
the very bonds of society, brother casts off brother, and mother disowns
son. The unhappy conditions in the coal regions in 1902 rivaled the
tragedies of civil war. A reasonable use of the boycott, refusal to
maintain social relations with the person who offends one, is doubtless
a part of personal liberty; but the boycott, as experience shows, has
moral limits, and it should have strict legal limits. Its use beyond the
moderate limit of the first degree of personal relations is antisocial
to the degree of criminality, whether it be used as the weapon of
organized workers or of organized wealth.
[Sidenote: Violence in strikes is mob law]
When peaceable means fail, often there is a recourse to violence both
against the employer and his property and against the non-union men. The
evils of violence in strikes often are tardily recognized by the public,
whose sympathy up to a certain point is with the striker as "the under
dog." It is slow to realize that strike violence is mob-law. Whenever
men of one group assume the right to coerce forcibly and to wreak their
hatred against one of their fellow-workers, it is a blow at political
liberty. No free society can safely go the first step in permitting one
group of men to usurp control over others in this way.
[Sidenote: Costliness of strikes]
5. _The great losses caused by strikes are the penalty of an unsolved
industrial problem._ The losses to workers in wages, to employers and to
investors in income and property, and to the public in interruption of
business, aggregate an enormous sum. It is, however, impossible to
estimate it at all exactly, as the losses are in many cases indirect and
intangible. The strikers are concerned not with the balance of total
losses and total gains to society as a whole, but with the net gain that
in the long run accrues to them. It is true that there are indirect
gains not easily calculable, as the advance of wages made to avoid a
strike while the lesson of the consequences is still fresh. Opinion
among workingmen is not a unit as to the value of strikes. A few years
ago it seemed safe to say that strikes were declining as compared with
the period of the early eighties. It is probably true, as is often said,
that as laborers become educated they put less faith in strikes. The
epidemic of labor troubles, marking the years from 1899 to 1903, gave no
evidence of a decrease in the use of strikes, yet many of these were due
to the recent organization in various trades. The coal strike of 1902,
though doubtless due to real grievances, was opposed by the officers of
the union, an unusually capable set of men, but the more violent and
discordant elements overruled the more pacific counsels. The public is
perhaps as favorable as it has ever been to the cause of labor, but it
appears to have less patience with strikes than it had fifteen years
ago, and strikes usually fail if not backed by public opinion. The
public has not as yet thought out consistent conclusions on the question
of the rights of the union. It is just now much impressed with the value
of arbitration. As experience destroys the unsound sentiments, and
divides the wise from the unwise measures, a peaceable solution of
industrial differences must and will be found.
§ III. COMBINATION AND WAGES
[Sidenote: Wages are raised by a labor monopoly]
1. _Wages in particular industries often are maintained above the
competitive rate._ The older economic writers were somewhat
unsympathetic with trade-unions, and were even inclined to deny that
organization could be helpful in any way in raising wages. This view, it
must now be recognized, was mistaken, and overlooked the hindrances to
competition and the effective economic forces that organization can
bring into play. The sympathies of most men favor the wage-earner so
strongly that they hesitate to express an opinion in any way unfavorable
to his efforts to raise wages. But the view of the economic theorist as
to the services of the union cannot be as roseate as is that of the
union labor leader. The general proposition, however, is applicable,
that wherever it is possible to limit supply, prices may be raised. If
men fitted to do a certain work are not permitted to do it, labor in the
special industry becomes more scarce and consequently more highly
valued. This involves the result that some men are forced to remain
where they get lower wages than they could earn if free to act. The
temporary need of the employer may enable the union to force from him a
division of his profits. If the trade-union watches its opportunity and
takes occasion to strike when a failure to fill orders would cause him
great loss, it may compel him to pay for a time more than the normal
value of the labor. It may well be doubted whether such action on the
part of labor is generous, fair, honest, or in the long run wise; but
that it may be immediately effective cannot be denied. By the principle
of complementary goods an essential kind of labor can be given an
artificially high value, if its supply can be controlled. If only the
labor that is ready and willing to come in to take the place of the
strikers can for a time be kept out, wages may be fixed practically
according to monopoly principles, later to be discussed in connection
with capitalistic organization.
[Sidenote: Exaggerated claims made for trade-unions]
2. _Trade-unions can, in various but limited ways, set in motion
economic forces to increase the productiveness of labor._ It is
difficult to take a moderate view of trade-unions; it is easier to go to
one extreme or the other. In a book by Trant, reprinted from the English
edition and circulated by the American Federation of Labor as
representing its theory and claims, all the advances in wages that have
been made are said to be due to the trade-unions. This claim is believed
by many besides the members of trade-unions. The thought is sometimes
expressed even by social students that but for the trade-unions wages in
America would be the same as in 1850. Many well-known facts should cause
such an opinion to be accepted with hesitation, to say the least. Only
about one tenth of the workers in England are unionists and of the
twenty-two million workers in the United States, far less than ten per
cent. are organized. Can it be maintained that one tenth of the labor
supply fixes the value of all? In many lines where labor is not
organized, as in teaching, clerical positions, professional and domestic
service, wages have risen even more than in organized trade. The
evidence advanced to support the extreme claim is that wages are higher
in some organized trades than in other unorganized trades requiring the
same grade of laborers. Trant says that "where there are no unions wages
should be lower. This is exactly the case"; and he quotes: "Wherever we
find union principles ignored, a low rate of wages prevails and the
reverse where organization is perfect." But he later explains in part
this difference: "The union men are the best workmen and often employers
pay a man more than union wages. This is not surprising as no man can be
a union carpenter unless he be in good health, have worked a certain
number of years at his trade, be a good workman, of steady habits and
good moral character."
[Sidenote: Certain unquestionable reasons why union wages should be
higher]
If this be true, it is in accordance with strict competitive principles
that, as the elite of the trade, they should get higher wages than those
outside. Moreover the unions exist mainly in the more populated places
where cost of living, wages, and all prices range higher than in the
towns. A much higher standard of work prevails in the cities, both among
union and non-union men, and the old men and the inefficient drift away
to the smaller towns and the places where wages are lower. Many of the
differences are explicable without taking any account of the union. So
far as unions tend toward intelligence, education, sobriety, efficiency,
fuller and fairer competition, they are economic factors in all branches
of industry, and it cannot be doubted that they do work in some measure
in all these ways. So far also as they strengthen the bargaining power
of the laborers, or as they can enforce a monopoly of labor in a
particular trade and locality, they can secure the full competitive or
even a monopoly price.
[Sidenote: Labor organizations a minor factor in lifting the mass of the
workers]
[Sidenote: The chief factors determining wages]
3. _Wages viewed in general industry, and in the long run, are
determined mainly by impersonal economic forces._ That implies the
converse, that they are not determined mainly by the trade-unions. This
statement, in fact, is admitted in calmer moments by the extreme
partisans of the unions. Even the book before quoted says somewhat
vaguely that "it is an error to think that the trade-union seeks to
determine the rate of wages. It cannot do that. It can do no more than
affect them." Again it says: "Capital is increasing faster than
population.... It seems therefore merely in obedience to natural laws
that wages should rise." Men can easily see personal and immediate
results. They cannot follow out the impersonal and ultimate workings of
economic forces. The leaders make exaggerated claims; laborers believe
them and pay their dues more readily; the public believes them and is
the more inclined to pardon the excesses of so important an institution.
That wages in a number of special trades are raised in a considerable
degree cannot be questioned. The open or secret use of violence and
other antisocial forces make much of this boasted service to some of the
workers, an injury to others, and an occasion of reproach from the
citizen who condemns the spirit of lawlessness thus encouraged. The
chief factors tending to raise the general standard of wages are the
productiveness of industry, peace, order, and security to wealth,
honesty in man and master, in lawmaker and in judge, the efficiency and
intelligence of the workers, and an earnest effort on their part to get
the share that competition would accord them. Chiefly, though not
exclusively, because of their bearing on this last factor, trade-unions
have a useful, even though subordinate, part in the regulating of wages
over the whole field of employment.
DIVISION B--ENTERPRISE AND PROFITS
CHAPTER 28
PRODUCTION AND THE COMBINATION OF THE FACTORS
§ I. THE NATURE OF PRODUCTION
[Sidenote: Man's active intervention in production here to be studied]
1. _The aim of industrial effort is the increase of the quantity and
quality of scarce goods; this is economic production._ The thought has
become familiar to the student that the supply of economic resources of
whatever sort is limited, while the wants are practically unlimited. A
supply of consumption goods meets a perennial stream of wants, the
result being that value is attributed to things. The aim of production
is to add to scarce things, to make the supply of goods as large as
possible. There is occasion here to recall the thought of the two
aspects of production noticed in Chapter 24. Man's part in production is
passive when goods come into existence without his effort. One can
imagine the indolent savage of the tropics, lying under the banana-tree,
letting the fruit drop into his mouth. One can conceive of a tribe
living upon manna, where every day the people awoke to discover a
certain amount of food provided to each person's hand. Though no effort
could increase that amount, still, if the food differed in flavor and
the better qualities were rare, value would come into existence and
exchange would arise. Now there is something very analogous to that in
daily experience. There are some goods which effort can do little to,
increase. Usually, however, there is a possibility of change and
adaptation to make them better suited to needs, and there is required
the use of intelligence to choose among the goods and to employ them in
the best way. Further, man can intervene and direct the course of
industry; he does not merely gather what is provided. It is this active
intervention and effort that is here to be considered.
[Sidenote: The four essential characteristics of value]
2. _To have value, a thing must be of the right stuff, in the right
form, at the right time, and at the right place to gratify wants._ A
distinction is sometimes made between elemental, form, time, and place
value. It is a mistake to say that the value of anything is due to any
one of these features, for to have value all must be united in a single
thing. But the distinction is useful in emphasizing the missing
characteristics, which if supplied, cause value to emerge. Ice may be
considered to have form value when produced artificially by a machine,
time value when stored from winter to summer, and place value when
brought from the north to the south. But not less essential is the
psychological condition of a hungry and thirsty population ready to
consume the ice. Any act or agent is said to be productive which works
in any one of these respects: puts things in better form, or in a more
fitting place, or provides them at a more fitting time to serve human
wants.
[Sidenote: Economic vs. technical changes in goods]
3. _Economic production (in contrast with technical or merely formal
production) is such a change in goods as is attended by an increase in
value._ It is often well to contrast form, appearance, imitation, with
the thing itself, the reality. Men sometimes go through the forms of
study when their eyes and thoughts are wandering; through the form of
getting a college education when they are simply having a good time.
Likewise in production there is the form and the reality. The young lady
just out of boarding-school rarely produces a masterpiece with the tubes
and brushes that Raphael might have used. The justification for amateur
work is to be found in the doing and not in the market value of the
result. Blue rosebuds, painted with loving if unskilled touch on red
velvet slippers, may bloom into a romance and happiness; but to the
economist this appears to be a consumption of good pigment for
amusement, not a creation of value. The difference between the form and
value of productive effort becomes, in the study of business
organization, a most essential question. The significance of leadership
and control of industry is found in this fact that economic goods may be
united to produce results having either a less or a greater value than
the materials that are used.
[Sidenote: Acquisition vs. social production]
4. _Individual acquisition may be contrasted with social production in
cases where the individual increases his wealth at the expense of
others, without adding to value._ Most economic efforts increase the
income of the individual and the income of society at the same time. The
fruits of the field and the uses of machines are net additions to
current income; they are not merely subtracted from the income of one
and added to that of another. The increase of products by labor may
depress somewhat the exchange value of competing labor, but the general
welfare is furthered by the greater abundance. With very slight
qualification it is true that in these cases the good of each is the
good of all. But in some forms of human effort, social and individual
interests clash. When two men bet, one gains and the other loses. The
gambler's gain is a loss not only directly to his beaten opponent but
indirectly to society. Certain forms of speculation approach dangerously
near to the appropriation of the goods of others, and others become
outright stealing, or cheating so nearly like stealing that it would be
treated as a crime if discovered. But many a man prowls along the
border-line of crime all his life and succeeds in making large gains
without falling into the clutches of the law. Cheating that can be
detected, and outright stealing, are prohibited by the law not because
the burglar is an idler; he loses sleep; he has his trials too. The
pursuit of burglary requires courage, effort, and ingenuity, but society
does not reward these as virtues nor recognize as production the
transfer of wealth from the bank-vault to the pocket of the burglar. It
is the aim of social institutions to harmonize individual and social
interests in the pursuit of wealth, to force men into lines of action
where individual acquisition adds to the sum of social utilities. But
there are many marginal cases where human justice discriminates only in
a bungling way, and many controverted questions arise at the
meeting-point of ethics, economics, and law.
[Sidenote: Industries are socially more or less productive]
5. _In this sense, productive industries may be distinguished from
unproductive ones._ The old distinction between productive and
unproductive labor rested on the idea that production must be embodied
in material and lasting form. We have rejected this for the thought that
the tests of production are to be found in feeling, not in outward
things. The distinction, therefore, between productive and unproductive
labor must now be of a very different kind. Viewed from the social
standpoint, the efforts of men may be seen to be directed along more or
less productive lines. Enterprise and effort shade off from the more to
the less productive, from the extreme where the value is a net addition
to wealth, through other cases where one's gain is partly at the cost of
others, to fraud and crime where there is merely a transfer of
ownership.
§ II. COMBINATION OF THE FACTORS
[Sidenote: The factors of production defined]
1. _The various parts, materials, and agents that unite to form products
are called the factors of production._ In a general sense every separate
thing that enters into industry is a factor; as, in agriculture, for
example, the seed, plows, fields, fences, barns, cattle, labor. But
usually in economic discussion, these numerous factors are grouped in
large classes. The main factors are two, variously named as man and
nature, or labor and material agents, or humanity and wealth. Rejecting,
as we have, the old view as to the nature of consumption goods and as to
the nature and possibility of the distinction between "land" and
artificial capital, we class under wealth all material economic agents
whatsoever. The discussion of labor and wages has broadly laid down the
principles that apply to the value of human effort, but the factor of
directing energy presents in modern society so many important features
that it calls for special and fuller consideration.
[Sidenote: Progressive stages of control over natural conditions]
2. _The economic progress of society has been marked by decreasing
dependence on the bounties and chances of nature and by increasing
control of natural forces by man._ Various stages of progress in human
history have been recognized. First is the stage of _appropriation_--the
stage of hunting, or of fishing, or of gathering fruits. Man in this
stage is still an animal in his economic methods, not guiding and
controlling nature, but merely gathering what nature chances to bring
forth. The limitations to man's powers in this stage are marked. There
is excess of supply and waste at one season, scarcity and great
suffering at another. With such crude utilization of the bounties of
nature, a vast area will support but a small population. When sheep and
cattle have been domesticated, and where there is a large area for
grazing, industry rises to the _pastoral_ stage. While still dependent
on nature's bounties for the feeding of his cattle, man is hourly
intervening to increase, regulate, and improve the supply of food and
materials. Famines are more rare, economic welfare is greater, a greater
population is nourished on the same area. The _agricultural_ stage
begins whenever man plants seeds, trims, tends, and increases by his
care the supply of vegetable food. This is a still greater intervention
in the course of nature. Man anticipates the future, directs forces, and
groups materials to his purpose of getting a regular food-supply. He is
thus himself forced into settled life, begins hand-production, and
makes the first steps in commerce. Then gradually comes the _industrial_
stage, in which control over nature grows, supplies increase, machinery
and motive forces are utilized, and humanity is in the full tide of
industrial development. These are not sharply marked changes, but
throughout all there is a growth of security, of certainty, and of
productivity. With man's increasing power and foresight, chance is
lessened, for directing energy takes its place.
[Sidenote: Increasing importance of skilled organization and direction]
[Sidenote: The source of American enterprise]
3. _For a high efficiency of production, as a whole, conditions must
favor the best organization and direction of industry._ Industry is
dependent primarily upon natural resources. Climate, rainfall, iron
deposits, fuel, supply of wood or coal, predetermine in large measure
the limits within, and the direction in which, the industry of any
community can move. The progress of production depends also on an
increasing efficiency of labor as embodied in individual men, and upon
social and political conditions making possible an increase of capital.
But--a condition as important as any of these--production is dependent
also on a wise combination of the factors. Social, political, and
economic conditions must be such as to call forth the factor of
direction and control of industry, to make possible industrial progress.
This is one of the greatest sources of America's superiority to-day. It
has been strikingly said that it is now no longer "young America and old
Europe," but "old America and young Europe." America is older in
industrial experience; Europe, with undeveloped resources, awaits the
touch of American methods and machinery. There are dynamic forces in
American society not present in equal degree in any other. It is
therefore not alone the great resources of coal and iron,--equal
resources may be found in unexplored parts of the world,--it is the
dynamic social forces, invention, enterprise, and organization, which
have brought America to the forefront in industry. Her natural resources
have thus yielded an incentive and a premium to enterprise as a sort of
by-product. Absence of caste, political liberty, the democracy
following the spread of the frontier, have not made it possible for
every one to succeed, but they have made it possible, as nowhere else in
the world, for real ability to scale the barriers of birth, poverty, and
hardship. A conservative population never can equal a progressive
population in industrial efficiency. It has been remarked that America
has little to fear from Oriental competition so long as the avenues of
education and enterprise are open to her young men, insuring her the
highest capacity in the organization and direction of industry.
[Sidenote: Growing specialization of industry]
4. _A high efficiency of industry is dependent on many social causes
making possible a great specialization._ It was said in another
connection that division of labor is dependent upon the size of the
market. With a large population massed at one spot, so that the demand
for even the less important products is large, there may be a high
specialization of industry. An increase of transportation, such as
railways and telegraphs, is equivalent for many economic purposes to
growth of population on one spot. In colonial days it took ten days to
go from Boston to Philadelphia, and two weeks to go to Washington. San
Francisco is now for many economic purposes but one fourth as far from
Boston as Washington was at that time. California and the eastern states
are distant only thirty minutes by telegraph and three days and a
fraction by railroad, and are thus in many respects in the same market.
The great development during the past century in the means of
communication and of carriage has made possible, as never before, the
massing of population to secure the advantages of division of labor in
most lines, without meeting the hitherto insurmountable difficulty in
the securing of food for such large numbers in a limited space. The
population draws its food from the whole vast area; whereas it is massed
at the points more favorable for other products and can make use of the
most highly specialized machinery. These several conditions thus have
favored the growth of large industry under a single control and
direction, on a scale never before approached. These changes have
brought in their train social problems connected with the concentration
of economic power. It remains to be seen whether the unquestioned
economies of this new organization can be retained and improved while it
is divested of its evils.
[Sidenote: Growing importance of directive ability]
5. _With the growing division of labor, grows the need of the highest
ability for the directing of industry._ Ability may be judged by various
standards. From one point of view, the scientific mind, grouping facts
in the cold light of reason to arrive at truth, is the highest type. But
supreme, each in his own sphere, are also the artist expressing, through
painting, poetry, dramatic action, and music, the subtleties and
complexities of feeling, the moral philosopher, the prophet, the
preacher, in the best sense of the term the teacher, all aiding to guide
the spiritual forces of humanity along lines that make for social
welfare. Not least is the business enterpriser, whose function is to
direct the economic forces for production. It is vain to assign a mean
place to the organizing intelligence and its social work. Its importance
grows apace with the growing magnitude and complexity of industry.
Misjudgment now will destroy more wealth, and wise judgment can produce
larger results, than ever before. The captain of industry also may work
as an artist or as a gambler; he may, by the methods he pursues, uplift
the moral plane of his society or he may help to corrupt and degrade it.
No citizen is in control of more potent influence for good or ill than
the successful business organizer. On the attitude of society toward
him, and on the standards to which he is held, depend in large measure
the use that will be made of his exceptional powers.
CHAPTER 29
BUSINESS ORGANIZATION AND THE ENTERPRISER'S FUNCTION
§ I. THE DIRECTION OF INDUSTRY
[Sidenote: Judgment and self-direction as elements in personal skill]
1. _In the simplest kinds of individual production the value of the
results depends largely on intelligent choice._ Even for the solitary
worker the choice of the right time to do work is most important. The
first thing Robinson Crusoe did was to turn to the ship to save as much
as possible of the cargo before it was dashed in pieces by the waves. If
he had begun first to till the soil to provide a future supply of food
it would have shown one kind of foresight, but it would have shown very
poor judgment. Every moment of delay in recovering the cargo of the
wrecked vessel cost him many useful materials. The humblest farmer has a
great range of choice and a need of good judgment in fixing the time to
sow, to reap, to do each simple task. There is the same need to-day for
the small shopkeepers, for the blacksmiths, for the small producers of
all kinds to make wise choice of time in the use of their own labor.
There is also a wide range of choice in the distributing and combining
of labor, agents, and materials. A limited supply of agents can be used
to secure a variety of goods, more or less desirable. There are many
chances for mistake, but in the long run it is judgment, not chance,
that determines the success of one man as compared with another. There
is a choice in ways and methods by which a thing can be done. There are
many wrong ways, there is but one best way, at any stage of industrial
progress. While most work is done in customary ways and little
independent judgment is required, yet in every business from time to
time new problems arise and call for an exercise of choice as to
methods. Moral qualities are continually called for, such as control of
impulse, and the giving up of the comfort of the moment. The wisdom of
our fathers is embodied in a multitude of proverbs that suggest the wise
course. Men must "make hay while the sun shines," not lie in the shade.
But virtue fails less often from lack of knowledge than from lack of
will. As men differ in judgment, character, and will-power, their
products differ, even in the simplest circumstances. The ability to
choose and to do wisely is an element in personal skill.
[Sidenote: Direction of a group of workers]
2. _When men work in an associated group, the direction of effort
becomes relatively more important._ The first and simplest advantage of
association is working in unison. Men unite their muscular efforts for a
single task, and accomplish what is impossible to them working singly.
But when many work in unison, the right selection of time and way is of
greater importance; a mistake will waste more materials and agents. If
association is to yield its advantages, there must be division of labor;
hence harmony of effort, hence agreement or direction. While the gain of
well-directed association is large, the waste of ill-directed effort is
greater, when specialization has taken place, than with isolated
workers. Most communal societies have failed because of the lack of a
good head. The few exceptional successes have been due to the presence
of a man of superior ability, such as George Rapp of the Harmonist
Community, who, had he lived in this day, could have become easily the
head of a great business corporation.
[Sidenote: Direction of interrelated groups]
3. _Where various industrial groups are associated, direction becomes
still more important._ In the single group it is an internal harmony
alone that is needed. The work of a dozen men must be so arranged that
each is in his fitting place. But as this group comes into contact with
others, the relationship becomes two-fold, and there must be both
internal and external harmony. The more complex the economic
organization of society, the more the chance of mistake and the more
injurious are the mistakes to a wide range of interests. Large amounts
of capital and labor can be rapidly lost through lack of wise direction
of associated groups.
[Sidenote: Greatest need now of capable direction of industry]
4. _The increased efficiency of industry has been accompanied by the
specialization of control._ The crude, early methods of enforcing
harmony in industry were slavery and political subordination. Under
division of labor, with free workmen, industry is ruled by impersonal
economic forces that bring the less capable under the direction of the
more capable. This work is rudely done, no doubt, but the penalties of
bad direction of labor and capital are so great that blundering cannot
be permitted. The man who shovels dirt must do it at the right time and
place if, in this complex society, it counts for something and gives the
effort value. If he cannot choose well for himself, he comes under
direction. The average man cannot decide nearly as well here as he could
on a desert island where and when to put in his spade. There it would be
to raise food for the current year; here it may be to dig a canal or a
tunnel whose uses will not become actual for many years. The more
distant the end sought, the more difficult is the choice. To every
worker, according to his personal skill, is left some degree of choice
in the method of his work, but in a large part of industry the range of
choice is very narrow. The man with the shovel and the man with the hoe
come under direction.
§ II. QUALITIES OF A BUSINESS ORGANIZER
[Sidenote: Technical knowledge and skill]
1. _The organizer and director of industry must first have technical
knowledge of methods, processes, and materials._ The qualities required
in the direction of industry are implied in the foregoing section, but
they may be more specifically enumerated. Knowledge of technical
processes is relatively more important in the direction of industry in
the earlier stage. In the single independent producer it is the quality
most desirable. He must know the quality of the materials with which he
works and the best modes of combining them. But, as industrial
organization becomes more complex, only a broad knowledge and ability to
judge of the results of different processes and to compare plans are
necessary in the organizer. He can hire the technical knowledge of
details required in the larger management of business. Draftsmen,
engineers, pattern-makers, men with far more education and capacity in
certain lines than the business manager, work under his direction.
[Sidenote: Judgment of men]
2. _The organizer requires ability to judge men and tact in relations
with them._ In the small group, ability to get on well in personal
contact with workmen is of great importance. Especially rare is the
genial manner that wins the confidence and even the affection of the
men. A sense of humor and the ability to turn a joke are said to have
obviated many a strike and thus to have prevented losses both to the
employer and to the men. In large affairs much of this managing tact can
be hired in good foremen; but the organizer must still have a knowledge
of men, ability to judge of human nature, to select his subordinates,
and to animate them with his own purposes and plans. Mr. Carnegie has
said that an appropriate epitaph for himself would be, "He was a man who
knew how to surround himself with men abler than he was himself." That
seems too modest; but in a sense it is not, because he claims for
himself, and justly, the highest of all industrial qualities. A great
administrator in political or industrial affairs can dispense with
everything else rather than with this, the supreme quality of the great
organizer.
[Sidenote: Foresight in commercial affairs]
3. _The organizer must have unusual foresight and the ability to form a
large commercial policy._ This proposition is to be interpreted
relatively to the task before the organizer, and to the size of the
business. Modern industry anticipates demand far more than did primitive
industry. Large amounts of materials and energy are embarked in
directions from which they cannot be recalled. With the progress of
electrical engineering it soon may become possible to recall at any
moment a cargo embarked for a distant port. But no wireless telegraphy
is able to recall the great masses of capital that are embarked on
distant and definite journeys in modern business. The organizer
anticipates future demand, and prepares for it. The process has been
figuratively expressed somewhat as follows: the enterpriser throws into
the crucible great quantities of material; they melt, and an industrial
result is secured, but whether the deposit is greater in value than the
material is a question that cannot be answered for years. The need of
anticipating demand is greater to-day than ever before, and this
requires large investments months and even years in advance. The losses
are proportionally large if there is miscalculation of demand. A large
commercial policy is one that takes into account the more distant
factors, and anticipates the new conditions. The rare ability to do this
is rightly called statemanship in economic affairs.
[Sidenote: Command of financial resources]
4. _The organizer need not himself have great wealth, but he must have
ability to command financial resources._ Business to-day is done in many
cases with borrowed capital. Even a subscription to stock is frequently
as much in the nature of a loan, made in reliance on the reputation of
the organizer, as an investment for profits. There are many temporary
needs that require sudden loans. The confidence of investors, whether
banks, trust companies, individual shareholders or investors in bonds,
must be secured by the organizer. Good judgment of the money market
often is as vital as judgment of the market for the particular product.
In some of the largest corporate enterprises this quality becomes the
most essential.
[Sidenote: Scarcity of great organizing ability]
[Sidenote: The industrial leaders]
5. _Organizing ability of the highest order is rarely found._ This is
almost a superfluous statement after the foregoing. According to the
theory of chances, such a combination and balancing of qualities is
likely to occur in very few cases. Even where it exists, it may not be
discovered or developed. The man may not find his opportunity, nor the
task the man. There are many misfits in the world. On the occasion of
the visit of Prince Henry of Prussia to America, in 1902, he was
entertained at luncheon in New York with one hundred of the leaders in
invention, finance, and industry, wherein have been the most
characteristic achievements of America. In jocular reference to the
French Academy, whose members are the forty most noted literary men of
France, the newspapers called this the meeting of America's one hundred
immortals. There were J. P. Morgan, the great financier; Vanderbilt,
Hill, and Harriman, the railroad kings; Carnegie, the iron magnate;
Irving Scott, "the man who built the Oregon"--nearly all the company
deserving a place at the table mainly by reason of excellence as
business organizers. Such a gathering has a dramatic interest as
presenting the greatest leaders of industry, but about other tables
might be gathered thousands of other less notable figures worthy to be
accounted captains of industry in their several fields. One may well
ask, How did they come into the important places they occupy?
§ III. THE SELECTION OF ABILITY
[Sidenote: Various roads to industrial leadership]
1. _The men actually in control of industry have been selected in
manifold ways._ Skill develops a small industry into a large one. A
small factory owner gradually adds machine to machine, building to
building, till he finds himself at the head of a great industry. Or an
employee develops ability and becomes an employer. Who does not know of
some one who, as a small boy, went into a store to do chores, worked up
to a clerkship and, enlisting the confidence of men of wealth, was
enabled to establish a business of his own and become an employer?
Others have won promotion from the ranks to the head of a large industry
in which they secured at last a controlling interest. Employees that
have proved their ability may be selected by the directors of a stock
company. Men that have worked their way up from the ranks may bequeath
their business positions to their sons and grandsons, as in the case of
the Vanderbilts and the Goulds. And finally, but rarely, there may be
selection by fellow-workmen in the case of coöperative business.
[Sidenote: Success as the evidence of ability]
2. _There is a constant selective process: dropping out the weak and
advancing the efficient organizer._ There is, to be sure, an element of
chance in this selection. The process in general is a rude one.
Accidents and unforeseen changes, industrial crises, failure of health
at a critical moment, fraud and crime, may defeat men of ability and
they may never regain their foothold. Lack of experience may lead to
disaster a naturally able but youthful heir, too suddenly burdened with
the responsibilities of a fortune. On the other hand, men of limited
ability may inherit fortunes and preserve them by caution, without
enterprise. It is not always true, even in America, that "It is but
three generations from shirt-sleeves to shirt-sleeves," although many
fortunes slip away from the sons of rich fathers. In general, success in
retaining the control of a business is an evidence of considerable
ability. By loss of fortune unwisely risked, through unforeseen changes
in methods, and after manifold blunders, the less capable drop out.
Thus, by the ceaseless working of competition, the higher places are
taken by those most capable of filling them, and the efficiency both of
the employers and of the workmen is increased.
[Sidenote: Various modes of business organization]
3. _In the various kinds of business organization the merits of men and
of methods are tested._ The independent producer working entirely alone,
directing his own industry, is analogous to the animal organism of a
single cell. More complex is the family partnership found often in early
stages of industry but more rarely now, where the father directs the
work of his children and all share in common. The simplest form of the
wage system is the single employer with a few assistants. When the
employer is in danger of losing valuable assistants, he sometimes gives
them a share in the business. In the ordinary partnership, two or more
men divide the ownership and duties, agreeing as to the division of
control. Coöperation among workmen, though rare, gives an unusual
opportunity for the discovery of special talent. The dominant form of
organization to-day is that of the stock company, or corporation, the
ownership of which is divided among the holders of shares of stock, or
of certificates of membership.
[Sidenote: Many chances to try ability]
This variety of organization affords opportunity for a two-fold test:
that of the ability of men and of the merits, in varying circumstances,
of the different forms of organization. Methods of organization are
constantly tested by their results. Men having money to invest are
asking whether they would be better off to go into business by
themselves, or to join with a partner, or to buy stock in some large
corporation. Each of these forms of organization has its peculiar
advantages. A stock company can better enlist large amounts of capital,
while the individual employer is generally more free from dictation and
can adapt his business more quickly to changing conditions. At the same
time this variety of organization offers better opportunities for
managing ability to show its metal. On the watch towers of industry are
many observers sweeping the horizon for the appearance of men of
business talent. Some characters develop better under direction; others
prove that nowhere does native ability count for more, and mere
book-schooling for less, than in business administration. There is some
ground for the belief that a college education does not increase
executive capacity in business. Such ability often seems to be a freak
of nature and a product of practical experience, rather than the result
of college training.
CHAPTER 30
COST OF PRODUCTION
§ 1. COST OF PRODUCTION FROM THE ENTERPRISER'S POINT OF VIEW
[Sidenote: The enterpriser's cost]
1. _The task of the enterpriser is to get together the essential factors
to secure valuable products._ The enterpriser must first decide what
product he will endeavor to secure, and the kind, the place, the time,
the quantity, and the quality. He must then select in the right
proportion the materials, labor, plant, and machinery necessary for that
product. He must purchase these factors in the market at the lowest
price he can, unite them and sell the product to recover the expenses in
the selling price. A thousand items enter into the cost and perhaps a
single product emerges. What the business man thus pays out, expressed
in money form, are the costs that are here to be considered.
[Sidenote: Several meanings of cost]
2. _The term cost of production is used in several senses, the chief of
which are money cost, psychic cost, and alternative cost._ The ambiguity
of this term is a source of much confusion. _Psychic cost_ is the pain,
fatigue, irksomeness of labor. This is not definitely measured except at
rare points. When the pain of work more than offsets the value of the
product, the worker who is free to determine the length of his own
working-day, stops. At that point the psychic cost and the utility of
the marginal unit are almost equal in intensity--the one as a positive,
the other as a negative quantity. But the value of the product as a
whole cannot be related to the psychic cost or sacrifice, and therefore
it cannot serve as a measure of cost in every-day business.
_Alternative cost_ is any good or gratification that must be given up
when any other good is chosen. One may stay at home and read a book or
go on a picnic; the pleasure of reading the book will cost the pleasure
of the picnic. A good dress may cost a happy vacation that must be given
up for it. In this sense, each thing is a cost of every other thing that
might be chosen in the place of it. Alternative cost is therefore
manifold and indefinite. The thought is significant at the moment of a
choice, but it is not constantly measurable for practical purposes. The
_money cost_ is the practical cost generally implied in the term cost of
production. It expresses not the pain of the laborer in doing the work,
not the sacrifice of the owner of the capital in saving the money, but
merely the sum of money paid out by the producer. There is frequent
confusion of these ideas in economic discussion, few even of the leading
economists of the nineteenth century having quite escaped it.
[Sidenote: The cost of the factors is their market price]
3. _The enterpriser, looking upon the cost of most of the factors as
fixed, seeks to combine them as economically as possible._ Whether the
enterpriser is running a factory or a farm, is engaged in a retail or a
wholesale store, is conducting a school, or a railroad, he has to solve
much the same problem. By close attention, good judgment, skilful
bargaining, he may be able to buy slightly cheaper than his competitors,
and thus have an advantage over them at the outset. When he does this,
it is usually by searching out a better market in which to buy, buying
at a better time, and judging better than his competitors the quality of
goods. If, in a given market at a given time, goods are sold to one more
cheaply than to others, it is an act of generosity. Even the best buyers
pay nearly the prevailing market price for agents. The most successful
enterprisers are not found to be those paying lower wages or lower
ground-rent than their competitors. It must not be forgotten that the
main forces fixing the prices of agents are impersonal, and can be only
slightly modified in most cases by a particular buyer. He looks
therefore upon the cost of the elements as an ultimate fact which he can
change little, if at all, and he shows his judgment chiefly in the
selection of quality. Cost determines and limits the extent of his
business and determines the price at which he sells.
[Sidenote: The right proportioning of the factors]
4. _The right proportioning and skilful substitution of the factors is a
delicate technical task for the enterpriser._ Good buying and good
selling must precede and follow the central part of the enterpriser's
task, that is, the combining of the various factors. Each factor is
applied, subject to diminishing returns, up to a point where its
addition will not secure the value attributed to it in its cost. The
enterpriser is constantly studying the question whether the application
of another unit of any one factor at the price will add to the value of
the product as much or more than the cost. This calculation is made for
every one of the minor factors entering into the business, and for the
business as a whole. The proper proportion varies at different prices,
or costs. If wages rise, "it pays" to get machinery; if wages fall, it
pays to let the machinery deteriorate and to do more by hand-labor.
Likewise there is constant substitution of the various materials. The
right proportions change constantly with inventions. A model factory is
so proportioned that the buildings hold the right number of machines,
with the right amount of space for the workmen, and the right amount of
power. If there is more of a single factor than the ideal proportion, it
is an unnecessary cost. Even the model factory begins to be out of date
almost as soon as the walls are dry, and the latest method is to build
as nearly as possible on the unit system, so that new parts may be added
without the loss of harmony and proportion.
[Sidenote: Pressure of price toward cost at certain points]
[Sidenote: The enterpriser in contact with costs]
5. _The enterpriser's costs determine the lowest price at which he can
continue to sell, but if successful he may have a wide margin of
profits._ New factories are constantly arising with new and better
adjustments. In industries of competing products, also, the processes
are changing. Hence there is always a pressure of competition on some
enterprisers who constantly complain that they must sell below the cost
of production. The organizers of a trust always declare, some no doubt
truly, that they have been selling below the cost of production.
Business men say that competition is destructive, and it certainly does
destroy the less favorably situated enterprises. Each enterpriser's
price is the highest he can get in the market for his product; it may
far exceed his costs; it may even fall below them, but only temporarily,
for if sales continue to encroach on capital, the sheriff soon closes
the doors. Successful competitors are constantly pressing upon the
marginal enterpriser, fixing a price that leaves themselves a profit,
but is below his cost. Even the most successful enterpriser comes into
contact with cost, and seems to be compelled by it. He reaches out for
trade, and sells some (not all) goods at a price which leaves him no
profit. He enlarges his factory and ships goods farther, paying the
freight, which means a lower price at the factory. The expanding
business, therefore, comes at length to the point where it cannot go
farther at the prevailing prices. Hence the business man's view of the
costs is that they determine value. It is true in the sense that the
supply of a particular product in any market is at last limited by cost
of marginal producers or of marginal portions of supply. But it is not
true of all the units of product that costs determine, or equal, market
price. There is a margin above costs to the successful enterpriser on a
large portion of his output. The margin may be narrow or wide, according
to the business. The margin is "profit," or the gain of the enterpriser.
§ II. COST OF PRODUCTION FROM THE ECONOMIST'S STANDPOINT
[Sidenote: Money cost not the ultimate explanation of value]
1. _The economist should view money cost as an intermediate and not as
an ultimate explanation of value._ The value of all things must be
traced back to gratification, to the relation of goods with psychic
income. This being true, the value of the factors which the enterpriser
uses must be derived from the value of the products, and not the
reverse. This does not mean that the business man is deceived into the
belief that he has in cost of production a final explanation of value.
He simply is not interested in that question. He knows that there are
many influences determining the cost of the factors he buys, but they
are distant; he cannot influence them, and in the single stage of his
production they seem to fix the price. In some purchases, and on the
stock exchange, a marvelous recognition and analysis of the most distant
influences is necessary; but in general a superficial view of value is
taken in business; it does not pay to do other. The logical treatment,
however, must go deeper into the question and trace the cost of agents
back to the ultimate cause of value, that is, to want-gratifying power.
To say that the price of a product is determined by the money cost, or
price, of the factors is simply to postpone the answer to the question
of value; one has still to ask, What determines the money cost, or
price, of those factors themselves?
[Sidenote: The cost of agents is fixed by their marginal utility in
alternative uses]
2. _The demand for any factor entering into products is reflected, in an
increased price, to its cost in all competing products._ Figuratively
speaking, products compete with each other for the factors that enter
into them. According to location, quality of the soil, and improvements,
a certain area of land has various rival uses. These uses bid for the
land, or put in an economic claim for it. Products of a higher value
outbid and exclude those of a lower. If fine wine can be raised on a
piece of land, potatoes ordinarily will not be planted in it. But if
there is such a supply of that quality of land that it continues to be
used side by side for both products, it will have the same value and
yield the same rental in both uses. The least utility yielded by any
portion of the supply fixes the value of all the units. Machines are
usually made for some product determined in advance, but often they are
only partially specialized and within limits they can be adapted.
Sewing-machine factories were readily turned to the making of bicycles
at the time of greatest demand, and bicycle factories later were used
for the making of automobiles. Thus, in general, machinery is used for
the product to which it contributes the most value. Any enterpriser
seeking it for any other use finds its "cost" affected by its various
alternative uses. The same is true of all the materials and of all the
grades of labor entering into products. The enterpriser's _cost_ is
therefore the reflection of the want-gratifying power of the productive
agent in all its other uses as well as in the particular product he
desires. To the enterpriser, cost seems the cause of the value of a
product. To the economist it should be clear that the utility found in
the various products is the basis of value in the factors, _i. e._, of
the costs.
[Sidenote: A single source of a single product]
3. _The genealogy of value may thus be traced through the various
intermediate products to consumption goods._ A single product having a
single source of supply shows most clearly the reflection of value
directly from the product. The discovery of a mineral spring or of a
good quality of building-stone on worthless land, will cause a value to
attach at once to the source of supply. When a great singer like Adelina
Patti commands several thousand dollars for each appearance in concert,
the source is the magical throat of the singer, and the salary reflects
the utility of the music in the minds of delighted hearers.
[Sidenote: One source of several products]
When the one source of supply yields several different kinds of products
there is just one new condition which confuses the thought and suggests
the error that value begins in the source (with costs therefore) and not
in the product. Looking at the products severally, no one of them
explains the value of the source, and, on the contrary, each one is seen
to have a value independent of the particular use to which it is put. To
make the illustration most simple: a savage finds in a wreck on the
coast a number of bars of iron. His fellows wish them for various
purposes: to make arrow heads, spears, knives, hatchets, hoes,
ornaments, nails, needles, etc. Value is in this case derived in part,
through the source, from the alternate uses. Taken jointly and
considered as one sum, the value of the various products accounts as
completely and exclusively for the value of the source as if they were
merged into one product. The source (_S_) is distributed to each of the
products in accordance with their marginal utility, and therefore the
value of the various products from any source of supply constantly tends
to equality. Any unit of product sought for any purpose must be paid for
according to a marginal utility determined in all the applications. The
genesis of the value is in the utility of the product; the value of the
source is derived.
[Illustration: _1. A single Product_
_2. Several Products from one Source_]
[Sidenote: Complex conditions with intermediate products]
In actual life the problem is far more complex, and yet, through its
settlement runs just the same principle. There is constant bidding for
materials, and through their price the claims of rival products are
adjusted. A point is reached where it does not pay to use any more of an
agent in a certain industry; the production of another unit results in
a loss. There is a most complex relation among many different industries
using the same factors, the value of a unit of product (at _a_) being
reflected up to the source, and through successive links to the most
distant product (_z_). The effect of this is to reduce the sale (of _z_)
and correspondingly the use made of the agent in question. A higher
price of leather, due to the increased use of shoes, raises the value of
hides and cattle (this increasing the extent of cattle raising) and
raises thus the cost of carriage-trimmings, pocket-books, foot-balls,
leather belts, and every other leather product. As the price rises,
substitutes for leather, and imitations of it, are used for such of the
products as cannot bear the increased cost of leather.
[Illustration: _3. Complex Relations Through Intermediate Products_]
[Sidenote: The enterpriser the medium of price movements]
[Sidenote: Costs are an expression of consumers' estimates]
4. _The enterpriser does not fix the value of products or of agents, but
is the medium through which consumers express their estimates._ The
enterpriser who anticipates aright and satisfies the public taste is the
good medium. He readily transmits and accurately focuses the rays of
public judgment. One that misjudges is a poor medium. The enterpriser is
himself the servant of costs. Laborers sometimes assume that the
employer can dictate wages, prices, and markets, can rule things with a
lordly hand. With rare exceptions the ultimate control in these matters
by business men is very slight. In the main the enterpriser masters the
situation only by bowing to it, just as the scientist and the engineer
gain mastery over nature because they know when to bend and how to obey.
The consumer, by deciding to buy this or that product, sets in motion
waves of value. The consumers of products are the true purchasers of
labor, materials, and uses of agents. The enterpriser must conform
closely to cost, to the price prevailing for the moment, or his
competitors in this day of narrow margins will seize the opportunity.
The enterpriser is merely the distributor or equalizer of cost among all
the different products for which different agents can be used. If he
acts efficiently, profits arise.
CHAPTER 31
THE LAW OF PROFITS
§ I. MEANING OF TERMS
[Sidenote: Broadest use of the term profit]
1. _The term profit is popularly used as any gain or advantage secured
by any means in business._ The terms used in economics, being taken from
popular language, vary in meaning according to the context. It is
necessary to clear thinking to reject some words entirely and when using
others to define them more strictly. The broad usage of the term profits
just noted includes every kind of return to industry: such as interest
on capital, and wages or services of the man owning the industry.
Precise thinking requires its use in a much narrower sense.
[Sidenote: Used of gross gains on sales]
2. _A common meaning of profits in retail business is the gross gain on
a given sale._ Buying an article for one dollar and selling it for two
dollars, is said by the merchant to be selling at one hundred per cent.
profit, jocularly called, "The Dutchman's one per cent." The cost price
is considered to be that paid to the manufacturer or wholesaler. In
different lines of goods there is added regularly to this cost twenty,
thirty, or fifty per cent., as the case may be, as the merchant's profit
on the sale. This is of course a gross profit, and not net, or true
profit. It leaves out of account rent, interest on capital, clerk hire,
freight, and many other minor items that enter into the cost of running
a store. It often happens that the Dutchman's way of reckoning is nearer
the truth, and that the gross profit of one hundred per cent. proves at
the end of the year to be only a net profit of one per cent. This
evidently is a loose meaning, impossible in the discussion of
theoretical questions. This meaning is sometimes developed, making
profits the sum of all the gross profits on separate sales within a
year, or the difference between the wholesale and retail prices of goods
sold within the year.
Another meaning given to the term is gross profit (as above) compared
with the capital invested. The "profit" in this case varies partly with
the rate of the turnover. To illustrate: if the amount invested in a
printing-office is $100,000, and the annual business done is $300,000,
the capital is said to be turned over three times; if the gross profits
on sales averaged twenty per cent., they would be sixty per cent. on the
investment; but, if the capital had been turned over four times, the
gross profit would have been eighty per cent. on the investment.
[Sidenote: Of net gains as a percentage of invested capital]
3. _Another meaning of profits is the annual net gain of the business,
as compared with the average investment of capital._ This is a long step
toward greater definiteness. If at the end of a year it were found that
after paying all outside expenses there were $10,000 to set aside, this
would be accounted a profit of ten per cent. on $100,000 invested. But
confusion still reigns because of wide variation in the methods of
estimating costs before fixing net profits. In one case the enterpriser
rents lands and buildings, in another he owns them; in one case he has
borrowed money and counts interest as a cost, in another he is free from
debt; in one case he counts as a part of cost an estimated fair salary
for himself and his partners, in another (usually in a small business)
no such allowance is made Such a variation in business usage is most
perplexing. In all these cases one must have the exact conditions in
mind before it is possible to make any comparisons and draw any
conclusions as to the relative profits of different industries.
[Sidenote: Profits in economic theory]
4. _In the narrower and exacter sense profits are the net gain of the
enterpriser after counting the rent of material agents and contract
wages of employees at the prevailing rates._ Into the practical problem
of cost and profit many factors enter, and the theoretical problem is to
determine just how much ought to be attributed to each. In a large
business usually the practical bookkeeping problem is not unlike that of
economic analysis. A stock company counts as cost, as a part of fixed
charges, interest on capital borrowed either from banks or bondholders.
Its managers are paid salaries, counted as a part of cost. The net
balance, after deducting these and all other expenses, is counted
profits and paid in dividends to stockholders. The economic student is
not attempting to get a theory of profits that is in contrast with
practice. Rather, he is trying to analyze profits generally, just as
they are analyzed in the few cases where the books are properly kept. In
economic theory, therefore, profits are the part of the gain of any
business that is logically attributable to fortunate investment and good
management; profits are the income attributable to the enterpriser's
services.
[Sidenote: Profits a species of wages]
5. _Typical economic profits are thus a species of wages but are marked
by peculiar features._ In some of the older treatises on political
economy, profits are treated merely as a combination of "wages of
management," and of interest on capital invested. A man hired at a fixed
sum to manage a business is receiving simply contract wages. Economic
profits are not _contract_ wages, not being paid by agreement, but being
yielded impersonally by the industry. Profits are, however, _economic_
wages or the earnings of services. As business has developed, it has
been seen that the enterpriser's work has its peculiar character and
deserves special attention. The old English word "enterpriser," used of
the "adventurer" who embarked in foreign trade, may fittingly apply to
the organizer and director of business to-day. Foreign trade then, more
often than now, was most uncertain, and there were many chances that the
ship would be lost, or the venture prove a losing one. In the simplest
business to-day there is this element of enterprise, or undertaking,
combined with ordinary capital and labor. As industry develops, this
special service stands out more clearly. In the corner-grocer and in the
manager of the little news-stand, the elements of enterprise and labor
are not apart. In the large wholesale house, the enterpriser is seen to
be not merely an abstractly thinkable function, but a separate and
concrete person. The typical enterpriser is the man who gives his time
and energies to the launching and guiding of business.
§ II. THE TYPICAL ENTERPRISER'S SERVICES REVIEWED
[Sidenote: The enterpriser's skilful use of capital]
1. _The enterpriser guarantees to the capitalist-lender a fixed return._
Agents will yield the highest economic rent of which they are capable
only in the hands of those who can use them with exceptional skill.
Owners of capital who for any reason, such as youth, inexperience, ill
health, incapacity, or conflicting duties, are not able to make agents
yield the average rent, seek out, or are sought out by, those who in
general can make the agents yield more than the average. The interest
contract between them is one of mutual advantage, in that the
enterpriser pays a definite sum to the investor unable himself to apply
his productive agents. Immense sums of capital are now put into the
hands of small enterprisers, such as Western farmers improving their
lands, builders of city homes and business blocks, and small
manufacturers. But stocks and bonds of corporations give a wide variety
of investments which shade off from the safer or capitalistic type, to
the more uncertain, or enterpriser's type. First-mortgage bonds, being a
first claim on the income and property, have the highest security and
yield generally the lowest interest. Even national bonds are not
absolutely safe, and for that reason as well as because of their
fluctuation in price, even their purchase has something of the nature of
an enterprise. Stocks are the enterpriser's type of investment, the
dividends being more uncertain, but giving the chance of a higher return
than the average. It is because some stand ready to assume the risk of
making goods yield average returns or more, that others can sit and
enjoy a fixed income with little effort and in comparative security.
[Sidenote: The enterpriser's insurance of the lender's capital]
2. _The enterpriser gives up the certain income to be got by lending his
own capital, and, becoming a borrower, offers his capital as insurance
to the lender._ Every business has an element of uncertainty in it, and
some one must meet the risk. A man with marked ability as an organizer
of industry is rarely found long without capital of his own. But even a
penniless man who can gain the confidence of investors is able to get
backing and to secure the necessary funds to engage in business. The
lenders in such a case, however, run a greater risk than when the
enterpriser is a man of some means, and they therefore ask a higher rate
of interest than if they were loaning to a wealthy man or to a wealthy
company. They are in part the enterprisers. When, as usually, the
enterpriser invests some of his own capital, it is a guarantee of his
good faith, a sort of insurance reserve to protect the lender from loss.
The first loss falls on the enterpriser, and the chance of loss to the
lender is in large part, though not entirely, eliminated. It is
characteristic of modern loans that the borrower may be rich, not
poor,--often richer than the lender. The mortgage on real estate and the
creditor's claim on a merchant's property usually give security of far
greater value than the loan.
[Sidenote: The enterpriser's insurance of the laborer's production]
3. _The enterpriser gives to other workers a definite amount for
services applied to distant ends._ In discussing the wage system it was
pointed out that most labor at the present time is put upon future
goods. It is not known what they will be worth a month or a year later
when they mature as consumption goods; their present worth can merely be
estimated. If they prove to be worth little, the profits may be nothing
or less than nothing. The enterpriser, however, buys the services for
ready money, embodies them in goods, and assumes the risk; the goods
may sell for more or less than the wages. It is sometimes said with a
certain irony that if the enterpriser assumes the risk he is very
careful to pay so little for labor that he does not lose. In this naive
view the enterpriser is so independent of the market that he can pay
much or little as he pleases. In fact in many cases he gains little, and
in many he loses and loses largely.
[Sidenote: The risk of the enterpriser's services]
4. _The enterpriser risks his own services and accepts an indefinite
chance instead of a definite amount for them._ Assuming the risk for the
right conduct of industry, he backs himself, expresses his faith in
himself as a manager who can make labor earn more than the prevailing
wages and make capital yield more than the prevailing rate of interest.
If it were otherwise, he would loan what capital he has instead of
borrowing more; instead of employing others, he would himself seek
employment in some other industry. Men are constantly shifting from the
class of hired workers to that of enterprisers. It is a rude and often
tragic process of adjustment and selection that enables men having
ability as enterprisers to continue in that work, and forces others into
the class of employees.
[Sidenote: The enterpriser the intermediary in industry]
5. _The enterpriser is the economic buffer; economic forces are
transmitted through him._ In a more primitive industry each man is
wage-earner, capitalist, and enterpriser combined in one. As industry
develops, some of the factors of cost become distinguishable, and
relatively stable and calculable. A low rate of interest, ranging from
three to four per cent., can be secured with practical certainty by
putting one's money into good corporation securities, into the
savings-bank, or into national bonds. Contract wages in each class of
labor also are fixed by competition at a point where they are a medium
or average of gains and losses. The enterpriser is the most movable
element. As the specialized risk-taker, he is the spring or buffer,
which takes up and distributes the strain of industry. He feels first
the influence of changing conditions. If the prices of his products
fall, the first loss comes upon him, and he avoids further loss as best
he can by paying less for materials and labor. At such times the
wage-earners look upon him as their evil genius, and usually blame him
for lowering their wages, not the public for refusing to buy the product
at the former high prices. Again, if prices rise, he gains from the
increased value of the stock in his hand that has been produced at low
cost. If the employer often appears to be a hard man, his disposition is
the result of "natural selection." He is placed between the powerful,
selfish forces of competition, and his economic survival is conditioned
on vigilance, strength, and self-assertion. Weak generosity cannot
endure.
[Sidenote: Fluctuation of profits]
6. _Profits therefore fluctuate more from industry to industry and from
man to man than do other incomes._ As a somewhat exceptional case, small
employers in industries such as baking and tailoring, may for long
periods get less for their work than their employees get in wages. The
pride in being an employer and occasional chances of greater gains
perhaps explain the fact. The fluctuations of the market may sweep away
from the enterpriser not only all his "profits," but all his accumulated
wealth. As a consequence, profits may be at other times very high, for
men will not take the risk of great losses unless there is a chance of
large gains. While the income of the salaried man is occasionally
advanced, and then for long periods remains unchanged, the profits of
enterprise come in waves. In seasons of prosperity the income of the
employer swells with a dramatic swiftness while rents and wages move
tardily upward. But for years again the employer earns a return hardly
exceeding a low interest on the capital invested in the enterprise, or
runs the business for a time at a loss. Profits of this kind should not
be spoken of as a percentage. Greater or less, they are the net result
attributable to the enterpriser's skill, and bear no fixed or calculable
relation to any capital investment.
§ III. STATEMENT OF THE LAW OF PROFITS
[Sidenote: Antisocial or pseudo-profits]
1. _Some apparent profits are due to antisocial or criminal acts._
Cheating, lying, breaking of contracts, bribery of public officials, and
many similar acts may greatly increase individual incomes. These are not
profits, as the term is here understood, but they are hard to
distinguish from profits in practical life. One man gains a temporary
success by acts that are later punished as crimes; another, guilty of
like deeds, escapes conviction for lack of evidence or on
technicalities, and enjoys ill-gotten wealth. More fortunes, however,
are due to actions on the border-line of ethics, which society is not
yet honest enough to condemn or wise enough to prevent. No code of laws
can be framed that will make possible the punishment of all antisocial
acts. Any law that would catch all the guilty would injure many of the
innocent. Economic analysis may exclude from the concept of profits the
gains made by such means, but only omniscience could distinguish them in
every actual case from "swag and boodle."
[Sidenote: Chance profits]
2. _Some profits are the result of pure chance or luck._ What is luck? A
result that is not calculable, coming to pass in conditions where a
rational choice is not possible, is called luck, for lack of another
name. Now pure luck often brings temporary profit to the individual, but
chance does not in the least account for the average and abiding
profits. There is bad luck as well as good luck. According to the law of
chance, in the tossing of a coin for "heads and tails," one side is as
likely to come up as the other, and in the long run the number of heads
and tails will be equal. Where cases are numerous, losses and gains
distribute themselves about a general average, and may be eliminated by
insurance, as that against fire, flood, lightning, against sickness of
the employer, which would cripple the business, or against his death,
which would check it. But many factors evade all attempts to reduce
them to rule, and chance remains a considerable factor in the success of
many individuals. It still sometimes appears better to be born lucky
than rich.
[Sidenote: Profits due to a union of chance and choice]
3. _Some profits are temporary gains from happy but not entirely
accidental choice of the best course._ Many cases of profit said to be
due to chance are found on closer knowledge to be due to superior
judgment. A slight advantage in choice will give now and then apparently
chance gains. The adventurer who, on the discovery of gold, goes at once
to California or to Alaska, may stumble upon a gold-mine. It is luck;
but if he stays at home it is more likely, according to the theory of
chances, that he will stumble over an ash-heap. In places where
gold-mines are comparatively plentiful, one takes chances between a load
of lead and a bag of money. Throughout life there is constant
opportunity, but it must be sought. One who has the good judgment to be
ever at the right time at the place where he has the best chance of
stumbling upon a good thing, usually gets the advantage, and men call it
luck. The more the causes of success in general are studied, the larger
is found the element of choice, the smaller that of luck. Some writers
make these temporary gains the essence of profits. Considering that
profits are always due to the introduction of new and better methods,
and not to the continued use of better ones, they argue that as the
knowledge of these becomes common property profits will disappear. But
this in our view is a partial truth.
[Sidenote: Skill the essential condition of continuing profits]
4. _Continuing profits arise from the continued exercise of superior
judgment._ After all the chance elements are taken into account, there
remain differences in the abilities of men, and a continued and
ever-renewed need of organizing power. Profits, being recognized as due
to these differences in the abilities just as rent is due to differences
in the fertility and efficiency of goods, have therefore been called
differential gains. There would be no objection to the term were it not
intended to emphasize a supposed difference between profits and rents
on the one hand and interest wages on the other.
[Sidenote: Risk of loss reduced by skill]
Some writers have so magnified the thought that the enterpriser's
function is to assume risk, as to make it a denial of the view that
profits are the earnings of ability. The risks of business are not those
of the throwing of dice in which (if it is fair) skill plays no part,
and gains in the long run offset losses. Business risks are rather those
of the rope-walker in crossing Niagara; the task is easily undertaken by
the skilful Blondin, it is fatally dangerous to the man of unsteady
nerve and limb. Profits are due not to risks, but to superior skill in
taking risks. They are not subtracted from the gains of labor but are
earned, in the same sense in which the wages of skilled labor are
earned. So long as some men have better organizing ability than others,
have better judgment, are better able to take the risks, there is reason
to believe that profits will continue.
Profits are the share, or income, of the enterpriser for his skill in
directing industry and in assuming the risks. Despite the complex
influences, they are determined by his contribution to industry
essentially as is the value of any skilled service.
CHAPTER 32
PROFIT-SHARING, PRODUCERS' AND CONSUMERS' COÖPERATION
§ I. PROFIT-SHARING
[Sidenote: Nature and definition of profit-sharing]
1. _Profit-sharing is rewarding labor with a share of the profits in
addition to contract wages._ The essential mark of profit-sharing is
that the additional payment depends on the net profits of the whole
business at the end of the year. It is not to be confused with a free
gift, or with special privileges granted by the employer, such as
lunch-rooms, bathrooms or houses at a low rent. Profit-sharing is a
contract made in advance, not a free gift. Nor is it the same as a bonus
or premium for a larger output, made contingent on the physical product,
on the increased number of pieces turned out by the workmen,
individually or in groups. Premium for output is given for something
directly under the influence of the worker. The amount of profits is
affected by the amount of output, but also by a number of other things
that are quite outside the control of the workmen.
[Sidenote: The possibilities of profit-sharing]
2. _The purpose of the employer in adopting profit-sharing is to
stimulate the industry of the workers, thus reducing waste and cost of
labor and supervision._ The employer adopting the plan does not intend
to lose by it; he believes that if he can get his workmen to take an
interest in the business his costs will be reduced. He offers to divide
with them the resulting savings. There is, in every factory, greater or
less waste of materials, destruction of tools, and loss of time, that
no rules or penalties can prevent. If the worker can be made to take a
strong enough personal interest he will use care when the eye of the
foreman is not upon him. The product also can be slightly increased in
many ways by the workmen's exertions or suggestions. In some cases the
quality of the work cannot be insured by the closest inspection as well
as it can be by a small degree of personal interest. Either
responsibility for the fault cannot be fixed, or the defect is one not
measurable by any easily applied standard. Strikes are averted, good
feeling is promoted, and contentment is furthered if the interest of the
worker can be made to approach, and actually to be in harmony with, that
of the employer. The economic result of the plan, if it can be made to
work, must be to reduce the costs of these establishments below what
they are. The crucial question is whether this alone insures that the
costs will be less than those of competitors, thus giving a source out
of which an increased amount, really a wage, can be paid to the laborer.
This additional wage is made conditional on the employer's success in
gaining a net profit on the year's business.
[Sidenote: Its successes and failures]
3. _The profit-sharing plan is now successfully working in over one
hundred firms in America and Europe._ The plan was first tried in Paris
by Leclaire, a house-painter. In house-painting there is often a great
waste of materials and time by men working singly or in small groups in
different parts of the city. By this new method Leclaire enlisted the
aid of the workmen, reduced the costs, and increased the profits. It is
a remarkable fact that the plan has been continued successfully by the
same firm to the present time. The most important examples of
profit-sharing in the United States are the Pillsbury Mills in
Minneapolis, Procter and Gamble's soap-factories at Ivorydale, O., and
the Nelson Mfg. Co. at Leclaire, Ill. In some cases both manufacturer
and workman value the system highly. N. P. Gilman, the author of "Profit
Sharing," puts the ratio of successes very high. Others declare that
the failures are mostly lost sight of and are very many. The proportion
of business done in this way is not large. One hundred firms is a very
small fraction of one per cent. of the total number of firms in Germany,
France, England, and America. A still more important fact is that this
method of remuneration did not spread in the ten years preceding 1900.
[Sidenote: Objections to and difficulties in profit-sharing in practice]
4. _The failure of profit-sharing to grow is due to objections on the
side both of the employer and of the workman._ On the side of the
workman there is the bookkeeping difficulty. He is suspicious, and he
lacks knowledge of the business. If at the end of the year the books
show no profits, the workman loses confidence, considers the plan to be
mere deception, and rejects it. Moreover, the plan puts a limitation
upon the workman's freedom to compete for better wages by changing his
place of work. It is almost indispensable to make length of service a
condition to the sharing of profits. Workmen coming and going, working
only a few months, cannot be allowed to share; the percentage given to
the others increases with length of employment. Whenever men are thus
practically subject to a fine (equal to the amount of shared profits) if
they accept a better position, there is danger of a covert lowering of
wages. The plan tends to break up the trade-unions, which is one of the
reasons that the employers like it, and is the reason that organized
labor opposes it. The employer on his part objects to the interference
with his management, the troublesome inspection of the books, and the
constant grumbling and complaint of the workmen. It makes known the
amount of his profits; if they are large, the advertising of his success
invites competition; if they are small, publicity injures his credit and
depresses the value of his property. In view of all these difficulties
it is not surprising that while the plan often starts promisingly, it
usually loses its efficiency after a short trial. Business methods are
severely subject to the principle of the survival of the fittest.
Through competition and the survival of the firms that adopt
improvements, better methods must eventually supplant poorer ones. If a
method fails to spread when it has been tried for fifty years and all
are free to adopt it, there must be some defects inherent in it. That
must be our conclusion as to profit-sharing.
[Sidenote: Defective character of profit-sharing]
5. _It is usually better to make wages depend on the worker's efficiency
rather than on the profits of the whole business._ The strongest motive
to efficiency is present when reward is connected immediately and
directly with effort, not with some result only slightly under the
worker's control. In profit-sharing the added share is only partially
due to increased effort of the worker. Labor is but one of the groups of
costs. Profits are the net result of many influences. Chief among these
is the wisdom of the enterpriser in planning and conducting the
business. The "profits" may be nothing, though the worker may be
exerting himself to the utmost. The plan is, therefore, reactionary, not
in accord with the general progress of the wage system, which is tending
constantly to centralize responsibility, to put the risk into the hands
of competent managers, and to secure to the worker a definite amount in
advance, as high as conditions make possible. The system of premiums, or
bonus payments, for output, gives in most cases better results and is
rapidly spreading. It is sounder in conception and works better in
practice. This premium depends on the increase by the laborer of the
output of his particular machine or process as compared with a standard
based on the experience of some definite period.
§ II. PRODUCERS' COÖPERATION
[Sidenote: Purpose of producers' coöperation]
1. _Producers' coöperation is the union of workers in a self-employing
group to do away with any other enterpriser than themselves, and to
secure for themselves the profits._ Its object is not to do away with
any return on the capital investment. Capital may be borrowed either
from outsiders or from the individual coöperators, and is paid a
stipulated interest apart from the profits. The source of the gain is to
be found in the saving of what the worker looks upon as the needless
drain of profits into the pockets of the employer. The hope is that the
enterpriser's function (if it is admitted that he has any useful
function) will be performed by the workers collectively or through their
representatives. They undertake to furnish brain as well as muscle,
management as well as hand-work. The hope is even to increase the
profits through increasing the stimulus to the workers and by saving in
friction, disputes, and strikes.
[Sidenote: Its limited success]
2. _Practically the plan has been made to work in a comparatively few
simple industries._ The most notable examples of successful coöperation
in America have been the cooper-shops in Minneapolis. There were a
simple problem of costs, few and uniform materials, patterns, and
qualities of product, few machines and much hand-labor, simple
well-known processes, a sure local market. Mr. Lloyd, in a recent book,
describes many successful societies in England, but they are all of a
simple sort of industry, as agriculture and dairy-farming. Within the
whole field of industry, this method of organization makes little if any
progress. Most experiments have failed and the successful ones often
become ordinary stock companies with the most able men in control.
Therefore, whether losing or making money, they nearly all cease to
exist as coöperative enterprises. This result has disappointed the
prophecies of many wise men of seventy-five years ago. In the time of
John Stuart Mill, great expectations were entertained of the future of
productive coöperation, which was thought to be a solution of the whole
social problem.
[Sidenote: Its main difficulty]
3. _The main difficulty in productive coöperation is to secure managing
ability of a high order._ There is no touchstone for business talent, no
way of selecting it with any certainty in advance of trial. This
selection is made hard in coöperative shops by the jealousies and
rivalries, and by the politics among the workmen. A man thus selected by
his fellows finds it almost impossible to enforce discipline. In
coöperation there is occasionally developed good business ability that
might have remained dormant under the wage system; some workmen showing
unusual capacity cease to be handicraftsmen. But the unwillingness on
the part of the workers to pay high salaries results in the loss of able
managers. Having demonstrated their ability, the leaders go to competing
industries where their function is not in such bad repute, and where
higher salaries can be earned; or they go into business independently,
being able easily to get control of the necessary capital.
[Sidenote: Coöperators under-value the enterpriser's function]
4. _Most coöperative schemes have suffered from a lack of good theory,
an inability of the workers to see the importance of the enterpriser's
service._ Most men make a very imperfect analysis of the productive
process. They see that a large part of the product does not go to the
workmen; they see the gross amount going to the enterpriser, and they
ignore the fact that this contains the cost of materials, interest on
capital, and incidental expenses. They ignore further that the
enterpriser's function is a productive and essential one. The theory of
exploitation, or robbery, as explaining the employer's profits, is very
commonly held in a more or less vague way by workmen. With a body of
intelligent and thoroughly honest workmen, keenly alive to the truth,
the dangers, and the risks of the enterprise, coöperation would be
possible in many industries where now it is not. The producers'
coöperative schemes usually stumble into an unsuspected pitfall. When a
heedless and over-confident army ventures into an enemy's country
without a knowledge of its geography, without a map, and without leaders
that have been tested on the field of battle, the result can easily be
foreseen.
§ III. CONSUMERS' COÖPERATION
[Sidenote: Nature and kinds of consumers' coöperation]
1. _Consumers' coöperation is the union of a number of buyers to save
for themselves the profits of the merchants or agents._ There are many
classes of consumers' coöperation, but the chief ones are: (1) to sell
goods (retail stores); (2) to provide insurance (coöperative insurance
companies); (3) to provide credit or capital (coöperative banks). These
are also productive enterprises, for the merchant's work adds value to
the goods, the insurance company and its agent do a real service, the
profits of the small bank are, ordinarily, earned fairly under existing
conditions. The terms producers' and consumers' coöperation merely set
in contrast the part of the productive process that is undertaken.
Producers' coöperation is concerned with the earlier steps, usually
stopping when the product is disposed of to wholesale or retail
merchants. Consumers' coöperation (often called distributive
coöperation) is concerned with the later steps, the placing of a
consumption good (rarely also productive agents) into the hands of the
final user. It imparts the same value to goods that the retail merchant
does. The one thing this class of coöperators is sure of when they begin
is a number of consumers to make use of the service or products they
purpose to supply; hence the name.
[Sidenote: Costliness of competitive mercantile business]
2. _The waste of competitive mercantile business is the source from
which it is expected that the savings of the coöperative enterprise will
come._ It is a great expense to the retail dealer to secure a body of
customers. Rent of store-room, clerk hire, interest on invested capital
are fixed charges, which can be met only on condition of a regular and
frequent turnover of the stock. To attract customers the dealer must
have a well-located store, must advertise, keep open long hours, and pay
idle clerks. Frequently he must give credit, raising the price enough to
cover the expense of bookkeeping, collection, bad accounts, and loss of
interest. The public's likings, whims, lack of judgment, and lack of
business analysis make these charges necessary. There are many
communities where it would be impossible to carry on a cash business
even at considerably lower prices. Customers are exacting and require
the costly delivery of small packages; two horses and a driver must
travel two miles to deliver a spool of thread or a half-dozen oranges.
Frequent changes of fashion and the shifting of customers from one store
to another keep the merchant always insecure in his trade. A number of
buyers mutually agreeing to pay cash, to buy at certain times, to place
all their orders with one store, to go to a cheaper location, down an
alley or into a basement, can save much of this cost on one condition:
that the management approaches in its efficiency that of ordinary
competitive business. In spite of all these advantages, if there is
inefficient management the final cost will be no less than that of
ordinary business.
[Sidenote: The more successful coöperative stores]
3. _Despite the possibilities of saving, most coöperative stores fail
through a lack of good management._ Note first the greater successes.
Since 1842, from which time it dates, the coöperative-store movement has
progressed steadily in England, where the scores of retail societies are
federated and own large wholesale stores. The long experience has
developed good methods and a conservatism almost inconceivable to an
American mind. They are practically great stock companies in which one
can buy a share at a small cost and become a purchaser at usual prices,
receiving a dividend later according to the amount of his purchases.
Coöperative stores in American universities are generally successful,
apparently because they don't coöperate. Some get into politics and go
the way of the wicked. The survivors gravitate into the hands of a
committee of the faculty, which tries to employ an efficient manager,
and administers the business as a public trust without private profit.
The wastefulness of multiplying orders for text-books to be used by a
class whose number is definitely known in advance, and the comparatively
uniform character of the supplies, make economy peculiarly easy in this
case. A large part of the services of the coöperative store, however,
are indirect; it reduces and regulates the charges in the stores near
by.
[Sidenote: The failures and their causes]
Nearly all the Granger stores, started thirty years ago in great
numbers, and most of the coöperative stores among American workmen, have
failed. The failure is easily explained by the ignorance of danger, by
lack of harmony, by credit sales, and by inefficient management. The
wastes of competitive business are partly a tax imposed upon men (taken
collectively) by their lack of business method; the community is not
intelligent enough, honest enough, or self-sacrificing enough to do
business in the most economical way. Partly they are the price paid for
variety and change, and for the cherished American right "to
kick"--something difficult for the members of a coöperative store to do
without hurting themselves.
[Sidenote: Profit-sharing and coöperation in relation to the
enterpriser]
[Sidenote: Continued need of the enterpriser]
4. _The experience with these plans verifies the analysis of the
enterpriser's function: pure profits are the earnings of a productive
service._ Comparing these three plans, they are seen to be alike in
seeking to make workers share some of the profits, to change the
destination to which profits would go. The first would create profits by
the effort of the workers, and give them a part of the saving. The
second would have collective workers perform the enterpriser's work in
the factory and get his reward. The third would have collective buyers
do the work of the merchant and save his profits and other costs. The
last is the easiest to do. Profit-sharing is next in difficulty, and
producers' coöperation is the hardest of all to put into practice. In
some cases, under some conditions, the enterpriser's services may be
more economically performed than at present, for the waste is great. But
taking men as they are and things as they are, in most places the
enterpriser's service is necessary and must be paid for. His
contribution to the success of the industry depends on his nature and
ability, and it can be distinguished theoretically and practically from
the contribution made by the workmen. Nothing but changes in human
nature, in education, and in morality can diminish the necessity for his
service.
CHAPTER 33
MONOPOLY PROFITS
§ I. NATURE OF MONOPOLY
[Sidenote: Difficulty of fixing the meaning of monopoly]
1. _The term monopoly is used loosely and in many senses._ In popular
discussion monopoly means almost any wealthy corporation or the power
the corporation possesses, a power which is usually thought of as
oppressive. Even economists have held the vaguest ideas regarding
monopoly. The recent rise of trusts and monopolies has given a large new
body of facts bearing upon the subject, but all the resulting discussion
by the public and by economists has not brought agreement upon a
definition entirely satisfactory. When usage has not settled upon any
one meaning, the selection of a definition is in a measure arbitrary,
though it may be guided by logic and considerations of expediency. Let
us state the various meanings and indicate the one adopted in this
discussion.
[Sidenote: Monopoly is not merely scarcity]
2. _Monopoly should not be used as synonymous with scarcity._ Scarcity
is the essential condition of all value. The simplest things--bricks,
sand, the commonest unskilled labor--would have no value were there not
a degree of scarcity relative to the wants that may be gratified.
"Monopoly," whatever else it means, always conveys the idea of some
exceptional kind of scarcity, scarcity due in part to some source or
cause not ordinarily present. It is a bad practice in definition to
apply two words to one idea, leaving the other idea unnamed, as is done
when monopoly is made synonymous with scarcity. Both words are needed.
Such a usage unfortunately is common in economic literature. Many
economic writers, for example, have called landownership monopoly,
saying that land being the work of nature cannot be increased by men,
and therefore must always be scarce. Even if it were true that in the
economic sense land could be produced by man, there still would be
confusion here between a general class of goods and a special thing. The
fact that a particular field cannot be duplicated does not make a
monopoly of land as a whole, any more than the existence of desert land
in Arizona makes land valueless or a free good. Nor is a land-owner a
monopolist any more than is the owner of a valuable machine. The owner
of forty acres of land worth four hundred dollars, or the owner of a
village lot worth a hundred dollars, can hardly be called a monopolist.
It leads to absurdity to use the word monopoly with reference to
landownership indiscriminately. Neither mere scarcity nor the limitation
of natural stores should be called monopoly when ownership is scattered
and combination between owners does not exist.
[Sidenote: Monopoly is not merely superior economic power]
3. _The ability of superior material agents and of skilled workers to
secure higher returns than do poor ones does not constitute monopoly._
The free competition assumed in abstract discussions of value, does not
mean equal capacity or efficiency, but the legal freedom and personal
willingness to move a productive agent into the highest industrial place
it is capable of holding. The rocky field does not compete with the
fertile one in the sense that it can yield the same uses. The field fit
only for potatoes does not compete with those rare and favored
localities that can raise the best wines. The gardener earning two
dollars a day does not compete with the skilled physician with an income
of twenty thousand dollars a year, for he has not the economic capacity
to do so; but he is _free_ to compete (as is the owner of the rocky
field) unless law, caste, class legislation, social prejudice, or some
other objective factor forbids. Anything, however, that prevents the
labor or capital of buyers or sellers from application for which they
are fitted, defeats free competition. To use the term monopoly of any
and every limitation of economic ability is to extend it to every case
of value. To use it of the high wages of skilled workmen, where no union
to suppress competition exists among them, is to make it a colorless
synonym of scarcity. It should be confined to a narrower and more
exclusive use. Some special kinds of limitation should be connected with
the idea of monopoly.
[Sidenote: Monopoly consists in unified control]
4. _The limitation connected with monopoly is not that of economic
capacity but that of ownership and control._ The derivation of the word
from the Greek points to the general thought: _monos_, alone, _poléo_,
to sell, a single seller, the sole source of supply in a given market.
The term was first used in England of special grants or patents of
monopoly from the crown to make or deal in specified articles, such as
soap, candles, etc. The political power of the state created and
defended the monopoly. This policy is pursued in a limited degree to-day
for the encouragement of invention, in the granting of patents and
copyrights. In the current definition, "The exclusive right, power, or
privilege of dealing in some article or trading in some market," the
term "dealing in" is well chosen, for it is broad enough to cover cases
of buying as well as selling, and includes power derived from political
as well as from other sources. But the term "exclusive" is too absolute,
allows of no gradations, and makes the definition applicable only in the
rarest cases.
[Sidenote: Definition of monopoly]
[Sidenote: Monopoly limits supply]
5. _Monopoly is such a degree of control over the supply of goods in a
given market that a net gain will result to the seller if a portion is
withheld._ Every producer has control over some agents and some portion
of the supply of products; but ordinarily the portion controlled by any
one is so small that withholding it entirely from sale would not cause
the market price to rise in any appreciable degree. The producer in such
a case regulates his action as if the market price were fixed beyond his
control, and he uses his productive agents fully up to the point where
costs equal price on the marginal unit of product. A skilled worker
getting five dollars a day loses that sum every day he is idle. A
landowner whose land can command a competitive rent of ten dollars an
acre must take that sum or less, or nothing; he cannot get more. How can
a net gain ever result from a smaller sale? As a reduction of supply
results in a higher price, it is possible, as is seen in the paradox of
value, for a situation to arise in the case of some goods, where a
smaller number of units yield a larger sum in the market than a larger
number of units. But the seller's interest lies not in the increase of
total sales, but in that of net gains. Net gains, being the product of
the number of units sold multiplied by the gain on each unit, increase
at a much faster rate than do total sales. The existence of monopoly
power in any degree depends therefore on several factors: the effect of
contraction of supply in raising prices, the effect on costs, the number
of units remaining in the ownership of the one contracting supply, and
the possibility of preventing others from increasing supply later to
profit by the higher prices.
§ II. KINDS OF MONOPOLY
[Sidenote: The sources of monopoly power]
[Sidenote: Political monopoly]
1. _Monopoly gets its power from political, economic, and commercial
sources._ A political monopoly derives its power of control from a
special grant from the government, forbidding others to engage in that
business. The typical political monopoly is that conferred by a crown
patent bestowing the exclusive right to carry on a certain business. A
second kind is that conferred by a patent for invention, or the
copyright on books, the object of which is to stimulate invention,
research, and writing by giving the full control and protection of the
government to the inventor and writer or their assignees. In this case
the privilege is socially earned by the monopolist; it is not gotten for
nothing. Moreover, the patent is limited in time, expires and becomes a
social possession. A third kind is a government monopoly for purposes
of revenue. In France, the government controls the tobacco trade, and
the high price charged for tobacco makes the monopoly yield a large
income. A fourth kind are public franchises for public service, as
street-railways, lights, gas, waterworks, etc. These are granted to
private capitalists to induce them to invest capital in something which
has public utility.
[Sidenote: Economic monopoly]
Economic monopoly arises when the ownership of scarce natural agents, as
mines, land, water-power, comes under the control of one man or one
group of men who agree on a price. Economic monopoly is a result of
private property that is undesigned by the government or by society. It
is exceptional, considering the whole range of private property, but it
is important. The oil-wells embracing the main sources of the world's
supply have come under one control. One corporation may control so many
of the richest iron-mines of the country as to be able to fix a price
different from that which would result under competition. Coal-mines,
especially those of some peculiar and limited kind, such as anthracite,
appear to become easily an object of monopolization. Economic monopoly
merges into political monopolies, such as patents and franchises.
Private property is a political institution designed to further social
welfare, and only rarely is any particular property a monopoly. Private
control of great natural resources doubtless would have been prohibited
had it been foreseen.
[Sidenote: Commercial monopoly]
Commercial monopoly, variously called contractual, organized, or
capitalistic monopoly, arises where men unite their wealth to control a
market, to overpower or intimidate opposition, and to keep out or limit
competition by the mere magnitude of their wealth. These various kinds
so merge into each other that they cannot always be distinguished in
practice. A patent may help a capitalistic monopoly in getting control
of a market; great wealth may enable a company to get control of rare
natural resources.
[Sidenote: Special classes of monopoly]
2. _Monopolies may, for special purposes, be classified also as selling
and buying, producing and trading, lasting and temporary, general and
local._ The terms selling and buying monopoly explain themselves, though
the latter conflicts with the etymology. Under conditions of barter the
selling and the buying monopoly would be the same thing in two aspects.
A selling monopoly is by far the more common, but a buying monopoly may
be connected with it. A large oil-refining corporation that sells most
of the product may by various methods succeed in driving out the
competitors who would buy the crude oil. It thus becomes practically the
only outlet for the oil product, and the owners of the land thus must
share their ownership with the buying monopoly by accepting, within
certain limits, the price it fixes. The Hudson Bay Company, dealing in
furs, had practically this sort of power in North America. Many
instances can be found, yet, relatively to the selling monopolies, those
of the buying kind are rare. A producing monopoly is one controlling the
manufacture or the source of supply of an article; a trading monopoly is
one controlling the avenues of commerce between the source and the
consumers. Monopolies are lasting or temporary, according to the
duration of control. By far the larger number are of the temporary sort,
because high prices strongly stimulate efforts to develop other sources
of supply. Yet the average profits of a monopoly may be large throughout
a succession of periods of high and low prices. Monopolies are general
or local, according to the extent of territory where their power is
felt. At its maximum where transportation and other costs most
effectually shut out competition, monopoly power shades off to zero on
the border-line of competitive territory.
[Sidenote: Relativity of monopoly]
[Sidenote: The test of monopoly]
3. _Degrees of power to affect price result from varying extent of
control; monopoly is a relative term._ The term monopoly by its
derivation has reference to a single seller; but there are other
thoughts in the concept. Monopoly has reference also to the amount of
the supply controlled. The frequent use of the adjectives partial,
limited, and virtual are implied but usually superfluous recognitions of
the relative character of monopoly. Ownership of a particular knife,
pencil, book, makes one the unique seller of it, but confers no monopoly
power, as the power of substitution is practically absolute; the welfare
of no one depends in any appreciable measure on that particular pencil.
Ownership of an important fraction of an entire species of goods gives
more power to affect value. One owning a large part of the desirable
building sites or houses in town may gain by occasionally letting one
stand vacant in order to drive better bargains with tenants. A
trade-union may control most of the labor-supply of one kind in a town.
But the test of monopoly is that a gain results from a higher price and
fewer sales. It begins at the point where there is a motive to limit the
supply in accordance with the paradox of value. The control of an entire
species of goods gives price-fixing power, limited only by substitution
of goods. Even though one person controlled all the coal and wood in any
market, their prices still would be limited. If there were but one
possible source of meat-supply, most people could live without meat. The
monopoly of great species of goods can thus be seen gradually to merge
from one grade into another. It is a matter of quality as well as
quantity. There is more or less of it in the different industries, and,
as noted in the preceding paragraph, it varies over time and territory.
§ III. THE FIXING OF A MONOPOLY PRICE
[Sidenote: Forces governing competitive prices]
1. _A competitive producer gets the highest price that will permit him
to dispose of his product._ The enterpriser seeks to get the highest
price for his product that the market will afford. His ability to
continue making a profit at a lower price does not induce him to reduce
the price unless the reduction is to his interest. The ordinary
competing manufacturer is limited in his price by two things: first,
his customers may cease to buy such articles entirely and may substitute
other goods if the price is too high; secondly, they may buy of other
sellers. Between his wish to keep the price up, and the customer's wish
to buy as cheaply as he can, the price is fixed at a point where there
is no inducement for others to come in and reduce his sales, or for him
to seek a better market. There may be under these conditions a potential
but very limited monopoly power. The sole druggist in a small town might
occasionally get extortionate prices from particular customers in times
of dire need, but he would thus drive away much of his custom, and would
tempt a fairer and less grasping competitor to come in. Thus, when men
and capital are free to come and go, there results an average or normal
return for ability and agents of a certain grade. Prices come to
equilibrium where each is selling his total product.
[Sidenote: Monopoly's greater control of price]
2. _Where a monopoly exists to a greater or less degree, there is less
reason to fear loss of custom to competitors._ The degree of control
determines the fear of competitors. If the control is slight, a very
small rise of price will bring in competitors. The monopoly profits in
this case either must be very small or they will be very brief. Those
outside, controlling a large supply, will be tempted by large profits to
market it at once and to increase it as fast as possible. Even where a
large part of the supply is under one control, the fear of substitution
puts a limit on the price demanded. If the control were extended to all
wealth, the monopolist would be the absolute despot of the lives of his
fellows. But as things are, the monopolist aims, just as the competitor
does, to get the price that gives the maximum gain. The monopolist,
however, is in a more or less favored position, as he can raise his
price considerably before losing the most of his customers. Much depends
on whether the costs increase or decrease as output grows. Where a large
increase in output greatly decreases the cost, lower price may leave a
larger margin between the cost and the selling price. A general
monopoly price is therefore not an unlimited price. It is higher than
the competitive price if the same cost of production is maintained. It
may conceivably be lower than the former competitive price if the
economies of combination greatly reduce the cost and justify a large
increase of the output.
[Sidenote: Discriminating monopoly rates]
3. _A monopoly often seeks to avoid a general market price, and it
adjusts its charge in each small market separately._ This is a most
important aspect of the monopoly problem and a most important
modification of the principle just stated. A market price is the
expression of the least urgent demand that aids in carrying off a given
supply. It is a maxim that there can be but one price at a time in a
given market. The baker ordinarily sells the loaf at the same price to
every one buying a given quantity. If he had a monopoly of the
bread-supply, however, he might deal with each customer separately,
ascertain, by personal inquiry into the lives of the citizens and by the
aid of a force of detectives, just how much each could or would pay
rather than do without bread. The policy of varying prices is thus
followed by monopolies, though usually in a less inquisitorial way, to
enable them to get the highest possible returns. Under the name of
"charging what the traffic will bear," it is practiced by the railroads
as local and personal discrimination. The endurance of some communities
and of some individuals being greater than that of others, the burden is
adjusted to the back, being made not as light but as heavy as each can
be forced to bear.
[Sidenote: Low rates to destroy competitors]
Large monopolies dealing in commodities use an adaptation of this method
to kill off small competitors who, within a certain district, sell at
less than the monopoly price. Prices are suddenly reduced in that
community below cost until, the small competitor being ruined, the
monopoly rate is reëstablished perhaps higher than before. Fear of
suffering a like fate prevents others from attempting competition even
when prices offer a great attraction and give a high monopoly profit.
[Sidenote: The source of monopolistic profits]
The profits of monopoly can be explained by the ordinary laws of value,
yet evidently they form a peculiar economic and social problem. They
appear to be due not to the services of the enterpriser in increasing
production, but to his success in limiting it. There is, therefore, an
antisocial element in them not found in the profits of ordinary
industry. This deserves further and closer study.
CHAPTER 34
GROWTH OF TRUSTS AND COMBINATIONS IN THE UNITED STATES
§ I. GROWTH OF LARGE INDUSTRY IN THE UNITED STATES
[Sidenote: Distinction between large capital]
[Sidenote: Large production]
[Sidenote: And monopoly]
1. _In the discussion of the so-called trust problem three things must
be distinguished: large individual capital, large production, and
monopoly power._ Capital, in the sense of valuable agents, is found in
the smallest as well as the largest industry, and every owner, from the
small shop-keeper to the wealthiest bondholder, is a capitalist. In
popular discussion, however, the word frequently implies great wealth in
a single hand, though this wealth may be invested in a large number of
small industries. Large production is the concentration of capital into
large units of industry. The capital may be the same as before, the
ownership may or may not be widely diffused, but the control and
management are unified. Large factories may or may not have monopoly
power; as factories grow in size, competition among them often becomes
more, not less, complete and severe. On the contrary, monopoly, as
before defined, may exist where the industry is small, as the waterworks
in a small town, or a small factory for making patented articles. In
periods of depression a business with a capital of ten thousand dollars
may go on and prosper, while one with millions may be forced into
bankruptcy. These three ideas--great individual wealth, large industry,
and monopoly power--are often hopelessly confused in the discussion of
present-day questions.
[Sidenote: Stages of tools and household industries]
[Sidenote: Of simple machines]
[Sidenote: And of large industry]
2. _Three industrial stages may be broadly distinguished: that of tools,
that of machines and small factories, and that of large production._ Men
are prone to forget that all the world is not doing just as they are.
Over two thirds of the people on the globe are still in the first
industrial stage. One billion people use only tools, and have no better
source and means of power than domestic animals. This is true in the
most of Asia and Africa, in the greater part of South America, and in
many portions of North America. About two hundred million people live in
the stage of simple machines and small factories. These are found in
eastern and southern Europe, small portions of South America, some parts
even of the United States. In this stage there is not enough
manufacturing power in the community to supply much more than its own
needs. About two hundred million people in the United States and western
Europe have reached the third and highest industrial plane, where the
highest mechanical devices are employed and industry becomes highly
specialized. These differences are broadly stated; there are contrasts
within every nation. Three hundred miles from here, in the Alleghanies,
people still can be found spinning and weaving and wearing homespun as
in colonial days. In a trip of twenty miles in Tyrol or Switzerland one
can observe every one of these industrial stages. The most striking
development, if not the typical form, in America to-day is large or
concentrated industry.
[Sidenote: Household industry in America]
[Sidenote: Recent changes in number of factories]
3. _In the last half century the unit of organization in leading
industries has tended to grow larger._ Seventy-five years ago a
tool-using household industry, on farms and in homes where the greater
part of the things used were produced in the family, was still the
typical organization in the United States. The early factories growing
out of the household industry were small. A family specialized in
producing cloth and exchanged with its neighbors; so with shoes,
candles, soap, canned goods, cured meats, etc. Since that time two
counter forces have been at work to affect the ratio of manufacturing
establishments to population. The number of establishments has been
increased by specialization of farming which has called for many
industries to produce the things once made on farms, and by increasing
wealth and invention, which has made possible many small industries
supplying things before almost unknown. The number of establishments has
been diminished as the staple products that can be transported have come
to be made in larger factories. The resultant of these movements during
the thirty years ending in 1900 is somewhat surprising: the ratio of
factories (with an output worth five hundred dollars) to population has
somewhat increased. In 1870 there were two hundred and fifty-two
thousand establishments; in 1890, three hundred and fifty-five thousand,
and in 1900, five hundred and twelve thousand, a ratio to population of
one to one hundred and sixty-two, one hundred and seventy-seven, and one
hundred and forty-four respectively. The last date was one of great
industrial prosperity, and doubtless many ephemeral enterprises had been
called into existence, thus giving a somewhat abnormal result. Moreover,
there has been a large increase in the number of things made in
factories which were formerly made in the homes, and which then did not
appear at all in the census of manufactures.
[Sidenote: Large production in some industries]
In cotton-weaving, however, the unit of industry is growing, factories
in 1870 numbering nine hundred and fifty-six; in 1890, nine hundred and
five; in 1900, one thousand and fifty-five, the later increase being due
to the fact that many new factories in the South have been started in
the last decade. The population meantime doubled. This movement has been
going on for seventy years, there being about the same number of mills
in 1900 as in 1830, though population had multiplied six-fold. Iron- and
steel-mills numbered one thousand three hundred in 1880, one thousand in
1890, and nine hundred and sixty-five in 1900. In industries having
local markets and sources of supply for materials, the change has been
less rapid. There were twenty-four thousand grist-mills in 1880,
eighteen thousand in 1890, and twenty-five thousand in 1900, a change
of ratio from two thousand one hundred to three thousand population per
grist-mill. There were twenty-six thousand sawmills in 1880, twenty-two
thousand in 1890, and thirty-three thousand in 1900, a change from about
one thousand nine hundred and twenty to two thousand two hundred and
seventy persons per sawmill.
But while the number of establishments in these staple industries was
decreasing, the number of employees per establishment in most cases was
increasing. The average in all industries, in 1870, was eight; in 1890,
twelve; in 1900, ten and four tenths. In cotton-mills, in 1870, the
average was one hundred and eighty-four; in 1890, two hundred and
forty-four; in 1900, two hundred and eighty-seven. The grist-mills, in
1880, had two and four tenths persons per establishment; in 1890, three
and four tenths. The sawmills, in 1880, averaged six employees each; in
1890, fourteen; iron- and steel-mills in 1880, one hundred and
twenty-one each; in 1890, one hundred and ninety-six.
[Sidenote: Growing concentration of capital into large industries]
4. _The amount of capital per establishment is tending to increase in
the leading lines of industry._ The amount of capital is not so easy to
determine as the number of employees, and it is recognized that the
census figures on this subject are only approximately correct. We are
told that in cotton-mills, in 1830, the average capital invested was
fifty thousand dollars; in 1890, nearly four hundred thousand dollars;
in 1900, four hundred and forty thousand dollars. It is easy to observe
the large increase in investment of capital in flouring-mills since the
new processes came into use. The average capital of all industries does
not grow as in the staple ones, for many smaller industries have come
into existence. In 1880, the average capital was eleven thousand
dollars; in 1900, it was eighteen thousand dollars.
[Sidenote: Recent formation of combinations]
The years between 1890 and 1900 saw the rapid formation of trusts and
combinations, and of larger industries. Consolidation took place on a
great scale in railroads and in manufactures. Much of this has been of
such a kind that it does not appear at all in the figures showing the
number of establishments and of employees. Many discrepancies appear in
the data regarding this movement given by different authorities, as
there is no generally accepted rule by which to determine the selection
of the companies to be included in the lists, and as the conditions are
changing from day to day. A competent financial authority[1] gives the
following figures regarding the "industrial" trusts (manufacturing and
commercial) and gas trusts, organized in the United States between 1860
and 1899, not including combinations in such businesses as banking,
shipping, railroad transportation, etc. The figures refer to the
reorganization and consolidation of industries into larger units, some
of which have much and others little or no monopoly power.
Decade Number Organized Total Nominal Capital
1860-69 2 $13,000,000
1870-79 4 135,000,000
1880-89 18 288,000,000
1890-99 157 3,150,000,000
--------------- --- -------------
Total, 40 years 181 $3,586,000,000
The number organized and the capital represented by this movement in the
last of these decades are eight times as great as in the thirty years
preceding. In the last ten years can be traced the influence of general
industrial conditions.
Year Number Organized Total Nominal Capital
1890 6 $82,000,000
1891 13 168,000,000
1892 13 140,000,000
1893 5 226,000,000
1894 2 35,000,000
1895 7 104,000,000
1896 3 40,000,000
1897 6 93,000,000
1898 22 574,000,000
1899 80 1,688,000,000
--------------- --- -------------
Total, 10 years 157 $3,150,000,000
[Footnote 1: Compiled from data given by "The Journal of Commerce and
Commercial Bulletin," reprinted in "The Commercial Year Book," Vol. V,
1900, pp. 564-569.]
The first three years enjoyed great prosperity and the number of
combinations were six, thirteen, thirteen. In 1893, the number was less,
but the total nominal capital (preferred and common stocks and bonds)
was still the greatest it had ever been in any year. Then came the
period of depression, 1894-97, when both the numbers and the capital
were comparatively small. Then followed the period of the greatest
formation of trust companies the world has ever seen, which extended
from 1898 to 1901, and ended in 1902.
[Sidenote: Trust statistics for 1904]
In a list recently revised by another authority[2] it appears that the
data for all "industrial trusts" (nearly, but not quite, comparable with
the foregoing figures), are in round numbers as follows:
Number of
Plants Acquired Total
Date Number or Controlled Nominal Capital
Jan. 1, 1904 318 5288 $7,246,000,000
[Footnote 2: John Moody, "The Truth About the Trusts," 1904.]
These figures would indicate that the industrial trusts more than
doubled within four years, most of the growth being within three years.
The same authority, in a more comprehensive list, classifies in six
groups all so-called "trusts" of the United States, at the date of
January 1, 1904, as follows (the figures just given above are the totals
of the first three groups):
No. of Plants
Acquired or Total
Groups Number Controlled Nominal Capital
1. Greater industrial
trusts 7 1528 $2,660,000,000
2. Lesser industrial
trusts 298 3426 4,055,000,000
3. Other industrial
trusts in process
of reorganization
or readjustment 13 334 528,000,000
4. Franchise trusts 111 1336 3,735,000,000
5. Great steam
railroad groups 6 790 9,017,000,000
6. Allied independent
railroad groups 10 250 380,000,000
--- ---- ---------------
Total, 445 8664 $20,000,000,000
§ II. ADVANTAGES OF LARGE PRODUCTION
[Sidenote: Economical use of machinery in large production]
1. _A great technical advantage of large production is the better and
fuller use of machinery._ A large factory with a large output can keep a
special machine adjusted for each pattern and process, whereas in a
small factory much time and energy are wasted in adjusting one machine
for various processes. The machinery in a large factory is thus more
fully utilized. Compare the machinery used in a large ax-factory with
that used in twenty-five small ax-factories having the same total
output: the one hundred and fifty workmen in twenty-five small factories
would use twenty-five shears, one hundred trip-hammers, fifty
grindstone-pits, fifty polishing-frames, a total of two hundred and
twenty-five machines; the same one hundred and fifty men in one large
factory would require three shears, a saving of twenty-two; twenty
trip-hammers, a saving of eighty; thirty-seven grindstone-pits, a saving
of thirteen; thirty polishing-frames, a saving of twenty; a total of
ninety machines, a saving of one hundred and thirty-five machines. The
difference in cost due to machinery is not so great as these figures
indicate, as the unused machines last longer; but in the small factory
there is more depreciation from rust and decay, and a larger
proportionate investment of capital for which interest must be earned.
The average amount of stock and materials required in a large factory is
not so great in proportion to the output.
[Sidenote: Economy in labor power]
2. _In a large factory the division of labor may be more complete and
effective._ The technical economies of the division of labor can be
realized in large measure only when a number of men work together.
Partly because of the advantages in the use of machinery, but partly
from other causes, labor in a large group is proportionately more
effective than in a small group, especially in producing form-value. In
making plows, nine men working separately will average sixty-six plows
each per year, while one hundred and eighty men working together will
average one hundred and ten each per year, the output per man being
increased sixty-six and two thirds per cent. In a rifle-factory with a
daily output of fifty, eight men are needed for the same product that
can be supplied by three men in a factory with an output of one thousand
daily.
[Sidenote: Miscellaneous economies]
3. _In the larger industry the costs of management, supervision, and
marketing are relatively less._ Division of labor decreases the
difficulty of supervision in larger factories, where the processes are
divided, systematized, and made a matter of routine. The necessary
inspection of the results is more rapid and easy. The advertising of
certain kinds of goods involves a large and inevitable outlay, which is
relatively less for a larger business, as the greater the output the
smaller the burden on each unit of the product. Combination effects a
great saving in the number of commercial travelers, a result partly due
to the decrease in competition, but partly also to better organization.
Each of twenty different factories must send its drummers into every
part of the country to seek business. In combination they can divide the
territory, visit every merchant and get larger orders at smaller cost.
Supplies can be purchased more cheaply in large amounts, and shipments
in car-load and train-load lots make possible special (sometimes
illegal) concessions from railroads and from carriers on waterways.
[Sidenote: Limits to the growth of a single factory]
4. _There are some disadvantages in a large industry which put a limit
to the growth of a single local establishment._ There is practically a
limit to the advantages of size in a factory. When each man is working
on the smallest possible subdivision of the product, doubling the number
of employees will not increase his skill. When the finest machinery can
be kept constantly in use, economy in its use has reached the maximum.
As large factories tend to create cities around them, land rises in
value and higher wages must be paid the workmen. Small factories are
constantly seeking out lower rents, taxes, wages, salaries, cheaper
local sources of materials, cheap though limited sources of power, and
thus they compete successfully in many markets. The point is reached in
the growth of establishments where oversight cannot be as perfect and
complete; the eye of the master cannot be over all. The market that can
be reached by one factory is limited by distance, as the cost of
transportation finally offsets all the other advantages of large
industry.
[Sidenote: Do not necessarily limit consolidation]
It is evident that most of these reasons apply to a single local factory
with far greater force than to a federation of locally scattered plants.
It was once believed that the growing disadvantages of large industry
would set an early limit to consolidation. While there is a truth in
this thought not to be overlooked, the effects must now be recognized to
be more distant than was supposed. The limits to the advantages of
combination have been removed by the application of the federative plan
which makes possible under one management the maximum of advantages with
the minimum of the disadvantages in large industry. That was the
discovery of the early promoters of the trust movement.
§ III. CAUSES OF INDUSTRIAL COMBINATIONS
[Sidenote: Trusts in the legal and the popular sense]
1. _Trusts are large combinations of capital with some degree of
monopoly power._ The original, legal meaning of the term trust does not
include the idea of monopoly. The old legal idea of a trust is the
confidence imposed in a trustee. The method that was adopted by the
early combinations was the trust method, that is, they made use of this
legal device: the stock of the separate companies was put into the hands
of a board of trustees to whom was thus given the right to control. As
it has been found possible to accomplish the same end without the use of
this legal method, the popular meaning of the word trust, as applied to
a monopoly, no longer agrees with the legal meaning. The word trust is
popularly used of any large industry, though usually there is connected
with it the idea of some evil power to raise prices to the consumers. A
large number of the corporations called trusts have, however, little
monopoly power, and some have none at all. They are simply large
establishments.
[Sidenote: Economies of combination]
2. _A strong reason for combination of competing plants is found in the
legitimate economies of large production._ The economies that are
possible within a single factory may be still greater in a number of
combined or federated industries. The cost of management, amount of
stock carried, advertising, cost of selling the product, may all be
smaller per unit of product. A large aggregation can control credit
better and escape loss from bad debts. By regulating and equalizing the
output in the different localities, it can run more nearly full time.
Being acquainted with the entire situation, it can reduce the friction.
A strong combination has advantages in shipment. It can have a
clearing-house for orders and ship from the nearest source of supply.
The least efficient factories can be first closed when demand falls off.
Factories can be specialized to produce that for which each is best
fitted. The magnitude of the industry and its presence in different
localities strengthens its influence with the railroads. Its political
as well as its economic power is increased.
[Sidenote: Integration of industry]
A recent phase of corporate growth is the "integration of industry,"
that is, the grouping under one control of a whole series of industries.
One company may carry the iron ore through all the processes from the
mine to the finished product. A railroad line across the continent owns
its own steamers for shipping goods to Asia or Europe. Large wholesale
houses own or control the output of entire factories. The possibilities
in this direction have only begun to be realized.
[Sidenote: Combination prevents competition]
3. _The men uniting to form a trust always declare that its formation
is the necessary result of excessive competition._ The statement is
often true in the sense that a hard fight and lower prices have preceded
the formation of the trust. But as this excessive competition usually is
for the very purpose of forcing the combination, this explanation is a
begging of the question. It is fallacious also in that it ignores the
marginal principle in the problem of profits. Profits are never
homogeneous from factory to factory, and to those that are on the margin
competition may appear excessive. It is generally the largest and
strongest factories, in the more favored situations, that, in order to
get rid of troublesome competitors, force the smaller, weaker,
industries to come into the trust. When, therefore, it is said that
competition is destructive, it may be a partial truth, but more likely
it is a pleasantry reflecting the happy humor of the prosperous
promoters of the combination.
[Sidenote: Financial gains of combination]
4. _Another strong motive for the combination is the profit to promoters
and organizers._ There are indirect as well as direct gains to the
managers of a large business. There is the gain from the production and
sale of goods to consumers, and there is the gain from the financial
management, from the rise and fall in the value of stock. The promoters
of a combination often expect to make from sales to the investing public
far more than from sales to the consumer of the product. A season of
prosperity and confidence, when trusts and their enormous profits are
constantly discussed, has an effect on the public mind like that of the
discovery of a new El Dorado, a California, or a Klondike. Then is the
time for the wily promoter to offer shares without limit to investors.
These considerations show that the trust is not simple in its cause, nor
in its nature. In a sense the most artificial of industrial
arrangements, in another sense it is a natural evolution of industry.
More and more it is being recognized that though it has in it something
of evil, it has as well something of good, and certainly much of the
inevitable.
CHAPTER 35
EFFECT OF TRUSTS ON PRICES
§ I. HOW TRUSTS MIGHT AFFECT PRICES
[Sidenote: Economics of the trust problem]
1. _The economist's task, strictly confined, is to explain the relation
of trusts to prices, not to solve the problem of their political
control._ The question of trusts is such a large one that its discussion
here must be confined to those aspects having close relation to the
central subject of economic study,--the laws of value. These laws were
by the older economists thought to be true only within the limits of
free competition. Seeing that in various ways this freedom is interfered
with not only by caste, custom, organized labor, but by patents,
political privileges, and the power of large aggregations of capital (in
short by all things that check the flow of ability and of agents from
one industry to another), the question occurs: Are the abstract laws of
rents, profits, and wages of any significance or of any help in
discussing the great practical questions of to-day? Are not prices
determined by the personal whim of industrial despots who can bid
defiance to the laws of price? The control of trusts by legislative
action is largely a political problem, but it must be guided by a
correct economic analysis. Proposed legislative measures often assume or
imply that in no way, directly or indirectly, is competition found in
the problem. It should be the aim of economic study to make clear the
true bearing and force of monopoly power in practical problems of value.
[Sidenote: Limited power of trusts]
[Sidenote: Monopoly and supply]
2. _The fundamental principles of market value cannot be changed by a
trust; a selling monopoly can affect price only as it affects supply or
demand._ The strongest "trust" yet seen has not been omnipotent. Many
careless expressions on the subject are heard even from ordinarily
careful writers and speakers: "The trust can fix its own prices," "has
unlimited control," "can determine what it will pay and for what it will
sell." This implies that trusts are benevolent, seeing that the prices
they charge are usually not far in excess of competitive prices in the
past. Such a view overlooks the forces that limit the price a monopoly
can charge. The law according to which the value of products on the
market is determined, is as valid where there is a trust as anywhere
else. The marginal utility of goods to the consumer determines the price
of any given supply. If the supply remains the same, no trust can make
the price go higher. What it gets in exchange are the services or the
wealth of the rest of the public. At what rate can it exchange its
products for the products of others (including other trusts)? The
monopoly usually directs its efforts to affecting the supply, leaving
the price to adjust itself. (This is the case of the selling monopoly;
the statement must be adjusted where it is a buying monopoly.) It can
affect the supply either by lessening its own output or by intimidating
and forcing out its competitors. It is true that this logical order is
not always the order of events. The trust does not first limit the
supply, and then wait for prices to adjust themselves; it first raises
its prices, but unless it is prepared to limit the supply in accordance
with the new resulting conditions of demand, such action would be vain.
The control of the sources of supply is the logical explanation of the
higher price, even though the limitation of supply is effected later by
successive acts found necessary to maintain the higher price.
Monopoly price is therefore a rational thing, not a mystery entirely out
of harmony with the simple law of value laid down for consumption goods.
The trust works as the magician does, not as was thought of old, in
defiance of natural laws, but in harmony with them and by their aid. The
view the public took of the trusts was at first medieval. That should
not be the view to-day.
[Sidenote: Monopolistic gains from successful combination]
3. _The economies of large production after a successful combination may
be divided in varying proportions among monopolists, workmen, and
consumers._ If the great economies of large production are effected by a
new combination which makes no attempt to fix a higher price and limit
production, where will the fruits of these economies go? They will go
first to the owners of the trust, because, unless inspired by motives of
philanthropy, they have no need to lower prices. Though they are in
possession of special facilities, they will try to secure as high a
price as before. A wider margin permits greater profits on each unit
without limiting the output or the sales. They may retain this so long
as they do not yield to the temptation to increase the output in
proportion to their new facilities.
[Sidenote: Gains to workmen]
These economies, may, however, at times inure to the benefit of the
workmen in higher wages if they succeed by any means whatever in
squeezing the employers at this time of exceptional gains. The
suggestion has even come from employers that in order to allay labor
troubles there should be a union of capital and labor to squeeze the
consumer, by doing away with all competition in fixing prices. This
proposition to divide the plunder of monopoly has been viewed
approvingly by some leaders of organized labor, but it does not look
especially alluring to the general public, to which is assigned the
humble part of paying the bill.
[Sidenote: Gains to consumers]
Part of the advantages will go to the consumer whenever there is a
motive on the part of the large establishment to increase supply in
order to get a larger profit or to forestall new competition. As the
improvements become matters of public knowledge, most of the new
economic methods can and will be adopted by new enterprisers, and other
large aggregations of capital will be induced to come in to reap the
benefits. The effect, of course, is an increase in supply and a lowering
of prices. The fiat of the trust to prices to remain fixed while supply
increases is as vain as a mortal's commands to the waves to be still.
The undesigned result of the economies of large production, therefore,
where control is not great, is to lower the prices and to diffuse the
benefits among the public.
[Sidenote: Social burden of monopoly profits]
4. _If the trust succeeds in raising its prices it gains at the expense
of the community._ If a producer has some monopoly power, recognizes and
uses it, his gain does not correspond with an increase in production. It
is taken from those who buy these products, it is deducted from the
psychic incomes of other members of society. This raising of prices
actually reduces technical production, for the output is limited in
order to secure the higher price. The probably less urgent wants of the
receivers of monopoly incomes are gratified in place of the probably
more urgent wants of the average purchaser. The result is a decreased
social income, with an increase of the inequality of distribution. There
is an analogy here with the effects of trade-unions. If the trade-union
succeeds in forcing prices higher than the competitive prices, it gains
at the expense of the other portion of the community. But while its
gains appear to be more largely at the expense of the richer elements of
society, the gains of the trust are more likely at the expense of the
poorer elements. If the success of organized labor means to some extent
a leveling up of income, the success of the trust means a still further
inequality. Hence a difference in public sympathy in the two cases.
[Sidenote: The praise and blame for trust prices]
5. _The responsibility for either the rise or the decline of trust
prices cannot always be determined._ Prices are changing constantly
under competitive conditions. In this active, moving world, changes of
demand, the exhaustion of sources of supply, new processes, expiration
of patents, opening up of new lines of transportation, affect prices in
a multitude of ways entirely independent of organization.
Trust-controlled industries are open to all these influences. Economic
forces cannot be isolated as can elements in a chemical laboratory, and,
therefore, trusts claim the credit for all the reductions of price that
have occurred. By such a calculation the trusts usually make a showing
of progress, as, until 1896, for twenty years the tendency of prices in
most lines was downward. Always getting the highest price they can under
the market conditions, they yet pose as benefactors. They would claim
that the economies possible only under trust organization cause even a
monopoly price to be less than a competitive price would be. Critics of
the trusts, on the other hand, charge them with causing all the increase
that occurs, and with checking the decline in prices. The critics
compare the percentages of decline in price during the decades before
and after the combination was formed, and as it is impossible for a
geometric rate of decrease in price, as a result of improvements, to be
long maintained, this showing is very unfavorable to the trusts. A
method has been found, however, of testing, in the case of a few leading
industries, the effects they have had on the price of their portion of
the productive process.
§ II. HOW TRUSTS HAVE AFFECTED PRICES
[Sidenote: Trusts raise prices]
[Sidenote: The oil trust]
1. _Examination of the course of prices in the case of some notable
trusts shows that, wherever effective, they raise prices above the
competitive rate possible to smaller production._ The most instructive
study in the subject is that undertaken by J. W. Jenks a number of years
ago, and later developed by him when working with the Industrial
Commission from 1898 to 1900. Its results are embodied in a series of
charts. It appears that the price of refined petroleum, in 1871, was
twenty-five and seven tenths cents per gallon; in 1880, eight and six
tenths cents; in 1887, seven and eight tenths cents; in 1900, seven and
eight tenths cents. A writer in the "North American Review" claims that
this decline was due to the economies accomplished by the Standard Oil
Trust. It will be noticed, however, that prices fell most rapidly (from
twenty-five and seven tenths cents to eight and six tenths cents)
between 1871 to 1880, a period of intense competition, when the industry
was new, and when the independent companies, fighting for their
existence, introduced many improvements and began the construction of
the pipe-lines that were later secured by the Standard Oil Co. Despite
this rapid decline, the smaller companies still could have maintained a
profitable business had it not been for the ruinous discrimination of
the railroads against them. Because of this, the Standard Oil Co., in
1880, obtained almost complete control. The price twenty years later
than that date was less than a cent cheaper. In the meantime the price
for a time continued to fall. Competition was never quite stilled. The
small competitor, wherever he saw a chance, has nibbled off a bit of the
tempting profits. The rise from 1898 to 1900 was in accord with that
occurring in other lines. A much lower cost of production is now
possible to the great monopoly with its larger sales and more economical
methods. The by-products, unknown at the beginning of the period, now
yield large sums, yet the price remains much the same as a quarter of a
century ago. The trust has succeeded in retaining a large part of the
increasing margin of price over cost.
[Sidenote: The sugar trust]
The influence of the sugar trust may be studied by what is known as the
method of differentials. The differential in sugar is the difference
between the cost of the raw sugar and the refined granulated sugar. Raw
sugar is the main material and the principal fluctuating item of cost
beyond the control of the trust. Changes in the differential reflect the
changes in profits except as modified by a cheapening of the process.
The period from 1880 to 1887 was one of great competition. In 1880, the
differential was one and ninety-two hundredths cents on each pound of
refined sugar, but it fell steadily till, in 1887, it had reached
sixty-four hundredths cents. In the fall of that year the trust was
formed; and the next year the differential had risen to one and
twenty-five hundredths cents, in 1889 to one and thirty-two hundredths
cents. Tempted by the enormous profits, the rival refineries of Claus
Spreckel were started, and with competition the differential fell, in
1890, to seventy hundredths cents. The rival factories were then bought
up and under the new combination the differential went sailing up to one
and three hundredths in 1892, and to one and fifteen hundredths in 1893.
Rival factories again arose and competition grew stronger, reducing the
differential to ninety-four hundredths in 1894. It was in that year that
the firm of Arbuckle Brothers and Claus Doscher each opened a great
refinery, and in the next year the differential fell to fifty hundredths
cents. In 1900, some agreement, the terms of which were unknown to the
public, was entered into by the rivals and the differential had risen,
in March, 1901, to ninety-five hundredths cents. In every case the
differential fell when competition was effective and went up when
monopoly power was regained.
[Sidenote: The nail trust]
The differential of steel-wire nails is the difference between the cost
of the steel billets and the price of the wire. Between 1890 and 1895
there was a steady decline in the differential. In 1895 was formed the
nail pool, an agreement to share the profits, a form of combination. A
rapid advance took place, both in the price and in the differential. In
the fall of 1896 the pool was broken and then occurred a fall in prices
and in the differential during 1896-97. In January, 1899, the nail trust
was formed, controlling sixty-five to ninety-five per cent. of the
output of wire nails, and a rapid advance occurred in the price and also
in the differential.
[Sidenote: The tin-plate trust]
The tin-plate industry practically had its origin in the United States,
in 1892, under the McKinley tariff. As competition increased, prices and
the differential fluctuated and declined. At the end of 1898 the
tin-plate company was formed and prices at once started upward with a
rapid increase in the differential. Cause may, in a measure, be mistaken
here for effect. In these cases the part of the rise in price due to the
rise of materials is not brought about by the trust. The differential
represents its part of the productive process and its source of profits.
The power to make the differential high is due in part to the general
conditions of business in the last three years considered. The profits
of all industries in those years increased. While prices may have risen
partly because the trust was formed, it may have been possible to form
the trust because prices were rising. The general conclusion is that
trust prices are always raised when, and to the extent that, control is
secured. They are lowered below normal prices when competition becomes
troublesome. Fluctuation of prices probably has been more rapid and more
spasmodic under trusts than it has been under ordinary competitive
conditions.
[Sidenote: Effective trusts injure various producers]
2. _A large degree of monopoly control may lower the incomes of
producers of materials, the value of competitive plants, and prices in
special local markets._ A strong selling monopoly tends to become also a
buying monopoly. A great industry using great quantities of materials
may either own the sources or purchase from small producers. The steel
trust owns mines, and ships and railroads to bring the ore to the
furnaces; but the tobacco trust buys from the farmers. If the packing,
refining, and marketing of a product is monopolized, the sellers of the
raw or partly finished product are subject to one-sided competition. The
small producers of tobacco, of crude oil, and of anthracite coal claim
that the effect of the trusts is to give them lower prices for their
products. Some have been severely punished by the monopolies for
refusing to take the first offer made. Monopoly is thus likewise able to
purchase competing plants at ridiculously small sums, by first making
them valueless through fierce price-cutting, or by threats of it. "Rich"
is often a relative term, and it is said that many a small millionaire
producer has anxiously waited to see whether the great trust would next
turn its attention to him.
[Sidenote: The persistence of competition reducing prices]
3. _Competition of less capable producers works in most cases to prevent
the great or continued rise of trust prices._ Early trusts overestimated
their power. The persistence of competition in industries where the
trusts have had great advantages in position and resources has been
astonishing. The wall-paper trust, though for many years it kept prices
above competitive rates, was repeatedly undermined by competition. The
whisky trust, while it frequently raised prices, was as often forced by
the growth of small distilleries to lower them below competitive rates.
Competition in the oil industry has persisted under the greatest
difficulties. The smaller companies have hauled the product by wagon
when the trust was moving it by pipe-lines. The continuance of high
prices by a trust depends on a high degree of control of supply. A
recognition of the limits of their power has led trusts in some cases to
a policy of moderate prices, affording a good profit, but not
encouraging competition.
[Sidenote: Supply as the condition of low prices]
The limits of the power of the trust to control prices are strikingly
shown by the fact that it cannot even insure low prices if the market
conditions do not justify them. The steel trust, in 1902-3, declared
that it would not advance the price of steel rails above twenty-eight
dollars, and this was hailed as a beneficent effect of trust control,
which, by equalizing production, could prevent excessive fluctuations of
price. But the trust's declaration was a bit of inexpensive humor on the
part of the managers; the trust had nothing to sell at the price quoted,
as its entire product had been sold out months in advance. While,
therefore, the trust continued calmly to quote steel rails at
twenty-eight dollars, competition raised the market price to
thirty-three dollars a ton; twenty-eight dollars or more was paid for
second-hand rails, and a proportionate price for other iron products.
Such exceptional conditions, raising prices to abnormal levels, are
followed by a decline disastrous not only to the small producer, but to
the trusts as well.
[Sidenote: Modes of controlling trusts]
4. _The control of the trusts must be sought in the direction of
maintaining potential competition through fair and free conditions of
industry._ Many of the remedies suggested are reactionary and would give
up the benefits of large production. Measures must be sought in harmony
with the economic principles of price. Since many of the trusts have
grown wealthy by special shipping privileges from the great quasi-public
corporations, the railroads, and by special favors from public or
corporation officers, who have been false to their duties, the solution
must be a political and moral one; it must be sought in the development
of honest citizenship and of a more efficient social regulation of
quasi-public industries. The conditions of competition may be made
fairer by requiring publicity of accounts, and by making it impossible
for great corporations to strangle their local competitors by special
and temporary prices. The state here has the same duty to perform that
it has to protect the weak man from personal violence at the hands of
the strong. This will not prevent competition, but it will determine the
ways in which the rivalries of men can be manifested. Any measures for
controlling the great combinations must start from a right understanding
of the law of value, neither underestimating nor overestimating their
economic power. Public sentiment toward the trust question has changed
somewhat in recent years, because the nature of trusts and the extent of
their power are better understood. There is now less fear of them, and
more confidence that they can be tamed and made to serve the welfare of
society.
CHAPTER 36
GAMBLING, SPECULATION, AND PROMOTERS' PROFITS
§ I. GAMBLING VS. INSURANCE
[Sidenote: Unavoidable chances]
1. _Many forms of chance are inseparable from the individual
enterprise._ There are what may be called natural chances chances,
arising from the uncertainties of the seasons, from rainfall, heat,
hail, storm, flood, lightning, land-slides. Such chances must be taken
both by the small enterpriser and by the large. In an earlier condition
of society natural chance almost dominated industry, and it still
remains and must always remain an important factor to deal with. There
are political chances, as war and riot; as legislation on money,
tariffs, credit, and business relations. These are caused, it is true,
by the action of men, but it is a collective action out of the control,
to a greater or less degree, of the individual--absolutely out of the
control of most individuals. Men of greater political influence can to
some extent control these chances, possibly in their own favor. There
are chances of carelessness causing fire, explosions, wrecks on
misplaced switches, and involving penalties and losses that must be met.
There is the chance of physical or mental collapse, as the sudden
insanity or the sudden death, unforeseen and unpreventable, of one
performing responsible duties. Sickness often wrecks the plans and the
fortune of a whole family. There are economic changes, such as those in
methods of production, in machinery, in methods of transportation; such
as the growth of fashions or the growth of population changing demand in
some directions and for some materials.
[Sidenote: Average of chances in each industry]
Some of these chances are more connected with money-lending, others with
manufacturing; some with agriculture, others with commerce; but all are
present in some degree in every industry. In the broadest view they are
not chances, for on the basis of experience it can be foretold that they
will occur to some one; but no individual can tell when and how they
will occur to him. A general average of chances in different lines of
business causes some to be called safe, others extra-hazardous. The
chance is averaged and added to the profit or gain of that industry, for
an extra-hazardous industry must in general afford a higher average of
profit in order to induce men to engage in it. It is folly to take a
risk without ascertaining its degree, so far as general experience
enables one to choose. But inasmuch and in as far as the gains and
losses fall unequally upon different individuals, income depends on
chance.
[Sidenote: Other chances artificial and avoidable]
2. _The essence of gambling is the attempt to gain by taking chances
that are not the unavoidable incidents of productive enterprise_. The
chances just enumerated are not sought, but avoided as far as possible;
yet they must be borne by some one, and the burden must be distributed
throughout society. There are unquestionably many kinds of chance-taking
which differ from these in economic, and therefore in moral quality; but
it has taxed the ingenuity of philosophers to lay down an abstract
definition of gambling that would permit ready and certain distinction
in practice between gambling and legitimate chance-taking. Typical
gambling is the transfer of wealth on the outcome of events absolutely
unpredictable, so far as the two gamblers are concerned. Examples are
the shaking of unloaded dice or the honest dealing of a pack of cards.
There can be no doubt of the entire lack of a productive economic basis
in the betting on prices carried on in so-called bucket-shops by
ignorant persons having no connection with the market of real things,
and seeking to get something for nothing as a result of mere chance.
[Sidenote: Cheating and gambling]
Cheating is not a necessary mark of gambling, although the cruder kinds
of dishonesty, such as the loading of dice or the collusion of
horse-owners or of horse-jockeys to deceive the betting public, are so
common that they seem often to be its essential feature. Gamblers
recognize fair as opposed to unfair methods. Fair gambling is a kind of
minor morality within the immoral field of gambling, like the honor
found among thieves. Gambling bears somewhat the same relation to
legitimate chance-taking that play does to labor. The chance-taking in
gambling has no useful purpose or result outside itself. The gamblers
constitute themselves a little fictitious economic circle, and they
transfer gains and losses on the turn of events that have no practical
objective result within their circle except to determine the direction
of the transfer.
[Sidenote: Various cases of a mixed nature; partisan bets]
3. _Legitimate forms of chance, or risk-taking, shade off into
illegitimate forms, or gambling._ Ranging between the extremes of
legitimate risk-taking and of gambling are a number of cases of a mixed
nature. The bets made on college games, races, and contests differ from
ordinary bets only in the added feature of so-called college loyalty (a
travesty on the real sentiment). These college gambling contracts are
supposed (according to a mode of reasoning found also among primitive
peoples) to exercise a subtle and irresistible influence upon the
result. A crew that enters the race with the odds against it is unnerved
and undone, thinks the patriotic collegian.
[Sidenote: Knowledge and skill affecting the result]
In nearly all wagers, judgment in some degree influences the choice of
sides. One man bets on a horse whose pedigree and performances he knows
thoroughly; another judges by the horse's appearance as it comes upon
the track. The professional book-makers have the latest possible and
most exact information on which to base their bids.
In the bets made on one's own prowess, as on speed in running or rowing,
or in playing cards (wherein also the element of pure chance is mingled)
the chance-taking is still far over on the uneconomic side of the
border-line. The running is for the sake of the wager, not for a useful
purpose. A premium won by a runner for speed in delivering a message of
economic importance is in striking contrast to the winnings in a wager.
Finally, the very border-line of difficulty is reached in the purchase
and sale of goods in the market with a view of profiting by chance
changes in price. Land speculation, the purchasing and holding of
lumber, grain, cattle, and other tangible and useful things, must be
judged liberally. The quality of gambling depends somewhat on the motive
as well as on the ability of the actor. The enterpriser dealing with
real wealth, and fitted to take the risks, both because of his resources
and of his exceptional knowledge, needs the motive of gain, and in a
sense can be said to earn socially what he gets. The motive of the
uninformed must be a blind trust in luck, and a hope to gain from a rise
in prices which they are quite unable to foresee or rationally to
explain.
[Sidenote: Gambling an economic loss to society]
4. _In its relation to value, a bet, or wager, is the exchange of the
chance of loss for the chance of gain, involving a social loss._ Even
when fairest, the average results of such an exchange must be
unfavorable to society. One person loses a part of his income that
gratifies relatively urgent wants; another gains something that
gratifies only less urgent wants than were represented by the sum he
risked. The area that is subtracted from the loser's psychic income is
larger than the area added to the winner's psychic income. The result
would be different on the impossible condition that it were always the
poorer man that gained and the richer one that lost. Betting, then, does
not produce wealth; it merely transfers ownership in a way that reduces
the total want-gratifying power of wealth.
The effects that gambling and betting have upon character are still more
important and dangerous than their effects upon income. Motives of
economic activity are reduced; energy is diverted from productive
enterprise; society is demoralized through dishonesty of men
intoxicated by gambling; speculation and embezzlement occur; and there
is a reduction both of production and of enjoyment in society. These
things can be reasoned out with mathematical certainty by means of the
law of marginal utility.
[Sidenote: Insurance as a wager]
5. _Insurance is, in outer form, a bet; but its essential purpose is the
useful one of equalizing and eliminating chance._ In its early form
insurance was a bet made by a ship-owner to protect his cargo from loss.
The chance of loss in shipping was even greater in the Middle Ages than
now, and it became customary for the ship-owner to bet with a wealthy
man that the ship would not return. If it did come back, the owner could
afford to pay the bet; if it did not, he won his bet and thus recovered
a part of his loss. It was what is called to-day "a hedge," that is, one
bet made to neutralize, or offset, another. This gave to the smaller
merchant the advantage of distributing his losses over a number of
voyages, as was done by the owner of many vessels. Antonio, the wealthy
merchant, is made thus to express his security:
"My ventures are not in one bottom trusted
Nor to one place; nor is my whole estate
Upon the fortune of this present year.
Therefore my merchandise makes me not sad."
Gradually there came about a specialization of risk-taking by the men
most able to bear it. They could tell by experience about what was the
degree of uncertainty, and could lay their wagers accordingly. When
several insurers were in the same business, competition forced them to
insure the vessel and cargo of the ordinary trader for something near
the percentage of risk involved. The insurance thus tended to become a
mutual protection to the ship-owners; what had to be paid in premiums to
cover risk came to be counted as part of the cost of carrying on that
business.
[Sidenote: Insurance as mutual protection]
Modern insurance is mutual in nearly every case: the total premiums
equal the total losses plus operating expenses, the interest on the
reserve of premiums counting as part of the premium. Each one gets
protection for the loss of his property in return for the payment of a
sum that will cover the losses on others' property. Such an exchange is
a profitable one. The premium comes from marginal income; the loss of
house or property would fall upon the parts of income having higher
marginal utility. The less urgent wants of the present are sacrificed in
order to protect the income that gratifies the more urgent wants of the
future. In insurance each party gives a smaller utility for a greater;
each has a margin of advantage; while the greater certainty in business
stimulates effort and rewards it. This is quite the opposite of the
working of betting and gambling.
[Sidenote: Conditions of sound insurance]
6. _To be economically sound, insurance must have to do with real
productive agents, and with somewhat regular, ascertainable events
beyond the control of the insured._ The difficulties that arise in case
of fire-insurance are due largely to the failure to meet these
requirements. When the insured sets fire to his own buildings, fire
insurance ceases to be a legitimate thing. Constant efforts are made by
insurance companies to guard against these "moral risks," the least
calculable of any. Merchants whose stocks have been mysteriously burned
two or three times find difficulty in getting insured. In life-insurance
it was the custom formerly to refuse to pay death-losses in case of
suicide; but now that condition is attached only for the first two or
three years. It being reasonable to suppose that no man would plan
suicide years in advance, death by one's own hand some years after
taking life-insurance is regarded as coming under the ordinary rule of
chance.
§ II. THE SPECULATOR AS A RISK-TAKER
[Sidenote: An element of speculation in all business]
1. _Every enterpriser is to some extent specializing as a risk-taker._
This familiar idea may be taken as a starting point in discussing
speculation. In its broadest sense speculation means to look into
things, to examine attentively, study deeply, contemplate, meditate. In
a business sense the speculator is one who studies carefully the
conditions and the chances of a change of prices; hence arises the
thought that speculation is connected with chance. The enterpriser can
estimate these chances better than most men. He stands on a hilltop
sweeping the horizon, and can see farther than the workingman can. He
relieves the other agents of part of the risk, and he insures both
laborer and capitalist against future fluctuations of prices. Some of
the profits of successful enterprise in countries where no system of
regular insurance has grown up, and in certain lines here where no
insurance is possible, are speculative gains of this sort. Offsetting
them, however, in large measure, are the speculative losses, by which in
many cases the investment has been swept away altogether. The cautious
business man tries to reduce chance as much as possible by insurance,
and to confine his thought and worry to the parts of the productive
process where his ability counts in the result. The wise have found out
that it is better to shift the risk to some specialist who can take it
better than they. For a man who has his thought and effort concentrated
on running a flour-mill, it is foolish to take the risks of fire, of
loss in shipment, of a rise in the price of grain needed to fill
outstanding orders--it is as foolish as it would be for him to make his
own machinery. Insurance being the economical way to cover risk, the
reckless will, in the long run, be eliminated from the ranks of
enterprisers.
[Sidenote: Specialization of risk taking]
2. _In some lines the risk of marketing and carrying large stocks
becomes highly specialized, so that ordinary enterprisers shift it to a
small group of risk-takers._ In buying and selling large quantities of
produce there is required the closest and most exclusive attention of a
small group of men. The marketing of some staple products requires the
most minute acquaintance with world conditions. To foretell the price
of wheat one must know the rainfall in India, the condition of the crop
in Argentina, must be in touch as nearly as possible with every unit of
supply that will come into the market. Such knowledge is sought by the
great produce speculators in the central markets. If all means of
communication--telegraph, cables, mails--are open to all, competition
among these speculators becomes intense, and the result is the extremest
efficiency. Their survival depends on the development of acute insight
into market conditions. It is the testimony of expert witnesses and of
writers in the report of the Industrial Commission that the margin at
which farm produce is sold has fallen greatly in the last few years.
These products are marketed along the lines of the least resistance,
that is, of the greatest economy. The function of the commercial
specialists is to foresee the markets, and to ship to the best place, at
the right time, in the right quantities. If a product shipped to
Liverpool will, by the time it arrives there, be worth more in Hamburg,
there is a loss. Such difficult decisions can be made best by a small
group of men selected by competition. When handling actual products they
perform a real economic service.
[Sidenote: Produce speculators as insurers]
[Sidenote: Source of legitimate speculators' gain]
3. _Even some mere speculators on the produce markets may and do at
times perform a productive service as risk-takers._ Many of the
speculators in staples, wheat, corn, wool, rarely handle the material
things, the real products. They make it their business to study the
world conditions, to foresee prices, and in a sense to bet upon them.
Regular merchants buy and sell fictitious products of these men. When a
miller buys ten thousand bushels of wheat that will remain in the mill
three months before they are marketed as actual flour, he at the same
time sells that number of bushels to a speculator for future delivery;
or selling flour for future delivery the miller buys a future in wheat.
In either case he cancels the chance of loss or gain, giving up the
chance of profit in the rise of wheat in exchange for protection from
the loss of the product on his hands. To him this is legitimate
insurance, for he is striving not to create an artificial risk, but like
the medieval ship-owners, to neutralize one that is inseparable from the
ordinary conditions of his business.
One may ask, How, if the miller in the long run benefits, can the
speculator gain? He does not intend to perform this service for nothing.
Yet as the sales in the whole market equal the purchases, some say that
there can be no profits to the speculator. There are unsuccessful
speculators and at any rate their losses go to the successful as a sort
of gambling profit. Speculators do not dine entirely on "lambs"; they
are anthropophagous. But, further, the sales to legitimate purchasers
should net a gain to the abler speculator. In proportion as his
estimates are correct, there will remain a regular slight margin of
profit to him. If he agrees to sell wheat at eighty-five cents to be
delivered in three months, he expects it to be a little less at that
time. In the long run the ablest speculator probably buys at a little
less and sells at a little more than the price really proves to be. This
means that the merchants in the long run pay something for protection
against changes in prices, just as they pay something for insurance. And
yet this is the cheapest way to eliminate risk, and a man engaged on a
large scale in milling is, it is said, at a disadvantage if he neglects
this method of marginal buying.
[Sidenote: Ignorant and dishonest speculation]
4. _The buying of margins by the "lambs" is simple betting, and much
manipulation of the market is dishonest._ What has just been described
is the more legitimate phase of marginal buying, not its darker aspect.
One who, having no special opportunities to know the market, buys or
sells wheat, or other commodities or securities, on margin, is called a
lamb. He is simply betting. He has no unusual skill; he cannot foresee
the result. The commission paid to brokers "loads the dice" slightly;
the opportunities of the larger dealer of anticipating information load
the dice heavily against the lambs. Secret combinations and all kinds
of false rumors cause fluctuations large enough to use up the margins of
the small speculator. At times a number of powerful dealers unite to
cause an artificially high or low price, a situation called "a corner."
But this is little other than gambling between betters. The general
public gains and loses little if any by these operations, except in the
evil effects they entail socially.
§ III. PROMOTER'S AND TRUSTEE'S PROFITS
[Sidenote: The promoter's service to the owners]
1. _The promoter of trusts performs in some ways a substantial economic
service._ A promoter is one who undertakes to convert a number of
unrelated factories, or establishments, into a trust, or combination. He
gets options on different factories, that is, the right to buy them at
an agreed price within certain time limits. He gets some banking house
to underwrite the combination, that is, to agree to dispose of a number
of shares to the investing public. A certain number of shares go to the
owners, a certain number to the banking house for its services in
underwriting, and a substantial number, it may be ten or twenty per
cent, of the enormous capitalization, to the promoter himself. This is
payment for his ability to water the stock successfully, to capitalize
it for more than its former value. Evidently the owners think he earns
the money or they would not pay him. So far as there are economic
advantages in large production, and inasmuch as there is always friction
in the forming of new industrial arrangements, there is a real social
service performed by the promoter. The gains of the promoter are in part
the legitimate price of progress.
[Sidenote: The loss of the investors]
2. _A large part of the profits of promoter and of owners is unfairly
taken from the investor._ The larger modern business is less and less
attached to particular neighborhoods. A much smaller proportion of
investments is made in industries which the investor himself can control
or even see in operation. Business, therefore, in these days is done
largely on faith in other men. Especially the investor takes great
chances. The prospectus announcing a reorganization is frequently
misleading. It frequently misrepresents the sources of income and the
probable dividends, conceals essential facts, and makes misleading
statements. The capitalization often is absurdly high, compared with the
value of the different establishments. In one case eight million dollars
of stock were issued to represent factories whose combined value had
been five hundred thousand dollars. So far as the capitalization is
based on the increased profits due to the monopoly power, the profits of
reorganization are taken out of the pockets of the public. But in fact
even monopoly earnings cannot support such valuations, and from the
outset if fair dividends are paid, they are falsely paid out of capital,
not out of earnings. With the approach of bad times there must be a
suspension of dividends, a fall in the value of securities, and a loss
falling upon the investors. Such practices are a serious evil, for the
stability of industry depends on the opening up of opportunities for
safe investment to the average man.
[Sidenote: The speculating trustee]
3. _Corporation officers and trustees, speculating in the stocks of
their own companies, are reaping illegitimate gains._ It is recognized
by public sentiment and in law that for public officials to let
contracts to themselves is bad morals and bad public policy. It is the
duty of legislators not to make laws for companies in which they are
interested. One of the greatest scandals in American public life, "the
Credit Mobilier affair," was caused by the acceptance by members of
Congress, virtually as a gift, of shares in a company that was seeking
favoring legislation. Such action must be looked upon as a sort of
industrial treason, comparable to the old form of political treason.
Corporation officers are in a position of public trust toward the
investors quite comparable to that of government officers toward the
citizens. The power of directors and of other officers to manipulate
earnings and dividends, and thus to affect the market value of the
stock, leaves the investing public helpless. The practice by officials
in great corporations of speculating in their own stocks, whose prices
they can manipulate, is so common as scarcely to attract comment. Large
fortunes result from this betrayal of the trust imposed by the
shareholders. This is not legitimate speculation; it is like loading the
dice, pulling the horse, drugging the pugilist--things despised and
condemned even in gambling and sporting circles.
[Sidenote: Two types of speculation]
It appears, therefore, that in the complex conditions of modern business
there is a legitimate concentration of risk in the more capable hands,
but also a growth of opportunities for illegitimate speculation and for
large dishonest gains that were not possible before. These two types of
speculation should be distinguished, as far as possible, in thought and
in practice; but this it not easy in concrete instances, which vary
almost indistinguishably from the clear case of honest earnings to the
other extreme of illegitimate gains.
CHAPTER 37
CRISES AND INDUSTRIAL DEPRESSIONS
§ I. DEFINITION AND DESCRIPTION OF CRISES
[Sidenote: Broader definition of a crisis]
1. _In a broad sense, a crisis is a decisive moment or turning point;
hence, in industry, a collapse of prosperity._ In the course of a fever
the crisis is the point where there is a turn for the better or for the
worse. The figure of speech as applied to industrial conditions would
seem to fail, in that what precedes is apparently exuberant health, not
disease. Business conditions do not move along uniformly. There are
waves of prosperity. Profits are apparently great, then may be suddenly
swept away. The profits of the prosperous time are partly illusory, or
exist only on paper. The situation has all the unhealthiness of the
fever-patient. Men trade in promises and when the crisis comes, they
have only promises for profits. The discussion of business management
and profits is not complete without a consideration of this rhythmic
movement of confidence and prices.
A crisis in the business affairs of an individual, in the sense of a
collapse of prosperity, may occur from many mischances. A local crisis
may be felt in some one neighborhood as a result of flood, of fire, or
of other accidents. Such a case was that which occurred in 1864, in
Manchester, England, when the cotton factories were compelled to close
because the supply of cotton was cut off by the blockade of the ports of
the South in the Civil War. Such a local crisis sometimes results from a
change of transportation, throwing a town out of the line of trade.
These have been mentioned in discussing chance and risk; but the
phenomenon known generally as an industrial crisis is of wider extent
and of a more peculiar nature.
[Sidenote: Various types of crises]
2. _In a more special sense a financial crisis is the confusion and loss
that mark the end of a period of rising prices; an industrial depression
is the period of hard times that follows._ The word crisis suggests a
brief period, a moment, something that is severe, sudden, and soon over.
The term financial panic is frequently used as a synonym for financial
crisis. A crisis in the narrower sense has to do with prices--is always
connected with money in some way. While, therefore, crises may be
divided into industrial, speculative, and financial, according to their
immediate occasion, all of them are financial in the sense that they
have to do with a change in the general price level. A crisis is a jolt
to prices which shatters the credit of some banks, brokers, merchants,
and manufacturers. Crises are thus peculiar to the money economy and to
a developed industry. Not every business misfortune is to be called an
industrial crisis, but only those where prices and credit are generally
depressed. A long period of hard times is sometimes called a crisis, but
it is better to distinguish it by the term industrial depression.
[Sidenote: Industrial conditions preceding a crisis]
3. _The period leading up to a crisis is one of general prosperity._
Industry in successive decades does not pass through an unvarying series
of changes, but history repeats itself with sufficient regularity to
justify the view that a certain series of changes is typical in modern
industry. When prices are at the lowest point many factories are closed,
and much labor is unemployed. Conditions are worse in some industries
than in others. General economy and great caution prevail; few new
enterprises are undertaken. To those having available money this is a
good time to buy, and property begins to change hands. Then hoarded
money begins to come out of its hiding-places. Money flows in from other
countries, particularly if business conditions are better abroad than
here, for low prices make a country a good place in which to buy. At the
same time that the money in circulation thus increases, there is a
general return of confidence that increases credit. Not only are there
more dollars, but each does more work. Then old enterprises are resumed
and new ones are undertaken. The purchase of materials in larger
quantities causes a rise in prices and an increase in costs. The surplus
labor on the margin of efficiency gets employment, and wages begin to
increase. The only classes not sharing in this improvement are the
receivers of fixed incomes. As prices rise, the purchasing power of
their incomes gradually falls.
[Sidenote: The crisis and its results]
4. _The crisis is a moment of widespread loss, which is followed by a
long period of small profits to most enterprises, and of enforced
economy._ As prices cease to go up rapidly, the question arises in many
minds whether the movement can continue, and if not, when it will cease.
Men wish to hold on for the last profits, and are willing to risk
something to gain them. When foreign prices do not rise in as great
proportion as domestic prices, foreign imports are stimulated and the
quantity of exports falls. This disturbs the equilibrium of money and
requires at length large and continued exportation of specie. This
checks prices, and, reducing the specie reserves of the banks, compels
them to be more cautious. The fall in the value of many stocks and
securities held by the banks forces many brokers and speculators to
convert their resources into ready money. This is the moment of danger;
weak enterprises find their foundations crumbling, and there are many
failures. The falling prices, the shattered credit, and the financial
losses force many factories to close; many workmen are thrown out of
employment, and business must again enter upon a period of retrenchment,
for it has completed the cycle of changing prices.
§ II. CRISES IN THE NINETEENTH CENTURY
[Sidenote: No financial crises in the Middle Ages]
1. _The periods of industrial hardship in the Middle Ages were connected
with adverse conditions of production, not with the collapse of prices._
Periods of exceptional hardship in medieval times were mostly due to
political oppression, famine, wars, pestilence, and scourges of nature.
There being very little of the money economy, there was no development
of credit and of credit prices. The money economy began, as has been
noted, in the cities. As the use of money spread, as larger commercial
enterprises were undertaken, as borrowing and the payment of interest
became common, there began to appear in city trading circles, on a small
scale, the phenomena of the modern crisis.
[Sidenote: European crises of the eighteenth and nineteenth centuries]
2. _In Europe general industrial crises date from 1763 and have occurred
at more or less regular intervals since._ It frequently is said that the
cycle, or period, of crises is ten years, but it takes an elastic
imagination to find support for this in history. The crises of the
eighteenth century occurred in 1763, 1783, 1793, these dates marking the
close of wars of some magnitude. The crises were not widespread or
general, but were more marked in England, which was most developed
industrially and in its money economy. Likewise in the nineteenth
century, the crises were of unequal force in the various countries,
usually being severer in England. The English crises may be roughly
dated 1803, 1825, 1838, 1847, 1857, 1864, 1875, 1890. These were
attributed to various causes; that of 1825 to over-trading abroad; that
of 1847 to railroad-building; that of 1864 to the interruption of the
cotton trade and of commerce, as a result of the Civil War in America.
While in many parts of England the crisis of 1864 was unusually severe,
in other countries it was of little moment. Germany, after several years
of great speculative prosperity, had a most severe crisis in 1875; while
France (a somewhat significant fact), although prostrated by the war of
1870-71, losing a large amount of wealth, and paying a thousand millions
of dollars to Germany as a war indemnity, escaped a commercial crisis
almost entirely at that time.
[Sidenote: Crises in the United States]
3. _In the United States there have been five marked crises: the first
in 1817, the last in 1893._ These crises were of date 1817-20, 1837-39,
1857, 1873, 1893. Major crises thus occurred about twenty years apart,
and minor crises in several instances alternated with them, notably in
1866, 1884, and we might add, 1903. These crises were the culmination of
different kinds of speculation, usually spoken of as their causes. The
crisis of 1817 was due to over-trading and to the immense importation
following the war of 1812 and the resumption of commerce with Europe in
1816. In 1837-39 came in quick succession two crises, not quite distinct
from each other, the second similar to the relapse of a fever patient.
The immediate occasions were over-speculation in lands, a great issue of
bank money, national expansion, and over-confidence, possibly in some
degree the heedless financial measures of Andrew Jackson. The crisis of
1857 followed a period of great prosperity marked by the discovery of
gold in California in 1848, by great expansion of commerce, by the
building of railroads, and by a great increase in foreign trade. The
crisis of 1873, probably the severest in our history, is attributable to
great speculation, especially to railroad-building on an unexampled
scale following the war. The blow, when it fell, was intensified by the
contraction of currency leading to the return to a specie basis and
lower prices. The crisis of 1884, a comparatively slight one, occasioned
(rather than caused) by the discussion of the money question, was
followed by some years of noticeable depression. The years 1889 to 1892
witnessed a prosperity that culminated in a crisis in September, 1893,
(likewise generally explained as due to the unsettled state of our
monetary system) followed by a period of depression lasting until 1897.
The period from 1897 to 1903 has been marked by great prosperity and by
rising prices. The over-hasty prophecies of collapse in the last two
years have thus far been falsified,[3] but there is now a general
feeling of distrust in investing circles. Already there has been a
reduction of dividends in leading industries, and here and there a fall
in the value of stocks. High prices have greatly checked building. The
great credit advances made on "industrials," the stocks of manufacturing
corporations, are one of the main sources of danger. Caution, however,
has been learned by experience; the banking interests are more closely
coördinated and give better mutual support than in the past, and a
considerable decline in stocks has already occurred without as yet
affecting general prices of commodities. Various novel features in the
situation make prophecy difficult, but a period of liquidation and lower
prices appears to be at hand.
[Footnote 3: These statements are retained as they were made in March,
1903. In the following September occurred a very remarkable panic in
stocks which had the minimum of effect on general business. While stock
prices have somewhat recovered since that time, general business
conditions, on the whole, tended for a while toward the worse until the
spring of 1904.]
[Sidenote: General features of crises]
4. _Irregular in time, and unlike in their immediate occasions, crises
show some general features._ The chief of these are told in the brief
story of the course of prices. Crises are less severe in countries with
less developed money and credit systems. They are harder in the United
States and England than in Germany, harder in Germany than in France,
harder in western Europe than in eastern Europe, harder in Christendom
than in heathendom. They are less severe in rural districts, where
prosperity depends more on crop conditions, and business has in it less
of financial speculation. Their effects are least felt in the staple
industries, for when hard times come, people economize on the less
essential things. The glove-factory, the silk-factory, the
golf-club-factory are more likely to close than the flouring-mill. They
are felt less by classes with fixed incomes than by those with variable
ones. They affect wages and salaries less than profits. The rate of
wages is affected only in a moderate degree, but laborers suffer in the
loss of employment. The money-lender who has eliminated chance as far as
possible and has taken a low rate of interest loses little; the
risk-taker who draws his income from dividends on stock probably loses
much.
§ III. VARIOUS EXPLANATIONS OF CRISES
[Sidenote: Glut theories of crises]
1. _Over-production and under-consumption theories are those most widely
held._ In the first annual report of the United States Commissioner of
Labor (1886) is given a long list of theories, more or less wild, that
have been advanced in explanation of crises. It is simply a catalogue,
not a logical grouping. Most of the views can be classed as
under-consumption or over-production theories, which are but two aspects
of the same idea. One view is that too many things are produced, another
that too few are consumed. The over-production theorist, seeing that
warehouses are filled with goods that cannot be disposed of for what
they cost, that factories are shut down and men are out of employment
for lack of demand, declares that productive power has grown too great.
The under-consumption theorist, seeing the same facts, says that the
trouble is lack of purchasing power. He admits that there are people who
would like to buy these things, but he asserts that such people lack
money because production grows faster than wages, wages being fixed, as
he believes, by the minimum of subsistence--a theory akin to the iron
law of wages. In both over-production and under-consumption theories the
inequality of demand and supply is looked upon as a general one. There
is supposed to be not merely an unequal and mistaken distribution of
production, but a general excess of productive power.
[Sidenote: Defects of glut theories]
The wide vogue held by these views would justify a fuller discussion and
disproof of them here, did space permit. It must suffice to indicate
merely that they have the same taint of illogicalness as the "fallacy of
waste," the "fallacy of saving" and, still closer likeness, the "fallacy
of luxury." They overlook the fact that an income, either of money or of
other goods, coming even to the wealthiest, will be used in some way. It
may be used either for immediate consumption or for further indirect use
in durable form. Through miscalculation there may be, at a given moment,
too many consumption goods of a particular kind, but the durable
applications can find no limit until the inconceivable day when the
material world is no longer capable of improvement. At the time of a
crisis, there is unquestionably a bad apportionment of productive
agents, and a still worse adjustment of their valuations, but these in
no wise negative the basic economic fact of the scarcity of wealth.
[Sidenote: Money theories of crises]
2. _Another group of theories explains the crises as being due to money,
either too much or too little._ The unregulated issue of bank-notes has
been assigned as the cause of crises, especially under the circumstances
accompanying such crises as those of 1837 and 1857 in America, when
bank-note issues chanced to be the agency most marked in the undue and
unsound expansion of credit. The issue of government paper money,
leading to inflation and speculation, is assigned as a cause leading up
to such a crisis as that of 1873, following our Civil War. The reverse
view is taken by the advocates of a cheap and plentiful money. They say
that these crises were caused, not by the expansion, but by the
reduction of bank-notes; for example, not by the inflation of prices
through the issue of greenbacks in 1862 to 1865, but by the contraction
of the currency from 1866 to 1873.
[Sidenote: Their inadequacy]
There is only a fragment of truth in these various views. It is always
lack of money at the moment of the crisis that causes any particular
failure, and in that sense it is always lack of money that causes a
crisis. But the question is, whether in any reasonable sense it can be
said that it was lack of a circulating medium before the crisis that
brought it on. There is no support for this view, except in the rare
case when the money standard is undergoing a rapid change, as in the
United States from 1866 to 1873, and the statement then needs much
modification and explanation. The money theories of crises are nearer to
the truth than are the over-production type, for the crisis is always
connected with money and prices. But it cannot be said that the absolute
amount of money in circulation in the period preceding crises gives
occasion to them. In a few instances a rapid change in the amount has
had an important effect, but this fact does not explain crises in
general.
Lack of confidence is said to be a cause of crises. This is a truism,
but the lack of confidence is not without reason and cause.
Over-confidence in the period of expanding prices is succeeded by
extreme depression when many false hopes are shattered.
[Sidenote: Capitalization theory of crises]
3. _Crises must be explained essentially as the forcible and sudden
movement of readjustment in the mistaken capitalization of productive
agents._ Capitalization runs through all industry. The value of
everything that lasts for more than a moment is built in part upon rents
that are not actual, but expectative, whose amount, therefore, is a
matter of guesswork, or "speculation." Many unknown factors enter into
the estimate of future rents. The universal tendency to rhythm in motion
(material or psychic) manifests itself in an overestimate or
underestimate of rent and of every other factor in value. This is
emphasized by a psychological factor called the "hypnotism of the
crowd," Most men follow a leader in investment as in other things. The
spirit of speculation grows till it becomes almost a frenzy, and people
rush toward this or that investment, throwing capitalization in some
industries far out of equilibrium with that in others.
The use of credit enhances the rhythm of price. A large part of business
is done practically on margins. If the value of a thing fully paid for
falls in the hands of the owner, he alone loses; but if the value of a
thing only partly paid for falls so much that the owner is forced to
default in his payment, the loss may be transmitted along the line of
credit to every one in the series of transactions. A credit system,
highly developed, is a house of cards at a time of financial stress.
There is an element of credit in all modern business. Enterprisers enter
into strenuous rivalry to secure the profits of a rise, ever hoping to
get out whole before the crisis comes.
[Sidenote: Psychological nature and objective conditions of crises]
The fundamental cause of crises thus is seen to be psychological; it is
the rhythmic miscalculation of rents and of capital value, occurring to
some degree throughout industry, but particularly in certain lines. But
this subjective cause in men is given full opportunity for action only
when certain favoring objective conditions are present. Most noteworthy
of these besides the credit system is a dynamic condition of industry.
The past century has opened up new fields for investment on an
unexampled scale. Investment has advanced both intensively and
extensively in a series of great waves. New machinery and processes have
given undreamed of opportunities for enterprise in the older countries,
and the physical frontier of investment has moved outward with the march
of millions of immigrants to people the fertile wilderness. Such factors
disturb the equilibrium of prices both in time and space, give a
powerful impulse toward higher values in the older lands, and stimulate
the hopes of all investors. When the balance between the capitalizations
of various industries and between the rents of the various periods
proves to be false, the inevitable readjustment causes suffering and
loss to many, but particularly in the inflated industries. But, because
of the mutual relations of men in business, few even of those who have
kept freest from speculation can quite escape the evils.
[Sidenote: Widespread effects on incomes]
4. _Crises must be discussed in connection with other subjects than
profits._ In the text-books the subject of the crisis is variously
classified. It may well be discussed with money, credit, and banking. It
has its bearings on wages, justice in distribution, the theory of
interest, and the consumption of wealth. But the reasons for taking it
up in connection with the subject of profits are strongest. In no other
connection is the presence of the element of speculation and of chance
profit and loss in business so forcibly seen.
[Sidenote: Their probable mitigation]
The income of every class of society is to some extent affected by these
more or less periodic fluctuations. They are in part the price paid for
progress under the constantly shifting conditions of our dynamic
industry. In part they are the proof of industrial maladjustment. The
force of the shocks will no doubt be much reduced by better banking and
business methods, and by a sound currency system. More important still,
the development of moderation, conservatism, and a less speculative
spirit among the leaders of business will do much toward softening the
asperity of these scourges of industry.
PART III
THE SOCIAL ASPECTS OF VALUE
DIVISION A--RELATION OF PRIVATE INCOME TO SOCIAL WELFARE
CHAPTER 38
PRIVATE PROPERTY AND INHERITANCE
§ I. IMPERSONAL AND PERSONAL SHARES OF INCOME
[Sidenote: Functional vs. personal distribution]
1. _Under the title "the social aspects of value" are to be considered
the influences exerted upon incomes by various social acts, ideals, and
institutions._ The incomes from the wages of free labor and those from
the rent of wealth, as studied in the abstract theory of value, are
alike in their impersonal aspect, their relation to utility. But while
wage flows from a personal source--is an income appearing to reward the
personal effort of the laborer, the income of the wealth-owner is due to
the uses of goods. In the abstract theory of value we do not seek to get
behind this impersonal phase of rent. The income arising from goods goes
to the de facto owner of the goods. We do not ask how the goods first
came into his possession, whether through labor or as a gift, whether
stolen or inherited. Indeed, the economic theory of competitive rent may
be said not to recognize the personal fact of ownership; it is concerned
with the impersonal fact of usufruct. The theory of economic rent, of
time-value and capital, and of wages, as measured by efficiency, is
impersonal, is a study of functional distribution. In the problem of
monopoly the personal factor is more prominent, but the economic study
of rent cannot well stop there.
[Sidenote: Social institutions and personal incomes]
An answer, at least in broad outline, must now be given to the question
why some men are permitted to hold wealth as their "own," that is, as
"property," while other men are propertyless. Why do the owners exact
payment for the use of goods, and why are they allowed by their fellows
to do so? Back of these facts is a great system of social institutions
that helps to determine what men will do. Market value is a social fact;
price is determined by the bidding of men under the existing social and
political conditions. These broader social aspects of value remain for
consideration. The influence of lawmaking, of collective action, and of
social institutions on value must be noted. Incidentally, this has been
done in speaking of patents, political monopolies, and related
questions; but mainly the subject has been viewed from the individual
standpoint; now it must be looked at more fully from the social side.
[Sidenote: Harmony of the studies of impersonal and of personal
distribution]
2. _The study of personal distribution should include a further
explanation of the various elements that unite to form the individual's
income._ "Distribution" in economics is the reasoned explanation of the
way in which the total product of a society is divided among its
members. It is a logical question and not an ethical one. The economist
first asks, What is the effect of utility on value? and, next, What is
the relation of these goods to the personal incomes of the members of
society? It is not his peculiar part to say whether this is the best
distribution in an ethical sense, yet in pursuing the question of
distribution one comes to the border of certain moral questions.
The impersonal and the personal views of distribution are not, however,
contradictory; they are different aspects of the same question. It
cannot be said that the analysis of economic rent is a purely abstract
piece of work. In fact, the impersonal view of distribution is essential
to an understanding of the personal view of it. The one gives general
principles, the other the special cases. In the practical economic
issues of the day, the most urgent need is a better popular
understanding of the abstracter theory of value. It is a guiding thread
through otherwise bewildering mazes.
[Sidenote: Composition of personal incomes]
The actual incomes of individuals are made up of different elements. The
wage-earner and the salaried man are rarely quite without material
wealth. The enterpriser gets some income also in the form of contract
interest, or as rent from machinery. Actual personal incomes are
therefore a sum of various functional or impersonal incomes. The
earnings of every agent may be thought of as always going either to some
individual or to some group. By social convention the receiver of
incomes that are not personal gifts is supposed to have produced them.
This involves the great assumption that the owner of a piece of land has
produced or contributed in some way to society an amount equal to the
rent. This may be true in many cases, but in many cases this view cannot
be accepted without close scrutiny.
[Sidenote: Law in relation to wealth]
3. _Property and wealth are respectively the personal and the
impersonal, the legal and the economic, aspects of productive agents._
Law holds an important place in the discussion of actual economic
questions. This fact was not overlooked by John Stuart Mill, and it has
been far more clearly recognized in the last few years, especially by
the German economists. Political law in the broadest sense, as embodied
in the state, is, in the first place, a set of rules to guide the
conduct and regulate the relations of men in society--a legal code; it
is, in the next place, a governmental machine to determine disputes
between men--a judicial system; and it is, finally, physical power to
bring contestants into court and to secure and protect their rights--a
police force. Whether acting through legislature, courts, or police, in
all its dealings with wealth the law is predominantly personal. The
question the law asks and answers regarding wealth is not _What_, but
_Who?_ Who is the owner, who should control, receive, enjoy the income?
Economic wealth consists of scarce things, of valuable agents, and
because they are scarce, men quarrel over them. Because of the
impersonal economic fact that a field and a machine produce scarce
goods, arises the legal question as to which man is entitled to enjoy
them.
[Sidenote: Property and wealth]
In the case of material things, property value and capital value must be
exactly equal. Property rights cover the ownership of a material thing.
Material property consists of things viewed with reference to ownership;
capital consists of the same things viewed with reference to their
economic services. There are other property rights besides those in
material things, various immaterial rights controlling the action of the
individual and thus giving a sort of ownership of the individual's
actions. Such are patents which forbid other men making a particular
kind of machine; copyrights which forbid other men printing certain
writings; legal contracts that limit the action of men in various ways,
and thus appear to abridge their liberty.
§ II. THE ORIGIN OF PRIVATE PROPERTY
[Sidenote: Property and income]
1. _Property is ownership, the legal control over the sources of
economic income._ The Latin word property means ownership, and hence
that which pertains to the individual, that which is a man's own. The
control of property is greater or less. The law makes between property
rights and equity rights certain subtle distinctions which have their
reason in the history, if not in the logic, of the law, but which are
not essential to economic discussion. What we are interested in are the
equitable claims of men to wealth rather than the technical property
rights. With that thought let us consider the value of the control of
wealth. If a farm worth ten thousand dollars is mortgaged for five
thousand dollars, its economic worth is ten thousand dollars after as
before the mortgage, but the equitable claim is divided into two shares
of five thousand dollars each. The value of the property right cannot,
in a reasonable view, be greater than the value of the economic wealth
it covers. There is much confusion in the law of taxation on this point.
The law treats the farm as property and the debt upon it, whether
secured by a mortgage or not, as another body of property. Needless to
say, this leads to absurd conclusions in reasoning, and to gross
injustice.
[Sidenote: Forms and modes of ownership]
There are different forms of ownership: first, private, as that of
individuals, families, partnerships, or corporations; second, public or
state, as the ownership of the state house, the highway, the Adirondack
forest-reserve or the Erie Canal. These are equally effective as against
the claims of outsiders, but the rights of those inside the circle of
ownership differ. For example, the rights of one shareholder against
another, or the rights of one member of a family as against another, are
not the same as the rights against outsiders. Private property is the
characteristic feature of our present industrial society, but it exists
side by side with state property and with many intermediate grades
between private and common property. Private property, while attacked on
some sides, is usually accepted without question; but in this age of
inquiry its origin should be examined, its limits and the reasons for
them should be noted, and its purpose, faults, and effects should be set
clearly before the judgment.
[Sidenote: Various theories of property: Occupation]
2. _The older theories of the origin of private property are those of
occupation, conquest, labor, natural rights, and law._ The theory of
occupation is that property is based upon the priority of claim of one
who finds wealth without an owner and appropriates it. This, to be sure,
is a statement of what happens in the settlement of new countries, but
it is not an explanation of the property rights that are arising every
moment, nor does it give a logical reason for the continuance of ancient
property rights.
[Sidenote: Conquest]
The same can be said of the conquest theory, the theory that property is
based on force. It applies to the invasion of the Roman provinces by
the barbarian tribes who divided the country and enslaved the
population. But it rarely applies to present-day happenings and at its
best it cannot, to modern minds, "justify" present property rights.
[Sidenote: Labor]
The labor theory, meeting some queries where others fail, is that
ownership is based on production, on the right of a man to that to which
his brain and his muscle have imparted value. It is evident that this
test leaves without explanation or justification a great number of
things that do exist and have existed as property.
[Sidenote: Natural rights]
The natural-rights theory is that property is necessary for the
realization of the dignity of human nature. This, if true, would be not
so much an explanation as a condemnation of private property as it has
existed in most cases, as millions of men are in every land all but
lacking in property, and inequality of possession is everywhere marked.
This theory expresses, however, one of the worthy ideals of modern
democracy. Although, in common with the various other "natural rights"
theories, it must to-day be deemed too absolute and too individualistic,
it contains a far-reaching truth, of which due account must be taken in
our social philosophy.
[Sidenote: Law]
The legal theory is that property exists because the law says it shall.
This expresses a truth, but is no more than a truism. The law determines
the limits of property, but what determines the limits of the law? What
practical or social justification is there for passing and continuing
such law? The legal theory does not explain anything finally. Each of
these theories has its defects, but each points to some fact important
and significant, at certain times and places, in the explanation of this
widespread institution.
[Sidenote: Property in early societies]
3. _The institution of private property has evolved under diverse
conditions; the question of its origin is not the same as that of its
present justification._ In early societies individual property rights
were not very clearly marked. Every tribe asserted against other tribes,
and tried to uphold, by war, its claims upon its customary
hunting-grounds; but the claims of the individual hunter and fisher
within the tribe did not often come into conflict. Private property at
the outset was in personal possessions, ornaments, weapons, utensils,
which were very meager in that primitive society where it was the custom
"to go calling with a club instead of a card-case." Only later came
individual property in land. A few years ago it was generally believed
that the organization of the old German tribes was politically an almost
perfect democracy, and economically a communism wherein all had equal
claims on the land. To-day this opinion is very seriously questioned. It
seems probable that the so-called communism was really an oligarchy of
the favored, and that the masses lived in subjection, cut off from all
but a meager share in the public property.
[Sidenote: Origin vs. present justification of property]
However that may have been, strong forces within historic times have put
an end to the common ownership and tillage of land as it existed among
the serfs of Europe. The common tillage of land was shown by experience
to be wasteful. Not only did competition tend to bring the economic
agents into more efficient hands, but the movement was furthered by many
acts of injustice and violence on the part of those in power. Inquiries
into the origin and development of this social institution are
interesting and helpful in forming an estimate of its present
significance, but the problems of the past are not those of to-day.
Whether or not the ancient beginning of property in Europe was in
violence and evil has but a remote bearing on the question as to the
present working of it. Social conditions and needs have not changed more
than have the forms and limits of property itself. Each generation has
its own problems to solve, and each must test existing institutions by
their present results, ignoring for the most part the evils of the past.
[Sidenote: Social expediency the ground of private property]
[Sidenote: Shifting limits of the law of property]
4. _Private property may now be justified mainly on the grounds of
social expediency._ This is a broad explanation under which can be
brought the many varying conditions; but it has the fault of a broad
explanation, that it needs be further explained. Conceding that private
property works hardship to the individual in many cases, it must be
justified on the ground that, on the whole, it furthers the progress of
society. Private property is looked upon by some as merely reflecting or
expressing the economic inequalities of men; the man poor in ability is
the man poor in property. It is looked upon by others as exaggerating,
indeed at times reversing, the economic abilities of men. In general, it
must be judged by this test: Does it further the welfare of society
better than would any alternative plan for the control of economic
wealth? The question is not whether it is faultless, for no human
institution is so. Nor must it be assumed that property is a fixed and
uniform mode of control; there are many kinds of property. Different
parts of wealth may be treated in different ways: there may be private
property in wagons, and public property in roads; private property in
houses, and public property in forests; private property in automobiles,
and, in some countries, public property in railway-carriages. But any
rule of property, like any other workable human law, must be applicable
to all individuals that meet the conditions. Hence any human institution
must be judged by its average working, not by exceptional cases.
The very acceptance of the theory of social expediency implies the need
of a readjustment of the institution of private property; for private
property, as it is found to-day, is complicated by many historical
accidents. Survivals of ancient injustice and relics of feudal
institutions that rest on no vital reason remain in our new country as
well as in the older ones. The limits of property in many respects are
determined, not according to the logic of expediency, but by the social
inertia which often governs succeeding generations.
§ III. LIMITATIONS OF THE RIGHT OF PRIVATE PROPERTY
[Sidenote: Public interests limiting property rights]
1. _Unmodified private control of property is unknown: the public makes
many reservations in its own interest._ Few realize the manifold ways in
which property rights are limited. There is, first, a whole set of
limitations to prevent nuisances. An owner in many situations is not
free to build a slaughter-house or to start a glue-factory on his land.
Property is governed by general public utility, and anything that
threatens to become a nuisance or a danger is excluded. When, under the
right of eminent domain, the state or the railroad takes the old
homestead from its owner who would live and die there, the payment of
money damages to him does not make this the less a limitation of his
property rights. Rights of way on property exist either through contract
or by prescription permitting its public use. Most important of all
limitations is the right of taxation, by which society takes more or
less of private incomes for purposes of which the individual owners may
in no way approve.
[Sidenote: Private claims limiting property rights]
2. _The law enforces a multitude of private claims against private
owners._ A variety of rights called easements or servitudes may attach
to private property, modifying its exclusive use. Leases for any period
are a virtual limitation of the control and division of the ownership.
Both the holder of the lease and the owner of the property have certain
rights before the law. The lender of money secured by mortgage has a
legally recognized and enforceable interest in the mortgaged wealth.
Property is left in trust for the benefit of persons or of institutions
or of the public, and is administered by trustees who are strictly bound
to the execution of the terms of their instructions. Contracts of many
sorts are entered into by owners, limiting their control in manifold
ways, and the law enforces these contracts. These all form a complex of
equitable claims, which together equal in value one undivided property
right, which in turn equals the value of the wealth. These claims
mutually limit each other (whether they be called equitable claims, or
liens, or property rights), and wealth is not multiplied by multiplying
the claims, as the lawmakers unfortunately sometimes assume to be the
case.
[Sidenote: Limitation of bequest]
3. _The right of bequest, or of gift at death, is limited in various
ways in different countries._ The term bequest implies a will, usually a
written will in which the person, foreseeing death, has expressed his
wishes as to the disposition of his property. It is said sometimes that
bequest is a "logical" result of private property, but the law does not
treat it as such. In countries where hereditary aristocracies exist,
primogeniture is in some cases required by law, in others so strongly
favored by public opinion that it is practically always followed. Custom
limits bequests in England to members of the family, and wills giving
outside the family are rare, and are almost always broken in the courts.
John Stuart Mill contrasts this with the frequent practice by rich men
in America of giving for public purposes. In France the right of bequest
outside the family is legally limited; only the share of one child can
be willed away by the father, and the rest must be equally divided among
the children. Settlements and _fidei commissa_ are limited in many
countries, because of the recognized social evils resulting from the
tying up of estates for generations. Throughout the history of England,
Parliament has given attention to the question of mortmain, which
chiefly concerned the drifting of great estates into the hands of the
church or of corporations, as a result of bequests by the pious. Only
recently in England, and to a less extent in this country, has been
seriously discussed the policy of permitting unlimited endowments to
charitable institutions, and new legislation has diverted from their
original purposes some of the old endowments. These varied and often
strict limitations of the right of private property are all determined
by some thought, wise or foolish, of social expediency.
[Sidenote: Limitation of right of inheritance]
4. _The law of inheritance varies greatly with time and place._
Inheritance, in contrast with bequest, usually means succession to the
property of one who has died intestate, that is, has made no will. The
old idea of family unity survives in great measure in modern laws of
inheritance. The nearest living relatives, no matter how distant they
may be, inherit property when there is no will. When a miser dies in
solitude and neglect, the world must be searched over to find a remote
cousin to take the hoarded wealth. Inheritance is limited largely at
present by the power of taxation. The view is growing that the claims of
the society in which wealth has been acquired are stronger than those of
relatives distant alike in space, in blood, and in affectionate
interest. This view is reflected in many recent inheritance-tax laws
which take from the shares of distant relatives a goodly portion for
public purposes.
The question is raised in many minds, If private property is not an
absolute right, what shall be its limits? What changes should be made in
it? The essential thought in the various attacks on the institution of
private property is that, because it occasions inequality in incomes, it
is not socially expedient. The conviction is growing that, in some
general way, incomes should correspond to, and reflect, social service.
It is well to consider more closely what the terms social expediency and
social service imply.
CHAPTER 39
INCOME AND SOCIAL SERVICE
§ I. INCOME FROM PROPERTY
[Sidenote: The justice of property questioned]
1. _Property rights must meet the test of social expediency._ If private
property is defended on the ground of social expediency, it must show
good social results. It is not a sacred thing; it is open to
examination, and must be judged by its fruits. Of all the forms of
income, that from property has been most strongly attacked. The thought
is that enjoyment of wealth should not be found apart from labor, and
that it should bear some proportion to services performed. The enjoyment
of an ample income by one who does no more than to draw checks or to
sign coupons seems to many minds to be unjust; and it is often
questioned whether there is any social service performed by the
receivers of the rent from land. Property seems in many cases to be
distributed without rule or reason. It does not correspond with beauty,
strength, wit, wisdom, temperance, gentleness, or charity. Since the
beginning of the Christian era, reformers have assailed and preached
against the prevailing inequality of wealth. The idea that incomes, if
not equal, should correspond to social service has always been present
in some vague way in the minds of men.
[Sidenote: Social effect of the right to give]
2. _The right to transmit property by inheritance or by gift may be
judged with reference to its effect on the giver, on the receiver, and
on society at large._ It is well to take these three points of view. The
right to dispose of property either during life or at death has
undoubtedly in many ways a good effect on the character of men. It
stimulates the father to provide for his children, the husband to
provide for his wife. There is a joy in giving, a joy in the power to
bestow one's wealth on those one loves. The right to give stimulates
industry, frugality, ingenuity, and yields productive results. Much of
the existing wealth probably never would have been created if men did
not have this right of gift. But there is a limit to the working of this
motive, and other motives often are much more effective. Many men after
gaining a competence continue to work for love of wealth and power in
their own lifetime, as the miser continues to toil for love of gold.
When men without families die wealthy, when men that have not the
slightest interest in their nearest relatives labor and amass wealth
till their dying day, it is evident that the right to bequeath property
has little to do with their efforts. Love of accumulation and love of
power in these cases supply the motive. A more limited liberty to
dispose of property at death might still suffice, therefore, to call out
the greater part of the efforts now made to accumulate property.
[Sidenote: Effect of the right to receive]
That the effects on the receiver of the property are good is somewhat
more doubtful. It is true that children raised in great comfort or
luxury would be more than ordinarily unhappy if plunged into poverty or
even into humble circumstances on the death of their parents. There is
much social justification for permitting families to maintain an
accustomed standard of comfort. Few would deny that a moderate provision
by parents to provide education and opportunity for their children is
commendable and desirable. But the evil effects of waiting for dead
men's shoes are proverbial. Many a boy's greatest curse has been his
father's fortune. Men of native ability wait idly for fortune to come,
and opportunities for self-help slip by unheeded. The world often
exclaims over the failure of the sons of noted men to achieve great
things, for, despite confusing evidence, men still have faith in
heredity. A too easy fortune saps ambition and relaxes energy; and thus
rich men's sons, if not most carefully and wisely trained, are made
pitiable paupers in spirit, while the self-made fathers think their boys
have chances they themselves did not enjoy. The greater social loss is
not the dissipated fortunes, but the ruined characters.
[Sidenote: Broader social effects of inheritance]
The effects of inheritance on the community are good in so far as it
secures efficient management of wealth. If the son or relative has been
in business with the deceased, there is a reason that he should inherit
the property, and his succession to it makes the least disturbance to
existing business conditions. But every profligate son is an argument
against inheritance; every incompetent heir is an argument in the hands
of the enemies of the existing order of society. It is to society's
interest that no able-bodied member shall stand idle. Every child should
have presented to him the motive to devote his powers to the social
welfare in economic or other directions. Moreover, many feel that the
great fortunes now accumulating through successive generations in the
hands of a few families are endangering our free society, even if these
fortunes should continue to be well administered. There is a widespread
feeling that the heredity of great wealth is, like the heredity of
political power, out of harmony with the democratic spirit--though this
may easily become a misleading comparison. Still, democracy wishes to
see men as individuals put to the test, not profiting forever by the
deeds of their forebears. This feeling is shared by those who cannot be
charged with radical prejudices. A few years ago the Illinois Bar
Association passed a somewhat startling resolution favoring moderate
limits to inherited fortunes. Every year sees bills of this purport
introduced in the legislatures and in Congress. Andrew Carnegie says it
would be a good thing if every boy had to start in poverty and make his
own way. Cecil Rhodes recorded in his will his contempt for the idle,
expectant heir.
[Sidenote: The test of wise inheritance laws]
3. _Social expediency will limit the right of intestate inheritance to
persons in essential economic and social relations._ Public opinion is
not yet crystallized in favor of this formal proposition, but tends
strongly toward it. The foregoing considerations show that the right of
gift in the lifetime of the giver should be the freest. The right of
bequest, that is, of gift by will, should be liberal. The man who has
acquired wealth may well be trusted to decide who bear to him a close
social or personal relation, and to say whose lives have in a measure
furnished the motives of his activity. But the right of intestate
inheritance by distant relatives is one that stands on weak social
foundations to-day. It appears to be an unreasonable survival from more
patriarchal conditions. The true test is whether the wish to provide for
these heirs has furnished the motive for the producing and preserving of
the wealth. The claims of those nearest in blood and closest in personal
relations are strongest. Family affection and friendship form the
strongest of social ties, and it is socially expedient to cultivate
them. Motives for abstinence and industry must be strengthened. But the
same test shows that the zealous regard of the American law for the
rights of grandnephews in Australia, or even of brothers long absent in
distant quarters of this country, is irrational, and is unjust to the
community where the fortune lies.
[Sidenote: Social services of favored classes]
4. _Many fortunes built on favoring legislation are defended as due to
social service._ In the Middle Ages kings often granted great estates to
nobles as rewards for past merit and as a payment for expected public
actions. The great landlords were the magistrates, military leaders, and
supporters of social order, and thus, in the judgment both of the king
and of the commonalty, the nobles earned their incomes by their social
service. While this practice has disappeared under constitutional
government, large grants are still made to royal families. Many
Englishmen who are democratic at heart uphold such grants as the price
of social stability. Regard for royalty is so deep-rooted in the minds
of the people of any long-established monarchy that there is always
danger in change. England must pay many millions annually as the price
of loyal and conservative sentiment. So long as this is true, a family
of royal figureheads and idlers performs a social service.
[Sidenote: Possible social service of protected industries]
Protective tariffs sought by wealthy manufacturers are granted, not
ostensibly to help them, but to help the country. The argument is that
the benefits are diffused. Aid to enterprises in private hands, such as
ship subsidies or as the grants to the Pacific railroads, are defended
on the ground that, as a whole, society benefits by thus increasing the
income of one class. The promise of social service is most urged by
those who get the immediate benefit. Their eyes are keenest. The
manufacturer sees clearly the benefits that will come to his factory
from a protective tariff, but before he can get it he must convince many
others that they too will gain. The majority of the American electorate
is not voting a special favor at the polls, but is recognizing what it
believes to be in its own interest. Most students of social questions
doubt the wisdom of most of these grants to the wealthy on grounds of
social service. The burden of proof is on their advocates, but few
to-day are so rash as to say that such a claim of social service is
never sound.
[Sidenote: Private property in land questioned]
5. _Property in natural agents is the most strongly attacked._ In the
case of great natural deposits, such as those of coal or iron, the
social service that is performed by the mine-owner is hard to see. Great
incomes are drawn in the form of royalty or rent by those who never lift
a pick or direct a stroke of work. Agricultural land in the hands of
absentee landlords yields an income not very clearly due to social
service, and this phase of property has been especially assailed during
the past century. The modern form of this discussion is concerning "the
unearned increment," the rise in the value of lands as a result of
social growth. It is proposed to appropriate by "the single tax" the
entire rental value of the land for the use of the public.
The defense of property in land is first positive: taking not the
extreme but the usual case, private property secures the discovery and
development of natural resources and their thorough use and good
management (not necessarily by personal labor with the hands). If this
is true, it is well for the individual and for the community to have
this wealth in private hands. But in other cases there is merely a
negative argument for property in land: no other better method of
employing it has been devised and found practicable The experience with
state ownership of mines, forests, and estates has not definitely
answered in every case the question whether the social results of state
ownership are more favorable than those of private ownership. In some
cases they clearly are not, in others they may be; and as the balance of
opinion inclines in the direction of public ownership, other reforms
will doubtless be undertaken.
[Sidenote: Inequality of fortunes]
6. _The present inequality of wealth, not private property as such, is
often attacked._ It is estimated that in the United Kingdom two per
cent. of the families own seventy-five per cent. of all the wealth,
while ninety-three per cent. own less than eight per cent. In the United
States it is estimated that one per cent. of all the families own more
than the remaining ninety-nine per cent.; and at the other part of the
scale eighty-seven per cent. of all the families own less than twelve
per cent. of all the wealth. The trend has been toward concentration of
fortunes and a larger proportion of the growing income from property is
in a few hands. Many feel that the law of property is defective when
this is possible, although at the same time the average income of the
wage-earner is increasing. Yet, it is not the institution as a whole
that is attacked, but its details. The custom of equal division of
property among children in the United States has not been as effective
in keeping fortunes small as was expected. The wealthy American families
have averaged small, and in some of the most prominent the rule of equal
division has not been followed. Opportunities for the investment of
small savings at low interest are not lacking, but the great fortunes
overtower the little ones, securing the great profits and great
political and economic power. The farms and the villages are refuges for
the small industry and for the small fortunes, and this fact has a great
influence on our national character. The whole social atmosphere in the
cities, with their extremes of wealth, differs from that in the country,
and this contrast promises to become greater as the years go on.
[Sidenote: Private property vs. socialism]
7. _The ideal of property rights is that they shall furnish the highest
motives for efficient social service._ Private property furnishes such a
motive in a broad way, but its most ardent defenders will recognize that
it does so imperfectly. It is an institution that has been tried and
that does the work, while other methods suggested to do away with it are
found to be dreams. The ideal of socialism is the abolition of private
property, the centralizing under the control of the state of all wealth,
except the simple personal belongings, clothing and other consumption
goods. But history and human nature unite to testify that extreme
socialism is an unworkable plan, excepting under special conditions, as
in barbarous times and under a political despotism. The modern ideal for
the control of wealth is the best attainable harmony of liberty and
efficiency. If private property as it is, falls short of that ideal, at
any rate it works either on a small or on a large scale, and socialism
does not work at all. Property rights as they exist are not a product of
pure reason. They are the result of social evolution, of historical
accidents, of class legislation, and of selfish interest in many cases.
Changing social conditions and ideas are bringing many changes in law,
and further change must be expected to come.
§ II. INCOME FROM PERSONAL SERVICES
[Sidenote: Some anti-social speculative gains]
1. _Incomes from legitimate enterprise and speculation correspond
roughly to social service._ It has been recognized above that there are
many grades of chance, of speculation, and of enterprise. The extreme
cases are bald crimes and are punished as such. Over some men that never
directly break the law there always hangs a suspicion of guilt. It is
the purpose of the law to make dishonesty unprofitable, but how
imperfectly it does so! There are many cases of chance gains where the
lucky man without social service legally enjoys his fortune. The law
must be framed in broad terms, and cannot provide for every case. It may
broadly forbid lotteries whose evils clearly exceed their benefits. But
what would be the effect of taking away reward for the discovery of a
gold-mine, even though sometimes it is awkward stumbling, not industry,
that reveals the veins of metal? Society has studied that question in
the past; even now changes are being made in the laws; and in their turn
the citizens and legislators of the next generation must decide the
question. It is always under consideration.
[Sidenote: Reward and enterprise]
Are the rewards of the successful enterpriser greater than he deserves?
How shall it be judged what he deserves? The answer is in the form of a
question, Could society have the service without the reward? Society may
be thought of as hiring the services of the efficient business man at
the lowest price. Does it wish the services of Cornelius Vanderbilt in
organizing a great system of railroads, of Andrew Carnegie, of Pierpont
Morgan? What can it get them for? It must appeal not only to their love
of money but to their love of power. Large services and large results
can be bought only with large rewards. The shrewd enterpriser is not to
be paid with abstract social gratitude. He is not to be tricked, as is a
Chinese god, with tissue-paper gold.
[Sidenote: Unmeasured gains of vast wealth]
But in many ways fortunes appear to grow without social services, and
sometimes with social harm. Russell Sage, the noted capitalist (who
should know something of Wall Street), in speaking of the greatest of
American corporations, said: "They dominate wherever they choose to go.
They can make and unmake any property, no matter how vast. They can
almost compel any man to sell out anything, at any price." Henry Clews,
the well-known New York banker, said of a certain group of financiers:
"Their resources are so vast that they need only to concentrate on any
given property in order to do with it what they please.... There is an
utter absence of chance that is terrible to contemplate. This
combination controls Wall Street almost absolutely. With such power and
facilities it is easily conceivable that these men must make enormous
sums on either side of the market."
[Sidenote: Antisocial use of rare ability]
2. _The high pay of rare ability and skilled labor reflects in general a
high social service._ The large income of some men reflects service to a
narrow class, not to society as a whole. Lawyers as a class aid in
maintaining right, but a corporation lawyer may get enormous fees for
defeating just public claims; a skilful criminal lawyer may grow rich
aiding the guilty to escape justice. Other service ministers to the
whims, follies, and vices of the men who pay the bill. Such a service is
"social" in a mean sense, corresponding to the low standards of desire
in that social group. But what of the high rewards of skilled service
ministering to worthy ends? Such favorites of fortune as Jenny Lind and
Patti have received five thousand dollars for a single concert. Is this
because they are the lucky possessors of a rare gift, or because they
perform a social service deserving such reward? Certainly many of their
auditors get what they want and believe they are getting the worth of
their money.
[Sidenote: General social result of rewarding talent]
In general the legal right of everyone to get the highest pay he can in
a free and open market is essential to the calling forth of ability. In
a particular instance it is possible that the service would continue if
one half or more of the income were confiscated by the public; but such
a personal discrimination would introduce an arbitrary and demoralizing
uncertainty into the problem. Who can tell how far the exceptional money
rewards have inspired to the highest cultivation of great genius and of
many minor talents? In a broad but very true sense, therefore, it
appears that high personal achievement, large economic reward, and large
social service are connected.
[Sidenote: Social service of manual workers]
3. _The low income of unskilled labor seems to fall short of its social
service._ This does not refer to the feeble-minded or utterly
inefficient, but rather to honest, industrious, "day-laborers," and to
the low-paid manual workers in field, on railroad, and in factory. Their
service is essential to the existence of society as it is, to all the
higher arts, to the sciences, and to the amenities of life; their tasks
are the roughest, most painful, most dangerous; yet their pecuniary
rewards are the lowest. There is such a unity in society that each more
fortunate man is dependent on the services of the humbler laborers who
make up a large part of society. According to the breadth of social
sympathy their claims seem more or less urgent.
[Sidenote: The problem of increasing their reward]
There is a vaguely recognized and growing conviction that these hewers
of wood and drawers of water should enjoy a larger income. But how are
they to get it? How is society to grant it to them? They get what they
can under the competitive conditions, they get what their service is
worth in the market. Are the conditions of the competition fair? If not,
what will be the effect of a change? If they get more, others will get
less; and with what result? However great the wish for better things,
the attempt to change conditions fundamentally in a forcible and
artificial way is both dangerous and foolish. Improvement must come
through the coöperation of many indirect agencies gradually changing the
nature and direction of the deeper economic forces.
[Sidenote: Imperfect social and individual estimates of service]
4. _The services of each are being measured and paid for by each and
all._ In two ways society is putting its valuation on the economic
services of other members of society: first, by law, or formal social
convention; secondly, by individual estimates. By formal law is
determined what institutions shall be continued. If the class of
property owners is considered worthy of this reward, the institution of
property will be continued; if not, it will be altered or destroyed.
These decisions are made imperfectly, but as well as men of limited
intelligence and honesty can make them. If men were more capable in both
these ways they would enact better laws. Again, individuals are putting
their estimates on others in bidding for services to minister to wisdom
and virtue or to ignorance and vice. If there is to be a much juster
estimate of social service, there must be wiser men in society.
[Sidenote: The ideal of social service]
Does the world owe each man a living? No; on the contrary, each man owes
the world his services in exchange for his living. The pauperism of
spirit that consists in taking something for nothing is found in every
rank of society that enjoys the blessings of progress without giving its
best services in return. The ideal of a better adjustment of reward and
service grows in the minds of men. Social evolution, shaped by this
changing ideal and by accumulating experience, will bring into closer
relation the social services and the economic rewards of men.
CHAPTER 40
WASTE AND LUXURY
§ I. WASTE OF WEALTH
[Sidenote: Loss of wealth in an isolated or an exchanging economy]
1. _The accidental destruction of wealth is a loss to the owner, rarely
with benefit, on the whole, to others._ In the consumption of wealth the
loss of its utility is accompanied by the gratifying of wants; in the
destruction of wealth utility is lost without the gratifying of wants.
In a simple society, without exchange, the result of such a loss is
evident. If food is destroyed, men suffer from hunger or gratify
appetite less perfectly; if clothing is destroyed, they are cold; if
houses are destroyed, they have no shelter. Likewise, if the
self-sufficing family on a farm loses wealth by fire or storm or blight,
its economic environment is made less fitted to gratify wants. In the
conditions of our society, where goods are exchanged, the result appears
to be different. The need to replace the lost goods makes a demand for
special kinds of labor or goods. There may be, therefore, an immediate
benefit to some, which obscures the corresponding loss to others. If a
part of the income of the loser must be diverted from other uses to
replace the wealth destroyed, those from whom he would have bought
suffer an unexpected falling off of their sales, and he has himself
gained nothing. The net result is a loss of wealth and gratification to
the community as a whole.
There is a real exception where the accidental destruction removes some
social difficulty. The great fire in London and the great fire in
Chicago resulted in wonderful improvement. When an old city is built
almost entirely of wood, each owner may think it to his interest to keep
the old buildings. A great fire sweeps them all down and compels the
rebuilding of the city on a new and higher standard. But the usual
social result of accidental destruction is a loss. It is a use of wealth
without a fulfilling of the purpose of production, the gratifying of
wants.
[Sidenote: Intentional destruction of wealth by the owner]
2. _The intentional destruction of wealth by the owner, to make trade
good, benefits neither himself nor others._ The case in mind is one
where there is full choice between keeping or losing the good, not such
a case as the throwing overboard of a part of the cargo when the ship is
in danger of sinking, in the hope thereby of saving the rest, or as the
blowing up of buildings to prevent the spread of a fire. In such cases
the destruction is inevitable without man's action; he merely tries to
minimize it. The case in mind is the deliberate destruction of wealth
that might be kept for use. One labor leader, for example, boasted that
when he drank pop he always broke the bottle "to make trade good" by
helping the glass industry. The refuting of this fallacy is one of the
time-honored tasks in political economy. There is, it is true, an
increase in the demand for glass and glass-blowers' labor, but without
an increase in gratification; but at the same time there is a decrease
in the demand for other goods which would afford additional
gratification. The proverb, old in Shakespeare's time, runs, "Nothing
can come of nothing." What is spent for one purpose cannot be for
another; "you cannot eat your cake and have it too." A given income can
be spent in one of many ways, but not in all ways or even in two ways at
once. It is a question of this _or_ that. At the same moment that the
demand for pop-bottles is increased, the demand for other things is
decreased, possibly that for pop-corn or pop-guns or Populist
papers--who can tell? Such a form of benevolence is a mistaken,
uneconomic attempt to provide labor for one man by taking it from
another.
If the advocate of wealth-destruction would be consistent, he should
break, not merely the pop-bottle, but the water-pitcher and the table as
well; he should make a bonfire at least once daily of his clothing, his
house, and its furnishings; he should advise blowing up the steamboat
and ripping up the railroad when they have carried a single load of
passengers. Thus, when all men were naked and starving, and civilization
had sunk to savagery, trade would have been made as "good" as, by the
policy of destruction, he could ever hope to make it.
[Sidenote: Intentional destruction of others' wealth]
3. _The intentional destruction of wealth owned by other persons is
falsely thought to benefit trade in general._ The cases referred to are
not acts done with criminal motives, but those done with a view to the
public interest. If one sets fire to the property of another, seeking
revenge or plunder, he is guilty of the crime of arson. But what shall
be said of volunteer firemen that let an old house burn down to provide
labor for carpenters and "to make business good"? The duty of firemen is
to put out fires, no matter what the building is; but they choose
sometimes to be ministers to the social interest as they interpret it.
The more spent for carpenters' work out of any income, the less can be
spent for other objects. It is true, however, that if in a small town
the money to rebuild is borrowed from a distant loan or insurance
company, there is an increase in employment in that town for one season;
and that is as far as most men try to carry their economic analysis. Let
the student carry it further.
[Sidenote: The seen and the unseen]
Servants sometimes excuse the breaking of dishes and furniture on the
ground that it makes work, and that the employer can afford it. But
income is thus diverted from other expenditure, either for production or
for consumption. In the light of the theory of wages, it would appear
that carelessness reduces the servant's own efficiency, and in the long
run the loss comes, in part at least, off the wages of that particular
servant. Bastiat's discussion of the broken window-pane is often and
deservedly quoted. What is seen is a certain immediate benefit that the
glass-maker and glazier get; what is not seen is that the power to
expend an equal amount for other things is thereby lost by the owner of
the house.
[Sidenote: The wasteful use of wealth]
4. _The destruction of unnecessarily large value to secure a given
gratification is not economically sound._ The careless use of wealth to
secure an inadequate result is likewise justified as "making trade
good." The blunder that compels the rebuilding of a wall in a rich man's
garden is an occasion for congratulation to those who see in it a happy
provision of work for the unemployed. It is easy to forget that the
proper use of goods is the final step in production. According as goods
are well or poorly used, the production--that is, the real income or
gratification they afford--is large or small. Differences in skill in
the use of wealth are great. A French cook, we are often told, can make
a palatable soup from what goes from the average American kitchen into
the swill-pail. Waste in the use of goods is more likely to be found in
new countries where wealth comes more easily and necessity does not
enforce frugality.
The praise of waste implies the error noted in the preceding
propositions. Deliberately securing less than the maximum result from
wealth is merely a minor degree of the intentional destruction of
wealth. The mistaken view is essentially that of the opponents of
labor-saving machinery. It may be true, if the interests of a small
class of workers or of tradesmen for the moment are looked at; it is
false, if the interests of society as a whole be considered. Far more of
wisdom lies in the proverb, "A penny saved is two earned." The economic
use of wealth as surely adds to wealth (and, ultimately, to the income
of society) as any other mode of production.
[Sidenote: Waste in public outlay]
Some government expenditures, as for river and harbor improvements, are
sometimes favored, not because their immediate purposes are good, but
because they "make work" and "distribute money" throughout the country.
This money comes from taxation, and no matter what the system of
taxation, the burden falls on some one, reducing the incomes at the
disposal of the people to expend for objects of their own choice. If the
work is not worth doing for itself, the collection of money in small
amounts from many taxpayers and its expenditure as a large sum in one
locality results in a net loss to society as a whole. Where the result
is worth something, but not enough by itself to justify the expenditure,
the fallacy of the destruction of wealth is present in a smaller degree.
Examples are seen in the extreme use of pensions and in some public
subsidies.
[Sidenote: The fallacy of waste]
5. _The supposed benefits of destruction and waste are due to a narrow
and incomplete view of the question._ Let us restate the ideas that have
been touched upon. In many cases it is possible that one person may
benefit by another's mishap or folly in the use of wealth. The complex
interrelations of men in society make this inevitable. But, to
appreciate the final effects of such action upon society, one needs but
to go back to the essential thought of wealth and its purposes. As the
average efficiency and bounty of the world fall, so fall the income and
welfare of men. As it rises, the social and economic levels rise also.
Every kind of economic wealth has potentially two kinds of uses: to
gratify wants--thus fulfilling its destiny--or to be converted into
higher and more efficient agents--consumption or production. That the
possibilities of the latter are boundless is overlooked in the fallacies
here criticized. An efficient world would be the result of "economy" and
saving; a wasted and used-up world, the result of the fallacy of the
destruction and waste of wealth.
§ II. LUXURY
[Sidenote: Luxury defined]
1. _Luxury, while variously defined, involves always the thought of
great consumption of wealth for unessential pleasures._ It is not
possible to define luxury absolutely; it is a relative term. Those
opposed to it condemn it in their definition of it, as, for example: "an
excessive consumption of wealth," or "devoting a relatively large amount
of wealth to the satisfaction of a relatively superfluous want." Those
who take a more moderate and favorable view say: "It is the enjoyment of
forms of wealth not obtainable by the mass of men." The difficulty in
the definition as well as in the problem of luxury is that it involves a
mixture of economic and of ethical questions.
[Sidenote: Extravagance "to give employment"]
2. _Luxury is erroneously justified by some as giving employment to
labor._ Typical instances are extravagant dress and elaborate balls
where fine and costly flowers, decorations, music, coaches, require the
expenditure of a large amount of money. It is said of the Empress
Eugenie, wife of Napoleon III, that, in order to help the glove industry
of France, she wore no pair of gloves more than once; in order to help
other French industries, she purchased many silks and laces. It is a
very comfortable doctrine to some people that the oftener they change
their dress, the greater benefactors to society they are. A few years
ago the "Bradley-Martin ball" was given in New York city. It was
possibly little more elaborate and expensive than many another ball, but
it chanced to be a dull time for news and the papers all over the land
gave columns to its discussion. In the many interviews with ministers
and business men, the thought appeared over and over that the ball had
at least the merit of giving employment to labor.
[Sidenote: The fallacy of luxury]
The fallacy of this is essentially the same as that in the argument for
waste and destruction. From the fact that these particular tailors,
musicians, and florists would have less employment if this ball were not
given, it is falsely concluded that, but for this ball, this particular
income, or capital, would not be used at all. The average of employment
in those special industries which minister to luxury is the result of
and is determined by the average level of demand. There are more
caterers and florists in Ithaca than in Hayt's Corners. A more than
ordinarily gay season gives unusual profits to these enterprises, and it
is true that an abrupt and extreme falling off in demand would cause
them large losses, and leave many workers lacking employment for that
one season. But, if this limited demand became usual, capital and labor
would shift to the other industries to which expenditure had shifted.
Other modes of expenditure than twenty-five thousand-dollar balls are
possible, as, for example, twenty-five thousand-dollar public libraries.
Mr. Carnegie takes his dissipation in that form. That gives employment
also; not less does investment in new houses, in new railroads, and in
new factories. More employment of a particular kind of labor is caused
in one case than in another, but not more employment of labor as a whole
and on the average.
[Sidenote: Results of a sudden change in standards of living]
3. _If all extreme luxury ceased, men of means would improve durable
agents more or would give more or would take more leisure while
producing less._ The question of luxury is most difficult when put thus:
What would happen if everybody began suddenly to live on the simplest
food and to confine himself to the bare necessities of life? A sudden
change of this sort is almost unthinkable, but if it took place, all the
factories and agents used for non-essentials would lose their value at
once. A great industrial crisis would follow, as industry would have to
adjust itself abruptly to an unprecedented standard of desires. What
would happen if that standard continued would vary as human nature
varies. There might follow increase of population, or a heightening of
the efficiency of such agents as were of use, or, more probable than all
else, a progressive lightening of labor, a use of the surplus of energy
in study, rest, and recreation. It is, of course, illogical to suppose
that with limited desires for the objective goods of the world there
would continue undiminished efforts to produce goods and to save for
future superfluities. In actual life changes of standard occur
gradually. Economizing in material things by simpler living makes
possible not only the increased efficiency of productive agents but the
increased enjoyment of immaterial goods.
[Sidenote: Luxury as an incentive to progress]
4. _The defenders of luxury claim that it is the great incentive to
progress._ It is undoubtedly true that a dead level of conditions is
unfavorable to the progress of society. There must be in society some
motive for emulation and ambition after the bare necessities of life are
provided. There is therefore much strength in the defense of luxury.
Necessities, strictly understood, are things absolutely essential to
life and health. No hard line can be drawn between necessities and
comforts, between comforts and luxuries. The level rises; it is a trite
and true saying that the luxuries of one age become the necessities of
the next. The rise of the bath-tub in the nineteenth century is an
epitome of the progress of civilization in that period. The free baths
in our cities surpass the hopes of the wealthy of a century ago. Even
the meaner motives of envy may have their social function. The lower
social grades, emulous of the higher standard held before them, labor
with greater energy. The successful and capable, not content with
necessities, continue to give their efforts to production. The
destruction of the motive of luxury before the development of a
substitute in a higher social conscience, would be paralyzing to
industry. Luxury in a moderate measure may be defended by the same
arguments as those for private property. True as this view may be in
many cases, in others it seems directly opposed to the facts. Let us
look at the economico-moral questions involved from the side of the
individual who is indulging in luxury, and from that of the society in
which he lives.
[Sidenote: Happiness and the simple life]
5. _As a question of consumption luxury involves for the individual both
an economic and a moral problem._ The economic question is, Does luxury
enhance the man's real income? Does a greater expenditure on himself
give him a larger sum of gratification in life than a moderate
expenditure would give? Ostentation has its penalties. Undue striving
after effect defeats its own purpose. This is the cold fact of
experience, not a speculative proposition. To get back to the
fundamental principle: gratification results from a harmonious relation
between man's nature and the world. Life loaded with too much luggage
staggers under the burden. The tired faculties of the Sybarite cease at
length to respond to natural pleasures. When the senses are robbed of
their fineness, youth grows blasé, mature manhood is ennuied, life is
empty. The praise of "the simple life" has lately been heard in a
quarter whence such counsel does not usually come. In gay Paris, a wise
pastor has made one of the most beautiful and rational pleas for plain
and sincere living that society has heard since the time of the stoic
philosophers. The word is needed. With the growth of incomes grows the
strain to reach the self-imposed standards of frivolity. Insanity and
suicide are on the increase. The stress of modern life makes men yearn
for the simpler joys. Happiness dwells not outside of men; they must
seek it within.
[Sidenote: Luxury vs. social welfare]
An economic failure, luxury is likewise in most cases a moral failure.
Morality has to do with others; the social aspect of luxury is its
effect on other people. The mere spending of a large income in selfish
indulgence absorbs all the energies and interests of some men and women.
Not only happiness in the narrow sense, but self-realization, is to such
lives impossible. Those absorbed in display can give no due measure of
thought to social obligations. A society made up of self-absorbed and
self-centered individuals is a selfish society, foredoomed to decay.
[Sidenote: Luxury generally condemned]
6. _The larger moral problem involved in luxury is connected with
distribution or the justice of the income, rather than with consumption
or the spending of the income._ The individual effects of luxury broaden
thus into the larger social effects. Most of the enemies of luxury
condemn all expenditure of wealth above a very moderate sum, declaring
that it is "unjust" for one man to have much while others are in
poverty. This communistic doctrine pervades the teaching of many moral
teachers, pagan and Christian. In many ways a public opinion can be
developed to disapprove and condemn ostentation. Frivolous display
becomes bad taste. Flaunting riches meet the public frown. The spending
of income for dress and display has never been successfully forbidden by
law. The Middle Ages are full of futile sumptuary laws which sprang from
the envy of the nobles for the wealthy merchants. The growth of good
taste may do what formal law found impossible.
[Sidenote: Increasing social uses of wealth]
The use of wealth in these days is taking more social directions. It
turns from dress toward education, art, music, and travel; then ceases
to be applied merely to self and family, and benefits the community.
Nowhere and never before has this movement gone so far as in America.
Andrew Carnegie, with his gifts of millions annually to public
libraries; Peter Cooper, founder of the People's Institute; Ezra
Cornell, the patron and prophet of the modern type of higher
education--are citizens of a kind better known in this country than in
any other.
[Sidenote: Justice of the large income]
[Sidenote: Legal repression of luxury inadvisable]
The immorality of luxury rests in most minds on the conviction that it
is unjust that any one should have so large an income to use. The
question of luxury leads back to the question of distribution: Has the
man honestly gained his wealth? If so, he may spend it with good
judgment or poor, with good taste or bad, but, so long as he does not
injure others in the spending of it, there is much vagueness and
confusion in the talk of "justice" or "injustice." Each must in large
measure be his own judge of the wisdom of expenditure. Luxury is not
always a question of wealth. Every person of moderate income has
relatively superfluous and expensive tastes. One spends more for music
than many a millionaire does; another more for books. How many college
students' budgets could pass the censorship of Hetty Green, reputed to
be the richest woman in America? If expenditures were regulated by the
public, few persons would be within the law. But whatever the goods that
are bought, if income is unjustly acquired, if its distribution is by
rules that do not give the best possible approach to social service,
there may well be talk of injustice. There is need of better standards
of taste and judgment in expenditure, but not of sumptuary laws. If
there is any legal change, it should be rather in the law of property.
CHAPTER 41
REACTION OF CONSUMPTION ON PRODUCTION
§ I. REACTION UPON MATERIAL PRODUCTIVE AGENTS
[Sidenote: Essential mark of the consumption of goods]
1. _Economic consumption is the enjoyment of the utilities which wealth
is capable of affording._ All wealth looks toward consumption. To take
away the prospect of the enjoyment of goods is to take away all their
value. Consumption involves generally the using up of a thing. Food is
consumed quickly, clothing more slowly, and houses wear out after many
years. The using up is, in some cases, due to the forces of nature, and
is not hastened by enjoyment. A house goes to ruin more rapidly if
uninhabited than with a careful tenant; clothing is destroyed more
quickly by moths than by wear. The use of many goods that give esthetic
pleasures, as art, painting, sculpture, and the enjoyment of fine
scenery or of beautiful building sites, does not destroy the things that
afford the pleasure. The idea that all value originates in labor has led
to false views on this question. The essential mark of consumption is
the using of the income as it arises, not necessarily the using up of
the material agents that afford it, though this frequently occurs as
well.
[Sidenote: Consumers' choice as influencing value]
2. _The kind of consumption affects the value of material agents._ Each
buyer helps to determine the use of productive agents. The control of
purchasing power means the potential control of industry to that degree.
It was necessary in discussing the enterpriser to recognize that the
buyer eventually dictates the direction of industry; the enterpriser
seeks to produce that for which there is most demand. A change of taste
affects the value of natural agents. An increase in the demand for meat
affects the value of wheat and potatoes, and also the land used for
producing them. A change in the national diet may be equivalent to the
discovery or to the destruction of half a continent. If one chooses to
drink wine instead of buying statuary, he increases the value of
vineyards and decreases that of marble quarries: If one drinks beer, he
bids for barley; if he eats candy, he may be offering a bounty for
beets. Therefore, choosing vines or violets, pictures or pretzels, each
with his nickel helps to determine what shall be produced.
[Sidenote: Inventions influencing value]
The distribution of wealth thus affects the value of agents. The wealthy
spend relatively more for luxuries, the poor for food and other
essentials. Where wealth and incomes are very nearly equally
distributed, the demand of different families will be for much the same
kinds of goods. If there were no rich men, the demand for vineyards
producing fine wines would be less. The very best qualities of goods
take on the highest prices when there is a small, but very wealthy,
class of purchasers.
Inventions often shift demand, and value follows. The invention of the
bicycle with pneumatic tires, coincident with the adoption of electric
traction for street cars, reduced the price of horses between 1890 and
1895. This doubtless was a factor in agricultural land values at that
time. This change was sudden, extreme, and temporary, and there has
since been a gradual adjustment and a return to the former values.
[Sidenote: Consumers' choice as affecting productive forces]
3. _The production of the next period may be radically affected by the
use now made of agents._ Some consumption takes the form of using up and
reducing the stock of wealth. The demand for lumber causes the
disappearance of the forests, whereas the demand for oranges stimulates
the planting of orange trees. The reckless exploitation of natural
resources leaves society poorer. Great herds of buffalo were slaughtered
to get the hides, which were of comparatively slight value. Rich land
has been exhausted to get a few harvests.
War is a use of wealth for ends believed at the time to be necessary and
believed to forward social welfare better in the long run than would
dishonorable submission; but it causes misery and leaves industry
prostrate. The forms taken by saving are affected by the choice of
expenditure. In war the savings of individuals are given to the
government and used for destructive purposes. The lender parts with his
wealth and society uses it up. While the lender has a claim on the
industry and on the remaining property of the community, society as a
whole is the poorer. If the savings had taken the form of public
buildings, libraries, railroads, and factories, the wealth and income of
society as a whole would have been enhanced.
[Sidenote: Consumers' choice as affecting wages]
4. _The kind of consumption affects the wages of the various classes of
labor._ That an increase in the supply of a given grade of labor reduces
its wages and encourages its use, and vice versa, is a truth that became
familiar in the study of wages. An influence also is exerted from the
side of goods upon the price of labor. A shift of demand from one kind
of goods to another depresses the wage of the one kind of labor and
raises that of the other. A low grade of labor that performs only simple
tasks, and those but badly, is injured if demand shifts to better
products. Back of the sweat-shop shirt is the problem of the inefficient
worker. Progress takes place by the effort of labor to increase its
efficiency and to move into higher paid callings, and at the same time
by the desire of the purchaser to buy as good a quality as he can.
[Sidenote: The consumer's responsibility]
Every buyer then determines in some degree the direction of industry.
The market is a democracy where every penny gives a right of vote. It is
the thought of the society called "The Consumers' League" that through
purchases, pressure may be brought to bear upon the employer to provide
better conditions of work. The members of The Consumers' League refuse
to buy goods not made under sanitary conditions. Undoubtedly there is
here a great economic force which an enlightened public opinion, even
without a formal association, can make in large measure effective. Every
individual may organize a consumer's league, leaguing himself with the
powers of righteousness. Will he read a yellow journal or a pink or a
white one? A nickel or two will buy either. He has a dollar; will he go
to the theater or buy ten dishes of ice-cream? He decides to buy a book,
and more type and paper are made, and more printers are employed; he
subscribes to foreign missions and Christian workers penetrate farther
into Africa. Every purchase has far-reaching consequences. You may spend
your monthly allowance as an agent of iniquity or of truth. You cannot
escape a choice even by burying the money, for that is either a demand
for gold or a gift to the issuer of paper currency.
§ II. REACTION UPON THE EFFICIENCY OF THE WORKERS
[Sidenote: Instinctive choice as related to welfare]
1. _All consumption works some temporary change in the consumer, making
him a more or less efficient producer._ Most consumption goods are used
to gratify a wish of the moment. Many actions are governed by impulse
rather than by reason; but in general this impulse is in harmony with
the interests of efficiency. In primitive society instinct and appetite
must generally have been safe guides. Food not merely appeased hunger
and gratified the palate, but it gave strength. Sensations of cold,
hunger, and thirst were developed by nature to stimulate men to do the
things that helped them to survive. In primitive societies there are few
chances to seek pleasures that are not favorable to efficiency. In the
struggle for existence the more efficient tribes survive, and those that
develop many abnormal tastes must perish. But the conditions of modern
life are more complex, and temptations beset men on every side. Tastes
are pampered and appetite is gratified at the expense of later welfare.
[Sidenote: Choice of foods]
2. _The physical efficiency of the worker is conditioned on wise
consumption._ Chemists and physiologists are telling now in accurate
terms how the nutritive values of foods differ. Food values are not
measured by the pleasure afforded the palate. The wide variety and
greater choice now possible, even to the modest purse, make the chance
of error much greater than in simpler conditions. This subject, already
touched upon in the sections on the efficiency of labor, deserves
further notice. From youth to age, the foolish choice of goods yields
its harvest of ultimate misery. When babies are fed on crackers dipped
in coffee, or, as among the Italian immigrants, on stale bread dipped in
sour wine, there is a poor foundation laid for a vigorous manhood. Rich
and poor cook too much for taste and too little for nutrition or
digestion. Much cooking is still done in ways fit only for our
grandfathers who had cast-iron stomachs and worked in the open air.
Culinary methods have not been adapted as yet to a sedentary life.
[Sidenote: Of drinks]
Drinking tempts some men not only by taste, but by the appeal to
sociability; to other coarser natures the joys of Bacchus offer the one
hope of exhilaration. The pleasure from alcoholic liquor may at the
moment outweigh the cost in money, but a diseased appetite forbids any
reckoning of the vast psychic cost that follows. The coin paid for the
drink is the beginning of the expense; misery, disgrace, degeneracy, and
bestialty too often are the unreckoned items.
[Sidenote: Of clothing]
Clothing is primarily for ornament, secondly for physical comfort. That
was the historical order, and it is the logical order in most minds
to-day. How badly the two needs are harmonized! No wonder that the
savage suffers in adopting civilized dress. Travelers describe the
African potentate, attired in a high hat and a bracelet, striving to
outshine his rival resplendent in full-dress coat and a palm-leaf fan.
Civilization is making headway there; but the student of primitive
peoples finds one of the important causes of their decay to be their bad
judgment in adopting civilized dress, unsuited to their customs and
climate. A mistake is made likewise by workers in physical tasks in
imitating the dress of the wealthy and professional classes. The dress
of the higher classes often is chosen because of its unsuitableness for
an active worker. It serves thus to mark its wearer as one engaged in
delicate tasks or as a person of leisure. Possibly, therefore, because
of their strong social ambitions, the manual workers in America more
than elsewhere adopt a costume that is not sensible or sanitary.
[Sidenote: Reactions of enjoyment upon the intelligence]
3. _The intelligence of the worker is affected by the form of his
enjoyments._ This does not refer to the use made of spare time for
regular study in night schools, correspondence schools, vacation work,
but to the use of time when seeking recreation. The choice of recreation
reacts upon the nature of the man. Will he read a book or play
billiards? In proper proportions both may be good, in excess both are
evil. Liking realism, does he read Howells or the blood-curdling serial
entitled "Piping the Mystery"? Does he devote his spare hours to the
"Scientific American" or to the "Police Gazette"? At the moment there
may be as much pleasure in one as in the other (and one might add, in
Hibernian phrase, "Yes, and more too."). Does he enjoy music, the
theater, or the cheaper attractions of Coney Island and the Bowery? Is
his recreation permeated with a certain intellectual ambition? There may
be just as much momentary joy in one choice as in another, and life is
shaped by the direction of one's enjoyments. Much depends on the natural
bent; some natures incline to the healthy as the plant grows toward the
sun. With most characters much depends on the influences of neighborhood
life; thus the boy's clubs and college settlements of the cities, the
schools and playgrounds of the villages, are tending to surround child
life with healthier conditions, that will mould it into better social
habits.
[Sidenote: Reaction upon the character]
4. _The form of the worker's expenditures affects his industrial
virtues._ This is not a moral lecture; it is a look at the economic side
of the subject. There are some moral qualities, however, that are
closely connected with efficiency, while others are not. Some
individuals are corrupt in private personal relations, but "square" in
business dealings. But usually there is some connection between the two,
and under modern conditions this is becoming closer. Fitness for daily
tasks is affected by the daily thoughts of the worker. Sordid and foul
thoughts, like an internal malady, sap the economic efficiency of the
worker; clean, bright thoughts act as a tonic. Drink, gambling, fast
living, unfit men for positions of trust, while many pastimes leave the
moral nature cleaner and stronger. Few can live a double
life--honorable, conscientious, and exact in one part of the day, and
corrupt in another. Dr. Jekylls and Mr. Hydes are not often found in
real life. The habitual train of thought in leisure hours possesses and
controls the man throughout his work. It is said that "A man is what his
work makes him," but it is equally true that a man's work tends to
become what he is. A man fit for a higher kind of work rises to it in
the usual order of things; but no matter how humble the task, it
partakes of the worth and wholesomeness of its doer.
§ III. EFFECTS ON THE ABIDING WELFARE OF THE CONSUMER
[Sidenote: Production vs. welfare]
1. _Man and his welfare are the end and aim of the economic process._
The starting point of industry is wants; the goal is welfare. Momentary
gratification is only a way-station, not the journey's end. Too often,
in economic reasoning, things are looked at from the employer's point of
view. The older writers, such as Ricardo and Mill, were inclined to take
what John B. Clark has called the "feed and work" view,--the view that
the workman is merely an agent of production, a means to an end; that
his food, the same as coal for an engine, is to be thought of rather as
employer's cost than as consumer's gratification. But, in the broader
view, the welfare of men as men is the subject most worthy of economic
study. The workman's food is to gratify his hunger, primarily; not
merely to make him a better working machine. This reverses the order of
the older reasoning. The use made of the income is itself a kind of
production--its last stage. Is the process, on the whole, worth while?
This can only be judged by finding whether, on the whole, the welfare of
man has been furthered.
[Sidenote: The marginal application of income]
2. _An income yields the maximum gratification when it is apportioned
among goods so that their marginal utilities, as nearly as possible, are
equal._ Even a small income is income capable of many applications. The
choice lies among many thousands of articles. Utility varies not only
according to the kinds of good, but according to the varying quantities
of each. Every moment, therefore, the conditions of a choice are
changing. The best use of income forbids the purchase of an additional
unit of any good unless it affords the highest gratification obtainable,
at the moment, at an equal price. Various circumstances prevent the
exact application of this rule. Expenditure is a matter of habit, in
large measure, rather than a matter of judgment. The knowledge needed
for a rational choice very often is lacking. Appetites change, making
unwise the old purchases, yet men go on buying the same things in the
same proportions simply because a readjustment that would give greater
gratification requires thought. Finally, the best economic adjustment
must conform to the abiding physical and moral welfare of the user, not
to a temporary impulse; and such a choice is far more difficult than
that of the temporary good.
[Sidenote: Progress and the refinement of desires]
3. _Progress takes place where new wealth gratifies marginal wants as
intense as those of the preceding period._ If the utility of every kind
of goods decreased uniformly as wealth increased, desire would steadily
decline in intensity. But old wants vary and new wants develop with
prosperity. Desire grows by what it feeds on. Ambition passes on to
other and higher peaks. The direction of the individual man's life thus
is determined by the expenditure of his increasing income. Wealth makes
possible a new adjustment of life, a new character, both in the
individual and in the society.
[Sidenote: Wealth a means to living]
The thought that needs emphasis in this connection is that, while
production and consumption are separable in thought and distinguishable
in practice, they are not opposed in their ultimate purpose. The highest
fruits of production are in the lessons of sacrifice and discipline, and
in its opportunities for experience and self-expression. The best result
of the consumption of wealth is not the gratification of appetite, but
the strengthening of the spiritual forces within men. The world is to
rise to a higher social stage not by banishing labor and by multiplying
sensual enjoyments of the commoner sort. Wealth, even in an economic
view, is not the end of life, but merely the means to its realization.
[Sidenote: Variety and harmony in the choice of goods]
4. _Enjoyment is increased by a proper variety and harmony of goods._ As
the old kinds of goods increase in amount and fall in value, there must
be a substitution of new goods. An element added to the dress or to the
diet heightens greatly the total gratification. The result is a unit.
Think of a dinner without butter, or a cranberry-pie without sugar, or a
dress-suit without a linen collar. Certain combinations are essential to
the requirements of developed taste and present a problem of
complementary goods. Combinations of complementary goods enhance the
enjoyment; inharmonious combinations decrease it. That certain things
"go together" is a fact that rests often in the nature of things.
Complementary colors please the eye; well-seasoned dishes please the
palate.
Again, the harmony of goods is affected by the special nature of the
occupation. A farmer with his out-of-door life can use tobacco with far
less danger than the sedentary worker. A piano player cannot be a
base-ball player: the one requires soft and supple hands, the other hard
and callous ones. The young man must give up the piano or the game, or
play both badly. The harmony may rest on a still more complex social
adjustment. The loss to the man whose life is in the main on a higher
plane is greater if he descends occasionally to a lower. A ditch-digger,
looking at the question short-sightedly, may deem "a good drunk" a very
desirable form of enjoyment. But a brain-worker, whose joy as well as
efficiency depends on the clearness of his intellectual processes, must
see that in his case the perils and the costs are much greater.
[Sidenote: Unity of choice in happiness and in character]
Wise consumption depends not alone on physical pleasures, but on the
spiritual unity of the uses made of goods. Happiness and character are
akin in the qualities of simplicity and unity. Happiness, so far as it
depends on wealth, is a harmony of gratifications. Character is a
harmony of actions, a group of complementary deeds. There can be no
harmony, without a central, simple, guiding principle. The wise and
moral use of goods and the economic use of them are therefore for the
individual essentially the same. Life is a unity. The results of the
choice of goods are reflected in the health, intelligence, happiness,
morality, and progress of society. It is vain for the economist to
ignore the ultimate relations between economic choice and morality; it
is folly for the moralist to ignore the economic bases of right and
wrong in human conduct.
CHAPTER 42
DISTRIBUTION OF THE SOCIAL INCOME
§ I. THE NATURE OF PERSONAL DISTRIBUTION
[Sidenote: Definition of personal distribution reviewed]
1. _Personal distribution, in economics, is the reasoned explanation of
the ways in which income is divided among the members of the community._
Before noting more exactly the ways in which distribution can and does
take place, it may be well to review briefly some definitions that have
been given in other connections. Distribution is bound up in practice
with production, but it can be thought of as a more or less distinct
problem. Functional distribution is the attribution of value to agents
or classes of producers, to land, machinery, and labor considered
impersonally as groups of productive agents. Personal distribution is
the actual apportioning of income to living persons. This theme now to
be dealt with is the more important practically, for the abstract
discussion of rent and interest is of use only as it helps to an
understanding of this vital human problem. It is well to recall also the
distinction between wealth income, money income, and psychic income. The
first is the objective aspect, the last is the subjective aspect, of
income; the second, money income, may be an expression, in money form,
of either of the others, but commonly of the former. The money
expression of psychic income can be only approximately attained.
[Sidenote: Personal affection and distribution]
2. _The individual's income is determined by a number of forces, only
part of which are primarily economic._ Many persons derive income
directly neither from property nor from labor. They neither toil nor
clip coupons, but they flourish in the favor of others--parent, husband,
wife, friends, patrons. So long as the good-will continues these persons
may be as well off as if they drew a salary or owned a bank. If a person
in control of goods shares them with another, it is a matter that
economists must recognize, but cannot well reduce to rules of value. It
is not the task of economists to explain why the impulses of generosity
arise, but only how they affect distribution. The economic problem of
distribution really ends where owner or worker secures his income.
Giving a part of it to some one else is essentially a form of
consumption, and only secondarily a mode of distribution; it is the way
chosen to spend the wealth income.
[Sidenote: Complex source of psychic incomes]
The psychic income of individuals, therefore, is often made up of many
elements. Some parts are due to services performed by the person
himself. When one combs his own hair he is adding to his income.
Benjamin Franklin said it was better to teach a boy to shave himself
than to give him a thousand dollars. Other goods are the uses and fruits
of legally controlled wealth: chance finds, as gifts of value or lost
and abandoned goods; goods assigned to one by authority; wealth
inherited; illegal gains by robbery; goods secured on credit; gifts
either of things or of services. The uses of this university are a gift
forming a part, first, of the student's income, and, finally, of the
social income. Such gifts can be traced back to large-hearted,
public-spirited men like Ezra Cornell, but they must be looked upon as
coming from some one. This list, incomplete as it is, suggests that the
real income of most individuals has manifold sources. Let us undertake
to examine and analyze the various methods in actual use in the
distribution of income to the persons making up society.
§ II. METHODS OF PERSONAL DISTRIBUTION
[Sidenote: Compulsory distribution; violence]
1. _Distribution is sometimes compulsory, by force or fraud._ This crude
and primitive mode of distribution, the negation of personal liberty,
never has been quite eliminated. In every country an unhappily large
number of men from time to time break over into crime, from violence and
highway robbery down to sneak-thieving, pocket-picking, and bunco games.
Not more than ten per cent. of this criminal element is at any one time
in prison. This method of personal distribution, not hinted at in most
theories of distribution, determines a large part of the income of tens
of thousands of men in this country and concerns the distribution of
millions of dollars. These enemies of society appropriate whatever they
can, and the law stops them if it is able.
[Sidenote: Chattel slavery]
Slavery is distribution by legalized force, but the force is not
legalized by the consent of the victims. The evolution of the harsher
slavery may be traced through various forms of milder serfdom. There is
found an element of this in the freest existing societies; men unwilling
are forced to do things. A patent example is the convict on a
chain-gang, a slave to society as a penalty for his violation of its
commands. But some radical reformers to-day claim that present society
is wholly based on legalized force, and that the workingman is
essentially a slave. Their ideal cannot be realized without dissolving
social bonds and destroying civilization; yet the presence, even in our
society, of this forced, unwilling submission on the part of some of its
members cannot be ignored.
[Sidenote: War indemnities]
A similar example of forcible taking is seen in case of war. Savage
tribes plunder and take captive their weaker neighbors. Conquering
modern nations usually exact tribute from defeated enemies. Germany got
a billion dollars from France, Japan a quarter of a billion from China.
The terms of peace at the close of our great Civil War were the most
liberal ever granted by conqueror to vanquished; and yet the federal
pensions granted to Northern soldiers are a form of tribute, being paid
by taxes falling alike upon the North and the South. In all these cases
the distribution by force is unwillingly suffered. In none of them is it
reducible to economic rules or capable of a strict economic explanation.
[Sidenote: Charitable distribution within the family]
2. _Distribution may be charitable, that is, determined by
considerations of benevolence and affection._ Charitable is here used in
its original sense, as synonymous with love or affection. First to be
mentioned is the love of parents, the root and type of all the forms of
charity. The lack of economic equivalence in the relation of parent and
child is complete in early years. The helpless infant gives nothing
economic to the parent, the parent gives all to the child. Gradually,
however, the balance is regained; as the years go on, not only does the
child repay in affection but in many cases he repays in material ways.
In the factory districts and on the farm the child in early years begins
to reëstablish the balance, becomes a worker, and contributes as much as
the cost of his support, and finally more. A student of modern English
town life has traced the curve of poverty traversed by the average child
of the poor, as the family moves, now below, again above, the level of
minimum income required for physical efficiency. In the middle or
propertied classes the children do not for many years take the burden
from the parents, and it is doubtful whether in most cases the economic
balance is ever reëstablished. It is not to the parents, but to the
succeeding generation, that the debt is vicariously paid.
[Sidenote: And in larger circles]
Friendship widens the range of generosity and multiplies the mass of
gifts. Broad sentiments of humanity lead to gifts outside the range of
personal affection and personal interest, to the beggar on the street,
to institutions devoted to charity. In New York state about twenty
million dollars a year is given to charity, and in the country at large
many times as much. In the year 1901 over one hundred million dollars
was given to education in the United States by private donors; and that
high mark will no doubt soon be passed. Gifts in cases of great
disasters, as the Irish and Indian famines, the Chicago fire, the
Galveston flood, the eruption of Mount Pelée, bespeak a widening
generosity. Religion impels to the building of churches, to the support
of priests, missions, and manifold religious undertakings. Charity in
this connection is the expression of a sentiment that varies from the
broadest and most general humanitarian sentiment to the most intense and
ardent personal affection.
[Sidenote: Authoritative distribution in the despotic state]
3. _Distribution may be by an authority willingly acknowledged._ The two
preceding forms of distribution, force and love, shade off into this
form. In them the ones from whom goods are taken or to whom they are
given have no power to change the conditions; here is to be considered
the case where the person bows willingly to the superior power and takes
what that power accords him. There are few despotisms in which the
government is not based on the wishes and average capacities of the
governed. If the citizens as a body really desired and were deserving of
better government, in most cases they could get it. Much is heard, for
example, of despotism in Russia, and of the abject condition of the
people; but travelers testify that while many in the educated student
classes are filled with the greatest discontent, and the intelligent
subject peoples, such as the Finns, detest their rulers, such sentiments
are far from general throughout the empire. The power of the Czar could
not exist for a single moment if the mass of the people did not look to
him as the great father whom they venerate and love. If this is true,
the despotism in Russia, though abhorrent to our ideals of freedom, is
fitted to the aspirations of the mass of the people. So far as
government determines income, the authority distributing income there,
as elsewhere, is one willingly acknowledged.
[Sidenote: In communities and families]
In patriarchal tribes, in communal societies, in monastic and other
religious orders distribution is by an accepted authority. Each person
works at what he is commanded to do, and some one in authority (the
patriarch, head of the community, the father of the monastic order)
portions out the work and the reward. In the family this rule largely
prevails, and even after the children have come to years of discretion
they not infrequently accept, from habit or affection, the will of the
parents, and give up their entire wages to receive back a portion. The
method of charitable distribution while the child is young gradually
changes to authoritative distribution after the child becomes a worker.
The untrained and indocile youth, however, is made the subject of
compulsory distribution.
[Sidenote: In much governmental action]
The collection and distribution of taxes is by public authority. No
attempt is made to give back an exact equivalent to the tax-payer. The
money is taken and spent by authority for the public good. This method
is exemplified in the work of certain commissions appointed by law to
fix rates or settle disputes, as boards of conciliation and arbitration
and railway commissions. The courts sometimes find themselves obliged to
enter this field, although they do so most unwillingly. They try to
confine their efforts to interpreting the contracts men have voluntarily
entered into, and they avoid, so far as possible, the making of
contracts or the fixing of rates.
[Sidenote: In various contests]
In many cases, little thought of as economic distribution, the
authoritative method is followed. Literary and oratorical contests are
passed upon by a set of judges whose opinion of merit determines the
award. It is a poor method, often resulting in injustice (as every
defeated candidate will admit); but it is the only way practicable for
deciding such contests. Yet there are literary and oratorical contests
decided very differently. If a man advertises himself as an orator and
charges fifty cents admission to his lecture, everyone who goes to hear
the man votes that he is an orator; everyone having money but staying
away votes that he is not of such value. The one is judgment by the
authoritative, the other by the competitive, method. The essence of the
method of distributing by authority is that one individual (or group of
individuals) judges of the deserts or duties of others, decides what
others must get or must pay, not what he himself is willing to pay.
Authoritative distribution is necessary in many cases, but it is fraught
with dangers. It is the essence of socialism that it would make this
plan universal.
4. _Distribution of psychic income may be in part by the collective use
of social wealth._ By collective use in the full sense is meant the
continuing enjoyment at the same time by all caring to partake and
without limit as to amount.
[Sidenote: Distribution by collective enjoyment]
Now it is evident that, because of difficulties that arise, not all
things are capable of this kind of enjoyment. Free water for private use
from public waterworks is wasted; free meals and clothing to
school-children are open to still greater abuses. Men cannot thus
collectively enjoy rare wines or good confectionery; they cannot partake
without limit of a limited supply. But libraries and schools may
practically be managed in this way. They require both certain
qualifications and certain sacrifices on the part of the user.
Collective enjoyment is most completely possible where the use of a
permanent form of wealth, such as a park, can be made free to the
public. All individuals may enjoy equal privileges, though general rules
may limit the kind of use; for example: no one may be permitted to pull
flowers or to walk on the grass, but all who make use of the park enjoy
equal privileges. Henry van Dyke in one of his essays puts into the
mouth of his boy the question, "Father, who owns the mountains?" and the
answer is, He who can enjoy them. Every man without covetousness, as he
stands on this hilltop, owns the mountains, the lake, and this beautiful
valley.
In some ways the amount of public enjoyment is decreasing, as by the
growing density of population, by the loss of open spaces and commons
for playgrounds, by the destruction or fencing in of natural scenery;
but in other ways it is growing and must grow rapidly. The spirit of
civic improvement spreads. The streets are better paved than formerly;
there are more public buildings, art galleries, and noble monuments.
Every cross-road in the land will some day have its fountain and its
statue. The coöperation of the whole community gives to collective use
many of the advantages of large production, and the maximum of
enjoyment.
[Sidenote: Distribution by custom and status]
5. _Distribution may be by status or set rules and customs._
Distribution by status fixes the shares of men independently of their
effort and without their control. It is guided neither by their personal
merit nor by the economic value of their services, but by the merits and
acts of men not living. This method has prevailed and still prevails to
a great extent, though in our society this is hardly realized. Feudal
society was built on status. Men were born to certain privileges and
positions; they inherited property which could neither be bought nor
sold; they followed trades which could rarely be entered by any outside
of favored families. Caste in India and in other Oriental countries
regulates by status a large part of the life. In western countries
to-day inheritance of property is the main legal form of status and it
shades off into other forms of distribution. While in some cases
inheritance may be looked upon as a gift to the heir, in other cases,
elsewhere noted, it is partly earned by the heir who has helped to
produce it. By public opinion and by prejudices, status is still
maintained even where the law has formally abolished it, as is seen in
modern race problems.
[Sidenote: Competitive distribution the dominant form]
6. _Distribution is usually competitive in accordance with the value of
the product._ This is the dominant form of distribution in modern
society. It is the essentially economic form, as contrasted with the
legal and personal forms just described, because it is impersonal and
reducible to a rule of value. Distribution under competition is made
not with reference to abstract ethical principles or to personal
affection, but to the value of the product so far as it is honestly
controlled. Monopoly, it may be noted, never has ceased to rest under
the ban of Anglo-Saxon law, hence to exemplify compulsory, as opposed to
competitive, distribution. A striking feature of the competitive method
is its decentralization. Each helps to value the economic services of
each. If one pays more for the services of the singer than for those of
the cook, it is not because he would rather listen to the singing than
to eat, but because by apportioning his income he can get the singing
and the eating too. In the existing circumstances, the singer's services
seem to him worth paying for, and he backs his opinion with his money.
So each is measuring the services of all others, and all are valuing
each. It is the democracy of valuation, while the method of authority is
an oligarchy or monarchy.
[Sidenote: Various ideals of distribution]
7. _The best distribution in practice must be sought in union and
harmony of these various methods._ Various social reforms propose simply
the extreme application of one kind to the exclusion of the others.
There are two opposing views of competition: one, that it is the ideal
to be sought; the other, that it is inherently bad, and therefore should
be abolished. Extreme individualists, believing that everything would be
settled for the best by free competition, wish to make it universal.
They ignore the many cases where it does not, should not, and cannot
exist.
Socialists, ill content with the share secured by the less skilled
laborer, say that the competitive plan is unsound at the core. They say
that distribution should be not in proportion to value, but in
proportion either to needs or to deserts (they are not agreed which),
judged by a vague ethical standard. But this involves the principle of
authority in its extremest form. It intrusts to some men the function of
passing upon the economic merits or desires of all others. Yet that
alone is not a conclusive argument against all use of authoritative
distribution. In many practical cases the intrusting of power and
authority to men to judge of the value of others cannot be avoided.
Whatever is indispensable, whatever is the best possible, is, humanly
speaking, just. Assessors, judges, jurors, must be employed. Interstate
commerce commissioners determine whether rates are reasonable, boards of
arbitration settle disputes, the strike commission adjudicates
difficulties in the coal regions. Doubtless these methods will be
increasingly used.
[Sidenote: Need of a wise blending of methods]
There is no other kind of distribution than those enumerated. The
strongest contrast is between the competitive and the authoritative
principles; the others are minor and modifying. None of them alone is
sufficient; each has its merits and each has its defects; they must
supplement each other. Actually they are employed in modern society side
by side; each seems essential and best in some special application. But
it does not follow that exactly the proper use is now made of each. No
two generations have followed the same rule, and the proportions in
which use has been made of them has constantly shifted. It must be
recognized that the principle of diminishing utility applies to each
method of distribution as it does to the productive processes. Each may
be best under certain conditions and circumstances, but, extended in
application, each reveals its weaknesses. In any productive process the
best method depends upon the proper proportion and combination of
elements. Progress toward the best possible distribution is to be sought
in the wise adjustment of the various methods to human nature and to
human needs.
CHAPTER 43
SURVEY OF THE THEORY OF VALUE
§ I. REVIEW OF THE PLAN FOLLOWED
[Sidenote: The cycle and order of economic study]
1. _The beginning and end of economic study is man._ Before leaving the
more theoretical and abstracter part of the theory of value, it may be
well, at the cost of some repetition, to restate and review the
relations of the various parts of the argument. Intent on details of the
theory of value the student is in danger of losing its broader
perspective.
The proposition with which this section opens was accepted as our
axiomatic starting-point. It was not so in the older political economy;
men too often were looked upon rather as a means to an end, namely, the
creation of wealth. This proposition refers to all classes, not to a
small group of men. The aim of economic study is democratic, being the
welfare of all men. Economics does not purpose, however, to explain
man's action with reference to all things. It asks and attempts to
answer the question: "Why does man attach value to certain things and
actions; why does he measure them in certain ratios as expressed in
terms of each other; and why do these ratios change with changing
conditions?" This purpose has determined the order of our study.
Beginning with an analysis of the nature of wants, and of the mental
process of valuing consumption goods, the circle of inquiry widened to
the problem of valuing things whose relation to wants is more remote and
indirect (though not less important).
The problem of future uses, the major part of the theory of value,
leads back to the question of the use man makes of things--a field
claimed by the moralist, but one that cannot be neglected by the
economist. Economics is not the whole science of social relations. It is
a restricted part of the field. But it comes into relation with great
practical questions that touch all sides of life. Thus economics
broadens and unites with the general stream of sociology. In the pursuit
of our study one comes back to the starting-point and cause of
value--human wants and the use made of wealth to gratify them. The
circle is completed. We have surveyed, rapidly and imperfectly it is
true, the whole range of economic inquiry.
[Sidenote: The unit in value problems]
_2. The central point in economic study is the simplest problem of
exchange value._ The first look at the economic world reveals so many
things that have relation to wants, and relations so complex, that the
mind is confused. The object of science is to simplify; it seeks unity
in the midst of chaos. Relations exist between wants and things that
certainly never can gratify them directly. Where is the simplest aspect
of the problem to be found? Evidently in the exchange of consumption
goods, for these are in closest touch with wants. Out of the complex of
direct and indirect goods, those few which are at the moment gratifying
wants must be somewhat abstractly, but logically, set apart and studied.
In the simplest problem, the exchange of the most typical consumption
goods, is the key to the larger problem of value. If one could follow it
step by step into its complexer relations, he might hope to understand
everything in economics.
[Sidenote: Former or conventional conceptions of rent and interest]
3. _The problems of rent and of time-value are successive steps in the
explanation of the exchange value of indirect agents._ The term rent has
been so variously defined that no caution to the student as to its use
can be deemed superfluous. Until recently economists sought to confine
the term to the income from natural resources (or land). Rent, in their
conception, was the income from one group of goods, physically
distinguishable from another group of goods, called capital, which were
supposed to yield interest. That is, rent and interest was each supposed
to bear much the same relation to a particular set of durable agents;
the difference between them was primarily in the agent that yielded them
(though there were other complicating thoughts) rather than in the
aspect of value they represented.
[Sidenote: Rent and time-value as here used]
Rent as defined in this volume has the much broader meaning of the
usufruct of any material agent as contrasted with the use-bearer.
Usufruct is a conception most intimately related to that of consumption
goods, but is logically one step further removed from want. Time-value,
as here considered, is a broader conception than that of contract
interest, for it has to do with the all-pervading element of time in its
influence on value. Some rents are logically, and in practical business
as well, not measured over periods of time, but at the moment of their
accrual. The measurement of time differences is mainly required in
setting a valuation upon a more or less permanent use-bearer. This
process, which is capitalization, has only recently been recognized to
be the discounting of all the future uses to their present worth. While
in its essence this is merely a problem in exchange value, it is the
highest, subtlest, and most difficult of such problems. Its
understanding presupposes rent, just as rent presupposes the analysis of
wants and marginal utility. It is the outer zone of the value problem,
carrying the thought of value years away (all but an eternity away) from
present enjoyment.
[Sidenote: Different stages in value]
While both rent and time value are widened so that each applies in some
manner to all durable agents, it is a grave error to conclude hastily
that the intention is to make synonymous the old terms rent and
interest. Rent and time-discount remain essentially different stages in
the value problem. Actual concrete net _economic incomes_ as they arise
_are always rents_. Interest never accrues in a concrete form except
under the interest contract for a money loan (a contract income, not an
economic income), and this evidently is a species of contract rent.
Time-value is a phase of value connected logically with investment, or
the calculation of future earning power; rents are both actual and
expectative, or future, but as realized incomes they always express
present earning power. Together, rent and capitalization embrace the
whole problem of valuing durable material agents.
[Sidenote: Wages and profits related]
4. _Wages and profits are of the same genus, the value of human services
of different grades._ The attempt has been made in the foregoing
treatment to show the unity between the problems of wages and profits,
and to point out the difference between the conditions that surround
them. Through the common characteristic, social utility, the employer's
service can be compared with the most ordinary or the most artistic
labor. Profits and wages, therefore, are simply different aspects of the
same question. A common power, or principle, is found in all objects of
value, a power to gratify human wants. In the variety of human services
and in material goods must be sought this unity.
The different kinds of services range from direct to most indirect
goods. The commonest labor may serve welfare at the moment or may be
embodied in a form to be used years later. In that light, wages seems a
more complex problem than either rent or capitalization. But the moment
the service embodies itself in a material good with future uses the
general theory of capitalization applies to it.
§ II. RELATION OF VALUE THEORIES TO SOCIAL REFORMS
[Sidenote: "Orthodox" political economy]
1. _The earlier theories of political economy implied a dismal view of
the future of the masses._ The theory of value one holds is sure to
affect his view of economic progress and of social reform. The theories
from the middle of the eighteenth to the middle of the nineteenth
centuries, however varied they were in other respects, nearly all gave a
gloomy view of the condition of the laboring-men. The physiocratic
school in France, the so-called "orthodox" economists in England (that
is, the writers from about 1800 to 1850 that were in sympathy with the
landholding or commercial classes), and the socialistic or
laboring-class theorists, all inclined to this view. It was while this
view prevailed that Carlyle characterized political economy by the term
still sometimes heard--"the dismal science." The thinkers of that time
started their study of value at wages, and assumed that population would
always increase so fast as to force labor to a bare subsistence. The
other shares (or the other classes of society) were supposed then to
absorb all the surplus income. Economics to-day is not especially
lugubrious, and its more cheerful note is due as well to its changed
theory of value as to the evidence of advancing welfare among the
masses.
[Sidenote: The gloomy socialistic theory]
2. _The socialistic theory of value, akin to the other, holds that
capitalists absorb all the benefits of progress._ The socialists (of the
radical school) claim that their theory is merely the logical conclusion
to be drawn from the old "orthodox" theory, stated in its extremest
form. Usually, however, the orthodox theorists softened and modified
greatly the statement of their harsher views. The socialists have not
been willing to recognize any ameliorating conditions. They say:
economic theory shows that under a competitive condition of society the
laboring-man must be forever ground down in helpless misery; therefore
the only hope of the laboring masses is to do away with competitive
society and to substitute for it central, governmental control of all
industry. They did not and do not attempt to distinguish carefully the
part of production, due to brains and effort, from the part due to
ownership of capital. The socialist theory is a plan for political
agitation rather than a scientific theory of value. It was originated or
elaborated by men such as Karl Marx, Frederick Engels, and Ferdinand
Lasalle, as labor leaders and political agitators, who found a ready
weapon in the bungling economic analysis of the time. The claim of a
scientific basis for socialism has continued to be proudly made by their
followers, but it has a tottering support in their defective theory of
value.
[Sidenote: George's single-tax theory]
3. _The single-tax theory of value is that ground-rent automatically
absorbs all benefits of progress._ This is the most notable example of a
plan of social reform growing out of an abstract theory of value. While
the socialists first had their plan of social reform (or revolution), in
whose support Marx's fanciful theory of value was invented, Henry George
appears first to have got hold of a theory of value that suggested his
plan of social reform. Studying the political economy of Ricardo and
Mill, he accepted their ideas regarding the hopeless outlook of the
laboring classes, and their conception of the theory of ground-rent with
its false implication that landowners get all the surplus in society.
George thus came to believe that, with private ownership in land,
competition steadily robbed all but landlords, even the non-landholding
capitalist, of any share in the benefits of progress. This theory of
value is thought to explain all the poverty in the world. It calls, in
the single-taxer's opinion, for a radical measure of reform, namely, the
taking of all rent of land for public purposes as a common instead of an
individual income. If the theory of value on which it is based were
sound, the doctrine would have irresistible reasons in its favor; if it
is false, most of the argument falls to the ground, though there may
still be substantial reasons of a different nature for the exceptional
treatment of ground-rents for purposes of taxation.
[Sidenote: Recent hopeful theories of wages; Walker's]
4. _Recent theories of value assign to labor a more hopeful position._ A
most optimistic theory of wages is "the residual claimant theory,"
presented by Francis A. Walker. His view was that the various shares of
production, such as land-rent, the income from machinery, etc., and the
enterpriser's profits, were fixed by forces independent of wages, and
any increase in the product must therefore fall to the laborer as the
residual claimant. This conclusion has the one merit of explaining
somehow the rise in wages in the past century, but the fallacy of its
method is too evident to call for exposure. Not to enter into the
details of the method, it is enough to note that it involves the
circular reasoning that land-rent is a surplus over cost of production,
and is fixed regardless of wages, whereas the cost of production itself
is made up of money wages.
[Sidenote: Clark's wage theory]
Another American economist, John B. Clark, is led by his theory of
profits to a most hopeful conclusion as to the future of wages. Profits
he considers to be essentially the reward for improvements in productive
processes, which gradually accrue to the general benefit. As profits
thus disappear, the average wage-earner is correspondingly uplifted, a
conclusion quite as hopeful as that of Walker. In discussing profits
above, dissent from the narrow conception of their source has been
expressed.
Some facts lend support to every one of these theories of social
progress, but other facts refuse to be harmonized. The temptation to get
a simple, dogmatic explanation of value should be resisted. When the
interrelation of the factors is recognized there is little likelihood of
concluding that some one of them will absorb all the benefits of
progress. One is not driven to the extreme either of optimism or of
pessimism. While the theory of value is not in itself a theory of
society, it greatly influences social conclusions. Clear economic
analysis is a condition to sound thinking on practical questions.
§ III. INTERRELATION OF ECONOMIC AGENTS
[Sidenote: Organic nature of the productive process]
1. _The industrial process is a unity and the different agents bear an
organic relation to each other._ The problem of value is not one of
physical division; it is one of logical analysis, and this is not
possible in isolation or without the competition of men. Production as
now carried on is a social process; the determination of market price is
a social process. The different agents are complementary goods, each
necessary to the best use of the various other agents. The value of seed
is not to be found apart from the use of the ground; or the value of the
leather apart from the shoemaker or the thread he uses. When these
things are brought together in society their value is found by the
comparison and measurement of marginal utilities. Economic forces, like
other classes of forces, act and react upon each other. Two bodies
attract each other in space; two chemicals uniting are both transformed
into a substance differing from either. The economic result of materials
and men coöperating is something differing from either factor, yet
dependent on both.
[Sidenote: The conventional divisions of economics]
2. _The divisions of the older political economy are aspects of the
general problem of value._ The divisions conventional in the text-books
on political economy, namely, "production, exchange, distribution, and
consumption," have not been observed in the plan of this work. It has
not seemed possible to accept the view that each of these phases of the
vital economic process could be discussed completely apart from the
others. _Consumption_ must be studied at the beginning, as the basis of
exchange value, and again at the end, when the circle of thought has
returned to the use man makes of wealth; and it pervades the whole
subject of value, for back of every price is the potential utility of
the good. _Exchange_ is coextensive with the whole process of associated
industry; for wherever there is a price, there is exchange. Subjective
value outside a market forms a small, though not negligible, part of the
problem for the student of to-day. _Production_ is implied in every
exchange, as exchange is in all social production. They are, indeed, but
different phases of the larger phenomenon, the economic process. Nor is
_distribution_, considered in its impersonal or economic form, any other
than the logical valuing of the shares of the factors in economic
production. Impersonal distribution is coextensive with economic
production. Whatever a good, logically considered, contributes to value
in production, that is its share of the product. Personal distribution,
it is true, brings in other great influences which have been partly
considered, but which will be treated more fully in the division to
follow, on the influence of the state in the distribution of income.
[Sidenote: The broadest principle of value]
3. _The law of diminishing returns is the broadest principle of value._
The one character common to all goods is that their importance varies
with their quantity in any given connection. This is true of direct
goods whose power to gratify wants falls as the supply grows; it is true
of indirect goods, whose technical importance diminishes as the quantity
increases, and which when taken at any given cost can be applied, after
a point, only with diminishing advantage. The gradual extension of the
marginal principle from land used in agriculture to every conceivable
economic agent is the most important development of the last century of
economic theory.
[Sidenote: Generality of the law of value]
It being true that things are measured by the utility of the unit used
last, logically considered, the least change in the combination alters
the value of all the factors. Practical economic problems, therefore,
are dynamic, not static. The view that the shares of the different
factors are fixed by quite separate laws has not been accepted here. The
law of rent is the same as the law of wages in its essential point and
principle. It is a general law of value applied to a particular kind of
want-gratifier. The law of substitution likewise is a general law, for
within limits some substitution of factors is always possible along the
margin. That being true, every movement of price creates its own
resistance; substitutes will be found for materials, demand will
decline, and a new equilibrium of price will be attained.
[Sidenote: Mutual employment of the factors]
[Sidenote: An ever changing problem]
4. _The factors and agents of production mutually furnish the field of
employment for each other._ Each factor is dependent for its technical
efficiency on the presence of the other factors. If labor is plentiful
and machines are scarce, machines bear a high rent. In accordance with
the law of diminishing returns, the last unit of labor in that case
contributes little to the product, and labor gets low wages, while more
is attributed to the machine. Each machine thus may be considered to
offer a field for the employment of labor. If population increases and
land remains fixed, the need for food raises the rental value of land.
But if population increases slowly, and capital and science progress,
the field for the employment of labor is enlarged; and if new lands are
opened up or new resources are discovered beneath the surface of the
land, the field for labor is still more enlarged and a greater share is
attributed to labor. This changing character of the problem must be
recognized; no share is foreordained in size.
The pursuit of the analysis of value along the lines of marginal utility
thus leads to conclusions far less mechanical, and, to the superficial
student, less simple than were the doctrines prevailing in the older
economics. But the conclusions are, let us hope, more exact and more
applicable to the real world, enabling the student to arrive at juster
views of the present interests and of the future welfare of society.
DIVISION B--RELATION OF THE STATE TO INDUSTRY
CHAPTER 44
FREE COMPETITION AND STATE ACTION
§ I. COMPETITION AND CUSTOM
[Sidenote: Definition of economic freedom]
1. _Economic freedom exists when men's goods or their own services may
be exchanged as they choose, without hindrance._ Competition is but
another expression for economic freedom. Where men are _free_ to
exchange their goods and to get the best price they can, and actually do
so, they are said to compete. The action of men in the mass follows
pretty regular lines, corresponding to certain abiding motives. If one
man dictated all industry, a very fragmentary science of economics would
be possible; but the mass of men act according to some rule and are free
so to act. When men are free to bring their goods to a market and get
the best price possible, a single market price results.
When cost of production was believed to be the regulator of value, it
was said that the law of value laid down was true "within the limit of
free competition." Market price varied ceaselessly from cost of
production, and whenever it did "the law of value" as then formulated
was admittedly invalid or inapplicable. The law of monopoly price was
supposed to be in marked contrast to the law of competitive prices. The
law of prices, as followed in our study, stated in terms of marginal
utility, is equally valid in competitive and in monopolistic conditions
if there is merely one-sided, or buyers', competition. Two-sided
competition is not the sole, though it is the usual condition, which the
economist takes account of in reasoning on the problem of price.
Anything that keeps men from exchanging what they have for the best
price, interferes with competition. Some of these hindrances have been
noted, others are now to be.
[Sidenote: Economic freedom vs. equality of efficiency]
2. _Economic freedom does not mean equality of power or of efficiency._
It was said in discussing monopoly that it was not to be understood to
be merely either scarcity or superiority. To speak of the class of
laborers of ability above that of the average day laborer as having a
monopoly is certainly a confusion of monopoly with the scarcity of
efficiency. The term competition is not easy to define in practice; for
it is not easy to see just what part of a man's inability to exchange is
due to his own lack of efficiency, and what to things outside of himself
which prevent him from exchanging his labor. But the thought is clear
that free competition--economic freedom--is limited whenever men are
hindered by any power outside themselves from using their economic power
as they prefer. The limitations of competition, thus understood, are
essentially social limitations, imposed by other men either
unconsciously by custom, convention, tradition, or consciously by force
or by laws. When, among Polynesian tribes, the custom of taboo
prevailed, by which certain things were reserved to the rulers and were
forbidden to the common man, there was a limitation on his economic
freedom. Contrast such limits with those set by the penury of nature.
The savage may like best to hunt, but if there is no game, he must fish;
he may like best to make arrowheads, but in need of food he must dig
roots. Economic action is limited by lack of knowledge and skill; the
resources of nature lie unused under the feet of savages who are
suffering from their lack. These are limitations not of economic freedom
but of economic efficiency.
[Sidenote: Limitation by custom in early society]
3. _In early society custom limits economic freedom in many ways._ The
savage is not a man without law; he is bound in many ways to prescribed
lines of conduct. Primitive custom usually takes on a religious
sanction, and every member of the tribe is compelled to do as his
fathers have done and as his neighbors are doing. He is not free to
choose. Custom in some ways is favorable to the welfare of society, for
it limits the power of masters and rulers, preserves the rights of
individuals to common property, and is in the interest of the weak as
well as of the strong. In an age of force if it were not for custom, he
who had might on his side could take all. So in early society even
economic relations were complex and yet almost fixed--changing only
slowly from generation to generation. Every such social custom that
limits the choice of men limits economic freedom.
[Sidenote: Limitation by custom in the Middle Ages]
4. _Custom ruled a large share of the industrial life of the Middle
Ages._ Political and economic interests were not clearly divided in the
Middle Ages. Land was the all-important kind of wealth. Military and
other public services were performed by the vassal, who thus at the same
time paid his taxes and the rent of the land. The landlord was at once
the ruler, the receiver of rents, and the collector of taxes. The rent,
however, was not a competitive price, but consisted of the dues and
services the forefathers had been accustomed to pay. This limited
slavery, like all other slavery, was wasteful, as it did not give to the
individual the strongest motive to increase the quantity and to improve
the quality of his service. Trade became limited in almost every
direction. Crafts and gilds arrogated to themselves the right of
employment in their industries. No matter what talent the son of a
peasant might show, he usually found it impossible and always found it
difficult to follow the occupation of his choice. Privilege pervaded all
the life of that time. In such conditions economic friction is great.
Men are kept in trades below their ability, while others gain command of
monopolistic and unearned returns.
Yet through all the Middle Ages ran the forces of competition. The
inefficiency of customary services was a constant invitation to
competitors. Men were striving to break over the barriers of custom and
prejudice. The strife for freedom was the vital economic force even of
the Middle Ages. The industrial history of that time is largely the
story of the struggle of the forces of competition against the bounds of
custom.
§ II. ECONOMIC HARMONY THROUGH COMPETITION
[Sidenote: Effect of modern forces on custom]
1. _The industrial events following the discovery of America
strengthened the forces making for economic freedom._ Discoveries in the
Western hemisphere opened up a wide field for the adventure and
enterprise of Europe. Commerce is the strongest enemy of custom, and new
opportunities gave a rude shock to the conservatism both of the manor
and of the village. With the rapid growth of industry and manufactures,
old methods broke down. In an open market custom declines; it flourishes
best in sheltered places. Further, the movement of thought in the
Reformation and the spirit of the time, expressing the principle of
personal liberty, allowing the individual to follow his own opinions and
take the consequences, were favorable to competition. Despite these
facts the restraints of the national governments on trade continued
great, in some respects increasing during the seventeenth and eighteenth
centuries, in France, Holland, and England. The regulation before
attempted by towns and villages was employed on a larger scale by
national governments with their commercial systems. The colonies in
America were used for the economic ends of the "mother countries" and
for the selfish interests of the home merchants in Europe. The American
Revolution was one of the bitter fruits of the English policy of trade
restriction.
[Sidenote: Adam Smith's influence]
[Sidenote: The philosophy of natural law]
2. _Adam Smith's work advocating greater economic freedom had a profound
influence upon public thought._ "The Wealth of Nations," the first
great work on political economy, was published in the year 1776. That
was the "psychological moment," as public thought was so prepared for it
that it had its maximum possible influence. The year of the American
Declaration of Independence gave the most striking object lesson on the
evils of a selfish colonial policy that interfered on a grand scale with
economic freedom. The old customs had become ill fitted to life, ill
adapted to the rapid industrial changes that were going on. What was
needed in many directions, both in politics and in industry, was
negative action by the government, the repeal of the old laws, the
overthrow of old abuses. The French Revolution, following a few years
later, emphasized this thought in the political field. The philosophers
of the time believed in a "natural law" in industry and politics. The
reformers of the time wished to throw off the trammels of the past and
to give men opportunity to exert themselves "naturally." In America the
old abuses never had taken deep root, as the conditions of a new
continent were not favorable to monopoly and privilege. Although the
movement for the repeal of medieval laws has continued in Europe from
1776 till the present time, yet to-day custom is stronger in Europe than
in America. Serfdom was not abolished until the nineteenth century in
Austria and southeastern Europe, and not until a few years ago in
Russia. Many economic and cultural forces furthered this movement, but
the most powerful intellectual force in its favor was the work of Adam
Smith. So strong an impression did Smith's book make, that in the minds
of men "free trade" became almost identical in thought with political
economy, whereas that was but the temporary economic problem of the
eighteenth century.
[Sidenote: The doctrine of the economic harmonies]
3. _The doctrine of the "economic harmonies" is the extremest form of
belief in the virtues of competition._ Every truth in political
philosophy finds some exaggerated expression. The main task of the
student is to determine what shade of gray things are, rather than
whether they are white or black. The belief in the benefits of
competition and the virtues of economic freedom found expression in the
doctrine of "the economic harmonies." This is the faith that if men are
left entirely free to do as their interest dictates, the highest and
best efficiency for all will follow; it is the belief that the economic
interests of all men are in harmony. The most striking evidence in
support of this thought is the stimulating effect of self-interest
freely working in the field of competition. Each strives to do what will
bring him the largest return, and the price others pay measures their
estimate of the service. Each seeking his own interest is led to make
himself more useful to others. Thus are men stimulated to sacrifice, to
invention, to preparation; thus is zeal animated and are efforts
sustained.
[Sidenote: Good social effects of self-interest]
Through self-interest the working force is distributed over the field of
industry wherever it is most needed. The remarkable adjustment of
industry to the needs of each neighborhood is brought about by
individual motives, not by centralized authority. It is not mere chance
that produces this harmony. Wherever consumers settle, stores are
started and factories are built. Wherever work is to be done, men come
in about the right number to do it. Skill is adjusted to needs by the
delicate measurement of the market rate of wages. Competition gives a
definite rule of price--certainly the only definite impersonal rule;
some say the only just rule. The competitive price must be appealed to
even in arbitration. It is the standard to which things tend constantly
to adjust themselves in an open market.
[Sidenote: Conflicting interests in the business world]
4. _Experience shows that the economic interests of men are only partly,
not wholly, in harmony._ That there is a great measure of truth in the
statements just made, all must admit; but their application is limited.
They are partial truths, never to be ignored, but quite false if taken,
without modification, as practical rules of conduct. There are three
species of competition in every market: that between sellers, that
between buyers, and that between sellers on the one hand and buyers on
the other. It is to the interest of the buyers that the sellers shall be
numerous, eager, and freely competing. It is to the interest of the
seller that supply shall be small, that sellers shall be united, and
that buyers shall compete sharply. If at any point free competition is
hindered, even the disciple of economic harmony must expect a discordant
result. But in reality competition is rarely quite complete on both
sides, and when it is not, the weak suffer. Men do not start with fair
and equal opportunities. All that they may be entitled to under
competition may be so little that social sympathy seeks to better the
result; hence poor relief, public and private. Society as a whole has an
interest in the outcome of the individual's economic struggle. It cannot
see men starving or driven into crime. But the argument need not be
confined to such crude and extreme cases, for wherever economic
interests are not in harmony and it is possible to further the social
welfare, will not society be justified in acting?
§ III. SOCIAL LIMITING OF COMPETITION
[Sidenote: Imperfections of economic freedom]
1. _Undoubted evils result from some forms of competition under the
conditions actually existing._ Complete freedom must remain a somewhat
abstract ideal, and actual conditions must be recognized. Entire freedom
of choice means freedom to make mistakes, a privilege whose enjoyment
society cannot always permit. The child should be raised to good
citizenship, and entire freedom of choice makes that impossible or
improbable. The freedom of choice of the insane, the feeble-minded, and
the criminal, cannot be recognized. Even where competition is the ideal
of sound adult humanity, it is not to be too suddenly or extremely
applied. The inequality of faculties, the prevailing dishonesty, the
mass of inherited abuses, cannot be either ignored or at once ended. The
immigrant from Europe, plunged into the trying conditions of city life,
suffers in health and in morals, and often becomes a burden upon
society. One of many competitors may drive competition to an evil
extreme. The "problem of the twentieth man" is presented when nineteen
men desire to limit competition in ways not socially harmful, as by
closing shops on Sunday or in the evening, and the one man refuses. The
appeal to economic harmony often is the cry of "peace, peace, where
there is no peace." The highest social result may be attained now by
limiting, again by directing, in other cases possibly by fostering,
competition.
[Sidenote: Forces opposing competition]
2. _The main rivals of competition are custom, religion, morality,
combination, and state action._ The first three of these were the
strongest forces in the past and they are still operating; but
combination and state action are more characteristic of the present. The
influence of custom, of morality, and of religion on value, has been
touched upon at several points in our study; that of combination has
been recently and more fully discussed. But state action, one of the
most important of all the limitations, has been reserved for the
concluding portion of our work.
[Sidenote: The state's part in directing competition]
3. _It is a function of the state to determine in part the ways in which
men shall exert their powers._ This is not the sole function of the
state, nor is its influence toward this end exclusive. The state puts
limits to the physical rivalry of men. In the distant past no doubt
physical rivalry between men was an agent of progress. The strong drove
out the weak; physical contest developed more vigorous limbs, keener
senses, and higher sagacity. To-day it is one of the principal functions
of the state to suppress the physical contest between men. The citizen
is surrounded with a network of rules and regulations of which he is
hardly conscious. Most men easily avoid coming into contact with the
police and feel no irksomeness in the control of the civil courts. The
state regulates economic interests in many other ways; it controls the
building of streets; it inspects the material and construction of
houses; it forbids acts injurious to the public welfare; it regulates
the issue of money; it determines the manner in which credit may be
extended, the forms of taxation, and the direction which trade may
legally take. The state has a part in shaping great industries of a
public or semi-public nature, such as waterworks, railroads, and the
postal system.
[Sidenote: Aim and failings of state action]
The state is as wise as the men who constitute it. Men make mistakes,
therefore men collectively will make them. The state regulates and
limits--now wisely, now foolishly; but its aim is to preserve the
benefits of competition without its evils, to lift the competition to a
higher plane, and, by determining the direction in which men shall put
forth their efforts, to give a higher and truer economic freedom.
CHAPTER 45
USE, COINAGE, AND VALUE OF MONEY
§ I. THE PRECIOUS METALS AS MONEY
[Sidenote: Money defined and reviewed]
1. _Money we have defined as a material means of payment and medium of
exchange, generally accepted and passing from hand to hand._ The origin
and function of money were set forth in the study of capital. The
subject must now be approached from a different side and with the
two-fold purpose of seeing whether there is anything peculiar in the
relation of money to the general problem of value, and what is the
influence of the action of the state on the value of money. The
definition of money implies several ideas. First, the words "generally
accepted means of payment" imply that money, as something bearing the
stamp of social approval, has a peculiar social character, is not an
ordinary good. Second, the definition implies that money itself must be
a thing having value, otherwise it could not serve as a medium of
exchange. Exchange means the taking and giving of things of value. Money
is, therefore, not merely an order for goods, as a card or paper
requesting payment; it is itself a thing of value, though this value may
be due solely to its possessing the money function. This point is one of
the most difficult in the subject. Third, the definition implies that
money is a material thing. The telegram when transferring an order for
the payment of money, the spoken word, the promise to pay, etc., are not
money. Fourth, it implies that money passes from hand to hand, is a
thing that can be handled, and is or can be bodily transported.
[Sidenote: Difficulty in applying the definition]
The application of the definition is not always easy, for money shades
off into other things that serve the same purpose and are related in
nature. Even special students differ as to the border-line of the
concept, but as to the general nature of money there is essential
agreement. In many problems it appears to be at the same time like and
unlike other things of value, and just wherein lies the difference often
is difficult to determine. The use of money is of such social
importance, and it touches so many practical interests, that it raises
many questions of a political and ethical nature. There are perhaps more
popular errors on this than on any other one subject in economics. Yet
the general principles of money are as fully understood and as firmly
established as any parts of economics.
[Sidenote: Standard, or primary, money]
[Sidenote: Gold-using countries]
2. _The precious metals, gold and silver, are the standard, or primary,
moneys in the world to-day._ Primary, typical, standard money is the
unit in which the value of the money of a country is expressed, no
matter what its form is; the standard is a certain weight and fineness
of a particular metal. Coins of this standard are called full, or real,
money by some writers who deny the title of money to everything else. It
has been shown before that there has been an evolution in the use of
money. The more efficient forms, gold and silver, have competed with
copper, iron, tin, cattle, salt, tobacco. In this contest silver had
proved itself a few centuries ago to be the fittest medium of exchange,
but in the last century gold has, among the leading nations, been
displacing silver rapidly. In a higher degree than any other material,
gold has the qualities of a good standard money in rich and industrially
developed communities. The gold-using countries to-day are those of the
western world. England for perhaps two centuries practically has had
gold as its standard money; the United States since 1834 (except for the
period of paper money from 1862 to 1879); France since about the year
1855, at which time she shifted from silver under the working of the
bimetallic law; and Germany, then more backward industrially, since
1873. Australia and Japan have reached that result only within the last
few years, and Italy, Russia, India, Mexico--even China and other
Oriental countries--are striving to attain it.
[Sidenote: Subordinate kinds of money]
In all these countries other kinds of money are used side by side with
gold and silver. The actual money consists of a wide and confusing
variety: silver, nickel, copper, paper in various forms and issued by
various authorities. But among all the kinds, either gold or silver is
found standing preëminent and in a peculiar position. The difficulties
of the money problem must be attacked at the point of standard money
where it is nearest to ordinary value problems and is less complicated
than when the various money substitutes are included. Most of the
fallacies regarding money have arisen not about standard money, but
about paper and light-weight silver.
[Sidenote: Coinage defined]
3. _Coinage is the act of shaping and marking a piece of metal to be
used as money so as to indicate its weight and fineness._ The precious
metals can and do circulate as money without coinage. Any other mark
equally plain and equally recognizable serves for many purposes just as
well as the government stamp on the standard metal. The use of metals in
antiquity was without coinage, by weight and test of fineness. In
backward countries to-day most payments are made by weight.
International payments are made by means of gold ingots that bear the
mark of some well-known banking-house, and for that purpose gold bullion
is money without the coiner's stamp. But for most uses government
coinage has marked advantages. It is far more convenient for the average
citizen to handle coins uniform in size and design than the diverse
coins that would be put out by private enterprisers.
[Sidenote: Technical features of coinage]
An established rate of fineness insuring uniform quality is a great
convenience. In the United States all gold and silver coins are nine
tenths fine; in Great Britain, eleven twelfths. The established weight
of the gold dollar in the United States is twenty-three and twenty-two
hundredths grains of fine gold or twenty-five and eight tenths grains of
standard gold. The limit of tolerance is the variation either above or
below the standard weight or fineness that a coin is allowed to have
when it leaves the mint. The par of exchange between standard coins of
different countries is the expression of the ratio of fine gold in them.
Thus the par of exchange between the American dollar and the English
sovereign (the "pound") is four and eighty-six and two third hundredths,
that is, four and eighty-six and two third hundredths dollars contain
the same amount of gold as an English gold sovereign. The embossed
design, milled or lettered edges, and other similar devices are merely
to make the coins easily recognizable and difficult to counterfeit.
[Sidenote: Seigniorage defined]
4. _Seigniorage is the right the ruler or state has to charge for
coinage, or it is the charge made for coinage._ Coinage as a function of
great importance politically as well as economically was early exercised
by governments or rulers. The prince, king, or emperor stamped his own
device or portrait upon the coin; hence the term seigniorage from
seignior (meaning lord or ruler). The right to issue money came to be
one of the most essential prerogatives of sovereignty. Coinage is rarely
without charge, and often has been a source of revenue to the ruler. In
the Middle Ages this right was frequently exercised by princes for their
selfish advantage to the injury and unsettling of trade.
[Sidenote: Free or gratuitous coinage]
When no charge is made for coinage, the coinage is said to be
gratuitous. Coinage is said to be free if the subject or citizen can
take bullion to the mint whenever he pleases, paying the usual
seigniorage. Coinage is limited if the government or ruler determines
when coinage is to take place. Thus, coinage may be both free and
gratuitous, when citizens are allowed to bring bullion whenever they
please and have it converted into coins without charge or deduction. But
coinage is free without being gratuitous when any citizen may bring
metal to the mint, whenever he chooses, to be coined subject to the
seigniorage charge.
[Sidenote: Money value under free coinage]
5. _Where coinage is free and gratuitous the coin is worth the same as
the bullion that is in it._ This evidently and necessarily must be near
the truth if the citizens exercise their right. They will not long keep
metal uncoined in their possession when it is worth more in the form of
money, nor will they long keep money from the melting-pot when it is
worth more as bullion. Yet there may be a slight disparity between the
bullion and the money values before the metal is converted into coin or
the coin melted down into metal. A motive for action must exist before
either change will be made; but a thing cannot have considerably
different values in two different uses at the same moment.
[Sidenote: Adjustment of supply to value]
There is here no special problem of value. The value of gold as bullion
and money is fixed by marginal demand. The several uses of gold are
constantly competing for it: its uses for rings, pens, ornaments,
championship cups, photography, dentistry, delicate instruments, and as
a circulating medium. If the metal becomes worth more in one use, its
amount there is increased and correspondingly diminished in the others.
The supply likewise is influenced by changes in price. Gold-mining is
one among various industries to which men may apply their labor and
capital. Some mines are superior, others average, others marginal which
it barely pays to work. There is, therefore, a rise and fall of the
margin of production with change in price and change in cost of
production. If at a given moment, when it barely pays to work a mine,
gold becomes worth less, that mine will go out of use. As gold rises,
some mines that did not pay before, come into use. A similar variation
has been noted in the case of marginal land, marginal factories,
marginal forges, and marginal agents of every kind.
[Sidenote: "What is a dollar?"]
The question was once asked in Parliament, "What is a pound?" and a good
question to ask in beginning the study of money is, "What is a dollar?"
The answer, so far as it refers to the standard money, is: a dollar is
a convenient name applied to twenty-three and twenty-two hundredths
grains of fine gold or twenty-five and eight tenths grains of standard
fineness. The exchange value of gold varies in different places and
conditions, but the name remains the same. A dollar exchanges for more
wheat in Dakota than in New York or for more iron in Pittsburg than in
Oregon, yet it is sometimes asserted that the value is always the same
because the name is always the same. The fallacy of this may be seen in
the equivalent expression that twenty-three and twenty-two hundredths
grains of gold have the same value always and under all circumstances.
The problem of the bullion value of money metal, under gratuitous
coinage, presents no special difficulties. The ordinary theory of value
applies to it. The difficulties of the money question begin at the point
where the money value is seen to diverge from, and depend on, something
else than the value of the bullion. Yet in the principles just discussed
are found a firm foundation for any further study of the question.
§ II. THE QUANTITY THEORY OF MONEY
[Sidenote: The money use]
1. _The fundamental use that money serves is to apportion incomes of
goods so as to make them yield the maximum gratification._ Money first
increases utility by increasing the ease with which exchange takes
place. Like any tool or agent, it is valued for what it does or helps to
do. But further, it enhances the sum of enjoyments by the division of
goods into proper quantities, making them available at the best time. It
follows from the principle of diminishing utility that the particular
time at which goods are available for wants has an essential bearing on
their value. A hundred loaves of bread in the hands of a single
individual would mold long before they could be consumed. Money enables
men in society to acquire these hundred loaves in a series so that they
can be used when most needed. Money is the most successful device man
has ever discovered for distributing the supplies of a journey along its
course, and the goods of daily need over a period of time. The use of
money as a storehouse of value is merely an extreme case of keeping
things for the future when they will have a greater gratifying power.
[Sidenote: Concept of the money demand]
[Sidenote: Variation in the average]
The fact that money is essentially a valuable good kept on hand as the
best possible provision against emergencies points to the essential
nature of the money demand. Money is sought, in order to form a cash
reserve, up to a point where the loss from keeping it balances the
probable gain. The money use is subject to the law of diminishing
utility; beyond a certain point its added convenience is purchased at
too great cost. Every man may be thought of as having an average, or
usual, money demand, which is that proportion of his income that gives
him more utility retained in money form than if at once expended. A man
with an income and expenditure of fifty dollars a month paid monthly has
use ordinarily for no more than fifty dollars as his cash reserve. While
under ordinary circumstances this is his maximum demand, various
circumstances may diminish it. If his expenses are distributed in two
equal parts (the one on pay-day, the other thirty days later) his
average money demand is twenty-five dollars, not fifty dollars. If most
of his purchasing is done at the beginning of the month, his average
money demand may be perhaps ten dollars. Many a workman purchases on
credit, spends his fifty dollars within an hour after he receives it,
and goes without money for the rest of the month. The average demand of
a community for money required as a reserve is affected by the methods
of doing business. With a given method of use a reduction in the supply
of money results in loss of time and waste of effort; an increase in the
supply results in a lowering of its value relative to other things. In
either case the equilibrium of the marginal utilities of income must be
restored. The thought of an average, rational, money demand relative to
money income is the fundamental requisite for clear thinking on the
question of money, but to grasp this thought there is needed a certain
power of scientific imagination lacking in some minds.
[Sidenote: The quantity theory of money]
2. _The quantity theory of money is that, other things being equal, the
value of money falls as its quantity increases, and vice versa._ This is
an abstract statement of a concrete and difficult problem. The phrase
"other things being equal" betokens the statement of a tendency where
there are several unknown factors. In recent discussion the quantity
theory of money has been questioned by some critics; yet it is held by
most economists to be merely the general law of value as applied to
money. There are three sets of facts to be brought into relationship
with each other in the quantity theory: (1) amount of business or
exchanges to be effected; (2) the methods by which this is done; (3) the
amount of money available to do it. According to the quantity theory we
must expect that when conditions (1) and (2) remain fixed, the value of
money will vary inversely as its quantity. This conclusion follows from
the conception of the money demand as the value of circulating medium
that bears an average proportion to the value of goods exchanged.
[Sidenote: Example of its application]
Let us consider various conditions. When a number of men, by reason of
increasing gold supplies, get larger stocks of money than they have had,
the former proportion between their money incomes and their money is
altered. In reducing their stock of money by buying goods they bid up
the prices of goods until the total value of goods exchanged again bears
the same ratio as before to the total value of money. Taking an extreme
case: if twice as many dollars get into circulation in a community,
either some few men must have several times as many dollars as before,
while others have the same; or every man will have his due proportion,
just twice as much as before. The latter, "other things being equal,"
must be the logical result after equilibrium has been restored. Is any
other result thinkable? Now if prices of goods remained the same as
before, there would be twice as great a value of money available to
effect exchanges. There is no reason why each should tie up twice as
large a proportion of his income in a supply of the medium of exchange.
If, however, there is a concerted movement to spend the surplus money,
there results a general bidding down of the exchange value of money, a
general bidding up of prices of goods. At what point will this movement
stop? The rational conclusion must be that "other things being equal"
equilibrium will be reëstablished only when the ratio between the value
of money and the price of goods becomes the same as before. The money
being doubled, prices must be double, and likewise for any other change
in quantity.
[Sidenote: Objections made to the quantity theory]
3. _The quantity theory is misunderstood, and is criticized on the
ground that the facts oppose it._ If but one kind of metal were used as
money, and this were coined of uniform weight and fineness, the problem
would be comparatively simple. But in fact gold and silver, full-weight
and light-weight coins, circulate side by side. More mysterious still,
the money in circulation is partly coin and partly paper. How can the
quantity theory hold in these conditions? Several objections to the
quantity theory are presented. It is said, first, that prices do not
vary exactly with the per capita circulation of different countries at a
given moment. The per capita circulation in Mexico may be five dollars
and in the United States twenty-five dollars, while prices are much less
than five times as great here as in Mexico. Secondly, it is said that
prices do not vary directly with changes in the amount of money in a
given country. There is now perhaps five times as much money per capita
in the United States as fifty years ago and yet prices are not five
times as high. Thirdly, it is said that credit methods change, and
therefore that money does not fix prices. Fourthly, it is said that even
if true of primary money the theory fails to apply to actual conditions
with many forms of money in circulation side by side. Fifthly, it is
said that there are too many unknown quantities to permit the rule to be
used.
[Sidenote: The objections examined]
4. _A reasonable interpretation of the quantity theory makes it a
statement of the effect of a change in a single factor._ The objections
to the quantity theory assume that it is a statement of what occurs
under all conditions, instead of what it is, an index to the working of
one condition at a time. The foregoing objections need but to be further
analyzed to show that in each of them it is not merely the quantity of
money, but a number of other factors that differ in each of the
propositions. We may note briefly in turn the defects in the arguments
of the preceding paragraph.
[Sidenote: Not a per capita rule]
First, the quantity theory does not remotely imply that prices in
different countries differ at a given moment according to the per capita
money. In the case of the United States and Mexico not only the amount
of exchange per capita but the method of exchange, and the rapidity of
the circulation of money differ quite as much, doubtless, as does the
per capita circulation. The quantity theory would lead any fairly
careful student to a conclusion the exact opposite of that which its
critics have twisted from it.
[Sidenote: Recognizes the growth of trade]
Second, the quantity theory does not imply that during a period of years
when a country is changing in a multitude of ways, as in population,
methods of industry, modes of exchange and transportation, and in wealth
and income, the prices will vary directly either as the absolute or per
capita amount of money does. In the light of the quantity theory the
inquirer must be led to just the opposite of the ridiculous conclusion
imputed to it.
[Sidenote: Recognizes use of credit]
Third, the theory does not overlook the effect of an increased use of
credit, for it fully implies that any such a change, by economizing the
use of money, would enable the same amount of money to support a higher
scale of prices.
[Sidenote: Not confined to primary money]
Fourth, the theory does not overlook the variety of forms, and is not
true merely of primary money. However great this variety, the money
demand of individuals and of communities still represents a pretty
definite ratio of the value of exchanges effected. If the primary money
alone were doubled in quantity, while the various forms of substitute
money (smaller coins, bank-notes, government notes, etc.) remained
unchanged, the quantity of money as a whole would not be doubled, and
according to the theory, prices would not be expected to double. Indeed,
in such a case, the method of exchange would be very greatly altered,
and the case is fully covered by the statement of the theory.
[Sidenote: Is a practical rule]
Fifth, despite the number of changing factors affecting the methods of
exchange, the method of business, etc., the quantity theory is a rule
usable at any moment. These various factors change slowly, and the
quantity theory answers the question, What change occurs in prices as a
result of an increase or decrease of the money in a given community at a
given moment? Like the law of gravitation, the law of projectiles, and
the statement of the chemical reaction to be expected when adding some
substance to a given compound, the theory must be interpreted with
practical limitations. When the quantity theory is thus stated and
understood, its negation is unthinkable, as is evidenced by the
involuntary use made of it constantly by every one of its few critics in
explaining the simplest monetary phenomena.
[Sidenote: Practical application of the quantity theory]
[Sidenote: Recent price changes]
5. _The quantity theory makes intelligible the great and rapid changes
in price that have followed sudden changes in the money supply._
Inductive demonstration of broadly stated economic principles is
difficult, but in no other economic problem is laboratory experiment so
nearly possible as in that of money. Many inflations and contractions of
the circulating medium have occurred, now in a single country, again in
the entire world, and the local or general results have served to
exemplify richly the working of the quantity principle. With the scanty
yield of silver- and gold-mines in the Middle Ages, prices were low.
After the discovery of America, especially in the sixteenth century,
quantities of silver flowed into Europe. The great rise of prices that
occurred was explained by the keenest thinkers of that day along the
essential lines of the quantity theory, though there were many monetary
fallacies current at the time. The experience in England during the
Napoleonic wars, when the money of England was inflated and prices rose
above those of the Continent, led to the modern formulation of the
theory by Ricardo and others. The discovery of gold in California and
Australia, in 1848-50, increased the gold supply marvelously, and gold
prices rose throughout the world. Between 1870 and 1890 the production
of gold fell off greatly while its use as money increased and prices
fell. A great increase of gold production has occurred in the period
since 1890. In part the rising prices from 1897 to 1902 are explicable
as the periodic upswing of confidence and credit, but in part doubtless
they are due to the stimulus of increasing gold supplies. These are but
a few of many instances in monetary history which, taken together, make
an argument of probability in favor of the quantity theory so strong as
to constitute practically its inductive proof.
CHAPTER 46
TOKEN COINAGE AND GOVERNMENT PAPER MONEY
§ I. LIGHT-WEIGHT COINS
[Sidenote: Seigniorage and the value of coins]
[Sidenote: Saturation point for coinage]
1. _When the number of coins issued is limited properly, a seigniorage
charge does not reduce their money value; they are worth more as money
than as bullion._ The coinage thus far considered has been that of
full-weight coins without seigniorage. The question now is, What is the
effect of a seigniorage charge on the value of the coin as compared with
the bullion that is in it? This is one of the most difficult phases of
monetary theory. Two values must be thought of: one the value of the
coin as money, the other the value of the bullion in it. When coinage is
free and gratuitous, these two values are the same. How can they ever be
different? The answer to the question is found in the theory of monopoly
value. If the supply of coin is limited by the sole agency of issue, the
value can be kept above the cost of production (_i.e._, in this case the
bullion value), the seigniorage being the profit of the government. The
limit within which the coinage must be kept is the number of coins that
would circulate freely if they were made full weight without a
seigniorage charge. This is the "saturation point" of the money demand
of the country; it is a certain number of pieces of full-weight metal.
If more than that amount gets into circulation it becomes worth less as
money than as bullion, and it is melted or exported.
[Sidenote: Example of seigniorage value in coins]
If this full supply of money at a given moment is 100,000 pieces or
dollars, a seigniorage charge of ten per cent. could be made if the
number of pieces were not increased above 100,000. The government alone
having the right of coinage, the need of money would give the
circulating medium a monopoly value. The value of the money would rise
until the coin would buy one ninth more bullion than was in it, but if
there were any further rise the citizens would begin to take coins to
the mint. After the ten per cent. charge was taken out they would
receive a coin which, though containing one tenth less bullion, would be
worth very nearly the same as the metal taken to the mint. No
considerable depreciation could take place unless the volume of business
fell off so that less money was needed than at the old standard. In that
case there would be no outlet for the excess of coins until they fell to
their bullion value, _i.e._, till they lost the entire value of the
seigniorage, the monopoly element in them. Melting or exporting them
before that point was reached would cause the loss of whatever element
of seigniorage value they contained.
[Sidenote: Example of excess and depreciation of coins]
Assuming that the volume of business, or sum of exchanges, remains
unchanged, let us consider what will result if the government begins to
issue "on its own account." The number of coins might be increased until
at the bullion price the total money value were equal to the original
100,000 full-weight coins, at which point exportation would take place.
There being nine tenths as much precious metal as before, it would
require ten ninths as many pieces, or 111,111 pieces, to have as great a
value as the 100,000 had before. At this point there is no further
profit to the government in issuing coins of that weight. To make a
further profit it must again reduce the amount of pure metal in the
coin.
[Sidenote: Medieval examples of depreciation]
This is essentially what occurred often throughout the Middle Ages. A
ruler debased the quality or reduced the weight of money, but for a time
the new coin, having the same money use, circulated as freely as the old
coin. If, as so often happened, the ruler yielded to the temptation to
issue more in order to get the profit, the older, heavier coins at once
began to go abroad or into the melting-pot. Then occurred a fall in
value, mystifying alike to the prince and the people. The reason is now
perfectly plain: the number of pieces issued had not been kept within
the proper limits, and the coins went down to their bullion value.
[Sidenote: Difficulties with full-weight subsidiary coins]
2. _Subsidiary coins of lighter weight than the standard, if properly
limited, will remain in circulation at par._ Money to serve all of its
purposes must be of different denominations. The amount required of each
denomination is determined by the volume of exchanges for which each is
most convenient. Each kind of money, as the penny, nickel, dime, has its
own peculiar demand and its saturation point. For the smaller
denominations the standard metal is not suitable. A gold dollar cannot
well be cut into twenty or a hundred pieces. Thus copper, nickel, silver
remain in restricted use. When these are issued at their bullion value,
difficulties arise; not only are they too heavy, but as they vary in
bullion value, some of them become worth more as bullion than as coin,
and suddenly disappear from circulation.
[Sidenote: Adoption of light-weight minor coins]
[Sidenote: Theory of light-weight coins]
This happened often throughout the Middle Ages and until the nineteenth
century. Gold and silver generally were coined at a ratio of weight
corresponding exactly to their market ratio at a given moment, and every
time the market conditions varied, one kind of the money went out of
circulation, and the country was left either without the larger gold
coins, or without subsidiary coin, or "small change." At length the plan
was hit upon of issuing a limited number of subsidiary coins of less
than full bullion value, that is, as "token coins." By this plan there
is given to the minor coins a value greater than that of the bullion in
them. The small profit made by the government on every penny, nickel, or
dime issued, is a seigniorage charge. These minor coins, in somewhat
confusing variety, circulate side by side with full-weight money, their
value depending on the monopoly principle. The result of a large issue
of any one denomination would be a lowering of its value. In practice
their issue is determined by the needs of business and by the requests
of citizens for small coins in exchange for standard money. One needing
"change" gets it at the bank; when the bank finds its supply falling
short it gets more from the government mints. As business increased in
1898, the demand for nickels, dimes, and quarters became unprecedented,
and the mints worked night and day to supply them.
[Sidenote: Gresham's law]
3. _Gresham's law of the circulation of coins of different bullion value
is: bad money drives out good money._ This so-called "law" was stated in
these circumstances: England had two kinds of metal money, silver and
gold, which were coined at a fixed ratio in weight; and as the market
value of the bullion changed, the new full-weight coins of the metal
rising in value went out of circulation. The coining of the cheaper
metal caused the melting or exporting of the one becoming dearer, and
for those purposes the coins containing the most bullion were picked.
Likewise full-weight coins disappear whenever money of less bullion
value (either because containing more alloy, or because made of a
cheaper metal or of paper) is poured into the circulation in large
quantities.
[Sidenote: Proper interpretation of Gresham's law]
Gresham's law needs some explanation, for it is frequently
misunderstood. "Bad" money means money that has not the bullion value
equal to its money value, money that is either debased in quality or
light in weight. But not every piece of bad money will drive out every
piece of good money. If that were so, a single bad penny would drive out
of circulation all the gold. The law applies only under certain
conditions. The "good" will leave the country only if the total amount
of money in circulation is in excess of what would be needed if all were
of full weight or best quality. Paradoxically speaking, if there is not
too much of the bad money, it is just as good as the good money. The
good money may not leave the country. It may be hoarded, or be picked
out by banks and savings-institutions to retain as their reserve, or it
may be melted for use in the arts. Gresham's "law" is thus a practical
precept: keep the amount of token or light-weight coin limited to the
field of its peculiar use, or it will cause the other forms, the fuller
weight money, to leave for a better market. That better market may be
the melting-pot or it may be a foreign country.
§ II. PAPER MONEY EXPERIMENTS
[Sidenote: Nature of paper money]
[Sidenote: The legal-tender quality]
1. _Government paper money may be defined as money for which a
seigniorage of one hundred per cent. is charged._ The order in the study
of the money question is from seigniorage to paper money, because paper
money embodies the principle of seigniorage in its extremest form. The
issue of paper money grew out of the practice of debasing metal. The
gain of seigniorage from paper money is greater and is just as easily
secured. Government paper money is sometimes called "political money,"
in contrast with money whose value rests on the value of its material.
In this sense, however, all coins containing an element of seigniorage,
or monopoly value, are to that degree "political" money. The typical
paper money is irredeemable, that is, it cannot be turned into bullion
money on demand. It was simply put into circulation with the
legal-tender quality. The "legal-tender" quality is the declaration of
the government that the paper money must be accepted by citizens as a
legal discharge for debts due them. The object of this is to compel
people to use it as money whether they will or not. The purpose of the
government in thus employing its power over the circulating medium is
usually to profit, that is, to secure the value of the seigniorage for
public purposes. Paper money differs from bank-notes in that it does not
depend for its redemption on the credit of the issuer. It differs from
bonds in that its value is not based on the interest it yields, but
solely on its money uses. The issue of paper money may save the
government the payment of interest on an equal amount of bonds. The
promise to receive paper money in payment for taxes or for public lands,
may help to maintain the value of the notes by reducing their quantity,
but nothing short of prompt exchange for standard coins makes them truly
redeemable.
[Sidenote: Examples of paper money in the eighteenth century]
2. _The most notable examples of paper money in the eighteenth century
were the American colonial currencies, the continental notes, and the
French assignats._ In all the American colonies before the Revolution
notes or bills of credit were issued which were in most cases legal
tender. Without exception they were issued in large amounts and without
exception they depreciated. Parliament forbade the issues, but to no
effect. The continental notes were issued by the Continental Congress in
the first year of the war (1775), and for the next five years. The
object at first was to anticipate taxes, and it was expected that the
states would redeem and destroy the notes, but this was not done. The
notes passed at par for a time, but depreciated rapidly as their number
increased. The country had less than $10,000,000 of coin before the war,
and when, in 1780, over $200,000,000 of notes were in circulation they
were completely discredited; hence the phrase "not worth a continental."
Specie quickly came back into use. A few years later the leaders of the
French Revolution, failing to learn the lesson of the American
experience, issued, on the security of land, notes called assignats in
such enormous quantities that they became worth no more than the paper
on which they were printed. In a figurative sense they may be said to
have fallen to their "bullion" value.
[Sidenote: More recent examples of paper money]
3. _Notable examples of paper money in the nineteenth century were the
English bank-notes in the years 1797-1820, and the American greenbacks,
1862-79._ There have been many other examples. During the
Franco-Prussian War, France, through the medium of its great state
bank, issued notes which only slightly depreciated. At the present time
many countries--Russia, Austria, Portugal, Italy, all the South American
republics--have depreciated paper currencies. But the English bank
restriction of 1797-1820 is notable because it gave rise to the
controversy which did most to develop the modern theory of the subject.
The Bank of England was forbidden to redeem its notes in coin because
the government wished to borrow all the coin the bank had. The result
was the issue of a large amount of bank money not subject to the
ordinary rule of redemption on demand. It was virtually government paper
money. The notes depreciated and drove gold out of circulation, and not
until 1820 was there a return to specie payments.
[Sidenote: The greenbacks]
The United States under the constitution did not try paper money till
1862 when paper notes (called greenbacks, because of the color of ink
with which the reverse side was printed) were issued as a war measure to
the amount of about $450,000,000. Other interest-bearing notes were
issued with legal-tender quality and circulated as money to some extent.
Greenbacks depreciated in terms of gold, and gold rose in price until,
in June, 1864, it sold at two hundred and eighty a hundred. Fourteen
years elapsed after the war before these notes rose to par, in terms of
gold.
[Sidenote: Evil effects of political money]
4. _Paper-money issues usually have had injurious effects on general
industry._ The purpose of the issue of paper money is generally to
relieve the financial necessities of the government. It is a costly
expedient, resorted to only in desperate extremities. A result usually
unintended is the derangement of business and of the existing
distribution of incomes. The rapid and unpredictable changes in prices
give opportunity for speculative profits, but most legitimate business
is injured. This incidental effect on debts and industry becomes the
main motive of some citizens in advocating the issue. It is peculiarly
liable to be the subject of political intrigue and of popular
misunderstanding.
§ III. THEORIES OF POLITICAL MONEY
[Sidenote: Commodity-money theory]
1. _The commodity-money theorists declare that government is powerless
to influence value, or to impart value to paper by law._ There are two
extreme views regarding the nature of paper money, and a third which
endeavors to find the truth between these two. First is that of the
commodity-money theorists, or the cost-of-production theorists, who will
not admit that there is any other basis for the value of money than the
cost of the material that is in it. Money made of paper, on a printing
press, has a cost almost negligibly small, and, therefore, they say it
can have no value. The fact that it does circulate, and is treated as if
it had value, is explained by the commodity theorists as follows: While
the paper note is a mere promise to pay, with no value in itself, it is
accepted because of the hope of its redemption, just as is any private
note. Depreciation in this view is due to loss of confidence; the rise
toward par measures the hope of repayment. Such a view overlooks the
feature in which paper money differs from ordinary credit paper. The
value of one's promise to pay depends on his reputation and his
resources; the resources constitute the basis of value. Bonds have value
because they yield interest and are payable at a definite time in
standard money. But paper money, lacking this basis for its value, has
another basis in its money use, in its power to buy goods. The money
demand in connection with the monopoly power of government over the
money supply, furnishes a satisfactory logical explanation of the value
of paper money.
[Sidenote: Fiat-money theory]
2. _The fiat-money advocates assert that government has unlimited power
to maintain the value of paper money by conferring upon it the
legal-tender quality._ The meaning of fiat is "let there be," and the
fiat-money advocates believe that the government has but to say, "let it
be money," to invest paper with value. The typical fiat advocates in
the United States were the "Greenbackers," those voters who wished to
retain the paper money issued in the Civil War, and to increase its
amount greatly. They saw in paper money an unlimited source of income to
the government. They proposed the payment of the national debt, the
support of the government without taxes, and the loan of unlimited money
without interest to citizens. All might live in luxury if the extreme
fiat-money theorists could realize their dream. There are still some
survivors of this faith in the power of the government fiat. The
depreciation that has taken place in every case where government notes
have been issued, they declare to be due to a too mild enforcement of
the law of legal tender. To them the fact that paper money may circulate
for a time at par appears a reason why it always should. They do not
admit that there is a saturation point in the use of money, and that its
use is still further limited by the fear of larger issues. They do not
see that the ultimate basis of the value of paper money is economic,--is
in its money use, not in the fiat of the government.
[Sidenote: Theoretical possibility of a good paper money]
3. _A sound theory of paper money makes it a special case of monopoly
value._ It has been seen that the power of almost every monopoly over
price is relative, not absolute. As the power of a great private
corporation over the price of its product is limited, so is that of the
government over the value of political money. The money use is the
source of value to the paper notes. Business conditions remaining
unchanged, the limit of possible issue without depreciation is the
number of units in circulation before the paper money was issued, the
saturation point of full-weight and full-value coins. Because
governments generally have not stopped at that point, paper money has
depreciated. Popular error and selfish interests force legislation
beyond the reasonable limit. In a few cases only have there been public
integrity and courage enough to retrace the steps before great harm
resulted. It is principally this lack of control that prevents paper
money from being a good circulating medium.
[Sidenote: Influence of law on value]
It is sometimes said that government cannot affect value in any way, but
it can do so in many ways. Certainly one of the most remarkable is by
the use of its monopoly power over the medium of exchange, whereby it
can, under certain conditions, cause a piece of paper to have the value
of a piece of gold. Thereby at the same time it affects the interests of
nearly every member of society, raising or lowering the value of many
kinds of property, and of many incomes.
CHAPTER 47
THE STANDARD OF DEFERRED PAYMENTS
§ I. FUNCTION OF THE STANDARD
[Sidenote: Definition of the standard]
1. _The standard of deferred payments is the thing of value in which, by
the law or by contract, the amount of a debt is expressed._ A credit
transaction is a lengthened exchange; one party fulfils his part of the
contract, the other party promises to give an equivalent at a later
date. The equivalent may be in any kind of goods; for example, in barter
one may part with a horse on the promise of a cow to be received later;
or a small horse on the promise of a large one; or a flock of sheep on
the promise of its return at the end of the year with a part of the
increase of the flock. A simple standard in which to express the debt is
the thing borrowed, as horse, sheep, wheat, house, etc. This involves
the use of the renting contract. Again, the thing to which the value of
debts is referred may be a thing quite different from the goods
borrowed, and with the growth of the money economy and the use of the
interest contract, money comes more and more to be used as the standard.
The parties express the debt in terms of the standard unit established
by law.
[Sidenote: Increasing use of the interest contract]
2. _The importance of the standard of deferred payments increases with
the use of money and with the amount of outstanding debts._ Until the
use of money develops, the use of credit is difficult and limited; it
becomes easy when the value of all things is expressed in terms of a
common circulating medium. If all business were done for cash there
would be no great interests affected when a change in the value of
money occurred. Every dollar would change in value in the hands of the
holder, but there the effect would cease. But the volume of outstanding
debts expressed in terms of money now exceeds many fold the total value
of the circulating medium. The value of all these debts changes in the
same proportion as does that of the standard unit of money; when this is
cheapened either by law or as a result of increasing supplies, a
creditor to whom a thousand dollars are due loses the same as if he had
a thousand metal dollars locked up in a strong chest.
[Sidenote: Great effects of money changes]
Outstanding contract debts may be roughly divided into three classes:
short-time loans, running less than a year; medium-time, running from
one to five years; long-time, running over five years. Fluctuations are
rarely rapid and great enough to affect appreciably the debtors and
creditors in the case of short-time loans. The results are greater in
the case of long-time loans, such as national, state, and city debts,
bonds of corporations, mortgages given by farmers on their land or by
owners of city real estate. A multitude of interests are affected by a
change in the value of money. When, as in the years 1873-96, money gains
in purchasing power (prices fall) receivers of fixed incomes are
gainers. When, as in the years 1896-1903, the value of money falls, the
revenues from educational and charitable endowments, the salaries of
public officials, and all fixed incomes, lose purchasing power. In a
capitalistic age, therefore, almost every individual is affected in some
way by a change in the value of money. In most cases the change escapes
recognition; people do not trace out the relation that an industrial
change bears to their own interests. In a few notable cases, however,
the change has been revolutionary as in the period following the
discovery of America, when the feudal dues had come to be expressed in
terms of money instead of labor services. In modern times, the mass of
debts being greater than ever before, such changes as those following
the discovery of gold in California or the decrease in gold production
between 1873 and 1890 have the gravest economic results.
[Sidenote: Merits of gold and of silver as standards]
3. _The best standards of deferred payments available--the precious
metals, gold and silver--are still imperfect._ The good that is most
convenient as a standard of deferred payments is the one used as money.
Gold to-day is constantly expressing the value of all other things.
Borrowers prefer to make loans in the form of the general medium of
exchange. From the usage of speaking of all things in terms of money,
the false idea arises that the value of other things changes, but that
the value of gold is always the same. Money is no such a fixed objective
standard as a foot-rule or a pound weight. The value of gold rests on
the estimates made by men, and is constantly changing according to
conditions. A fixed objective standard of value is not possible of
attainment. The value of the precious metals is stable as compared with
most things. The current new supply is comparatively regular. For
generations at a time there may be no radical changes in the output of
gold and silver. For centuries there was no change in the methods of
extraction. Recent inventions, however, have considerably altered these
conditions. The nature of the use of gold and silver, likewise, is such
as to make the demand for them, under ordinary conditions, most stable.
The precious metals are but slowly worn out; only a portion of the
annual output is used in the arts; there is, therefore, a large
reservoir into which flows steadily a small stream; the existing stock
is twenty or thirty times the annual output. Yet the value of the
standard metals is never quite stable, and sometimes several influences
combine, as in the last century, to affect their value greatly and
suddenly.
[Sidenote: Various standards suggested]
[Sidenote: Enjoyment]
[Sidenote: Sacrifice]
[Sidenote: Labor]
[Sidenote: Tabular standard]
4. _Various ideals for a standard of deferred payments have been
suggested--as return of equal enjoyment, of equal sacrifice, social
expediency; and various standards--as labor, commodities, and the
tabular standard._ The ideal standard of deferred payments is one that
will insure justice between borrower and lender. Different views have
been taken as to what constitutes justice in this matter. The suggestion
is attractive that the sum when returned should represent the same
amount of enjoyment as it did when it was borrowed. Such a standard is
impossible of realization in any general way, for men's circumstances
are constantly changing. To insure even to the average man the same
amount of enjoyment is only roughly possible. The same goods do not
afford the same enjoyment when conditions have changed. Another
suggestion is that the goods returned should represent the same
sacrifice as those loaned. Here again the difficulty is in the lack of
an objective standard. Whose sacrifice? That of the lender, who may be
rich, or that of the borrower, who may be poor? Some have supposed the
conditions of equal sacrifice were met by the labor standard, according
to which the sum returned should purchase the same number of days of
labor as when borrowed. But what kind of labor is to be taken, that of
the lender or that of the borrower, or that of some one else? Labor is
of many different qualities, which can be exactly compared only through
their objective value in terms of some one good. The ideal of equal
enjoyment has been supposed to be realized by the tabular standard,
which consists of a number of leading commodities in fixed proportions.
The money returned is to be enough to purchase the same goods at the
expiration as at the making of the loan, and thus may be a larger or
smaller sum than was borrowed. While this does not, as is sometimes
claimed, insure equality of enjoyment, it averages the fluctuations of
many goods, and thus prevents great extremes. This standard has been
favored by notable monetary authorities, but the difficulties of its
practical application are prohibitive.
It must be recognized that any possible concrete standard of deferred
payments will sometimes work hardship to individuals. The best average
results for justice and social welfare will be secured by measuring
debts in goods that change least often, least rapidly, and in the least
unpredictable manner. Gold thus far has proved itself worthy to serve as
the standard.
§ II. INTERNATIONAL BIMETALLISM
[Sidenote: Examples of price fluctuations]
1. _The fall of prices in 1873 and the following years meant a great
change in the standard of deferred payments._ The monetary changes
following the discovery of America were due to the inflow to Europe of
great quantities of silver taken by force from the native American
rulers, and from the rich mines. Silver, at that time throughout Europe
the main standard of deferred payments, was thus greatly lowered in
value. This change lightened all outstanding obligations, lowered the
money rents of the peasants, and the customary dues of labor wherever
they had come to be expressed in money form. By the third quarter of the
nineteenth century gold had become in Europe and America the main
standard, though silver still served as such in some countries. The
output of gold in 1849-57 caused the greatest money inflation that has
occurred since the sixteenth century, favoring in a similar manner the
debtor classes. The substitution of gold for silver by some countries at
that time, by making a great additional market for gold, helped in some
degree to check the fall in its value.
[Sidenote: The recent great fall of prices]
The decline in the output of gold was a change of the opposite
character, causing a fall of prices and increasing the burden of debts.
From 1873 to 1896 there was almost constant decline of the prosperity of
the agricultural classes, due in part to this money influence, but in
part to influences which cannot be dwelt upon here, as they had nothing
to do with the money question. There was complaint, agitation, and
demand for relief on the part of many interests in France, Germany,
England, and the United States.
[Sidenote: Bitmetallism defined]
2. _Bimetallism, the use of two metals as standard moneys, was the
remedy proposed._ Bimetallism is legally complete when both metals are
admitted to the mints for free coinage at an established ratio of
weight; it is halting or limping when one of the metals is not freely
coined. Bimetallism may be legally authorized, but not actually working.
As soon as the legal ratio varies appreciably from the market value,
only one of the metals will in fact be brought to the mint. National
bimetallism is confined to a single country, as that in the United
States before the Civil War, or in France before 1867. International
bimetallism is an agreement among several nations to use two metals on
the same terms, the only case in history being that of the Latin Union,
which included France, Italy, Switzerland, and other countries. The
discussion of international bimetallism in recent years has been on the
proposal to make a much larger league of states than the Latin Union,
embracing all the leading countries.
[Sidenote: Object of international bimetallism]
3. _The main object of international bimetallism is to prevent the
fluctuations of the standard of deferred payments._ Commercial dealings
between gold-using and silver-using countries are of great magnitude,
and the use of different standards leads to many difficulties.
Fluctuations in the ratio of the two metals occasion much uncertainty
and loss to individual traders. The rise in the value of gold meant an
increase in the burden of the public debts of silver-using countries
which collect their revenues in silver, but which must pay their debts,
principal and interest, in gold.
[Sidenote: Its theory]
The theory of bimetallism is that the government can act on the value of
the two metals through the principle of substitution. The metal tending
to become dearer will not be coined, the other will be coined in greater
quantities. The degree of influence that can thus be exerted on the
value of the two metals depends on the size of the reservoir of the
metal that is rising in price. When it all leaves circulation, the law
on the statute book permitting it to be coined becomes a mere sounding
phrase. In such a case there is bimetallism _de jure_, but monometallism
_de facto_. The greater the league of states, the greater is the
likelihood that the scheme will work. The economic theory of bimetallism
was recognized by a majority of economists to be abstractly sound, but
the political difficulties in the way of international agreements are
great, and have proved to be insurmountable.
§ III. THE FREE-SILVER MOVEMENT IN AMERICA
[Sidenote: Conditions leading to the demand for free-silver]
1. _International bimetallism, despite many efforts, failed of
adoption._ This brief proposition sums up the history of the movement,
from 1878 to 1892, to form a league of states and an agreement for
international bimetallism. International conferences were held, and
taken part in by the leading financiers of the world. France at first
favored the policy, and the United States was always foremost in
advocating it, while England in the main was opposed. Some of the
advocates of bimetallism argued that the fall of prices was due not
alone to economic forces, but also to a money conspiracy which had
influenced legislation to introduce and continue the gold standard.
This, of course, was strenuously denied. It is true that the commercial
classes found gold the form of money most suitable to large business,
and no doubt class interests entered into the question in some measure.
The difficulties of the debtor class in America were peculiarly great,
owing to the inflated paper currency, from 1862 to 1879, which had made
our conditions quite abnormal. In the period of speculation following
the Civil War an enormous mass of debts had been accumulated. The hopes
of thousands of tillers of the soil suffering from a fall in prices, and
of the great debtor class, clamoring for relief, were centered upon the
success of this movement. Banking and other large business interests in
general opposed it.
[Sidenote: Purpose of the free-silver movement]
2. _The plan of the free-silver advocates was to legalize national
bimetallism in the United States at a ratio between gold and silver very
different from the market ratio._ Gold had become, long before 1860, the
real standard of our money system, and after 1873 it was the only metal
admitted to free coinage. Silver, little by little, was losing
purchasing power in terms of gold, until from being worth, in 1873, one
sixteenth as much, ounce for ounce, it became, in 1896, worth but one
thirtieth as much as gold. It must be recognized that the power of
silver to purchase general commodities fell much less than the change in
its ratio to gold would indicate, gold having risen in terms of most
other goods as well as of silver. Nevertheless, the proposal to open the
mints to free silver at sixteen to one in the year 1896 meant a sudden
and marked cheapening of money. The prime purpose was to lighten the
burden of debts by making the standard of deferred payments cheaper. It
was at first a debtors' movement, but to succeed it had to enlist the
support of other large classes of voters. And thus, by force of
political necessity, but doubtless in large part naïvely, it developed
into the more sweeping theory that wages, welfare, and prosperity called
for a larger supply of money independently of the effect on debts.
[Sidenote: The free-silver theory]
In its extreme form the free-silver plan was a fiat scheme, for some of
its supporters believed that by the mere passage of the law the two
metals could be made to bear to each other any ratio desired. But its
most intelligent and high-minded advocates (who were moved to its
support by a sincere sympathy and concern for the distressed
agriculturalists) recognized fully that the force of the law was limited
by economic conditions. The extreme opponents of the plan, ignoring the
evident fact that the adoption of a metal as a standard money is one of
the most essential of the market conditions, denied that government
action could in any way affect the value. Most of the arguments
presented on either side in the political campaigns showed little
evidence of a sound theory of money. The victory of the gold standard in
1896 and 1900, it would seem, was due more to the well-founded fear that
a sudden change of the money standard would cause a panic, than to a
thorough understanding of the question.
[Sidenote: Increase of gold production]
3. _The increase of the gold output has for the present checked the fall
of prices._ Before 1890, for a number of years, the average output of
gold was shrinking till it reached a scant hundred million per year. At
the same time, nations which recently had gone over to the gold standard
were striving to secure large stocks for their banks and general
circulation, and those great reservoirs, as a result, became better
filled than they ever were before. After the opening of new
gold-yielding territory in South Africa and in the Klondike, the annual
output of gold became greater than it had ever been, being at the
opening of the South African War in 1898 nearly three times that of ten
years earlier. The present methods of extracting gold resemble those of
fifty years ago as civilized industry resembles that of savages.
Intricate machinery has taken the place of crude tools, chemical
processes have been introduced, and the principal product results from
the regular and certain working of deep mines rather than from chance
surface discoveries. Great masses of debris can now be reworked
profitably. In many parts of the world are enormous deposits of
low-grade ores, before useless, that can be worked economically by
present methods. For a generation at least the world's supply of gold is
likely to continue larger than ever before in history, and prices in
terms of gold probably will rise.
[Sidenote: Rising prices the temporary solution]
Though no change seems likely or possible at the present time, the
free-silver advocate has been justified by events against those gold
advocates who said that the amount of money has nothing to do with
prices. Prices have gone up as gold has increased. The free-silver
advocates have gotten what they wanted through a change for which
neither party can claim the credit. Yet the present situation is
unsatisfactory and undeveloped. A standard better than a single metal,
more stable than a single commodity, is desirable if it can be found.
The money question must arise again and in a new form before many years.
The difficulty has not been finally settled; it is but postponed.
CHAPTER 48
BANKING AND CREDIT
§ I. FUNCTIONS OF A BANK
[Sidenote: The essential banking function]
1. _A bank is a business whose income is derived chiefly from lending
its promises to pay._ Banks have passed through many changes in the past
three centuries. Originating on the street corner for exchange of money,
they have evolved into great institutions of many forms, and performing
many functions. The definition seems paradoxical, but it expresses what
in modern thought is the essential feature of a bank: the lending of its
credit. A reserve of money is needed by the man of business. But for the
banks each man would have to keep his reserve in his own till. Except
the small sum needed for current uses, a bank can keep this reserve more
economically than individuals can. It has the advantages of large
production similar to those of a large factory. The process of lending
credit is called deposit and discount. It grew out of the deposit of
actual money for safe keeping and the loaning to borrowers by the method
of discounting their notes. The term now has a somewhat different
meaning, for a merchant may obtain a deposit to-day without putting any
money in the bank. He gets the bank to discount his notes or collateral
security, and to enter the sum to his credit as a deposit. He becomes a
depositor by borrowing, not by lending to the bank. The sum is under the
borrower's control; he can check it out when he wishes; but he usually
keeps a certain balance to his credit. The bank's gain is larger than
ordinary interest, because it gets a discount on the large sums left in
its possession. The bank increases its funds also by attracting deposits
from those who do not care to borrow.
[Sidenote: Other functions usually performed]
2. _Functions not essential to banking are ordinary money-lending,
money-changing, exchange to distant points, safe deposit, and issue of
bank-notes._ Banks often lend in the ordinary way, allowing borrowers to
draw the money out at once, but this is not the business they prefer.
Many individuals and corporations, such as endowed charities, colleges,
insurance companies, lend great sums of their own money without thereby
partaking in any degree of the peculiar character of banking.
Money-changing (the exchange of coins of different countries) is done by
banks, but likewise by many other agencies not sharing the essential
banking character. Foreign and domestic exchange is the issue and
cashing of "drafts" for money payments between distant places. Most
banks are well fitted to perform this function, but some banks do not
undertake it, and it is performed also by some business houses that are
not banks. Safe deposit is the keeping of things to be returned in
identical form, as silverware, notes, and papers. By banks in small
towns this is sometimes done freely, sometimes for a slight charge; but
in large cities safe-deposit vaults are generally quite unconnected with
banks. Even bank-note issue is not essential to banking; most banks in
the United States issue no notes, others issue very few. All these
functions may be united under one management, but the essential banking
function is deposit and discount.
[Sidenote: Sources of the income of banks]
3. _The income of banks is derived from discounts, interest on their own
capital, charges for exchange and collection, rents on investments, and
profit from the loan of their bank-notes._ The income of banks is drawn
from different sources, according to the size of the community, and the
nature of the banks. While in the villages and smaller cities they
perform a number of functions, in the larger cities they usually
specialize in a far greater degree. Like every other enterprise, a bank
must start in business with some paid-up capital as a guarantee of
credit. Further security is afforded by the limited liability of
shareholders for losses, in proportion to their capital stock. The same
amount of money could be loaned with less trouble and more cheaply
without starting a bank, but used as a banking capital a part of it can
be loaned while still serving to attract money deposits. Charges to
smaller customers for exchange are a source of income to some banks, but
in many cases this service is freely performed for regular customers and
becomes a considerable expense. Banks make few investments in real
estate or other physical property; it is, in fact, their duty to keep
out of ordinary enterprises, but they are forced sometimes to take for
unpaid debts things that have been held as security. Profits on
bank-notes have at times been the main, possibly the sole, motive for
starting banks; but that is not the case to-day when the right of issue
is so strictly limited.
[Sidenote: Productive services of banks]
4. _Banks are productive economic agents performing important industrial
services._ False ideas have long been entertained about the magic power
of banks to produce wealth from nothing. To many, banks are a mystery
much like paper money. Their opponents sometimes have pictured them as
vampires fattening on the blood of industry. That they have shown abuses
at times is undeniable, but, like other economic agents, they are to be
judged by their net efficiency. The bank is a tool performing services
similar to those of money. For some purposes money is an awkward and
costly agent in comparison with banks. For remitting payments from New
York to San Francisco or Hong Kong, money is a medieval device. Money
can more safely be entrusted to a bank than to a strong chest in one's
own house. The man who refused to make use of banks in this day would
isolate himself economically, and would soon find himself out of any but
the smallest business. He could no more get along without the banks than
without the post, the telegraph, or the telephone.
[Sidenote: The bank as a labor-saving device]
The gathering of loanable funds by the banks, making them available at
once, reduces hoarding, makes money move more rapidly, and creates a
central market between borrowers and lenders for the sale of credit.
While not creating more physical wealth directly, it adds to the
efficiency of wealth; it oils the bearings of the industrial machine. To
abolish banks would be to destroy labor-saving machinery. Banks perform
incidentally a further service in developing better business methods in
the community. In supplying credit to active business, banks are
constantly passing judgment on the collateral security presented to them
and on the solidity of the enterprises that are seeking support. They
enforce promptness and exactitude in business dealings.
Because in their public nature banks are very analogous to money, they
have always been looked upon as properly subject to more supervision
than most private business, and government has always exercised a
considerable measure of control over them, sometimes for good, sometimes
for evil.
§ II. TYPICAL BANK MONEY
[Sidenote: Nature of typical bank money]
1. _Typical bank money consists of notes issued by banks on the credit
of their general assets, without special regulation by law._ As no two
leading countries have quite the same system of bank-notes, the subject
is a difficult one. It is well to begin, therefore, with a clear
conception of typical bank money, unregulated by government. Such a form
of note is one with which few now living in the United States have had
any experience, as the present national bank-notes differ in essential
ways from the typical form. Typical bank-notes are notes issued by banks
as a means of loaning their credit. The borrower, instead of receiving a
credit balance at the bank subject to check, gets notes which he hands
on to other men. These notes are returned for redemption to the issuing
bank as soon as any one wishes specie in their stead. The limit of the
issue of such notes is the need of the community for that form of
money, and if they are promptly redeemed in gold on demand, they never
can exceed that amount. A holder of a note (in the absence of special
regulations) has the same claim on the bank that a depositor has. As it
is to the interest of the bank to keep in circulation as many notes as
possible, there is a temptation to abuse the power of note-issue, to
which many banks yielded in the period of so-called "wild-cat banking"
before the Civil War.
[Sidenote: Bank-notes viewed as commercial paper]
2. _Bank-notes are viewed by some as a form of commercial credit._
Typical bank-notes are not legal tender, and every one has the legal
right to take or refuse them as he pleases. It is therefore said by some
that bank-note issue is of no special concern to the state, that it can
safely be left to individual self-interest. It is said that if one has
little faith in a note, he may refuse to accept it. But in reality every
one is compelled to take the money that is current. The average citizen
cannot know the credit of distant banks, and thus has not the same power
of judging wisely in taking bank-notes that he has in making deposits in
the bank of his own neighborhood. Between bank-notes and ordinary
promissory notes, there are other differences of a nature pretty
generally recognized. Bank-notes pass without endorsement and thus
depend on the credit of the bank alone, not like checks, on the credit
of the person from whom received. They yield no interest to the holder.
They are intended to be used as money and are so used. Thus they come
near to paper money in their nature, and the banks are near to
exercising the right of coinage.
[Sidenote: Bank-notes viewed as a form of political money]
3. _By others, bank-notes are considered to be almost identical with
government paper money._ Some opponents of bank-note issue declare that
it is a usurpation of the prerogatives of government, and that no power
but the sovereign state should issue money. While many in America to-day
hold this view, the comparison probably is false and strained. Typical
bank-notes, unlike inconvertible paper money, depend for their value on
the credit of the bank, not on their legal-tender quality and on
political power. They must be redeemed on penalty of insolvency;
government notes need not be, and yet will circulate at par if properly
limited.
While these differences mark off government paper money pretty sharply
from typical bank-notes, it must be noted that in many cases actual
bank-note issues have been far from this typical form. In the days of
"wild-cat" banking, bank-notes were issued in excess and fell below par,
yet the man in a Western community who dared to ask the bank to redeem
the notes in specie was not only frowned on by the bank, but condemned
by the public, which felt that business was endangered by such a demand.
Redemption on demand would have required a reduction of the amount of
money in circulation and would have caused a fall in prices. Inflation
of the bank currency went on with results almost identical with those
following an excessive issue of government paper money. Not formal law
but public opinion made such bank-notes essentially political money.
[Sidenote: Policy of public regulation of bank-notes]
4. _The public nature of bank money has led to many forms of public
regulation of their issues._ Bank-notes thus stand midway in their
economic nature between political money and private notes, sharing
something of the character of each. An extreme analogy in either
direction is misleading. It is of great social importance that the
circulating medium should be reliable. The least possible amount of the
citizen's energy and thought should be required to decide whether the
money is good or bad. Nevertheless, those opposed to state interference
in industry declare that if the citizen is not left to look out for
himself, the growth of stupidity will be encouraged; and they say that
it is no more essential for the state to guarantee the quality of
bank-notes than the quality of woolen cloth or of sugar. Few, however,
take so extreme a view, and it is generally held that it is a function
of the state to insure in a greater or less degree the quality of the
money in circulation. The actual bank-notes of the leading countries
are thus of many varieties. The Canadian notes are the most nearly
typical bank-notes issued to-day; those of Germany come next, while
those of the United States have little of the typical character.
§ III. BANKS OF THE UNITED STATES TO-DAY
[Sidenote: Forms of banks in the United States]
1. _The three forms of banks in the United States are private, state,
and national._ Any one with a little capital may become a private
banker. There are "curbstone brokers" in almost every town, and some of
the great financial houses are private banks. But the law will not allow
this to go very far. Some states will not allow a man to put up a sign
announcing himself as a banker unless he complies with certain banking
laws. In some states even private banks are subjected to the same
inspection as the state banks and are required to make the same reports
to the state officials. State banks are those organized under special
state banking laws. They are usually subject to inspection by state-bank
commissioners, must make regular reports, and are required to comply
with certain rules as to their reserves, rates, and investments. In any
case they do not issue bank-notes, because the national laws now tax the
notes of state banks so heavily that they are unprofitable. National
banks, the largest and most important portion of our banking system,
were authorized by law in 1863, during the Civil War. They are subject
to stricter regulation and inspection than are other banks, and that
regulation is perhaps an advantage to them, as it strengthens public
confidence in their stability. Yet this regulation does not insure the
depositors against loss, as some national banks fail every year. They
may be organized with twenty-five thousand dollars capital in towns of
less than three thousand population, with fifty thousand dollars in
towns of less than six thousand, with one hundred thousand dollars in
cities of less than fifty thousand, and with two hundred thousand
dollars in larger cities.
[Sidenote: Nature of our national bank-notes]
2. _Our national bank-notes have no essential mark of typical bank
money._ The one marked peculiarity of the national banks of the United
States as compared with those of other countries, is their mode of
note-issue. They perform all the other functions of banks, essential and
unessential, and perform them well, but the issue of bank-notes is
optional with them, and some of them do not issue any bank-notes. The
legal condition to their issue is that bonds of the United States shall
be purchased in the open market and deposited with the treasurer of the
United States. Until 1900, notes might be issued only to ninety per
cent. of the value of the bonds deposited; but now they may be issued up
to the par value of the bonds. The notes, being secured by the value of
the bonds, rest on the credit of the government, not on the credit of
the bank. These notes are not promptly sent back for redemption to the
banks issuing them, as is done with typical bank-notes. They may
circulate thousands of miles away from the bank that issued them, and
for years after that bank has gone out of business. They are not an
"elastic currency" increasing or diminishing with the needs of business.
The changes in their amount depend upon the chance of the banks to make
more or less in this way than by any other use of their capital, and
this in turn depends largely on the price of bonds and on the rate of
interest they bear. From 1864 to 1870, fortunes were made from this
source, but in recent years there has been little opportunity of gain
from note-issues. Our present bank-note issues are not on a logical
basis, and satisfy no one entirely. They are of importance neither to
the bank, to which they afford little or no profit, nor to the public,
for which they do a service equally well done by silver certificates,
greenbacks, or coins.
[Sidenote: Suggested reforms of the bank-note system]
Along with the discussion of the currency has gone, since 1896, a
vigorous discussion of the banking system. The two problems are so
closely related that a change in the one suggests readjustment of the
other. One extreme plan is to abolish bank-notes entirely and to
replace them with additional issues of greenbacks; the other extreme
plan is to authorize the issue of almost typical bank-notes. A
modification of the Canadian banking system, which has great merits, is
held up for imitation. Bills have been repeatedly before Congress
authorizing the maintenance of a general guarantee fund with which the
notes of failed banks could be redeemed, and at the same time
authorizing branch banks such as those in Canada. Public sentiment has
never strongly favored this plan, however, and there is more likelihood
of the passage of a bill providing for emergency notes in time of
financial stress, after the plan followed in Germany.
[Sidenote: Bank regulation a protective measure]
That the control of banking is an important duty of government is the
conclusion of the practical world. The various banking systems of the
leading countries embody different plans for the one purpose of the
adequate control of banking in the public interest. Government control
of bank-notes is felt to be of the same nature as factory inspection,
that is, to be a protective measure. When public interests are at stake
and private interests conflict with them, government acts to forbid one
citizen from doing harm, and to protect other citizens from injury.
CHAPTER 49
TAXATION IN ITS RELATION TO VALUE
§ I. PURPOSES OF TAXATION
[Sidenote: Taxation defined]
1. _Provision for the expense of organized government is the fundamental
purpose of taxation._ Taxation may be defined as the taking by the
government of private property for public uses. This implies a certain
degree of compulsion. When the national government accepts ten million
dollars in trust for the Carnegie Institution, it is not taxation,
though wealth is given for public uses. The effects of taxation pervade
all industrial affairs, but they will be discussed here only in relation
to the value of goods and to the distribution of incomes. By taxation
the government interferes with the individual's free choice and with the
impersonal economic forces. It expends income in different ways from
those which would be chosen by the individual.
[Sidenote: Taxation for public defense]
The primary purpose of taxation is public defense. War often has driven
men into closer social relations. Public defense requires sacrifice on
the part of the family and of the individual. In family or patriarchal
communities all share a common income and combine in the common defense,
but self-preservation compels such small communities to form a larger,
stronger state for the common defense. Personal service in the field
gives place to money taxes permitting a more regular, continuing, and
perfect organization of military forces.
[Sidenote: To preserve domestic order]
Next comes the need of civil government to insure domestic tranquillity.
As political unity grows, the citizens need less often protection
against foreign foes, and they need more often, relatively, defense
against the aggressions of some of their own countrymen. The
preservation of domestic order requires police, courts of justice, and
other agencies. The ideal of the anarchist to do without government is
nowhere realized. Everywhere there must be government to preserve peace
and to protect property. Unfortunately, this need grows with the growing
density of population. Crime increases when men swarm in great cities.
To maintain and operate the social machinery requires ever-increasing
resources. The courts which settle disputes between men, and which
interpret their contracts, are agencies of peace, displacing physical
contests. Many other public expenses tend to enlarge, as those for
legislative bodies, public buildings, statistical inquiries, the
printing of public documents. Government on these accounts has become in
modern times an increasingly costly institution.
[Sidenote: Developing public wants; social and industrial welfare]
2. _The promotion of the social and industrial welfare of society has
come to be an important purpose of taxation._ Some functions of
government, less essential than the primary ones just mentioned, seem
naturally to grow out of them. In a democratic society, popular
education is one of the necessary conditions of good government, as it
appears that domestic order is not possible in a democratic state
without intelligent citizens. Step by step the functions of government
are widened. Some industrial functions are performed by the government
in connection with the primary needs. Lighthouses are necessary to guide
the navy, but they also serve to guide the merchant marine and to aid
industry. The post was established as an agent of political and military
government to connect the ruler with the outposts (a fact the name post
indicates), but the postal service has grown in every country to be a
great industrial and social agency. The consular service, beginning in
the political need of keeping official representatives in foreign lands,
has grown to be a great economic agency. Consuls are commercial
travelers, advancing the trade-interests of their countries in all
quarters of the globe. These social and industrial functions have been
increasing of late. As the national and local governments engage more in
industry, they usually make larger demands in the shape of taxation.
[Sidenote: The sphere of the state expands]
It is along the border-line between the primary and the secondary
purposes of taxation that the contest goes on regarding the proper
functions of government. If they are to stop short of the extreme of
socialism, where shall the line be drawn? The movement has been of late
toward greater government activity; more of the wants of men are thus
supplied through the agency of the state. That year by year a greater
sum is taken by taxation and spent for the citizen is a fact that may be
recognized without debate here. The toll-road becomes a public road, the
toll-bridge becomes free, more is supplied by taxation for schools, for
advanced research, and for technical training. In our country great
wealth was given by the Morrill Act to scientific and technical schools.
The state universities, against much opposition, have become in many
states of the Union the dominant educational force. Moreover, taxation
often is used as a means not merely of raising revenue, but of
discouraging one kind of industry and encouraging another. One industry
wanes or dies under increasing burdens, another waxes strong by
fostering exemptions and bounties. A large share of this "protective
legislation" is done under the guise of taxation.
[Sidenote: Government as a consumption good and as a means of
production]
3. _Shifting of the limits of state action and corresponding changes in
the weight of taxation are constantly affecting value and incomes._
Society as a whole is made up of many groups of industry. Government is
the largest of these, collecting and expending more than any individual
or corporation. Government is in one aspect a consumption good. In
return for its collective cost men collectively get the enjoyment of
social organization, markedly in contrast with the uncertain ties and
hazards of primitive communities. But government becomes also a mode of
social investment, an indirect agent, a productive enterprise. Wealth
applied through it secures a greater product than is possible by
individual action. Government can maintain lighthouses more economically
than individuals could otherwise secure them.
[Sidenote: Apportioning of the cost]
But when the government undertakes these various tasks, the expense
falls unequally on individuals and affects differently their incomes.
When free schools take the place of private schools, the law compels
every one to contribute to education. To many individuals it is a matter
of indifference whether they pay tuition or taxes, but the wealthy
bachelor sometimes grumbles when forced to help in educating the
day-laborer's family of twelve. The average result may be right, but
individuals diverge from the average and thus have constantly a motive
to attempt to change the limits of governmental action. Happily the
subject is not always viewed with selfish eyes. The ethical and
patriotic thought is not, "How will this affect my interests?" but, "How
will it affect the general interests?" But as the question of value is
always involved, men are usually found favoring or opposing a measure of
taxation according as it affects their own income. Thus taxation is
inevitably an economic question.
§ II. FORMS OF TAXATION
[Sidenote: The various forms of taxes]
[Sidenote: On incomes]
[Sidenote: On property]
[Sidenote: On expenditure]
[Sidenote: On business]
1. _Taxes usually are a portion taken from the income arising from labor
or from wealth._ In rare cases more than the net income of wealth may be
taken, but the aim of taxation in general is to take only a portion of
the income for public uses. As economic income has many sources, it may
be intercepted at many different points, and taxation may take various
forms. First, private income may be appropriated by a tax on income.
This is the simplest in thought, but the administrative difficulties of
the income-tax are great in practice. It is not easy to determine the
money value of the various sources of enjoyment that come into a man's
possession in the course of a year, including, as the ideal requires,
the immaterial gratifications along with the material. A second form is
a tax on property in proportion to value. Since the value of material
wealth is the capitalization of the rentals at the prevailing rate of
interest, the property tax, so far as it applies to material wealth,
should take an approximately equal proportion of incomes. If it were
accurately assessed, it would be in some respects better than a tax on
actual rents, for it reaches the prospective, or speculative, rental. A
third form of tax is one on consumption, or expenditure. This is but
another mode of attacking income, for in the long run income is spent,
not always by the individual who earned it, but by some one, and thus it
is reached by a tax on expenditure. The principal consumption taxes in
the United States are the tariff duties and the internal revenues of the
national government. In time of war, internal revenues are extended in
the United States to a multitude of articles, but usually they are
limited (with minor exceptions) to liquor and tobacco. A fourth form of
tax is one on selected agencies of industry; such are business taxes,
licenses, taxes on investment in business, corporation taxes, etc. These
burdens are diffused and rest eventually on some income, not always
exactly ascertainable. Actual tax systems combine these forms in great
variety, subtracting many minute fractions from each citizen's income in
ways unsuspected by him.
[Sidenote: Changes of taxation and in capitalization]
2. _The immediate effect of a change in the form of taxation is a change
in the market value of goods._ If the new tax reduces the net rent of
any productive agent, it reduces likewise its value, which is but the
capitalization of its net rental. If taxes are taken off of factories
and put upon farm rents, factories rise and farm-land falls in value.
The immediate change in value is much greater than the annual tax, for
if five dollars is to be taken permanently from the annual rental of the
farm, nearly one hundred dollars is taken at once from its selling
value.
Taxes are reckoned by enterprisers as a part of the cost of production
whenever the conditions of competition and of substitution make it
possible to do so. In such a case the products rise in price and most of
the tax falls upon the consumers. In the Civil War an increase in the
tax on whisky increased its selling price, and distillers who owned
stocks on which a smaller tax had already been paid reaped profits of
millions of dollars. When recently the tax on tea was increased in
England, all dealers who had accumulated a stock before the law went
into effect were gainers. Every change in taxation inevitably affects,
either favorably or unfavorably, many interests. The chance to
anticipate a change in tax laws or to get, from those in power,
information of a proposed change, makes speculation possible and
political corruption profitable.
[Sidenote: Shifting and incidence of taxation]
3. _After every change in taxation, competition among bargainers goes on
and a new equilibrium of prices results._ The citizen who pays a tax
into the public treasury is not always the one whose income is reduced
in the long run. In most cases the final and regular burden of the tax
is distributed over a number of incomes. The passing on of the burden is
called the shifting of the tax; the location of the final burden is
called the incidence of the tax. The lawmaker cannot tell exactly where
the weight will fall. The principles of value give some guidance in the
inquiry, but the workings of the principle are difficult to follow.
Certain it is that the new tax, both in its collection and in its
expenditure, becomes a new influence in industry. Some occupations are
made more attractive, others less so. Some places are made more, others
less, desirable to live in. As property thus fluctuates in value, as
investments become more or less remunerative, the market price of
corporation stocks rises and falls. The rate of adjustment varies
greatly under different conditions. The inflow and the outflow of labor
and capital are more or less rapid in the various industries.
[Sidenote: Many personal incomes affected]
The fact that a change in taxation is a disturbing element in price is
not to be thought insignificant merely because "all comes out right in
the end." Every change in taxation is an element of uncertainty in
business and increases the fortunes of some men at the expense of
others. Hence no considerable change should be made without good reasons
in its favor. The older taxes have the virtue of stability, but in many
cases they have grown out of harmony with the industrial conditions.
While, therefore, from time to time there is a real need of a reform in
the tax system, it should not be undertaken without recognizing the many
and complex interests involved.
§ III. PRINCIPLES AND PRACTICE
[Sidenote: Various standards of justice suggested]
1. _Taxation should be adjusted with reference to the general social
interest._ Many standards have been suggested to measure the
distribution of the burden of taxation, such as benefit, equality, and
ability. Each of these terms is capable of various interpretations which
have changed from time to time. The benefit derived by any citizen from
most of the public services evidently cannot be measured with exactness.
The standard of equality cannot be applied in any literal sense to
strong and weak, to rich and poor. It is possible, however, to interpret
equality with reference not to objective goods, but to the psychic
sacrifice occasioned by taxation. Ability thus is of many kinds and may
be differently understood. Some think ability to bear taxation is "in
exact proportion to the money income"; others believe that it increases
at a greater rate than money income, and favor, therefore, progressive
taxation, that is, higher rates on the larger incomes.
[Sidenote: Social welfare as the aim]
The conflicting interests of the classes in each period are to some
degree softened by the social conscience, and taxes are adjusted
according to a vaguely held ideal of the social welfare. Social
expediency, more or less broadly interpreted, determines who shall be
taxed and what will give the best social results. The exemptions from
taxation in feudal times were great, and viewed from our standpoint were
inequitable, for it was the upper classes who escaped while the peasants
bore all the burdens. The landlords and nobility who were assumed to be
performing important social functions, often had outgrown their
usefulness. Exemptions are granted liberally in most states to-day for
some purposes and to some classes of citizens; to educational,
religious, and charitable institutions; to the homes of priests and
ministers; to homesteads purchased with pension money, etc. California
alone of all the states in the Union continued until 1903 to tax
churches and private schools. The social interest requires that taxes be
both elastic and productive, so that the needs of the government shall
be amply provided for. The harmonizing of these needs in the laws of
taxation requires a high degree of wisdom, of foresight, and of
integrity, in the legislator and in the citizen. No hard-and-fast rule
for the apportioning of taxes can be laid down. The decision must be
made in each generation by social opinion, guided by the social
conscience.
[Sidenote: Principles of administration]
2. _The administration of taxation should be economical, certain, and
uniform._ Whatever taxes are adopted, whether on property or income,
whether at a proportional or a progressive rate, their justice and
expediency depend largely on their administration. Principle and
practice in this as in most affairs may go far apart. Some laws are more
easily and economically executed than others. The time of collection
should be as convenient as possible for the citizen, and the mode of
payment should be the most simple. As to the time, method of payment,
and amount, the utmost certainty is desirable. Taxation that is
variable, shifting, dependent on personal whim and favoritism, is
despotism. Above all, the administration of the law should be uniform
and impartial,--yet this is a principle most frequently departed from in
practice. The assessment of taxes has to be intrusted to men with
fallible judgment, imperfect knowledge, and selfish interests. The
assessor is as near a despot as any agent of popular government to-day.
Not infrequently it is to men incapable of earning two dollars a day in
any private business that the power is given of passing judgment on the
value of millions of dollars' worth of property. Under the
circumstances, evils are to be expected and they occur. The small
property-owner often is crushed under the unequal assessment while the
large owner comes lightly off. Political friends are favored, political
foes are made to suffer. Woman nearly everywhere pays more than her fair
share of taxes, a fact that the advocates of woman suffrage do not fail
to urge as an argument for their cause, although women's disadvantage in
this matter is little greater than that of any man without special
political influence.
[Sidenote: Importance of taxation as a public question]
3. _The relation of taxation to private incomes makes it one of the
largest public questions of the day._ The discussion of taxation has
accompanied the growth of free government in England and America from
the time of Magna Charta. The control of the public purse frequently was
the occasion of conflict between the monarch and the people. Taxation
was a leading issue in the American Revolution. While, therefore, it
cannot be said that the subject has been of no great importance in the
past, it is true that in our own national history since the adoption of
the Constitution, taxation has not been much discussed, except in the
one aspect of the tariff. Constitutional and political questions, states
rights, and the question of slavery, long absorbed the interest of
citizens and legislators. But with the aroused interest of the public in
economic problems, taxation is attracting, and is certain to attract in
the next few years, increasing attention in local, commonwealth, and
national politics.
CHAPTER 50
THE GENERAL THEORY OF INTERNATIONAL TRADE
§ I. INTERNATIONAL TRADE AS A CASE OF EXCHANGE
[Sidenote: The motive of individual gain in foreign trade]
1. _International trade is exchange between individual men, and has the
same object as other exchange of goods._ The term international trade
should not be misunderstood as meaning that nations rather than
individuals engage in it. International trade differs from domestic
trade only in the fact that the parties are citizens of different
sovereign states. Exchanges between men in the same village, between
those in neighboring villages, and between those in different countries,
are prompted by essentially the same economic motive--the wish to
increase the want-gratifying power of goods. In every such case both
parties gain or think they are gaining. In international trade there is
the same chance for mistake as in domestic trade, but no more. In a
single transaction in either domestic or foreign trade one party may be
cheated, but the continuance of trade relations is dependent on
continued benefits. The once generally accepted maxim that the gain of
one in trade is the loss of another, is rarely applied now except to
international trade. The starting point for the consideration of this
subject is in this proposition: Foreign trade is carried on by
individuals, for individual gain, with the same motives and for the same
benefits as are found in other trade.
[Sidenote: Natural differences affecting foreign trade]
[Sidenote: Political boundaries and trade]
2. _As commerce has grown, the territorial division of labor has
correspondingly increased._ Although economic motives have had
influence in political affairs and have helped to determine political
groupings and the limits of modern nations, there is to-day no very
close correspondence between political and economic boundary lines. Both
industrial and political conditions have changed so rapidly that the
lines often have tended to diverge rather than to agree. It is common
for two portions of a nation to exchange far less than do two portions
of entirely different nations. The great territorial divisions of
industry are determined first and mainly by differences of climate,
soil, and natural resources. Thus trade arises easily between north and
south, between warm and frigid climes, between new countries and old,
between regions sparsely and regions densely populated. Foreign trade
with distant lands is as old as history. In medieval times the luxuries
of the temperate zone were mostly articles produced in the tropics.
Political divisions usually have not been large enough to embrace widely
varied soils and climates, the Roman Empire being an exception in marked
contrast with the comparatively small political units of the Middle
Ages. Before modern methods of transportation, a large free federal
state like our republic was impossible. As in recent centuries the large
political units have been formed, the question has arisen, Shall the
political boundary be likewise the economic boundary marking the limits
of trade? The firm constitutional Union of the American states arose out
of difficulties with regard to trade. The German Zollverein, the
forerunner of the modern German Empire, had a similar origin. The
Australian Federation consummated within the last few years has grown
out of the need of adjusting tariffs and tariff boundaries. These larger
political units containing such varied resources can in larger measure,
but never completely, become independent of the rest of the world if
they will.
[Sidenote: Differences in culture and industry]
Territorial division of trade is determined secondly by differences in
the accumulation of wealth, in the development of capital, of
invention, and of organization, in the degree of intelligence of the
workers, and in the grade of civilization. It is mainly trade due to
this second group of causes, and carried on between old and new
countries of about the same latitude, that is the subject of discussion
in economic treatises on international trade.
[Sidenote: Comparative costs as between individual workers]
3. _The doctrine of comparative costs is that relative, not absolute,
advantages of production determine for a country the benefits of
international trade._ The free-trade question in any country is whether
it is for its interests as a whole to permit trade between its citizens
and the citizens of other countries. The question appears especially
difficult where both countries have natural resources of about the same
character (as iron and coal in the case of England and America), and
where, therefore, both can produce the things that are exchanged. If
American labor can produce as much iron in a day as English labor,--or
more,--is it not foolish and wasteful, it is asked, not to produce that
wealth? Now, exactly the same case is presented in simple neighborhood
exchanges. The merchant may be able to keep his books better than does
the bookkeeper whom he employs. The proprietor may be able to sweep out
the store better than the cheap boy does it. The carpenter may be able
to raise better vegetables than can the gardener from whom he purchases,
and yet the merchant and the carpenter do not quit their better-paying
work and turn to clerking or to raising vegetables.
[Sidenote: As between communities differing in advantages]
It often happens that both countries can technically produce both the
articles that are internationally exchanged. It may frequently happen
that one of the two countries has an advantage in amount of sacrifice
and effort, as to both articles; but if the advantage is greater in one
article than in the other, the foreigners, like the low-paid clerk, will
be willing to exchange at a ratio that will make it profitable to
specialize in the product wherein the greater superiority lies.
Therefore not the advantage as to a single product, enjoyed by one
country over the other is most important in determining whether to
produce at home or to exchange, but the comparative advantages enjoyed
in the production of the two articles in question.
[Sidenote: Examples of comparative costs]
It must be remembered that comparative cost as here used refers to cost
in effort, not to money cost,--a point on which there is often
confusion. The money cost of a certain product is often greater in a new
country because wages are high, and wages are high just because psychic
cost is low, that is, because labor can produce so much. At the time of
the great gold discoveries in 1849-50, the price of goods in California
was much higher than in the East, and much higher in Australia than in
Europe. A day's labor doubtless would produce as much food in Australia
and in California as in New England and in Norway, but it produced far
more gold. Hence butter and cheese were shipped by long routes from
Norway to Australia and from New England around Cape Horn to California,
to be exchanged for gold. One of the standing arguments against foreign
trade is based on the idea that a country cannot profitably import goods
unless it is at an absolute disadvantage in their production. It is
declared that as our country can produce these goods "as well" as
foreign countries (meaning with as few days' labor), there is a loss on
every unit imported.
[Sidenote: Selection of the most paying industries]
4. _The equation of international exchange is that adjustment of prices
which results in the equalizing of the imports and exports of the
country._ The superiority of a new country over an old one is not
equally great in every line of industry. It is almost certainly most
marked in those enterprises where natural resources are employed. To
compete with the older country in less favored industries, capital and
labor in the new are forced to take a lower rate than they can earn in
the more favored. Without any government supervision, therefore, but
simply through the choice of enterprisers seeking the best investment of
capital, industries are developed in which the country is either most
markedly superior or least inferior to its neighbors.
If the productive energies of men interchanged between industries and
between countries with perfect readiness, a perfect equilibrium of
advantage would everywhere result. In every country, in every
occupation, labor and capital of given quality and amount would receive
the same reward. But the interchange of labor and capital between
countries is never without friction. Adam Smith said that "a man is of
all sorts of luggage the most difficult to be transported." The higher
wages in a new country are sufficient to attract constantly from the
older lands a portion of their labor supply; the higher rate of interest
in the new countries attracts constant additions of capital; yet,
despite these forces working toward equalization, the inequality may
remain and through the working of other influences even increase in the
course of years.
[Sidenote: Persistence of the differences]
The laborers, enterprisers, and investors in the one country are thus in
a position of more or less enduring advantage relative to those of the
other countries. The advantage is sometimes said to be a "monopoly"
which they, or the country as a whole, enjoy; but in the absence of any
contractual limiting of competition, this is a misuse of the term
monopoly. This variation in the degree of scarcity of agents in
different territories is not peculiar to nations as a whole. Differences
of the same nature exist between the Northern and the Southern states of
the American Union, have continued for decades between Eastern and
Western states, and are found even between neighboring counties. The
differences between two countries, however, are likely to be more
marked, the circulation of factors being so active within a country that
it is allowable to speak broadly of prevailing national rates of wages
and of interest.
[Sidenote: The ratio of international demand defined]
Every exchange of goods between the countries is made at a ratio that
reflects, or expresses, this abiding difference in comparative costs.
The imports into the favored country represent regularly the results of
more units of labor of a given grade than do the corresponding exports.
The ratio which expresses the disparity of advantage of productive
factors is called "the equation of international demand." This does not
mean that the money value of the imports exceeds that of the exports, or
vice versa. On the contrary, the equation itself embodies a maxim of
international trade that "in the long run," or "on the average," imports
and exports must be equal in value (_i.e._, equation of demand). This
brings us to the theory of foreign exchanges, which is essential to an
understanding of this feature of international trade.
§ II. THEORY OF FOREIGN EXCHANGES OF MONEY
[Sidenote: Purpose of foreign exchange]
[Sidenote: The rate of foreign exchange]
1. _Foreign exchange of money is the purchase and sale of the right to
receive a given kind and weight of metal at a specified time and place._
Par of exchange is the number of units of the standard coin of one
country that contain the same amount of fine gold (or silver) as the
standard coin of the other country. Usually the English pound is taken
as the basis in the tables which express the ratio of the gold in the
standard coins of different countries. The _gold shipping point_ is par
of exchange plus or minus the cost of moving the actual metal; it varies
with means of transportation and communication. The par of exchange
between England and America being $4.866 and the cost of expressing and
insuring a gold pound between New York and London being approximately
.03, the shipping point for the export of gold from New York is $4.896.
At the upper and lower limits, there is a motive for shipping gold as a
commodity. If each transaction were independent of all others, the cost
of exchange would be the weight of metal called for, plus grains enough
more to pay for loss of interest, cost of freight, risk, and trouble. In
such a case it would cost $4.896 to remit one pound; while a debt of one
pound payable in London would at the same time be worth $4.836 to the
creditor in New York. When, in New York, a number of men having bills
to pay in London meet a number of owners of bills receivable in London,
a market for London drafts is created and a rate of exchange results
somewhere between the shipping points. In this is the explanation of the
variation of the rate, and of the facts that the cost of outward
exchange sometimes is less than the par of exchange and that the value
of foreign drafts sometimes is above par.
[Sidenote: Variation about par of exchange]
The balancing of foreign exchanges is of essentially the same nature as
the domestic cancelation of indebtedness. It is going on constantly
between two merchants in the same town, between two banks in the same
town who represent groups of merchants, between men in neighboring
towns, between distant states like New York and California, and between
the trading nations of the world. The price of exchange to the
individual is reduced by the specializing of the business in the hands
of a few dealers, permitting cancelation of indebtedness or offsetting
of exchange, and greatly reducing the amount of bullion to be
transported. Exchange varies above and below par as conditions change.
When the movement of money is into the country, drafts on London are
bought and sold for less than par, for every pound draft thus remitted
to London reduces the need of shipping gold to this country, while every
London draft collected in New York at such a time increases the need to
ship gold.
[Sidenote: The cash balance of international trade]
2. _International shipment of money is always just the amount needed to
balance the accounts due._ The proposition that in the long run the
value of imports must equal the value of exports, while the fundamental
truth in the theory of international trade, must be understood in a
broad sense. Into the balance between the traders of two nations enter
many items: the cash values of the imports and exports of each;
freights, insurance premiums, and commissions; the expense of Americans
traveling in foreign lands, and the cost of the foreign service of this
government (such as the salaries of consuls and of diplomatic
representatives) which count as the importation to America of an
equivalent amount of food, clothing, and sundry services; subsidies and
war indemnities to foreign nations representing, as they do, an
expenditure, which at the moment may be paid in coin, but which, as is
to be more fully explained, must be offset ultimately in some way by
exports.
[Sidenote: Various credit items entering into the balance]
Many credit transactions affect the balance one way or another until
settled. The loans made by European capital to the American government
or to individuals and corporations in America, as well as the European
capital expended in purchasing American enterprises, require the
remitting of gold to New York, and thus offset many imports of goods to
New York otherwise calling for the remitting of gold to London. In the
direction opposite to this, act the interest payments and the eventual
repayment of the principal loan, for these require either money or goods
to be exported from America to the value of the obligations. Loans that
run for years thus offset annually (in their accruing interest) a
portion of the exports of the debtor country. An excess of exports may
therefore at any given moment indicate either that the country is in
debt or that it is getting out of debt. An excess of exports is
generally looked upon as an evidence of national prosperity; but it is
absolutely inconclusive on the point. Finally, after all the items of
imports and credit paper purchased abroad are set opposite the items of
exports and promissory papers sold abroad, the balance is paid in gold
bullion and is shipped one way or the other. Evidently the amount of
gold shipped is but a small fraction of the total volume of
transactions.
Industrial indebtedness is represented in various forms: bills of lading
for goods shipped, drafts made by the creditor on his debtor for goods
shipped or property sold, checks or letters of credit of travelers,
bonds and notes public and private. These are the objects dealt in by
the bankers who are the agents to carry on the work of exchange.
[Sidenote: Relations of the international flow of goods to the flow of
money]
3. _The territorial distribution of money is both a determined and a
determining factor in international trade._ It appears to be determined
in that the balance of all accounts for or against the country must be
settled eventually in money. After any such a settlement one country has
less, the other more money than before. The change in the amount of
money at once reacts on prices and becomes a determining factor in
international trade. The flow of money out of a country causes money to
tighten, interest rates on short loans in the large cities to stiffen,
and prices slightly to fall. When prices fall, imports decline, as the
country is not so good a place to sell in; when prices rise, imports
increase, as it is a better place to sell in. As the opposite effect is
produced on exports, there occurs immediately a change in the quantity
of money which continues until the national credits and debits balance
and for a brief time remain in equilibrium. If the trade of a country
with its neighbors continued long to give a balance of imports of goods
and of debit items (exclusive of money) it would ultimately be drained
of all its coin, and would default payment or cease to import. If the
trade constantly gave a balance of exports and credit items, money would
continue to flow in, until prices rose to unexampled heights. In fact no
such extreme is even remotely approached, for a slight movement of money
in either direction at once influences prices and sets in motion
counteracting forces. Decade after decade the circulating medium of
leading countries changes only slightly in amount, and the fluctuations
during periods of so-called "favorable balance of trade" and of
"unfavorable balance of trade" represent only the smallest fraction of
the value of goods passing through the ports of the country.
§ III. REAL BENEFITS OF FOREIGN TRADE
[Sidenote: Fallacious explanations of the gains from foreign trade]
1. _The direct advantages of foreign trade consist in the increased
efficiency it imparts to productive forces._ In explanation of the
advantages of foreign trade it is said to be a vent for surplus
production and to give a wider market to what would otherwise go to
waste. This involves the same fallacy as the "lump of labor," the
destruction of machinery, and the praise of luxury. If backward nations
now give a vent for products which would otherwise rot in the
warehouses, at length a time will come when the world will have an
enormous surplus unless neighboring planets can be successively annexed.
Again it is said that the great purpose of foreign trade is to keep
exports in excess of imports so that money may constantly increase in
amount. The ideal of such theorists is an impossible condition where the
country would constantly sell and never buy. In the commercial view the
sole object of foreign trade is to afford a profit to the merchants,
regardless of the welfare of the mass of the citizens.
[Sidenote: The real advantages of foreign trade]
The main advantage of foreign trade is the same as that of any other
exchange. It is hardly necessary to review the explanation here: the
increased efficiency of labor when it is applied in the way for which
each country is best fitted; the liberation of productive forces for the
best uses; the development of special branches of industry with
increasing returns; the larger scale production with resulting greater
use of machinery and with increased chance of invention; the destruction
of local monopolies.
The moral and intellectual gains of foreign commerce were formerly much
emphasized. Commerce is an agent of progress; it stimulates the arts and
sciences; it creates bonds of common interest; it gives an understanding
of foreign peoples and an appreciation of their merits; it raises a
commercial and moral barrier to war; and it furthers the ideal of a
world federation, the brotherhood of man.
[Sidenote: Conflict between general and special interests]
[Sidenote: Prevalence of protective tariffs]
2. _Free foreign trade thus has in its favor the presumption of
advantage to the citizens; but various interests may be adversely
affected._ The general attitude of economic students for a century and a
half has been favorable to a large measure of freedom in foreign trade.
But the actual practice of nations is opposed to the principles laid
down by the philosophers and accepted by nearly all serious students of
the question. Germany adopted very restrictive measures under Bismarck
in 1879 and by a recent law has discouraged trade still further. France,
Italy, and other smaller nations of Europe have strong protective
tariffs. The United States has followed a restrictive policy for the
last century almost unvaryingly. The explanation of this contradiction
is not entirely simple. Free trade is not the most desirable thing for
every one. Great interests are affected by foreign trade and certain of
these interests are able to dominate legislation. The general
proposition of free trade between nations, as advocated by most
economists since Adam Smith, is rejected by a majority of the people, by
the politicians, and by the legislators.
CHAPTER 51
THE PROTECTIVE TARIFF
§ I. THE NATURE AND CLAIMS OF PROTECTION
[Sidenote: Nature of a tariff for revenue]
1. _A protective tariff is a schedule of import duties so arranged as to
give appreciably more favorable conditions to some domestic industries
than they would enjoy with free trade._ Tariff duties were first laid to
get revenues for the government. The first effect of the tariff is the
same as that of any tax that enters as a new factor into enterpriser's
cost--the domestic price of the taxed article tends to rise. Other
results then follow. If the article cannot be produced within the
country (as oranges, spices, and coffee, in England, Norway, and
Sweden), its consumption is reduced. The lessening of demand may affect
somewhat the price in the producing country and may compel the foreign
producers to sell each unit for less than before. As such a tariff does
not increase home production, it is for revenue, not for protection.
[Sidenote: Effects upon home industry]
But if the article can be produced in the importing country at the new
price, "home industries" will start. If the whole demand at home is thus
supplied, imports stop and therewith stop all revenues to the government
from that source. This is a prohibitive or completely protective tariff.
Most tariffs combine the characters both of revenue and protective
measures. Where the freight charges are low along the coast and on the
main lines of transportation, some imports take place; while farther
inland, where freight charges are high, some home production of the same
goods takes place. A tariff that reduces imports but does not cut them
off entirely is either a revenue tariff with incidental protection or a
protective tariff with incidental revenue. The difference is partly one
of legislative intention, partly one of degree only.
[Sidenote: The beginning of the tariff under the Constitution]
2. _The tariff question has been the most discussed of economic
questions in American politics._ The tariff bill passed by the first
session of Congress in 1789 was primarily a revenue measure with rates
averaging only about five per cent.; but incidentally it was protective
(as most tariffs are), being laid on imports of iron and cloth, the
production of which had been undertaken to some extent before, but which
thus were further encouraged. Between 1808 and 1812, the United States
and England were in constant disagreement, and our government repeatedly
laid an embargo on British commerce, closing our ports to British ships,
and British ports to our ships. The war from 1812 to 1815 almost
annihilated American trade on the ocean. Added to this discouragement of
foreign trade was the high tariff imposed, in the vain effort to get
revenue from greatly decreased imports. Altogether these causes almost
completely stopped importation and forced the American people to rely on
their own efforts for such goods. Some industries having been
"stimulated" in a high degree, their destruction was threatened by the
repeal of the high war tariffs. Many investments and interests were at
stake, and the tariff became a most important question.
[Sidenote: The tariff controversy before 1865]
The first period of real discussion of the protective policy was between
1816 and 1846. The result of the first twelve years was an increase of
the tariff rates which, in 1828, reached a high point. By the compromise
of 1832, the rates were reduced by steps till 1841. Again from 1842 to
1846 was a brief period of higher duties, followed by a policy which,
relatively speaking, was one for revenue, from 1846 to 1860. Again in
the Civil War, 1861-65, the rates were steadily increased without much
discussion, the tariff not being the leading question at a time when
the prosecution of the war was absorbing nearly all attention.
[Sidenote: Recent discussion of the tariff]
The latest period of discussion was from 1874 to 1892. In the Tilden and
Hayes campaign of 1876 the tariff was made the leading issue and the
advocates of a lower tariff were very nearly successful. In 1880,
protection again triumphed in the election of Garfield. In the election
of Cleveland in 1884, the issue of tariff reform had some part, but no
effective legislation on the subject was enacted in the next four years.
In 1888, Cleveland was defeated in a campaign fought mainly on the
tariff issue, and Harrison was elected as a pronounced protectionist. In
1892, Cleveland was reëlected on the issue of tariff reform. From that
time, however, there has been a lull in the discussion of the tariff
question. The campaign of 1892 was the last presidential election in
which the tariff was the dominant issue. Since 1896, the money question
and imperialism have quite crowded the tariff issue off the stage.
[Sidenote: The "balance of trade" argument]
3. _A leading argument in favor of a protective tariff is that by
encouraging an excess of exports it maintains a favorable balance of
trade._ This notion of the favorable balance of trade appears in several
forms. One of these, already discussed in connection with foreign
exchanges, is that the exports of a country in the form of merchandise
must exceed the imports if the country is to prosper. The ideal
cherished is to keep more merchandise constantly flowing out of the
country than comes in. An interesting commentary on this delusion is the
fact that this is the usual situation in poor debtor countries having
constant interest payments to meet; while the opposite of the ideal is
the situation in rich creditor countries. England for many years in the
period of her greatest prosperity has had a constant excess of imports,
these being goods to the value of the interest payments due to
Englishmen from investments abroad.
[Sidenote: "To keep money at home"]
4. _Another argument is that the protective tariff keeps money at home
which, if trade is free, will be sent abroad to buy foreign goods, thus
impoverishing the country._ This is the "favorable balance of trade"
argument, with the emphasis on money rather than on goods. A superficial
glance at the trade relations of an old and rich country with a new
province seems to give evidence for such a belief. The older country is
lending capital (which it sends to the debtor country in the form of
goods) and it has at the same time a larger supply of money. These two
facts--the lack of money and the poverty of the newer country--are
looked upon by the protectionist as due to the importation of goods. The
real cause of the imports to the newer country and of its scanty
money-supply, it need hardly be said, is its comparative poverty. Europe
and the United States, in their trade with China and South America, do
not get gold in exchange, but merchandise of various sorts. It is true
that in the trade of England and New York with great gold-producing
districts, such as California, South Africa, and Alaska, gold is
received in return for merchandise, for to these districts gold is
merchandise and its export does not drain them of their supply. The
richer states in the Union do not drain the poorer states of money. A
few years ago the states of Kansas, Nebraska, Iowa, and their neighbors
were filled with resentment against the money-lenders of the Eastern
states. There was a widespread belief that hard times were due to an
insufficient currency. Attempted action took the form of the greenback
and free-silver movements, which were defeated by the opposition of the
East, but there can be little doubt that if the Federal Constitution had
not forbidden it, the discontented states would have established a
protective tariff "to keep their money at home." Few advocates of
protective tariffs are ready to admit that the money-supply of the
country is dependent on the general wealth of the country, and on the
methods of doing business, rather than on a protective tariff.
[Sidenote: The "two profits" argument]
5. _It is said that the tariff keeps "two profits" at home, foreign
trade gives but one._ The word "profits" is here used in the popular
sense of gain from a single transaction. This argument becomes somewhat
confused, for certainly in the admission that there are "two profits" in
a trade, the notion that "one man's gain is another's loss" is rejected.
Both parties are said to profit and both profits are thought to be
secured at home when two citizens are forced to trade with each other.
There is an error in elementary arithmetic here, both as to the number
and as to the aggregate amount of profits. The purpose of a protective
tariff is to compel _two_ of the citizens of a country to trade with
each other instead of trading with _two_ citizens of a foreign state;
the number of profits is therefore not increased by substituting
domestic for foreign trade. What, then, as to the size and aggregate
amount of the profits? The margin of advantage is not the same on all
exchanges; the exchange is made if there is a margin to both parties, no
matter how small it is; but the generous "profit" on one transaction
where the conditions of the two parties are very different may be
greater than the total of petty margins on a dozen exchanges between two
traders of evenly matched powers. Can it safely be assumed that every
trade with a foreigner is less advantageous than one with a
fellow-citizen? Diamond cuts diamond, but two shrewd Yankees left to
themselves surely should not be worsted in bargains with the universe.
If they could exchange to better advantage with each other they probably
would discover it as soon as the interested manufacturers and political
orators who can prove so eloquently that they know the other man's
business better than he knows it himself. Forcing the home trade is
doubtless to the advantage of one citizen, but it is not likely to be to
the advantage of both citizens.
[Sidenote: The claim that protection raises wages]
6. _The most effective popular argument for protection is that it
raises, or maintains, the general scale of wages in the country._ This
argument is two-fold: first, when wages are low in a country it is
claimed that a tariff is needed to raise them; and, secondly, when wages
are high it is argued that a tariff alone can preserve them. In Germany
the fear is of the higher paid and more efficient labor of England. In
America, where wages at all times have been higher than in England, it
was first argued that because of the greater cost of production, due to
high wages, the tariff was needed to start certain industries; but after
the tariff had long been established and the old argument had been
forgotten, it was said that the tariff was the cause of the high wages
and must be maintained to protect against the (so-called) "pauper" labor
of the older countries. That wages generally are higher in new countries
and where a tariff prevails is always claimed to be one of the chief
fruits of a protective policy. The cause of the high wages in America
appears to be the productive efficiency of industry under existing
conditions. Labor is surrounded here with advantages in the forms of
rich natural resources and of mechanical appliances such as never before
were combined. Because of the scarcity of workers in particular
protected industries, wages may be higher in them than in some other
industries; but such workers form a small fraction of the population.
The claim that the general scale of wages in all occupations is raised
by the tariff protecting this fraction, is no less invalid than the
sweeping claims in favor of trade-unions.
§ II. THE REASONABLE MEASURE OF JUSTIFICATION OF PROTECTION
[Sidenote: Political arguments for protection]
1. _For military and political reasons an otherwise uneconomic tariff
may be justified._ It usually is admitted by the believers in free trade
that in the interest of diplomacy, to secure proper concessions, tariffs
may sometimes be levied. Even in England, where protective arguments
long have had little acceptance, Mr. Chamberlain, with his eye on a
tariff union and imperial federation of England and her colonies, has
been advocating this policy. In such a case there is no pretense that
the justification of the tariff is its immediate economic advantages;
it is an expenditure for ultimate gain. By the same argument a
protective tariff is upheld as a means of defense--to encourage the
building of ships, arsenals, and factories for munitions. It is always
questionable whether an outright expenditure would not be better,
whether the government cannot build its own arsenals, ship-yards, etc.,
more cheaply than it can foster private enterprise by means of a tariff.
[Sidenote: The infant-industry argument]
[Sidenote: Applied to America]
2. _Protection may be defended as encouraging infant industries and thus
diversifying the industries of the country._ Most free-trade writers
concede a limited validity to this argument. If the natural resources of
a land are adapted to an industry, it may be called into being early by
a fostering protective tariff. This is merely anticipating and hastening
the natural order of progress. In the American colonies the manufactures
of iron, cloth, hats, ships, and furniture sprang up not only without
"protection," but despite numerous harassing trade restrictions made in
the interest of the English merchants; and they continued in some cases
despite their absolute prohibition by Parliament. Can it be doubted that
many of these industries would have developed and flourished in America
under no other fostering influences than those of rich resources and of
economy in freights? The growth of industries in the Middle West in the
last twenty-five years has been phenomenal. The discovery of natural gas
and the presence of abundant coal, ore, and timber have enabled them to
develop without protection against the Eastern states. Industries
capable of eventual self-support must in most cases naturally appear in
due time. Economic forces will bring them out. It is a trite but valid
remark that protective tariffs are often like hothouse culture,
anticipating the season by a few weeks and at great cost. The question
is whether the mere possession of the hothouse is a luxury worth the
price, if meantime the products can be gotten more cheaply by exchange.
English manufactures flourished because they were well established, had
excellent coal supplies, great stores of iron ore, and low-paid labor
which did not have the opportunity of better alternatives, as did the
American workman. If America had imported _more_ (it would not have been
_all_) of her iron and coal, the English mines would have been exhausted
earlier, and America's advantage surely would have asserted itself in
time. Her iron manufactures undoubtedly were hastened--they cannot truly
be said to have been created--by the protective tariff.
[Sidenote: Social effects of the tariff]
Industries are forced into an earlier diversification by tariffs. The
peculiar advantages of a new country attract labor and enterprise into a
few lines. Is it an evil? Contrast Iowa, Dakota, and Minnesota, or
Kansas, if you please, with New York and Pennsylvania. Is it so certain
that a dense population congested in cities and crowded in factories and
mines is a more ideal social aggregation than is a community of
prosperous farmers? The smoky industrialism fostered by protection often
puts a premium on a low grade of immigrant and keeps him an alien to the
American spirit. It would be surprising if Americanism on the Western
plains were not as good as in the Eastern cities. But the
infant-industry argument appeals strongly to the enterprise and the
speculative spirit of Americans, who like to do all things rapidly and
on a large scale. Every village aspires to be a great industrial center.
Americans are impatient of the suggestion that things "will come in
time"; they like things to come at once.
[Sidenote: The "home-market" argument as to freights]
3. _The tariff develops a home market for the products of agriculture._
It has been especially hard to reconcile the farmers in America to the
tariff. While in England the protection that existed before 1846 was
almost entirely for the benefit of the landholding interests, the tariff
in America has been peculiarly favorable to manufactures. The
"home-market" argument is the protectionist appeal that has proved most
effective with the American farmers. This argument, which takes on
several aspects, is akin to the "two-profits" argument when it declares
that the shipping of food to Europe and the importing of manufactures
involve a great cost for freight which could be saved by manufacturing
"at home." Of course the farmer is supposed to pay this cost, although
there is nothing in the argument to show that it is not all paid by the
European, either the manufacturer or the food consumer. Home trade
"saves the freights" for the farmer only in case he can buy goods under
a tariff with less of his own labor and products than under free trade.
The payment of freight charges is true economy when the goods can be
bought at a distance on more favorable terms than near home. The
freight-argument proves too much, for it condemns every exchange, within
the country, of goods produced a stone's throw away from the consumer.
[Sidenote: As to security of trade]
Again, the home-market argument dwells on the greater steadiness of
domestic trade. War or political changes, it is said, may change the
demand for products. This is true, but no other changes have affected
American agriculture so radically as the peaceful development of
domestic transportation and the opening of the West.
[Sidenote: As to the value of farm-lands]
The home-market argument is strongest when addressed, not to all
farmers, but to one class of farmers, those whose lands are situated
nearer the manufacturing cities. The higher value taken on by land as it
is converted from the extensive cultivation of corn and wheat to
dairying, fruit, and market-gardening, is pointed to as a benefit of
protection. The decaying agriculture and deserted farms throughout the
great industrial states during the past twenty-five years are pathetic
evidence that this benefit has failed to come to the average farmer just
where it should be most expected. There is, however, a partial validity
in the argument as applied to a comparatively small number of farmers,
who gain as landholders, not as tillers of the soil.
[Sidenote: Exports and exhaustion of the soil]
4. _The tariff may keep some of the natural resources of a new country
from becoming quickly exhausted._ The export of food takes out of the
soil and out of the country fertile qualities never to be returned. The
shipment of several hundred million dollars of food products year after
year represents a tremendous drain from the soil of the United States.
The assumption, however, that the use of the food in this country would
preserve the fertility of our own fields has been in the main mistaken.
The fertile material in the food shipped for human consumption five
miles away from the field is almost absolutely lost. Engineering skill
has as yet succeeded in saving hardly a fraction of the fertile organic
matter that flows into the sewers, that is dumped into river and ocean,
and that is buried in heaps at the borders of our cities. On the other
hand, the increased use of iron, coal, and timber, as a result of
encouraging manufactures, has very effectually aided in exhausting the
natural resources of the country.
[Sidenote: Protection as a monopoly measure]
5. _A new country has a limited potential monopoly in certain kinds of
products; a tariff may make it effective._ The opening up of a new
country with rich natural resources may be a great gain to the average
consumer in the older countries, although it causes a loss to a special
class of landowners. Whether the citizens of the older or of the newer
country shall reap the greater benefit in the trade depends on the
reciprocal demand for the two classes of goods, as was seen in
discussing the equation of international demand. A wide margin of
advantage may go to one party and a narrow margin to the citizen of the
more favored land. To put it concretely: if America, having great
natural resources for agriculture, continues to exchange food for
manufactures up to the narrowest margin of advantage, England reaps most
of the benefits of the trade. An American tariff on manufactures from
England will, under such conditions, check the demand for English
products and compel some Americans to leave farming. This reduction of
the American supply of wheat or corn and of the American demand for
English manufactures compels a new ratio of exchange. It is conceivable
that exchanging fewer goods at a larger margin of advantage, will give a
larger total of gain to the favored nation. Thus, by the shifting of the
ratio of exchange, foreigners may be compelled to pay a part of the
tariff to enjoy the favored market. This is but a special case of the
monopoly principle; the government by law artificially limits the supply
of goods offered by its citizens.
[Sidenote: Limited monopoly advantages of America]
This argument is somewhat subtle, but probably is the soundest one in
the theory of protection. The supposed conditions seldom occur, but they
may exist, and probably have existed in America. When the great system
of internal transportation was developed in the United States before
that of the other new countries, this country had such peculiar
advantages for the production of food that the quantity was enormously
increased and the prices fell. At such a time the tariff may work toward
retarding the unfavorable turn in the ratio of exchange and toward
reëstablishing early a more favorable ratio. But the limited application
of the principle must be recognized. The potential competition of
undeveloped countries on all sides, seeking to develop their resources,
to raise their own food, and to profit by the higher prices in the
world-market caused by the tariff, threaten the peculiar advantages of
the favored land. A great nation with its manifold interests is not
eminently fitted to practice the gentle art of monopoly.
§ III. VALUES AS AFFECTED BY PROTECTION
[Sidenote: Influence on the value of capital]
1. _An increase of the tariff is favorable to many capitalists and to
many owners of natural resources._ A denial of large general advantages
in protection is not the denial of all its influence on value. On the
contrary, it cannot be too strongly emphasized that manifold interests
are affected by the tariff. Owners of natural mineral resources are
among the first to benefit. When the price of iron is low, many iron-
and coal-mines may yield no rent and have small prospective values. A
tariff forcing home production opens the marginal resources and gives
them a large capital value. Factory sites and surrounding lands leap
from the level of rural prices to that of city real estate. The owners
of farms situated near the new industries have a home market and get
scarcity prices, as they alone can supply the needed fresh vegetables
and dairy products. Wealth less favorably situated, however, is in many
cases depressed in value because its products exchange for smaller
amounts of other products.
[Sidenote: The special gains and the general burden]
2. _A tariff is immediately favorable to some enterprises and to special
classes of workmen._ Enterprisers already acquainted with and engaged in
a business always may hope to gain by the higher prices immediately
following a rise in the tariff rates on their particular products.
Though they are granted no enduring monopoly by the protection, they for
the time enjoy the advantage of being on the ground and reap the first
fruits of the favoring conditions. The enterpriser usually profits when
the price of his product suddenly rises. Usually skilled workmen are
affected slowly by competition when there is any considerable increase
of their special industry. The burden of higher prices is very soon
distributed to a number of less favored citizens. A part of it may be
borne by the retail merchant, a part by his customers. The weight
falling on each is usually small, often unsuspected, always hard to
measure. The increased benefit is concentrated in a few industries and
accrues to a comparatively few producers. Here is a recipe for riches:
get everybody to give you a penny; they'll not miss it, and it will mean
a great deal to you. Something like this happens in the case of many
protected industries; every consumer of the article pays a penny more, a
few wage-earners gain, and a few enterprisers wax wealthy.
[Sidenote: Sudden tariff reduction injurious]
3. _A sudden reduction of the tariff causes local crises and may bring
on a general crisis._ The repeal of the tariff works in a direction the
reverse of its enactment. The benefits of the lower prices are
diffused; the immediate injury is concentrated and acute. Factories are
closed, capital is depreciated, labor is thrown out of employment. The
organic nature of local industry causes the evil to be felt by many
classes. Merchants, professional men, servants, and skilled laborers
that are tributary to the depressed industry, suffer. The effects are
transmitted to commercial and financial centers and credit is shaken.
The readjustment of industry is slow and much capital is lost in the
process.
[Sidenote: The two policies in political discussion]
It is rarely appreciated how great is the tactical advantage enjoyed in
political contests by the advocates of a high tariff. They can so easily
impress the popular judgment with the evident fruits of their own
policy, and with the immediate dangers of the policy of their opponents.
The low-tariff advocates in America undoubtedly have made the mistake of
underestimating or of quite overlooking these immediate effects. They
have been too abstractly doctrinaire, and have argued too absolutely for
the merits of free trade. They have opposed one extreme system by
another, with no thought of the inexpediency and injustice of sweeping
changes. There is a strong feeling among business men that any tariff,
be it high or low, is better than a shifting policy. Despite the great
preponderance of domestic production over foreign trade, it is perhaps
too much to say that the tariff is unimportant in our present
conditions. It can, however, be said that the tariff agitation has
taught that radical changes, especially sudden and large reductions, are
fraught with evils, and that business can adjust itself in large measure
to any settled conditions. The future of the tariff discussion in
America is hard to prophesy. The infant-industry argument now is of
little force. With the widening of our international relations are
growing interests favorable to reciprocity or to other freer trade
relations.
CHAPTER 52
OTHER PROTECTIVE SOCIAL AND LABOR LEGISLATION
§ I. SOCIAL LEGISLATION
[Sidenote: City growth and new social problems]
1. _Under modern conditions many laws restricting free competition are
required to secure the health and convenience of the citizens._ The
rapid growth of city populations has brought new social and economic
problems. The friction in social relations is greater when men are
crowded together. In 1790, three per cent. only of our population lived
in cities of over eight thousand; to-day the percentage is thirty-three.
Then the city dwellers numbered one hundred and thirty-one thousand; now
they number twenty-five millions. Then there were but six cities of
eight thousand or over; now there are five hundred and forty-five. Then
the largest city (Philadelphia) numbered fifty thousand persons; to-day
the largest city (New York) numbers three millions. Many laws are
survivals suited only to the older rural conditions. In London, these
problems were first forced into prominence, and a law passed after the
great fire of 1665 to regulate the rebuilding of houses, streets,
sidewalks, and sewers, foreshadowed alike the American law of special
assessments and the modern tenement-house legislation. A mass of laws
wise and foolish has resulted from the attempt to meet the new
conditions. The laws of nuisance and of sanitation have been rapidly
changing.
[Sidenote: Need of social regulation]
Why not leave such subjects to individuals? It is for the interest of
every one that his back yard should not be a place of noisome smells
and disagreeable sights. But men are at times strangely obstinate,
selfish, and neglectful, and through one man's fault a whole community
may suffer. The refusal of one man to put a sewer in front of his house
would block the improvement of a whole street. The obstinacy of one may
bring an epidemic upon an entire city. There must be a plan, and by law
the will of the majority must be imposed upon the unsocial few. Where
voluntary coöperation fails, compulsory coöperation often is necessary.
Thus health laws, tax laws, and improvement laws regulate many of the
acts of citizens, limit the use of property, and compel men to a course
against their own wishes and judgments. The justification for these
limitations on the right of private property, on free choice of the
individual, on "free competition," must be found in the social result
secured.
[Sidenote: Tenement-house laws in cities]
[Sidenote: Interests affected]
2. _Tenement-house legislation is an important recent expression of this
social protective policy._ As city population grows denser, land
increases in value, and the evils of bad housing threaten the welfare of
the great majority of city dwellers. Light, sun, air are shut out, and
cleanliness, decency, and home life are made impossible. Two policies
are open to the public. It may be left to private enterprise to solve
the problem. If the tenant agrees to rent a disease-breeding house, he
is the first to suffer. The interests of investors, it is said, will
supply as good a house as each tenant can pay for. The other policy now
adopted is to set a minimum standard of sanitation and comfort, to which
all builders and owners must attain. Property owners are no longer left
free to determine plans, height of building, proportion of lot built on,
lighting, materials, and workmanship. Complying with the legal
requirements, they are left quite free to collect whatever rent they can
get. Such legislation is partly in the interest of the body of
landowners as against the selfish desires of some individuals. One bad
building may bring down the rent of all on the street. Partly, however,
the regulation is in the interest of the tenants and of society as a
whole, and against that of the landlord. The rents from slum property
are threatened; hence the strong opposition always manifested against
tenement-house legislation by some landlords, architects, and
contractors, who fight it bitterly as an interference with their
interests and as a confiscation of their property. It is not quite
certain how marked will be the effect of this policy in making the rents
too high for the poorer tenants and driving them into the country. But
this result, predicted by the enemies of the policy, is not so
undesirable, and the enlightened sentiment of the public to-day favors
all efforts to destroy the breeding-places of disease, misery, and
crime.
[Sidenote: Public inspection of goods used in the homes]
3. _Laws forbid adulteration of products for domestic use and provide
for public inspection._ English laws of the Middle Ages forbade false
measures and the sale of defective goods, and provided for the
inspection of markets in the cities. Recent legislation in many lands
has developed much further the policy of insuring the purity or the
safety of articles consumed in the home. The oleomargarin law passed by
Congress was, however, designed as protective legislation in the
interest of the farmer. Usually, the self-interest of the purchaser is
the best safeguard for the quality of goods; but personal inspection by
each buyer frequently is difficult and time-consuming, requiring special
and unusual knowledge of the products, and special costly testing
apparatus. The state undertakes, therefore, to set a minimum standard of
quality, and to apply it by the economical method of social coöperation.
This policy extends only to staple products and to a comparatively few
articles. It would be impossible as well as unwise to apply it to art
products, except to protect the morality of the community. This
inspection sometimes raises the price, but the evils are small compared
with the convenience and the benefits resulting to the citizen. He is
assured that the article he buys is of standard quality, and if he
wishes a cheaper quality there is no law to prevent his adulterating it
for his own use.
[Sidenote: State support of education]
4. _Other kinds of social amelioration undertaken by the state, through
free, compulsory education, charity, and temperance legislation, are
likewise interferences with competition and freedom of contract._ Many
of these are so customary that they are not thought of in this light.
Schools are productive enterprises, education is industry, and the
supply of this service is always in large measure undertaken by private
enterprise and could be left entirely to it. But free elementary
education is the established policy, and is no longer debatable in
America and France. In England the policy is still debated, much as is
that of public ownership of trolley lines in America. One by one the
states are passing compulsory education laws, and thus interfering still
further with the freedom of the individual. The affection of parents can
in most cases be trusted to provide for the education of children, but
when family affection fails, the child and the state are the victims of
the resulting ignorance, crime, and pauperism. State support of higher
education is more in dispute. It is a universally accepted view that
social welfare requires a more generous support for higher education
than could be secured if it were sold at a competitive price; but while
in eastern America its provision is left mainly to private gifts, in the
West and South it is undertaken largely by the state. The justification
of this policy must be found, not in the benefit to the particular
students, but in the benefit diffused throughout the commonwealth by the
encouragement of science, arts, and letters.
[Sidenote: Public charity]
[Sidenote: Temperance legislation]
The system of public relief for the defective classes of blind, deaf,
insane, feeble-minded, and paupers, are examples of the social
protective policy. The public interest undoubtedly is served by having
these suffering classes systematically relieved, but the extent and
nature of the provision are questions ever in debate. Still more debated
is temperance legislation, both as to licensing and as to prohibiting
the liquor traffic. Nowhere is the manufacture and sale of intoxicating
liquor treated quite like the traffic in most other goods, because it is
recognized that the public interest is affected in a different way.
While it is beyond question that society should protect itself against
the drunkard, it is more doubtful whether it owes to the man, for his
sake, protection against his own blunders. Not even the gods can save
the stupid. Temperance legislation is strongest in its social aspect.
The opponent of it usually champions the individualist view; its
partisans uphold, in varying degrees, the social view.
[Sidenote: Other laws to protect public morals]
Similar questions arise regarding lotteries, gambling, betting,
horse-racing, etc. When a man backs a worthless horse against the field,
money probably is transferred from the stupider to the shrewder party.
The philosopher may say that the sooner a fool and his money are parted
the better; but the broken gambler remains a burden and a threat to
honest society. Gambling, lotteries, and speculation cause embezzlement,
crime, unhappy homes, and wrecked lives. Here are to be found with
difficulty the true boundaries between ethics and expediency. A busybody
despotism may protect the fool, but it thereby helps to perpetuate and
multiply his folly; yet if the fool is left alone, he too often is a
plague to the wise and the virtuous.
[Sidenote: Usury laws as social legislation]
5. _Usury laws are found almost universally in civilized lands._ By
usury was formerly meant any payment for the loan of goods or money; now
it means only excessive payments. In former times moralists and
lawmakers were opposed to all usury or interest. Most loans were made in
times of distress. The sources of loanable capital and the chances of
profitable investment were fewer in the past than to-day. For the last
four centuries there has been on the question of usury a gradual change
of opinion, beginning in the commercial centers and most rapid in the
countries with more developed industry. A moderate rate of interest is
now everywhere permitted; but in all but a few communities the rate
that can be collected is limited by law, and penalties more or less
severe are imposed on the usurious lender. It has been noted in another
connection that usury laws are practically evaded in a number of ways
within the letter of the law. Many writers maintain that usury laws do
more harm than good even to the borrower, whom they are designed to
protect. In a developed credit economy, where a regular money-market
exists, they are superfluous, to say the least, as most loans are made
below the legal rate. Such laws, however, have a partial justification.
In a small money-market they to some extent protect the weak borrower at
the moment of distress from the rapacity of the would-be usurer. Their
utility is disappearing, but in simpler industrial conditions usury laws
are fruits of the social conscience, a recognition of the duty to
protect the weaker citizen in the period of his direst need.
§ II. LABOR LEGISLATION
[Sidenote: Growth of child-labor legislation]
1. _Factory laws now limit in many ways the employment of women and
children, and the hours of work._ Factory legislation began in England,
early in the nineteenth century, to check some of the worst evils then
showing themselves in the factories. It has since increased in England
and has been copied rapidly by other countries. Some of the agricultural
states of the Union have as yet no factory laws, but the states
industrially more advanced have many. They are made, first, to apply to
children. The evil of forcing children into factories is easily
recognized. The child, subject to the commands of his parents or
guardians, is not a free agent. At times a lazy father is tempted to
support himself in idleness on the wages of his young children. Often
poverty leads the parents to rob their children of health, of schooling,
and of the joys of childhood. Child-labor depresses the wages of adults
and the evil grows. Children laboring long hours in close and grimy
factories, and growing into blighted and ignorant manhood, are a threat
to society. In agricultural conditions, such as have prevailed generally
in America, there is far less need of limiting the hours of work and the
age at which children may begin to work. The barefoot boy trudging over
clover-fields to carry water to the harvesters may be the happier,
healthier, and better for his work.
[Sidenote: Women's work and shorter hours]
The work of women in factories tends to depress the wages of men, is
inevitably harmful to family life, and, when the work is arduous and
continuous, the evils are visited upon succeeding generations. In the
early days of the factory system in England, the hours of work were
lengthened in order to make the machinery earn as much as possible. The
first laws regulating hours applied especially to women and children,
limiting their work to ten or twelve hours daily. Later, this regulation
was made to apply to men, and now is found in most civilized lands. In
recent years the agitation has been for an eight-hour day, and doubtless
it will some day be adopted in the majority of trades.
[Sidenote: The workmen's remedies for injuries]
2. _Many laws provide for the health and safety of workers in factories
and mines._ Both workman and employer are in many ways interested in
providing against danger from fire, bad ventilation and lighting, bad
sanitation, unprotected and dangerous machinery, and bad moral
conditions in the factories and other places of work. What can the
workman do to protect himself? (1) He may refuse to work whenever the
conditions are bad. But this requires that he inspect the factory and
judge of the sanitary conditions in each case, and that he then resist
the temptation to accept employment of which he may be sorely in need.
(2) He may ask higher wages to compensate for the added risk. But this
is not practically possible with his insufficient knowledge of
conditions, and it supposes an equal caution in many other workers. It
is well that individual men are not excessively cautious, or the state
would lack brave citizens and defenders. It is better that the
forethought be in part exercised by the community collectively. (3) The
person injured in health or limb may sue for damages. But this, with his
means and knowledge, is often impossible, and is a costly process,
yielding a pitiful recompense for a blighted life.
[Sidenote: Factory laws to reduce accidents]
The employer is interested in attracting better workmen at lower wages,
and in avoiding damages by making the conditions of work favorable. The
law seeks the same end by more economical ways when it sets a minimum
standard. Experience shows that certain safety appliances should always
be present to prevent the evils; for a state to leave their provision to
self-interest, is to trifle with the welfare of its citizens. Factory
legislation usually is opposed by employers because of the expense it
causes; but if the regulations apply to all factories, the expense
becomes a part of the cost of production and is shifted, like the other
expenses of production, to the general body of consumers, of which the
employers form only a small part.
[Sidenote: Legal regulation of wage-payment]
3. _Laws regulate the form, time, and methods of payment in manufactures
and mining._ Companies sometimes keep stores and pay the workers in
mines and factories in goods, instead of money. Such a store in the
hands of a philanthropic employer might easily be made, without expense
to himself, a great boon to his workmen, giving them more than the
benefits of consumers' coöperation. But the usual result is told by the
fact that such stores are known as "truck stores," "pluck-me stores."
They are most often found where some one large corporation dominates in
the community, as in mines, where the workers are in a very dependent
condition. If the higher prices demanded practically lower real wages,
it would seem that the worker had an immediate remedy in his power to
demand higher money-wages. Recognizing that this is for the most part an
illusion--for it is just in such places that the conditions for free
competition are least present--the law in many states prohibits these
stores. It regulates also the measuring of work, fixing the size of
screens and of cars used in coal-mining. The law is especially favorable
to the hand-laborer in regard to the collection of his wages, requiring
regular monthly or fortnightly or sometimes weekly payments. Mechanics'
liens give to workmen in the building trades the first claim on the
products of their labor.
[Sidenote: Limitation of freedom of contract]
4. _In some cases the law forbids "contracting out," and the courts fix
the terms of the contract._ In general, the law does not interfere with
the right of the citizen to make any formal contract he chooses. It
confines itself to providing rules and agencies for interpreting and
enforcing the contracts when made. Employers often compel workmen to
sign a release from damages in case of accident. This practice was
forbidden even by common law, and many recent statutes have specifically
provided that employers cannot "contract out" of the right to claim
damages. The courts are particularly watchful of the interests of
children, who are usually deemed incapable of entering into contracts
binding them to their injury. Sailors, likewise, have long been
protected and guarded by the law, because, journeying far from home,
they are peculiarly in the power of their employers. The English courts
may even change the contract if the sailors have been coerced by their
masters. The rights of married women to mortgage their property is
limited in some states in recognition of the undue influence that may be
exercised by their husbands. The attempts in the last twenty years to
settle the Irish land-question have resulted in a steady increase of the
interference of law and courts with the freedom of contract between
tenant and landlord. Though in many ways freedom of contract is thus
limited, competition is not entirely destroyed; it is turned in other
and usually better directions.
[Sidenote: General nature of this social legislation]
[Sidenote: Economic or moral objects primary]
5. _This group of social laws resembles protective tariffs in preventing
free competition, but differs from them in varying ways and degrees._
Writers class all such laws as protective legislation, in that they
depart from the rule of free trade taken in its broadest sense. It does
not follow, however, that all these laws stand or fall together,--that
if the protective tariff is wrong, all are wrong. The justification of
every such measure is limited and relative, and therefore of varying
strength. All protective measures are alike in that the free choice of
the citizen is forbidden by law. The argument for the tariff is economic
and political. The tariff does not seek to prevent a moral evil; foreign
trade is morally as good as other trade. In a large majority of social
laws the moral purpose is fundamental. It is the demand of humanity that
competition be placed on a higher plane. Tariff legislation is primarily
in the interest of a special well-to-do class, with which other citizens
are compelled unwillingly to trade. Most social legislation is to
protect the weak from being forced into contracts injurious to their
welfare and happiness. In any case, social legislation is not to be
justified by any but the most general abstract principle,--the
attainment of the best social result. The best test of social protective
laws is their contribution to a higher independence and to a freer
competition on a higher, more worthy, and more humane plane.
CHAPTER 53
PUBLIC OWNERSHIP OF INDUSTRY
§ I. EXAMPLES OF PUBLIC OWNERSHIP
[Sidenote: The kinds of political units]
1. _Local political units generally acquire only industries whose
products must be used in the place where produced._ The word industry is
used here in a broad sense, including agents of psychic income not
usually so classed, such as public parks. The grouping of publicly owned
industries according to the size and importance of the political units
cannot be exact, because some classes of industries are owned by several
kinds of political units. Yet, especially with application to American
conditions, an approximate classification may be made on this principle.
Federal states consist of three main groups of political units:
national, provincial, and local. Provincial units are the largest
subdivisions, as the American "states," or commonwealths, the German
states, and the provinces in other countries. The term local political
unit is more complex and may mean county, township, village, city, and
school or sanitary district; but most of what is to be said of local
ownership refers to cities or to incorporated villages.
[Sidenote: Municipal ownership of parks, libraries, &c.]
[Sidenote: Of bridges, markets, waterworks, &c.]
Nearly all public parks and recreation grounds are owned by cities. As
population has become more dense, private yards of any extent become
impossible, in cities, for all but the wealthy. Public ownership of
parks insures recreation grounds to the common man in the most
economical way. Of late the movement for large and small public parks
and playgrounds has gone on rapidly in American cities. Related to
parks are public baths, public libraries, art collections, museums,
zoölogical gardens, etc. Some have declared that such a policy stops
little short of a paralyzing socialism for the masses. Reason and
experience fail to reveal any such danger so long as the things supplied
gratify the higher tastes--as art, music, literature, innocent social
recreation. Not until the necessities of life, as bread, clothing, and
houses, are supplied, is encouragement given to the increase of
improvident families and to the breaking down of independent character.
The means of local communication--streets, roads, bridges--were once
owned largely by private citizens. Here and there still are found toll
roads and toll bridges built under charters granted a century ago, but
tolls on public thoroughfares are for the most part abolished. A public
market, where the producer from the farm and the city consumer can meet,
is an old institution that is now being established anew in many cities.
The providing of apparatus for extinguishing fires is always a public
duty; the conveyance of waste water is increasingly a public function;
and the supply of pure water, while often a private enterprise in
villages, and sometimes in large cities, is increasingly undertaken by
public agencies. Public ownership of gas and electric lighting is less
common, as the utility supplied is not so essential and the industry is
somewhat less subject to monopoly; but the difference is one of degree
only. Street-railroads are often under public ownership in Europe; but
there has thus far been no case of the kind in the United States, and
only one in Canada.
[Sidenote: American failures in state industry]
2. _The American state owns and conducts industries mainly whose
products have a wider territorial use._ The American commonwealth has
retired from some fields where once it was engaged in industry. Students
of American history know that between the years 1830 and 1840 some
states engaged largely, even wildly, in the building of canals and
undertook to construct railroads, to start banks, and to engage in other
enterprises. The undertaking of these industries was determined often
by political and by selfish local interests, and their operation often
was wasteful. A few enterprises succeeded, the most notable of these
being the Erie Canal in New York. The unsuccessful ones remained
worthless property in the hands of the state or were sold to private
companies, as in the case of the Pennsylvania railroad. This reckless
state enterprise was a bitter lesson in public ownership, and even after
seventy-five years is not without effect on public opinion. For a long
time no proposal for public ownership could have a fair hearing in
America. But railroads and canals are publicly owned, and more or less
successfully operated, in many foreign countries, as in Prussia and
other German states, in Switzerland, and in the new states of Australia.
[Sidenote: State ownership of various kinds]
There has been recently a rise of interest in forestry in America. This
is especially likely to be a state enterprise wherever the forest tracts
are entirely within the limits of the state, as is the case of the
Adirondacks in New York. Most of the forests in Germany are either
communal or state-owned. The schools, a great industry for turning out a
product of public utility, are largely conducted by the American state
and by local units rather than by the nation or by private enterprise.
The state encourages researches in the arts and sciences, and gives
technical training. A variety of minor enterprises have been undertaken
by states to supply salt, phosphate, banking facilities, even some
manufactures. In the prisons and public institutions, states, such as
New York, that have adopted the system of labor on public account engage
in agriculture and manufacturing on a large scale, the products,
amounting to millions of dollars annually, being used almost entirely by
public agencies.
[Sidenote: National ownership of various kinds]
3. _The nation owns and controls many industries of the widest use and
most general interest._ Some industries grow out of the political needs
of government. Established as a means of communication with military
outposts, the post became a convenient means of communication for
merchants and other citizens and grew into a great economic
institution. In most countries the telegraph is publicly owned and has
been annexed to the post, to which it is very closely related in
purpose. The national improvements connected with rivers and harbors
were first political--that is, they were for the use of the governmental
navy; they became, secondly, commercial--for the free use of all
citizens engaged in trade; and they continue to unite these two
characters. Forestry is most largely undertaken in this country by the
national government, doubtless because the large forest areas in the
West extend over state boundaries, and because large tracts of public
lands were still unsold at the time public attention was attracted to
the subject. Since 1890, the policy of reserving great areas for
forests, and picturesque districts for national parks, has developed
greatly. In some countries mines are thought to be peculiarly fitted for
national ownership and control. In Germany, the state owns some coal,
salt, and other mines. Coinage and banking are everywhere looked upon as
a function of sovereignty, and yet it is no more necessary for a nation
to own its own mint in order to control the monetary system than for it
to print the bank-notes in order to regulate their issue. The American
government has its own printing office and therewith its share of
troubles with organized labor. The fish commission, and the various
branches of the department, coöperate with private industry in many
ways. In Germany, compulsory insurance is provided for the workingman.
This hasty survey suggests that the industries undertaken by government
are both varied in nature and large in extent, although small in
proportion to the mass of private industry.
§ II. ECONOMIC ASPECTS OF PUBLIC OWNERSHIP
[Sidenote: The primary need of public ownership]
1. _Public ownership is primarily to control the essential agencies of
government._ A large part of public ownership and activity in industry
develops from political functions. As society evolves, what was
unessential to political life becomes essential. Civilized government
requires the use of a number of material agents. Buildings for
legislative and executive officers, custom-houses, post-offices,
lighthouses, can be rented of private citizens, as post-offices usually
are in small places; but it is obviously economical and convenient in
large cities for the government to own the public buildings. Government
can reduce to a minimum its employment of labor by "farming out" the
taxes, as all countries once did to some extent, and as France continued
to do up to the French Revolution. It is now the settled policy for
government to own or control its essential agencies, but this does not
involve in every case the employment of day-labor direct to clean the
streets, to collect garbage, etc. The more simple political functions
shade off into the economic. To coinage usually are added the issue of
legal-tender notes and certain banking functions; the post carries
packages, transmits money, and in some cases performs the function of a
savings-bank for small amounts. The only open question is as to the
proper limit to this development.
[Sidenote: Conflict of public and private interests]
2. _Public industry expands to supply as free goods many essentials of
good citizenship, and to insure cheaper and more bountiful supplies of
others._ It is the ideal of Herbert Spencer and of a small surviving
group of _laissez faire_ philosophers that government should confine
itself exclusively to the most essential political functions, leaving
the economic functions absolutely alone. It should keep the peace,
prevent men from beating and robbing each other, and preserve the
personal liberty of the citizen. They assume that all of the economic
needs will be provided by competition, in the best way humanly possible,
in quantities and at the rate needed. In many cases, however, the
general interest fails to harmonize with that of the individual. The
forest has an immediate utility to the consumers of lumber, and it has
also a diffused utility in its influence on industry, on climate, and on
torrents and floods. Yet, as the private owner cannot control enough of
the forest to affect the climate, and could not sell climate even if he
could affect it, he will cut down the tree whenever he can gain by doing
so. In this situation either government control or government ownership
of forests is essential.
[Sidenote: Social economy of some public industry]
In some cases the difficulty of private ownership is in the excessive
cost of collecting for the service. The cost of maintaining tollhouses
at short intervals on a turnpike sometimes exceeds the amount collected.
Collection in other cases, as for the service of lighthouses to passing
ships, is impossible. Public industry secures, through the economy of
large production, a cheaper and more efficient service, the benefits and
costs being diffused throughout the community. The benefits of the work
of experiment-stations for agriculture are felt immediately by the
farmers, but are diffused to all citizens. A manufacturer able to keep
his methods secret, or to retain his advantages for a time, can afford
to undertake experiments in his factory, but the farmer seldom can. The
public ownership of parks for the use of all gives a maximum of economy
in the production of the most essential utilities--fresh air, sunshine,
natural beauty, and playgrounds in the midst of crowded populations.
Municipal ownership of waterworks is an extension of the same idea. Not
only because large amounts of water are used by the public, but because
cheap, pure, abundant water is an essential condition to good
citizenship, speculation should in every possible way be eliminated from
this industry.
[Sidenote: Monopolistic nature of localized industries]
3. _Public ownership tends constantly to include the industries of a
monopolistic nature, locally supplying general necessities._ This is no
abstract principle; it is merely a statement of what is seen to be
happening. Some industries are of such a nature that they drift
inevitably into monopolistic control. Waterworks, gas, electric
lighting, street-railways, telephone systems, are among these. However
fierce may be the competition for a time, sooner or later either one
company drives out the other or buys it up, or both come to an
agreement by which the public is made to pay higher prices.
[Sidenote: Localized production favors monopoly]
A feature favoring the growth of monopoly when such industries are left
to private enterprise, is the need to produce and supply the utility at
a given locality. While two street-railways can compete on neighboring
streets, it is physically impossible for two or more to compete on the
same street. Two systems of water-mains or gas-mains can be put down, as
sometimes is done, but this is not only a great economic waste, but the
tearing up of the streets is an intolerable public nuisance. This
difficulty is less marked in the case of telephones and electric
lighting, and some persons still cling to faith in competition to
regulate the rates in those industries; but faith in competition between
water-companies and between gas-companies has been given up by nearly
all students of the subject.
[Sidenote: Gains from large production favor monopoly]
4. _A second feature favoring monopoly in such industries is the marked
advantage of large production in them._ These industries are usually
spoken of as "industries of increasing returns." This advantage is
enjoyed in some degree by every enterprise, but it is gradually
neutralized and limited (as has been noted elsewhere). The need to
extend an expensive physical plant to every point where customers are to
be served, and the very much smaller cost per unit of delivering large
amounts of water, gas, electricity, transportation, etc., on the same
street, offered a greater inducement for one competitor to crowd out or
buy out the other at a more than liberal price. Even then, larger net
dividends and correspondingly larger capitalization are secured than
were before possible to both companies combined.
[Sidenote: Uniformity of products favors monopoly]
5. _A third feature favoring monopoly is uniformity in the quality of
the product furnished._ It is a general truth that competition is most
persistent where there is the greatest range of choice open to the
customer, and consequently the most individual treatment required in the
enterpriser. An artist, even a storekeeper, attracts about him a body of
patrons who like his product (for the merchant's manner and method of
dealing are a part of the quality of his goods), and who cannot be
tempted away by slight differences in price. Rival companies in the
stage of competition are seen to claim superiority for their particular
goods and to improve their service in every way possible. A new
telephone company, entering where a monopoly has held the field, works
at once a wonderful betterment in rates, courtesy, and service. But as
the product of all competitors attains the highest technical standard
possible at the time, the rivalry is reduced to one of price, and it is
usually a "fight to the finish."
[Sidenote: Franchises favor monopoly]
6. _A fourth feature favoring monopoly in these enterprises is the
necessity of making permanent and exceptional use of the public streets
and alleys._ If this right were granted by a general law to every
citizen, this feature would be sufficiently implied in the foregoing
discussion. As it would be intolerable to allow private interests to use
public property in whatever way they wished, the legislative body makes
special grants in such cases in view of the circumstances. Not only is
the legislature (or council, or county board of commissioners, etc.)
induced by the economic difficulties to withhold a charter to a second
company, but it is exposed to the greatest corrupting influences by the
one already established. The knowledge of the opposition to be
encountered in getting a franchise must keep competitors out, even
though monopoly prices are maintained.
In view of these several features, which are so closely related that
they form a common character, more or less fully shared by various
industries, and especially in view of the necessity for the formal
granting to them of peculiar privileges in the form of a public
franchise, the public, in order to protect the general interest, is
forced to undertake an exceptional control of these industries.
[Sidenote: Modes of controlling public utilities]
7. _Several courses are open to the public, acting in its political
capacity, to retain these monopoly advantages for the general welfare._
First, it may do nothing, trusting vainly to competition to regulate
the rate, or consciously leaving the result to be worked out by the
monopoly principle; this is what in most cases has been done in the past
in America. Second, in granting the franchise it may attempt to fix near
cost the charge for the service or product, so that the franchise will
be worth little or nothing. Third, it may leave the rate to be fixed by
the monopoly principle, but charge for the franchise so much that the
value of the monopoly is appropriated into the public treasury. Fourth,
it may have public officials carry on the business, either selling the
product at cost or making monopoly profits that go into the public
treasury. Various combinations of these plans are followed in practice,
the most common plan being the fixing of maximum rates which, with
improved methods, generally become ineffective. It is difficult to fix a
uniform rate that is equitable, because conditions change, and, further,
because a uniform rate must be applied to all parts of the town,
although the cost of service varies greatly. It is difficult to sell the
franchise for near what it is worth, because of the uncertainty, of the
political blackmail, and of the limited number of competent bidders.
There remains only the policy of public ownership to secure the profits
of monopoly to the public, either directly or in a diffused manner.
[Sidenote: Economic basis of public ownership]
[Sidenote: Cost under public or private ownership]
8. _Public ownership is economically justified when it secures a utility
of widespread consumption, otherwise impossible, or insures the public a
better quality or a lower price._ The question of public ownership is
not exclusively an economic question. There are incidental problems,
such as its effects on enterprise and on political integrity, with which
it is not possible here to deal. In the main, however, public ownership
is simply a business proposition which must be justified by its economic
results. In the case of a general social benefit not to be secured
without public ownership, as popular education or the climatic effect of
forests, the only question to answer is whether the utility is worth the
cost. In the case of industries already in private hands, as
waterworks, gas and electric lighting, there is needed, to make a wise
decision possible, a knowledge of the effect a change to public
ownership will have on value. If public officials can furnish some goods
cheaper than they are furnished by private enterprise, it is because of
the wide margin of monopoly profit, not because there is any magic in
public ownership. The same general items of cost must be met. The first
cost of the plant and the annual interest payments are much the same.
Experience shows that, because of political influence, wages are likely
to be higher under public ownership, but salaries of officials are
higher under private ownership. On the whole, public industry in these
respects probably has no advantage. Some items of cost may be less under
public management. Public collection of dues along with taxes is an
advantage not enjoyed by private companies. Several public officials
sometimes share the same office and thus reduce expenses. In small towns
the public electric lighting and waterworks have been operated more
economically under one roof. Public industry does not have to meet the
cost of lobbying and blackmail which are often forced upon private
companies. But the greatest source of saving in public ownership is the
value of monopoly privileges that, under private management, go into
private pockets.
[Sidenote: Character of public officials]
[Sidenote: Limits and effects of public ownership]
The temptation to political corruption may be more insistent when a
large force of men is constantly employed, and when large supplies are
constantly purchased, by public officials, but the temptation is not so
strong or so centralized as it is in the granting of franchises to
wealthy corporations. Public industry is weakened by the absence of
certain motives to excellence that are present in private business. The
income of public officials not being dependent on the economy of
management, the spur and motives of competitive industry are lacking. No
social discovery has made individual honesty and civic virtue useless to
good government.
The decision in any specific case is one dependent on local conditions,
and the exact limits of public ownership are not fixed. Industry is
changing so rapidly that new experience is needed each year. The main
outlines of public ownership, however, are now in large part determined.
Some industries do well, others ill, under public management, and
between these lie many debatable cases. Waterworks and probably electric
lighting, because of the comparative simplicity of their operation, are
more suitable for public ownership than are gas-works. No absolute line
divides the one group from the other. But whatever the changes, the
student of the theory of value must never overlook the fact that the
increase of public ownership is altering in manifold ways the prices of
goods, and is reacting also on the production, distribution, and
consumption of incomes.
CHAPTER 54
RAILROADS AND INDUSTRY
§ I. TRANSPORTATION AS A FORM OF PRODUCTION
[Sidenote: Productivity of transportation]
1. _Transportation of goods and men is one of the most important modes
of production._ When utility was thought of as inherent in things rather
than as resulting from a relation between things and wants, it was usual
to consider only those industries as truly productive that brought
something physical into existence, as do agriculture and the extractive
industries. Even after it was recognized that a change of form also
imparted value, it was still denied that a changing of place could be
truly productive industry. But when production is seen to be the
bringing of things into right relations with wants, transportation may
be deemed to be the primary and typical mode of increasing income.
Movement is necessary to the existence of animals. The animal, in the
order of evolution a higher form of life than the more fixed plants,
goes to seek food, and has open to it a wider range of possibilities in
life. With slight exceptions, it is true that the only way in which
animals can bring about better place-relations between their wants and
goods is by moving themselves. To this power man has added that of
moving goods and thus adds enormously to income. Agents being valued in
accordance with their net productiveness, the nearness to market and the
ease of transporting the product are large factors in price. The
location of a field enters into its value as truly as do the chemical
qualities of the soil. A rocky field near a market may be richer, in an
industrial sense, than the richest soil far remote, which can be used
by men only at the cost of their alienation from society. Means of
transportation set a limit to social and political groupings, to the
size of the market, and to the possibility of exchange. Indeed, all
exchange value is conditioned upon the possibility of transportation.
[Sidenote: Original local advantages]
2. _Natural differences in the grades of fertility and of accessibility
determine first the most valued locations._ Primitive man, dependent on
the bounties of nature, had to take things as he found them. Few places
unite the best grades of the essential things: water, food, fertile
soil, a favorable climate, protection against enemies. Between tribe and
tribe went on ceaseless war for the few favored spots of the earth.
Where transportation is possible, trade can supply one or more of the
missing elements. International trade began early, wherever it could, to
strengthen economically the weak localities. Advantages in
transportation are sometimes better than fertile soil and rich
resources. The early centers of civilization were on the banks of rivers
and the shores of seas. Around the Mediterranean were the ancient
empires. Trading-towns grew up at ports and at the favored points of
trade: Tyre, Sidon, Carthage, Florence, Genoa, Venice, Antwerp, London,
New York. The early settlements in America were grouped along the coast.
Without the cheap communication afforded by water, the colonies would
have been cut off from the benefits of continuing contact with the older
civilization. It would have been a great price to pay, even for a rich
continent.
[Sidenote: Influence of waterways on local advantages]
3. _The opening up of new water-routes of travel has profoundly altered
the prosperity of nations._ Sometimes the relation of cause and effect
is the reverse of that just noted. The conquest of Asia Minor by the
Turks closed the lines of travel with the East, destroyed the trade of
the Italian cities, and stimulated exploration for new routes. The War
of 1812 in America stopped the coast trade and forced on the wagon-roads
between the New England and the Southern states a great traffic, which
declined quickly at the close of the war. Again, the growth of
population and industry shifts the center of trade, as it did from the
south to the north of Europe, and as it is doing from England to
America. The discovery of new routes, however, has wrought the most
rapid and sweeping changes. These three causes united, about the time of
the discovery of America, to overthrow the prosperity of the older
cities of Europe, while the opening of the resources in America, the
abundance of silver and gold, trade with the colonists and the Indians,
showered wealth and trade into the lap of Spain, Holland, Belgium,
England, and the northern cities of Germany. Such changes continue under
our eyes. The Erie Canal has an influence on values in every township
from New York to Buffalo, and along the lake shores to the head of Lake
Superior. The Suez Canal marked an epoch in ocean travel. The American
Isthmian Canal will affect the value of many investments, from the Gulf
of Mexico to the Pacific Coast. A marked change in transportation thus
shifts the level of values in a locality. Fortunes are made and lost.
One community rises and another sinks. Increments and decrements of
value on a great scale are unearned, and all classes of goods are
affected, though in varying degrees.
§ II. THE RAILROAD AS A CARRIER
[Sidenote: Technical vs. economic efficiency of transportation]
1. _Different modes of transport are more or less economical relatively
to the other industrial conditions._ Not only new routes but new agents
of travel change the scale of values. In early societies, undeveloped
industrially, first men, then domestic animals, were used as beasts of
burden. The first vehicles are technically simple in design and
construction; on land are used drags, sleds, carts; on waterways are
used rafts, canoes, barges, and boats. Primitive means of transportation
had to be inexpensive, for poverty and the uncertainty of early society
forbade the tying up of large resources in them. Technical efficiency
of means of transportation may be contrasted with economic efficiency.
Technical goodness is absolute, and is measured in speed and weight of
cargo; economic efficiency is relative, and varies with the money cost
and money value of the services. A turnpike is more efficient than a mud
road, yet in some districts it is bad economy to build it. A railroad is
more efficient than a cart, yet in some places even pack-horses are more
economical. To be economical, the expenditure needed to supply the
efficient agent must be warranted by the volume and value of traffic.
[Sidenote: Economic advantages of natural waterways]
2. _The most economical means of transportation before the railroad were
the waterways, natural and artificial._ Some natural waterways still
afford the most economical means of transportation between favorably
situated ports. Coal is shipped most cheaply in sailing vessels from
Wales around Cape Horn to ports along the western coasts of America. A
part of California's regular fuel-supply is obtained in this way. Coal
has been shipped from Pennsylvania to Europe, and in the anthracite
coal-strike in 1902, some was shipped from England to America. Invention
has reduced the cost of construction and operation of vessels and has
increased their safety and speed, thus multiplying the efficiency of the
natural waterways. The large cities in America are situated on
waterways, usually where there is a break in transportation requiring
reshipment, as, for example, at New York, San Francisco, Buffalo, New
Orleans, Cincinnati, Chicago, Minneapolis, and St. Paul. Likewise many
of the small cities and villages, serving as local trading centers, owe
their existence to similar though less powerful influences.
[Sidenote: Merits and defects of canals]
Canals are begun as connecting links in a system of natural waterways to
extend the advantages of cheap transportation. The Erie Canal not only
serves the three hundred miles of territory along its banks, but it
opened to commerce all the lands tributary to the Great Lakes. The great
advantage of canals is cheapness of operation due to the simplicity of
the machinery needed and to the great loads that can be moved with
small power. A cent a ton-mile is a paying rate on a canal. For heavy,
slow-moving freight, the railroads can hardly rival the canals at their
best. As canals, however, can be built only along a level country and
where the water supply is at a high level, their construction is limited
to a small portion of the country. The law of extensive diminishing
returns applies strongly to the construction of canals. The first canals
are easily constructed and economically operated, but it is only with
greater cost and difficulty that the system can be successively
extended. In temperate climates their use is limited by ice to a part of
the year, and the summer's drought sometimes limits it still further. At
its best, therefore, the small land-locked canal is fitted only to be a
supplementary agent in the system of transportation wherever industry
demands high speed and great regularity. Far different is the case of
the oceanic canal in a tropical climate.
[Sidenote: Superior advantages of railroads]
3. _The railroad is rapidly surpassing in importance every other agency
of transportation._ Even in respect to cheapness, the unique virtue of
waterways in favored localities, the railroad has been making rapid
gains. Improvements in roadbed, rails, cars, engines, and other
equipment are reducing greatly the cost of conducting traffic on the
main lines of roads. The adaptability of the railroad excels that of any
other agent of transportation; it can go over mountains or tunnel
through them. In certainty its superiority is marked; floods and snows
may delay it for a day, but there is no seasonal stoppage of traffic. In
speed, the railroad so far excels that the canal can survive only by
dividing the traffic, taking the lower grades of freight, and leaving to
the railroad the passenger traffic and fast freight.
[Sidenote: Results of the rapid growth of railroads]
Because of these qualities, the extension of the railroads in the last
fifty years has been so rapid that it has not given time for a gradual
adaptation of industry. It has worked in many places revolutionary
changes. The building of railroads in the Mississippi valley in the
seventies lowered the value of Eastern farms, ruined many English
farmers, and depressed the peasantry in all western Europe. With the
prices that resulted when the fertile lands of the Western prairies were
opened to the world's markets, the stony and worked-out lands of the
older districts could not compete. Great regions are still to be opened
in this manner in Russia, Siberia, Africa, and South America. While one
can only speculate upon the effects this development will have, the
changes promise to be less sudden and tremendous than those of the last
twenty years. Many minor changes, of no less moment in limited
districts, result from the building of railroads. Local trading-centers
decrease in importance. Villages and towns, hoping to be enriched by the
railroads, see trade going to the cities. Commerce becomes centralized.
Enormous increase of value at a few points is offset by losses in other
localities.
§ III. DISCRIMINATION IN RATES ON RAILROADS
[Sidenote: Monopoly power of railroads]
1. _The railroad has more monopoly power in fixing rates at points along
its lines than is the case with other agents of transportation._ The
ownership of the wagons, ships, and canal-boats of a country is usually
divided. Every point along the line of the turnpike or the canal and at
ocean ports enjoys competition between carriers, the great shipping
combinations not having been successfully formed as yet. In the early
days of the railroads it was believed that a company or the government
would own the rails and charge toll to the different carriers, who would
own cars and conduct the traffic as was done on the canals. Experience
soon showed the utter impracticability of this scheme and the need of
unified management. The railroad, therefore, has a monopoly at all
points on its line not touched by other carriers. This, like all other
monopoly, is limited by the need to secure some business and to meet
competition at terminal points. The railroads in private hands early
began to "charge what the traffic would bear" at every station, thus
practising various forms of discrimination disastrous in their effects
on the citizens.
[Sidenote: Discrimination as to goods]
2. _Discrimination as to goods is charging more for transporting one
kind of goods than for another without a corresponding difference in the
cost._ When reasonably understood, this proposition does not apply to a
higher charge for goods of greater bulk, as more per pound for feathers
than for iron, the "dead weight" of car being much greater in one case
than in the other. It does not apply where there is a difference in
risk, as in carrying bricks and powder, or coal and crockery; nor where
there is a difference in trouble, as in shipping live stock and wheat.
Any difference that can reasonably be explained as due to a difference
in cost is not discrimination; on the other hand a difference in cost
without a difference in rate is discrimination. Discrimination as to
goods may be by value, as low rates for heavy, cheap goods and high
rates for lighter, valuable ones. Coal always goes at a low rate as
compared with dry goods, and sometimes more is charged for coal to be
used for gas than for coal to be used for heating purposes.
Discrimination as to goods is the most usual and, if reasonably
employed, one of the most justifiable of the various kinds of rate
discriminations.
[Sidenote: Local discrimination]
3. _Discrimination between places (local discrimination) is charging
different rates to two localities for substantially the same service._
This occurs when local rates are high and through rates are low; when
rates at local points are high and at competing points are low; when
less is charged for shipments consigned to foreign ports than for
domestic shipments; when more is charged for goods going east than for
goods going west. The causes of local discrimination are: first,
water-competition, found at great trade centers such as New York and San
Francisco; second, differences in terminal facilities, making some
places better shipping-points than others; third, competition by other
railroads, which is concentrated at certain points, only four thousand
(one tenth) of the stations of the United States being junctions;
fourth, the influence of powerful individuals or large corporations and
the personal favoritism shown by railroad officials.
[Sidenote: Its effects]
The effect of discrimination is to develop some districts and depress
others; to stimulate cities and blight villages; to destroy established
industries; to foster monopolies at favored points; and to sacrifice the
future revenues of the road by forcing industry to move to the competing
points to get the low rates. The power of railroad officials arbitrarily
to cause rates to rise or fall is happily limited in practice by the
need of earning as large and as regular an income as possible, but even
as exercised it has been at times as great as that possessed by many
political rulers.
[Sidenote: Personal discrimination]
4. _Discrimination between shippers (personal discrimination) is
charging one person more than another for substantially the same
service._ This most odious of railroad vices, rarely practised openly,
is done by false billing of weight, by wrong descriptions or false
classification to reduce the charge below published rate-sheets, by
carrying some goods free, by issuing passes to one and not to all
patrons under the same conditions, or by donations or rebates after the
regular rate has been paid. In some cases a subordinate agent shares his
commission with the shipper, and the transaction does not appear on the
books of the company. In other cases favored shippers are given secret
information that the rate is to be changed, so that they are enabled to
regulate their shipments to secure the lower rate.
[Sidenote: Causes of personal discrimination]
One group of reasons for personal discrimination is connected with the
interests of the road. It is to build up new business; it is to make
competition with rival roads more effective by favoring certain agents,
as is very commonly done in the Western grain business; it is to exclude
competition, as by refusing to make a rate from a connecting line or to
receive materials for a new railroad which is to be a competitor; and it
is to satisfy large shippers whose power, skill, and persistence make
the concession necessary. Another group of reasons has to do with the
interests of company officials. It is to enable them to grant special
favors to friends; or it is to build up a business in which they are
interested; or it is to earn a bribe that has been given them.
[Sidenote: Evils of personal discrimination]
That the evils of personal discrimination are great, need hardly be
said. It introduces uncertainty, fear, and danger into all business; it
causes business men to waste, socially viewed, an enormous fund of
energy to get good rates and to guard against surprises; it grants
unearned fortunes and destroys those honestly made; it gives enormous
power and presents strong temptations to railroad officials to injure
the interests of the stockholders on the one hand and of the public on
the other.
Apart from government, the railroad represents the greatest single
economic factor in personal distribution. It has introduced a new form
of problem into economic society. It has created a monopoly comparable
to the prerogatives of feudal lords. No other industrial agency in
private hands so affects all the producing forces of society and
exercises such a potent influence on values.
CHAPTER 55
THE PUBLIC NATURE OF RAILROADS
§ I. PUBLIC PRIVILEGES OF RAILROAD CORPORATIONS
[Sidenote: Public nature of railroad franchises]
1. _Railroads enjoy peculiar public privileges through their charters,
franchises, and the right of eminent domain._ Railroads in our country
are owned by private corporations and are managed by private citizens,
not, as in some countries, by public officials. They have been built
under the motive of private enterprise, in the interest of the investor,
not as a charity or as a public benefaction. Railroad-building appears
thus at first glance to be a case of free competition where public
interests are served in the following of private interests. But, looked
at more closely, it may be seen to be in many ways different from the
ordinary competitive business. Competition would make the building of
railroads a matter of bargain with proprietors along the line, and an
obdurate farmer could compel a long detour or could block the whole
undertaking. But the public says: a public enterprise is of more
importance than the interests of a single farmer. By charter or by
franchise the railroad is granted the power of eminent domain, whereby
the property of private citizens may be taken from them at an appraised
valuation. The manufacturer, enjoying no such privilege, can only by
ordinary purchase obtain a site urgently needed for his business. Why
may the railway exercise the sovereign power of government and invade
other private property rights? Because the railway is peculiarly
"affected with a public interest." The primary object is not to favor
the railroads, but to benefit the community. These charters and
franchises are granted sparingly in most European countries. In this
country they have been granted recklessly, often in general laws, by
states keen in their rivalry for railroad extension. When thus great
public privileges had been granted without reserve to private
corporations, it was realized, too late in many cases, that a mistake
had been made and that an impossible situation had been created.
[Sidenote: State and National aid to American railroads]
2. _In America and in many other countries, large grants of lands and
money have been made to railroads on the ground of their peculiar public
nature._ Railroads were granted not only peculiar powers and privileges,
but also material aid. The railroad enterprise was uncertain, the
possibilities of its growth could not be foreseen, and private capital
would not invest without great inducements. In European countries where
capitalists were less enterprising or venturesome than in America,
railroad extension was very slow except where the state in some manner
extended its aid to the enterprise. The American states abandoned the
principle of non-interference most recklessly, and vied with each other
in giving lands, money, and privileges, in loaning bonds, in subscribing
for stock, and in releasing from taxation. These protective measures
fostering a special enterprise were expected by increasing wealth to
diffuse a greater welfare throughout the community. Many of the states
were forced to the point of bankruptcy by their reckless generosity, and
some of them repudiated the debts thus incurred. The national government
then took up the same policy and granted lands to the states to be used
for this purpose. The first example of this was the grant to the
Illinois Central road, in 1850, of a great strip of land through the
state from north to south. Grants were made in fourteen states, covering
tens of millions of acres of land. Then the national government, between
1863 and 1869, aided the building of the Pacific railroads by granting
outright twenty square miles of land for every mile of track and by
loaning the credit of the government to the extent of fifty million
dollars--a debt settled by compromise only after thirty years.
[Sidenote: Railroad grants by localities]
Counties, townships, cities, and villages along the line of projected
roads then entered into keen competition to secure them. Bonds, bonuses,
tax-exemptions, and many special privileges were granted. To obtain this
new Aladdin's lamp, this great wealth-bringer, localities mortgaged
their prosperity for years to come. The promoters bargained skilfully
for these grants, playing off town against town, cultivating the
speculative spirit, punishing the obdurate. Not the civil engineer, but
the financial engineer platted the devious lines of many a railroad on
the level prairies of America. The effects of these grants were in many
cases disastrous, and since 1870 they have been forbidden in a number of
states by legislation and by state constitutions. But before this era of
generosity ended, probably the railroads had received more public aid
than has ever been given to any other form of industry in private hands.
[Sidenote: Investors' view of railroads' obligations]
3. _The railroads are now generally held to have peculiar public duties
corresponding to their privileges._ Do all these grants in the past make
the railroads other than mere private enterprises? One answer, that of
those financially interested in the railroads, is No. They say that the
bargain was a fair one, and is now closed. The public gave because it
expected benefit; the corporation fulfilled its agreement by building
the road. The terms of the charter, as granted, determine the rights of
the public; but no new terms can now be read into it, even though the
public now sees the question in a new light. Similar grants, though not
so large, have been made to other industries. Bounties have been given
to sugar-factories; tariffs have favored iron-forges and woolen-mills;
factories have been given, by competing cities, land and exemption from
taxation; yet no attempt is made on that account to control these
businesses in a peculiar way and to treat them as public enterprises.
So, it is said, the railroad is still merely a private business.
[Sidenote: Social view of railroads' obligations]
But the social answer is stronger than this. As to the precedent of
tariff- and bounty-favored enterprises, most careful students would
admit a close analogy in the two cases, but would maintain that the
tariff policy also has been carried to an unjustifiable extreme, and
that it could not be used to vindicate a still greater assault on public
rights. But, further, privileges of railroads are greater in amount and
more important in character than those granted to any ordinary private
enterprise. The legislatures recognize constantly the peculiar public
functions of the railroads. In other private enterprises, investors take
all the risk; legislatures and courts recognize the duty of guarding,
where possible, the investment of capital in railroads. Laws have been
passed in several states to protect the railroads against
ticket-scalping. Whenever the question comes before them, the courts
maintain the right of the railroads to earn a fair dividend. Private
enterprise has been invited to undertake a public work, yet public
interests are paramount.
[Sidenote: Need of harmonizing public and private interests]
If an extremely abstract view is taken there is danger of losing sight
of the real problem, which is that of harmonizing these two interests in
thought and in public policy. Yet the extreme advocates of the private
control of railroads have resented indignantly any public interference
with railroad rates and with railroad management as an infringement of
individual liberty. At the time of the passage of the Interstate
Commerce Act this position was inconsistently taken by those in whose
interests free competition had been violently set aside at the very
outset of railroad construction, and for whom government interference
had made possible great fortunes. The railroads cannot change from a
public to a private character just as it suits their convenience. They
cannot be allowed to play Dr. Jekyll and Mr. Hyde; smooth and affable in
the character of public agents when public advantages are to be gained,
and then as private enterprises ugly and scowling, flouting the public
interests, charging all the traffic will bear, and resisting all
reasonable regulation and conditions. Though railroads are private
enterprises as regards the character of the investment, they are public
enterprises as to their privileges, functions, and obligations.
§ II. POLITICAL AND ECONOMIC POWER OF RAILROAD MANAGERS
[Sidenote: Railroad rates like taxes]
1. _In various ways railroad managers exercise great political influence
and power._ Some writers maintain that the power to make rates on
railroads is a power of taxation. They point out that if rates are not
subject to fixed rules imposed by the state, the private managers of
railroads wield the power of the lawmaker. By changing the rates on
foreign exports or imports, the railroads frequently have made or
nullified a protective tariff and have defeated the intention of the
legislature. High rates on state-owned roads have openly been used in
lieu of protective duties. These facts go to show that a change of
railroad rates between two places within the country is similar in
effect to the imposing or repeal of tariff duties between them.
[Sidenote: Political influence of railroads]
The wealth and industrial importance of the railroads give them
widespread political power in other ways. It is commonly charged in some
states that the legislature and the courts are "owned" by the railroads.
The railroads, in part because they are the victims at times of attempts
at blackmail by dishonest public officials, are compelled in
self-defense to maintain a lobby. The railroad lobby, defensive and
offensive, is in many states the all-powerful "third house." Railroads
even have their agents in the primaries, they enter political
conventions, they dictate nominations from the lowest office up to that
of governor, and they elect judges and legislators. The extent to which
this is done differs according as the railroads have large or small
interests within the state. How is this great political problem to be
met except by an appreciation of its importance and by a growth of
public integrity?
[Sidenote: The complex obligations of railroad directors]
2. _The economic power of the higher railroad officials enables them to
exercise certain functions of an important public nature._ When the
railroad was a young industry, its essentially public nature was not
recognized. It was at first thought to be simply an iron-track turnpike
to which the old English law of common carriers would apply. As this and
similar notions proved illusory, the railroad manager became invested
with complex and often conflicting duties to the stockholders and to the
public. He wore his conscience-burden lightly, and frequently made
little attempt to meet the one and no attempt whatever to meet the other
obligation. The new field offered for speculation gave opportunities for
great private fortunes. There were no precedents, no ripened public
opinion, no established code of ethics, to govern. It was a betrayal of
the interests of the stockholders when directors formed "construction
companies" and granted contracts to themselves at outrageously high
prices. It was an injury not only to shippers, but also to the
stockholders, when special rates were granted to friends and to
industries in which the directors were interested.
[Sidenote: Unclear convictions as to the railroads' public nature]
It is believed that a better code of business morality has developed,
and that the officers' relation of trusteeship toward the shareholders
is now more often recognized. But practical ethics need to be developed
much farther than this. A railroad manager is engaged by the
stockholders, is responsible to them, and looks to them for his
promotion. Hence their interests are uppermost whenever the welfare of
the public is not in harmony with the earning of liberal dividends. The
manager feels bound to defend the principle of "charging what the
traffic will bear" in the case of each individual, locality, and kind of
goods. If this ruins some men and enriches others, if it destroys the
prosperity of cities to increase the earnings of the road, at all events
he feels he has done his full duty. Railroad directors do not yet
recognize, and possibly never will, that their office is more than a
private trusteeship, that it is a public trust.
[Sidenote: Progress of railroad consolidation]
3. _The progress of consolidation among railroads is putting into fewer
hands greater financial and economic power._ The early railroads, many
of which were built in sections of a few miles in length, have been
slowly welded into continuous trunk lines with many branches. The New
York Central between Albany and Buffalo was a consolidation, by
Commodore Vanderbilt, of sixteen short lines. The Pennsylvania system
was formed link by link from scores of small roads. The growth of
consolidation recently has been more rapid than ever before. Sixty per
cent. of the mileage of the United States is under the control of five
interests; seventy-five per cent. is controlled by a group of men that
can sit about one table. The country is being divided territorially into
great railroad domains, within each of which one financial interest is
dominant. Great financial alliances and "community of interests" still
further unify the policy of the leading roads.
[Sidenote: Economic results of consolidation]
Toward this result strong economic forces are working. Consolidation has
many technical advantages: it saves time, reduces the unit cost of
administration and of handling goods, gives better use of the rolling
stock and of the terminal facilities of the railroads, and insures
continuous train service. It has the advantages of other large
production and the possible economies of the trusts. Most important,
however, from the point of view of the railroads, is the prevention of
competition and the making possible of higher rates and larger
dividends. The statement that competition is not an effective regulator
of railroads often is misunderstood to mean that it in no way acts on
rates. It is true that competition between roads does not prevent
discrimination and excessive charges between stations on one line only;
but competition usually has acted powerfully at well-recognized
"competing points." The larger the area controlled by one management,
the fewer are the competing points; the larger, therefore, is the power
over the rate and the more completely the monopoly principle applies. It
is a grim jest to say that consolidation does not change the railroad
situation as regards the question of rates.
§ III. COMMISSIONS TO CONTROL RAILROADS
[Sidenote: Railroad evils and the old legal remedies]
1. _Most of the states have undertaken, through commissions, to regulate
the railroads in the public interest._ When it became evident that
public and private interests in the railroads were so divergent, it
still was not easy to determine how the public was to be safeguarded. At
first, some general conditions such as maximum rates were inserted in
the laws and charters; but these were not adaptable to changing
conditions and, for lack of administrative agents, could not be
enforced. The early efforts at state ownership were, as was noted above,
futile and disastrous, the remedy of state ownership, as then applied,
being worse than the disease. The old law of common carriers gave to
individual shippers an uncertain redress in the courts for unreasonable
rates; but the remedy was costly because the aggrieved shipper had to
employ counsel, to gather evidence, and to risk the penalty of failure;
it was slow, for while delay was death to the shipper's business, cases
hung for months or years in the courts; it was ineffectual, for even
when the case was won, the shipper was not repaid for all his losses,
and the same discrimination could be immediately repeated against him
and other shippers.
[Sidenote: Object and working of the state commissions]
Attempting to remedy these evils, thirty-one of the states have
appointed commissions and, as the most important states are included,
this mode of regulation applies probably to four fifths of all traffic
beginning and ending in a single state. These commissions differ in
power, but in general they attempt to prevent excessive discrimination
in rates and to check all railroad practices injurious to the public
welfare. The commission principle, strongly opposed at first by the
railroads, has been upheld by the courts and is now an established
public policy. The state commissions, however, have fallen far short of
a solution of the problem. Though they have done much to make the
accounts of the railroads intelligible, something to make the rates
reasonable and subject to rule, and much to educate public sentiment,
on the whole their results have been disappointing. It has been
difficult to get commissioners at once strong, able, and honest; the
public does not yet know its own mind well enough to support the
commissions properly; and--more fatal weakness still--the courts early
decided that state commissions could regulate only the traffic
originating and ending within the state, and this left untouched the
much greater volume and more important class of interstate traffic.
[Sidenote: Passage of the Interstate Commerce Act]
2. _The Interstate Commerce Commission is an agency by which it was
hoped to secure a uniform national public control of railroads._ Public
hostility to private railroad management was greatest in the regions
where the most rapid building of roads occurred from 1866 to 1873. One
center of grievances was in "the granger states" of Illinois, Wisconsin,
Kansas, Nebraska, Iowa, and Minnesota; another center was in the oil
regions of Ohio and Pennsylvania. The Eastern states were not without
their troubles, for the report of the Hepburn Committee of the New York
legislature in 1879 shows that discrimination between shippers prevailed
to an almost incredible degree in every portion of New York state. When
the courts, in 1886, decided that the greater portion of the railroad
rates could not be treated by state commissions, national control was
loudly demanded. Scores of bills were presented to Congress between 1870
and 1886, and, despite the bitter opposition of the railroads, the
Interstate Commerce Act was passed in 1887.
[Sidenote: Its provisions]
The act laid down some general rules: that rates should be just and
reasonable; that railroads should not pool, or agree to divide, their
earnings to avoid competition; that they should, unless expressly
excused, fix rates in accordance with the long- and short-haul principle
(to charge no more for a shorter distance than for a longer one on the
same line and in the same direction, the shorter being included within
the longer). The act provided for a commission of five men, to be
appointed by the President, which might require uniform accounts from
the railroads, and which should enforce the provisions of the act.
[Sidenote: Results of the act]
3. _The object of the Interstate Commerce Act has been but imperfectly
attained._ This brief proposition sums up the story of years of efforts
and defeated hopes. The powers of the commission have proved inadequate
to attain the main purposes of the act--the prevention of discrimination
and the securing of steady and equitable rates to all shippers. By the
decisions of the federal courts, the commission's power has been reduced
far below the intentions of the Congress that passed the law. The
railroads have in many cases refused to obey the orders of the
commission and have succeeded in maintaining their refusal. Admirable
results have been secured in the way of uniform accounting, uniformity
of rates has been somewhat furthered at times, and the public has been
in many cases enlightened. But the greatest evils remain. Railroads
still give secret rates in great numbers; many competent witnesses
before the Industrial Commission in 1900 and 1901 testified that
discrimination had never been worse. From time to time the recognition
of the injury to dividends wrought by discriminating rates prompts some
railroad to offer its coöperation to the commission, and this inspires
new hopes of an effective administration of the act. The pressure of
competition, however, soon forces the penitent road back into its old
ways. On one thing the railroads and the commission are agreed: that
pooling should be permitted, though the commission wishes to have this
under strict supervision. To this point the public has not yet advanced.
[Sidenote: The railroad problem unsolved]
Despite the general acceptance now of the principle that the railroads
should be controlled in the public interest, despite the barren legal
triumph of the commission principle, it is evident that the railroad is
not yet under social control. The future must determine whether the
solution is to be found in effective public regulation or in public
ownership.
CHAPTER 56
PUBLIC POLICY AS TO CONTROL OF INDUSTRY
§ I. STATE REGULATION OF CORPORATE INDUSTRY
[Sidenote: The social problems of corporations]
1. _The great increase of late in the number of industries under
corporate control has brought new problems of social regulation._
Inventions, machinery, better transportation, better communication,
widening markets, have united to favor large-scale production, and this
in turn to multiply corporations. Corporate organization makes possible
greater massing of capital, greater stability of policy, and (because
not dependent on a single life) greater permanence than does individual
ownership. With these advantages the corporation brings also new social
problems. The relations in corporate business are more complex than
those in individual enterprise. The ordinary stockholder cannot have
personal knowledge of the business or exercise personal supervision over
his investment. The corporate official controls chiefly not his own
wealth, but the wealth of others. When men deal personally with each
other their sympathies are more appealed to. But, as noted in the case
of the railroad, the corporate official at best seeks to satisfy his
employers, often to the detriment both of the employes and of the
public. Corporations are "soulless" because they permit less of the
close personal relation that makes for morality. At various points in
these later chapters on the relation of the state to industry, mention
has been made of the measures society has taken to regulate corporate
industry. The purpose now is to survey the field more systematically and
to see the extent of this regulation, the difficulties arising, and the
principles involved.
[Sidenote: Examples of public control of corporate industry]
2. _Numerous laws and commissions recently have been established to
provide public regulation of industry._ The Interstate Commerce
Commission is the most prominent of the agencies for regulating
corporate industry, as the railroad problem is the most prominent of the
corporation questions. But before the advent of the railroad, banks had
been recognized as having an exceptional public character. Not only
stockholders, investors, depositors, and note-holders, but a large part
of the public suffers losses by the failure of banks. As investigation
by the various interested persons is quite impossible, the state through
its agents inspects the books of the bank in a manner not thought of in
the case of ordinary private business. The bank commission is the eye of
the public, safeguarding the public welfare. State inspection of
insurance companies, a later kind of corporate enterprise, grew out of a
similar need. Insurance to provide for sickness, old age, or death is
socially desirable and is possible in an equitable way only by the
association of a large number of policy-holders. But inspection of the
business by each policy-holder being impossible, regulation and control
through some public agency is needed. The tax commissions now found in a
majority of the states have been created principally to deal with
corporations. In California, a debris commission regulates the relations
between the farmers and the miners using hydraulic processes. A number
of states have mining commissions, harbor commissions, labor
commissions, boards of arbitration, and other similar bodies. The
increase of these public agencies to regulate corporate industry has
lately been condemned by some as a useless multiplication of state
machinery. Doubtless some commissions have, through improper influences,
been needlessly created; others having important duties have been
intrusted to incompetent political appointees. But most of these
commissions are needed, though at first their work may be ineffective.
[Sidenote: Helplessness of the small investor]
3. _There is a strong and increasing demand for publicity in the
business of the ordinary corporation, as a protection to investors._ The
law has looked upon corporations, with few exceptions, as private
businesses, having the right to keep every detail of their management
secret from their rivals. The inner management, therefore, has been
closely hidden from most of the stockholders, who, in the economic
analysis, are in the main the enterprisers. More and more the business
and capital of the country has thus come into the control of the few.
The ordinary investor in corporate stock "buys a pig in a poke" and
trusts to the integrity of officers working behind closed doors,
responsible to no one, too often speculating in the stock of their own
companies. The unearned gains thus secured have tainted with dishonesty
many a large fortune. No small part of the evil is the closing of the
avenues of safe investment to the small capitalists, giving to a favored
few a measure of monopoly in investments yielding large returns. Only
recently has it been recognized that no large corporation can now be a
private business in the old sense. The evolution of industry has left
investors and shareholders without protection in advance of a wrong, and
usually without legal redress when a wrong has been committed.
[Sidenote: Steps toward publicity to protect investors]
The demand for some remedy for a condition whose seriousness has been
steadily increasing has not come so much from radical quarters as from
business and financial circles. In England, some of the worst abuses
have been corrected by legislation. In 1900, a bill was drafted at the
suggestion of Theodore Roosevelt, then Governor of New York, which aimed
eventually to make the corporation a quasi-public institution, open to
inspection. The organizers of a company voluntarily accepting the act
were to be personally responsible for the statements in its prospectus;
its issue of stock was to be limited to actual investment and to be
publicly made; its office and records were to be open to inspection.
Though public opinion was not ready for this bill, and it failed of
passage, the bureau of corporations of the new department of commerce
of the federal government, established in 1903 under President
Roosevelt, may be looked upon as a fruit of this initial attempt.
[Sidenote: Broad social grounds for publicity]
4. _Greater publicity of corporation business is essential in the
interest of the public._ With the interests of the investor are usually
united more general public interests; but in many cases the two groups
of interests conflict. Some persons favor control of corporations only
to the degree needed to protect investors, but others place the policy
on broader social grounds. The ability of a manufacturing corporation,
at times, by threats of removal, to coerce unfair terms from the
community, from its employees, and from those who supply it with
materials, has led to the proposal that factories shall be forbidden to
change their location without the consent of the state.
[Sidenote: Publicity to insure just prices]
Especially does it seem desirable, if it is possible, to preserve the
benefits of competition, by forbidding rates and agreements in restraint
of trade. The old English idea, inherited in our law, is that the
highest price that can be got in an open market, under ordinary
conditions, is in general a just price. The control of any line of
industry by a few corporations makes secret agreement much more easy,
and thus replaces a general market-price by a discriminating rate, the
highest that each individual will bear. A trust's price might still be a
reasonable one if the seller met competition in every market; but it is
not reasonable when opposition is crushed by local and by individual
discriminations. The methods by which this result is obtained shrink
from the public gaze. They include secret agreements with railroad
agents, a system of espionage on the business of competitors, secret
special rates to the competitor's customers, to say nothing more of
corrupt political influence. Publicity in corporation accounts is the
first condition to a public and uniform price. The need thus to develop
potential competition is especially strong where a monopoly in a natural
product exists. A more general recognition of the public nature of
corporations will lead to further legislation and to the appointment of
corporation commissions, as has been done already in some states.
§ II. DIFFICULTIES OF PUBLIC CONTROL OF INDUSTRY
[Sidenote: Growing need of social coöperation]
1. _The progress of industry is compelling greater social contact and
more use of the agencies of government._ The numerous exemplifications
of this general statement that have been met in the course of this study
have a common cause. In simple conditions of industry, where most of the
productive energies were given to securing the necessities of life, the
struggle of men was with nature. Social relations then were simple and
crude, such as those of chattel slavery. Now, most men get their
livelihood from their bargains with other men. The relations of men with
nature now are fewer, and less close; the relations of men with men are
more numerous and complex. Efficient coöperation is a factor in
production. Right social relations are more essential to industry than a
fertile soil.
[Sidenote: The practical limits of legislative reform]
The social institutions of any community are its answer, expressed in
human consciousness and in formal laws, to this difficult problem of
living together. Laws and ways for regulating industry may be good or
bad. The good laws are those in harmony with human nature, giving the
best motives for work and the greatest happiness both in the effort and
in its reward. The merit of laws, therefore, is relative to human
nature; those good for one kind of citizens may be bad for another. Men
cannot be legislated into honesty without limit. The best that is
possible is to enact laws that encourage the best in men as they are. A
dishonest community neither has, nor is capable of choosing, men honest
enough to supervise the others. Society cannot, by any amount of tugging
and pulling on legislative boot-straps, lift itself above its own moral
plane. But though the change in formal law cannot far precede, it may
lag behind and retard, social progress. Law tardily adjusted to social
needs tempts and corrupts men. A time has never been when a higher
wisdom could not have corrected some ancient grievance, have leveled
some unmerited inequality, and, by making laws as good as men were
capable of administering at the moment, have freed their energies for
further advances. It is only a spirit of moderate expectation that will
not be cast down by the results of legal "reforms." Hence it cannot be
hoped that abuses will not appear in the attempts to regulate private
industry. Fallible men make mistakes and commit injustice, sometimes
greater than that which they are seeking to prevent.
[Sidenote: Local selfishness in industrial legislation]
2. _Legislative interference with industry presents temptations to
community selfishness to misuse social legislation._ Community greed is
not more lovely than individual greed. Many a citizen holds up a high
standard for the public official and bewails the corruptions of politics
when the legislator votes for his own interest instead of for his
constituents' interests. Such a citizen rarely reflects that the
responsibility for many legislative abuses comes back to the community
and to the individual voter. Can the water rise higher than its source?
Is it a high conception of a representative's duty that he should
out-talk, outwit, and out-vote his fellow-representatives, to get "a
graft" for the men who elect him? In many communities, the one public
question of importance is tariff legislation in favor of the local
industries. This selfish issue bribes the electorate, and blinds it and
its legislator to every question of the general welfare. A great
industrial commonwealth steeps its public life in corruption when its
voters sell their political birthright for a duty on iron. Many
congressmen are so burdened with the task of securing some public
expenditure in their district to help their constituents that they have
little thought and less interest to give to larger public questions. If
a local improvement will furnish labor and increase the value of
surrounding property, though it is most uneconomic for the general
community, the representative is expected to labor hard to secure it.
Many citizens see little harm in "log-rolling" by the legislator,--that
is, in his voting for a law without merit in order to get another law
that his constituents want. The guilt of this worst form of bribery
comes back to the community that forces its representatives to such a
course, sinking public morality to a lower level.
[Sidenote: Political corruption in industrial legislation]
3. _The power of the legislature to affect private fortunes presents
strong temptations to public representatives._ That the legislator is so
often true to a high standard of public duty, goes to illustrate the
familiar truth that the individual moral code is better than that of
communities. That some individuals betray their trust is less
surprising. The Credit-Mobilier scandal, in connection with legislation
in aid of the Union Pacific Railroad, implicated many congressmen. A few
years ago, in one of the greatest states, it was discovered that an
innocent-looking bill, relating to the rights of property-owners on
streams, practically involved the gift, to a ring of men, of a quarter
of a billion dollars' worth of coal-lands, lying under the navigable
streams, and belonging to the state. Such temptations for wealth-getting
are too great for men selected solely for their ability to obtain
offices and pensions for political supporters, and to secure
class-legislation for reputable citizens. The power of the legislative
bodies to grant franchises and to permit the use of public property to
corporations, constantly gives opportunity for dishonesty and occasion
for scandal in the larger cities. The histories of the granting of
franchises in New York, Philadelphia, Pittsburg, St. Louis, and many
other municipalities, are full of black pages. Public duties are too
heavy for the public integrity. Industrial power has grown faster than
the civic conscience, and somehow the balance must be made even.
[Sidenote: Heavy duties of the courts]
4. _The power of the courts and of executive officers in the
interpreting and executing of laws governing business has become
greater._ With closer contact of men there is greater friction in social
relations, and litigation increases. Fortunes turn on the result of a
civil suit. While juries often are corrupt, yet it is remarkable how
well the courts have kept their integrity in the midst of great
temptations. Professional pride and the noble traditions of the English
judiciary strengthen the individual's character on the bench, not
infrequently transforming a dishonest lawyer into a just judge; but
popular elections, selfish interests, and the social forces of wealth
and ambition make the task at times too heavy.
[Sidenote: Integrity needed in public officials]
The executive branch of government is necessarily intrusted with great
power, increasing with the extent of social regulation. The Secretary of
the Treasury has discretion as to the sale and purchase of bonds, and
thus can affect the rate of discount and the selling price of
securities. One man's decision, if known in advance, makes possible
fortunes for private pockets. A recognition of the importance of these
facts, which are typical of a great class of facts, must help to develop
a higher sense of public duty. Patriotism has been thought of too
narrowly. The enemies of early society were outside its borders, and the
citizen who traitorously gave them aid was held in abhorrence. Now,
independently, in many quarters is voiced the conviction that the
greatest enemies of society are within its borders, and that political
corruption is the modern form of treason. A higher conception of civic
virtue is required to meet the added tasks of society. Public official
control must be united with private industrial control in a way to
present the fewest temptations to the betrayal of public trust. Now, as
never before, must be felt the wisdom of Emerson's words: "The best
political economy is the care and culture of men."
§ III. TREND OF POLICY AS TO PUBLIC INDUSTRIAL ACTIVITY
[Sidenote: Recent growth of state socialism]
1. _There has been a large increase of state socialism in recent years._
The term state socialism, broadly understood, includes all the forms of
public participation in industry that have been passed in review:
ownership by towns, cities, state, or nation; laws regulating the
freedom of contract; agencies to inspect conditions and to enforce the
laws; commissions to supervise and control corporate industry. From
every direction comes evidence of the increase of state socialism within
the past twenty-five years. To those accustomed to think of the spirit
of the Germanic races as that of individual liberty and enterprise, it
seems remarkable that this increase has been greater among people of
Teutonic origin (Germany, England, America, Australia) than among those
of Latin race. The change seems to be a part of the movement of
democracy, even the measures of Bismarck in Germany having been taken to
ward off the demands of the radical party. The mere name of socialism no
longer frightens the citizens of a free state, and when men of strong
individualistic spirit even claim with pride that they are socialists,
the meaning of that term is becoming very vague indeed.
[Sidenote: Varieties of socialism]
2. _State socialism must not be confused with collectivism, or radical
socialism._ The word socialism is so variously defined that the earnest
student sometimes despairs of getting a clear understanding of it. The
thought of socialism ranges from the simplest form of state
interference, such as the support of public schools and public
fire-departments, up to complete public ownership of all industry. It is
well to describe as radical socialists those who would abolish private
property, and would strike at the very root of the existing order of
society. The modern form of radical socialism originated among German
thinkers of the school of Karl Marx, but it has many supporters in other
lands. The typical radical socialist claims to possess the only pure
brand of social reform, disdains any interest in state socialism, and
scoffs at state control as mere temporizing, as not even a single step
toward radical socialism.
[Sidenote: Aim of state socialism]
The typical state socialist agrees that these measures do not logically
force him toward the extremer view. He is at heart an individualist,
believing that the motive forces of society are in human character, not
in governmental machinery; but he seeks to prevent some kinds of
competition, to put other kinds on a better basis; "to make the rules of
the game fairer," but not to suppress it. According to this difference
in ultimate plan, men and present measures can in general be classified.
Yet one view sometimes shades into the other in the life-history of a
single individual. Believers in moderate interference sometimes move
toward the extreme, and the most radical thinkers, sometimes with no
less honesty, become, with broadening experience, more and more
moderate. It would be surprising if any one who is thinking and growing
in social philosophy should succeed in so exactly adjusting to each
other all his opinions, as to be absolutely consistent at a particular
moment in his views on social policy.
[Sidenote: Unripe social philosophy]
3. _It is not safe to predict from present evidence a continued trend
toward extreme social control._ Social prophecy is fascinating. Men like
to answer out of their ignorance the question, Whither are we tending? A
deeper study of social law should give this power, but it is not won by
hasty generalization. Unripe social philosophers assume that because the
theory of biological evolution is correct, the particular theory of
social evolution which they choose to invent or accept is unimpeachable.
Radical socialism is the exaggerated statement of a present social need.
It is a bridging with hope, not with experience, of the chasm between
reality and the dreams of the unsuccessful.
[Sidenote: Progress of social control]
[Sidenote: True Aim of social control]
It is true that many evidences point to an increase in social control
for some time to come. The laws, the institutions, the prevailing
morality of society, have not kept pace with industrial growth in this
period of sweeping change. What is seen, however, is a small arc of the
curve of progress. Much of the social regulation in the Middle Ages was
similar to that which is now increasing. Legislation by gilds and
privileges of private corporations hedged industry about. A reaction
against this in the seventeenth and eighteenth centuries brought on
national and state control, and state interference of another kind
rapidly increased until the time of Adam Smith. Then a strong reaction
came, and the next period of fifty years saw far less of interference.
The years from 1825 to 1840 were those of the greatest state socialism
ever seen in America, but the results were so unfortunate that a violent
reaction followed. The recent great increase of state activity is not
likely to be continued indefinitely. The path of progress is a spiral.
There are forces already at work creating a resistance to any great
extension of this movement. Competition of the healthier sort cannot be
suppressed without paralyzing results. Inequality and the opportunity
for ability to realize itself cannot be destroyed. The social
regulations must be of a sort to liberate the best energies of men, not
to enchain them. If the evils of state regulation increasingly appear to
outweigh the benefits, a limit must be put to the movement. While social
control may aid in lifting production and competition to a higher and
more moral plane, the ability of society will refuse to be ruled by the
standards of the weak and inefficient.
CHAPTER 57
FUTURE TREND OF VALUES
§ I. PAST AND PRESENT OF ECONOMIC SOCIETY
[Sidenote: Definition of economics recalled]
1. _The meaning and scope of economics can be better seen at the end
than at the beginning of its study._ The proposition with which this
inquiry opened may well be recalled in the closing chapter. The words of
the formal definition of economics should at this point convey a fuller
meaning. In the wide range of subjects passed in review has been sought
the answer to one question: What determines and affects the values of
good?
[Sidenote: Influence of economics on practical life]
Perhaps now also can be better appreciated what the influence of such a
study might and should be on practical action. At times economic
students have gained the ear of statesmen and rulers, and have exercised
much influence upon practical politics. It is sometimes bemoaned that
economists have to-day so small a direct part in the government of our
republic. They certainly have a greater part to-day than they had twenty
years ago, but if they had not, there would be small occasion for
regret. The immediate influence of the specialist on those in authority
is at most times less in a republic than it is in a monarchy, at those
rare times when a ruler shows the students his favor. That influence in
America is mostly indirect, but it is no less sure and lasting. The
results of the earnest pursuit of economic inquiry in the universities
and outside of them are already appearing, not in dramatic ways, but in
the more subtle, surer form of an intelligent public opinion.
[Sidenote: Examples of mistaken social prophecy]
2. _Economic science has not reached a stage that permits of much
prophecy._ Prediction is sometimes given as the test of science. This
test, however, is one that only astronomy can meet in any remarkable
degree. Chemistry can tell much of what will happen in the laboratory,
but nothing of the date of future powder-mill explosions. Geology
answers the question "What?" with surmises, and "When?" with an estimate
of a few million years more or less. Is it surprising that in human
affairs still less prediction is possible? There are countless
unmeasured factors in human action. Such generalizations as are possible
must be based on actions that appear and reappear with practical
constancy. Though a number of facts unite to suggest some conclusions as
to the immediate future, the experience of the last century bids one
beware of sweeping predictions. The close of the French Revolution was a
period marked by much speculation regarding the future of society. The
optimists, with faith in the perfectability of human nature and of
society, believed that all social ills were due to bad government; if
despotism were but overthrown, man's nature would develop, untrammeled,
to perfection. The economists of that day were sceptical, because,
looking deeper, they saw sources of misery in the scantiness of man's
environment, and in the sloth, ignorance, and incapacity of human
nature. The pessimists--the communists, and socialists of that
day--seeing the same evils, had other explanations to offer. While the
economists of that day believed the conditions of poverty and misery to
be inevitable, the pessimists pronounced them unendurable, and advocated
a radical social change as the only hope of saving the masses from
starvation. In such a variety of mutually contradictory views there must
have been much error, but likewise much truth if it could be
disentangled.
[Sidenote: Economic prophecies of the nineteenth century]
3. _The unexpected changes in transportation and in industry altered the
course of economic development in the last century._ Much of the
economic theory of that day appears absurd in the light of history. The
inventions of the period, from Adam Smith's writings to Ricardo's (1776
to 1820), were mostly for use in manufacturing. This suggested to the
minds of that time the progressive cheapening of cloth, iron, pottery,
and of all other products of machinery, but not the cheapening of food.
Indeed, the situation in western Europe then suggested strongly the
opinion that the products of the soil would steadily become more
difficult to get. The railroad was not of practical importance until
after 1830; the steamboat was not applied to ocean travel until 1837.
The opening of a rich continent and its annexation, by these new
agencies, to the available resources of the older countries were not
dreamed of. It was not fully appreciated that a great change in social
standards, controlling the growth of population, was in progress. This
was the panorama of the progress of society as seen by both the
conservative economists and the socialists of less than a century ago:
continued invention, an increasing population, low wages, scanty food,
growing wealth for the few, and growing poverty and misery for the
masses.
[Sidenote: Unexpected course of development in the nineteenth century]
4. _The actual course of economic development in the nineteenth century
falsified the predictions alike of optimists, economists, and
pessimists._ Not foreseeing the great supplies of natural resources soon
to be made available for the older countries, the men of that day
naturally thought of the supply of land as limited and fixed. Supply in
the economic sense means the amount available at the given time in the
market; but despite the great areas since brought into the
world-markets, the false idea of a century ago still persists in the
text-books, and shapes economic reasoning. It is vain to say that the
circumstances have been unique and that the general principle is still
valid. Much of the so-called orthodox economic analysis was essentially
erroneous as applied to the conditions of the past century; it is
erroneous to-day and will be so for years to come, if it ever fits the
facts. New continents are about to be opened. The building of railroads
the length of South America and to the center of Africa will make
available new mineral wealth, rare woods, enormous forests, and some of
the greatest food-producing areas on the globe. Population in
Christendom has increased more rapidly than ever before in the history
of the world, but it has not overtaken the progress in resources. The
rate of increase of population is slackening. The result of this
combination of events has been a general rise of the conditions making
for popular welfare. Despite the problems and the abuses that every new
change brings, the civilized world undoubtedly is more prosperous to-day
than ever before. The greatest misery and discontent is in the more
backward communities. This is past and present; what of the economic
future? Is the present condition a normal one--is this prosperity likely
to grow or to decline? Thus far, surely, the economic student may
question the oracles; for though the distant future is veiled from man's
view, the role of economic theory is to show causal relations, to
convert mystery into reason, and thus to give a lamp to the feet of the
present.
§ II. THE ECONOMIC FUTURE OF SOCIETY
[Sidenote: Exhaustion of certain natural resources]
1. _Present industrial progress is largely due to material conditions,
temporarily favorable._ Many of the materials now being destroyed in
immense quantities have been slowly stored up through the ages and are
not renewable.[4] Till modern times man knew little of the world beneath
its crust. Living, he scratched the earth's surface, and dying, left his
bones to fertilize the soil. But to-day, man exhausts the stores in the
interior of the earth, burns the treasures of the carboniferous age,
casts the fertilizing elements into the ocean, and leaves the world an
empty shell. Forests are being so rapidly cut off that the price of
fuel-wood and lumber in many parts of the United States has, within
twenty years, been multiplied by three. The world's store of iron ore
is not yet fully known, but much of it has been measured, and of the
deposits known to be within the United States over one half are said to
be owned by one corporation, and they are enough to continue its present
output no more than sixty years. Many other natural products are in like
manner gathered by civilized man from a stock created long ago. While
the supply of vegetable food promises to be ample, the supply of meat
will be maintained with difficulty as population becomes denser.
[Footnote 4: Though at first glance this may seem contradictory to the
statement in the foregoing paragraph regarding the nature of supply, it
will not be found so on closer examination.]
[Sidenote: Possibilities of other resources]
2. _Many other inexhaustible sources of essential materials have not yet
been developed._ What has just been said is the darker side. The
coal-mines can be emptied, but so long as the sun shines and the rains
fall, Niagara will remain as a source of light, heat, and power. The
tides flow on forever. In every thunder-storm enough force is dissipated
to run thousands of factories. The heat in the center of the globe,
though not inexhaustible, would suffice for man's needs for many
centuries. The force in Mount Pelée, if chained and utilized, would run
a million factories a million years. It is not too much to hope that
engineering skill will some day reach and utilize these sources. Such a
cheapening and diffusion of power would put a new face on many of the
problems of industry. New sources of materials undoubtedly will be
developed. It is reasonable to hope that before iron ore has become
extremely scarce, a cheap and practicable method of extracting aluminium
from clay will have been perfected. Secure of these permanent sources,
civilization will stand on a firmer foundation.
[Sidenote: Effect on values of shifting centers of power and materials]
A great displacement of local values must accompany this shifting of the
centers of power and materials. When the coal districts are heaps of
slag and cinders, industry will be found near the water-power. Because
of distance from raw materials, New England even now finds herself hard
pushed in her rivalry with the Southern states in the manufacture of
textiles. The industrial map of our country will be greatly altered a
hundred years hence. The possession of rich natural resources to-day
does not insure a community enduring prosperity.
[Sidenote: Effect of accumulating wealth]
3. _The mass and quality of wealth will increase rapidly if social and
political conditions remain stable._ The main method of increasing
wealth must be the putting of energies and resources into more abiding
forms. In order that a motive for saving may be present, there must be
stable conditions. Increasing subordination of present to future will be
accompanied by a fall in the rate of interest. The growth of wealth
means a higher quality of all artificial productive agents. A larger
part of the energies of men will then be directed merely to supervising
the developed machinery. Man will live in a better environment, in a
better and richer world. Wages must rise as the quality of tools and
machinery improves. Population most probably will not increase
proportionately and the relation of the labor-supply to the resources
with which it works should be more and more in favor of the laboring
classes. The difficult problems of the concentrated control of industry
and of the control of wealth must be solved in the interests of all.
[Sidenote: Social progress vs. race progress]
4. _Improvement of the race biologically, through selection of the
ablest individuals, has been a great factor in human progress._ Social
progress is not necessarily the steady biological betterment of the
native ability of men. The education of the average member of society is
becoming yearly better; it is doubtful whether the innate capacity of a
new-born babe in Europe and America to-day is greater than it was among
our Germanic ancestors in Roman times. Indeed, the progress of the past
two thousand years has been in social organization, in the enlargement
and simplifying of the mass of knowledge which has to be reappropriated
by each new individual, rather than in race-breeding and in quality.
[Sidenote: Nature vs. culture]
Few thoughtful persons now hold the view that the race can be rapidly
improved biologically by the process of educating the individual.
Education is cumulative in so far as it builds up a better environment
into which other children will be born, but the betterment is not due
to the inheritance by the child of the acquired knowledge and skill of
the parent. If this question is open to dispute among biologists, it is
only as regards a minute increment of improvement. Practically,
selection is the only means of improving the innate capacity of any
species in any large measure. Many forces were at work in the past to
lift man above the brute, and especially to increase the average
brain-power of the human race. The weak, the ignorant, the incapable in
primitive societies were ruthlessly killed off. The strong, the
sagacious, and the enterprising left the largest numbers of descendants.
[Sidenote: Decrease of the successful elements]
5. _Progress will be checked if the native quality of the race
declines._ Under modern conditions, especially within the last quarter
of a century, the successful elements of society are becoming less
fertile. Large families were the rule among the capable pioneers of
America; now they are rare except in the lower industrial ranks.
Democracy and opportunity are favoring this process of increasing the
mediocre and reducing the excellent strains of stock. Caste and status
kept successful generations of capable men in humble social ranks from
which only by chance some remarkable individual could rise. In a
democracy, those of marked ability can more easily move into the
better-paid callings and professions. This individual good fortune,
however, reduces the probability of offspring. In the higher social
ranks are more bachelors and old maids than in the lower ranks, and
fewer children are born to each marriage. The president of our oldest
university has shown that one fourth of the graduates of the last
generation have remained single, and that the average number of children
of the married graduate is two. That group of men, therefore, has left
only three fourths enough descendants to maintain its numbers, and as
the population has doubled within the same generation, that class
represents only three eighths as large a proportion of the American
stock as formerly.
[Sidenote: The menace to progress]
This sterilization of ability has cumulative results. If society were
composed in equal parts of two distinct strains of stock, not
intermarrying; if the total population kept intact from one generation
to another (say each period of thirty years), but the superior strain
contributed only three fourths of its own number, at the end of five
generations it would have sunk from one half to a little more than one
eighth of the population. A period brief in the life of nations would
serve to leave it an almost negligible factor in social life. There can
hardly be a doubt that at present our society is on the average
increasing far more from the less provident, less enterprising, less
intelligent classes. There has not yet been time for many of the
cumulative effects of this process to appear. Progress is threatened
unless social institutions can be so adjusted as to reverse the present
process of multiplying the poorest, and of extinguishing the most
capable families.
[Sidenote: Sympathy and selfishness in relation to progress]
6. _If progress is to continue, there must be left a wide field for the
ambitions and for the competition of individuals._ The results of any
given ability are dependent upon the energy with which it is used. The
social machinery finds its motive force in the nature of men. In taking
economic wants as the starting point of our study, it was not implied
that men were entirely selfish. Sympathy widens; economic wants include
family, friends, and, in a growing measure, humanity. The happiness of a
truly socialized man consists in part in the happiness of his fellows.
As social sympathy broadens, the sense of duty becomes a stronger
economic force. Men change, but not rapidly, and not always for the
better. It is unsafe to overestimate the generosity of men. Individual
wants and interests must, so far as can now be seen, continue to be
among the stronger forces that move society. Progress is made because to
exceptional ability in general is now presented the hope of large
rewards.
[Sidenote: Status endangering progress]
[Sidenote: Envy endangering progress]
These dynamic forces making for progress are at present, however,
threatened from two sides. Enterprise is threatened from the side of
privilege or status. The avoidance of certain kinds of work which, by
social convention, come to be regarded as degrading, takes much ability
out of business. The freedom of America to so great a degree from this
disdain of honest labor has been a large factor in her progress, but it
is endangered when men become timidly conservative of social position.
Progress is threatened, secondly, by democracy, with its tendency to
carry the notion of literal equality over into industry. When democracy
becomes envious, it denies to exceptional ability an exceptional reward.
The line of growth must be the resultant of the positive forces in these
two principles. The energy of the social reformer must be directed along
rational lines. If this can be done, the economic outlook is for a great
development of wealth and popular welfare. Economics must be looked upon
as the study of the forces in human nature as much as of the material
resources of the world.
QUESTIONS AND CRITICAL NOTES
THE QUESTIONS.--These questions are not intended to be used merely as
tests of knowledge of the text. They leave untouched many of the most
important questions in the reading, and they raise other inquiries
hardly hinted at in it. The list began ten years ago with one or two
questions on each topic, assigned in advance of lectures and
recitations, with the object of arousing the student's thought,
quickening his observation, and stimulating his interest in the
subjects. The possibilities of helpful questions of this kind are hardly
more than suggested by the examples given, and every teacher will find
peculiar opportunities in his own neighborhood for other similar
inquiries.
Other questions are more of the nature of those in _Problems in
Political Economy_, by W. G. Sumner (published by Holt & Co., New York,
1884), which are intended to be reasoned out in the light of principles
given in the class-room. Many teachers and students have found much help
in that little book, which in turn acknowledges large obligations to
earlier lists of questions. The changed point of view in economic theory
has, however, made most of the older problems of this nature unusable
except after reformulation. Fertile in suggestions of both of the kinds
of questions mentioned are two books by H. J. Davenport, _Outlines of
Economic Theory_ and _Outlines of Elementary Economics_ (The Macmillan
Co., New York, 1896 and 1897), though some of the questions imply
theoretical views differing from those of this book. Excellent lists of
questions with references to reading have been prepared by W. G. L.
Taylor, in his _Exercises in Economics_ (The University Publishing Co.,
Lincoln, Neb., 1900). The list of problems of this kind can easily be
extended to meet the special conditions of each community.
THE BIBLIOGRAPHICAL NOTES.--The few references and critical notes given
are intended as a help to teachers and advanced students desirous of
following some of the more recent contributions to controverted points
in economic theory. No attempt has been made to furnish a list of books
for the beginner or the regular reader. Among accessible books
containing helpful lists of that kind may be mentioned:
_The Reader's Guide in Economic, Social, and Political Science_, by
Bowker and Iles.
_Outlines of Economics_, by R. T. Ely (published by Macmillan, New York,
2d ed., 1900). Contains both questions and bibliographies.
_Introduction to the Study of Economics_, by C. J. Bullock (published by
Silver, Burdett & Co., 2d ed., 1900). The references to the literature
are given by pages or sections at the end of each chapter, and at the
back is a list (about twenty pages) of the most useful texts, documents,
and materials.
_Financial History of the United States_, by D. R. Dewey (published by
Longmans, Green & Co., 1903). Contains excellent references on public
finances, tariff, banking, and taxation of the United States.
_Introduction to Economics_, by H. R. Seager (published by Holt & Co.,
New York, 1903). Each of the first twenty-six chapters is followed by
fresh and well-selected references varying from one line to nearly a
page in length. A good general bibliographical note is given on pp.
61-2.
CHAPTER 1. THE NATURE AND PURPOSE OF POLITICAL ECONOMY
1. Has political economy anything to do with woman suffrage, the liquor
problem, a republican _vs._ a monarchical form of government, the silver
question?
2. Is political economy a study of things or of men?
3. Shall a piece of coal be studied in geology, botany, physics,
chemistry, or economics?
4. Do you expect to acquire wealth more easily as a result of the study
of political economy?
5. Of what practical use do you think political economy is?
6. Is political economy necessary to the understanding of the business
world, or vice versa?
7. How wide a knowledge would a complete understanding of industrial
society require?
8. Did the discovery of America make the study of political economy more
important?