patronise it, and lending on personal rather than material security.
Such banks are intended almost exclusively for the relatively helpless
borrower, as, the small farmer, artisan, shopkeeper, and the small man
generally. Fundamentally they are associations of neighbours who
combine their resources and their credit in order to obtain loans on
better terms than are accorded by the ordinary commercial banks. The
capital is derived partly from the sale of shares of stock, partly
from deposits, and partly from borrowed money. In Germany, where
credit associations have been more widely extended and more highly
developed than in any other country, they are of two kinds, named
after their respective founders, Schulze-Delitzsch and Raiffeisen. The
former operates chiefly in the cities, serves the middle classes
rather than the very poor, requires all its members to subscribe for
capital stock, commits them to a long course of saving, and thus
develops their interest as lenders. The Raiffeisen societies have, as
a rule, very little share capital, exist chiefly in the country
districts, especially among the poorest of the peasantry, are based
mostly on personal credit, and do not profess to encourage greatly the
saving and lending activities of their members. Both forms of
association loan money to their members at lower rates of interest
than these persons could obtain elsewhere. Hence credit co-operation
directly reduces the burden of interest.
The Schulze-Delitzsch societies have more than half a million members
in the cities and towns of Germany, sixty per cent. of whom take
advantage of the borrowing facilities. The Raiffeisen banks comprise
about one-half of all the independent German agriculturists. Some form
of co-operative banking is well established in every important country
of Europe, except Denmark and Great Britain. In the former country
its place seems to be satisfactorily filled by the ordinary commercial
banks. Its absence from Great Britain is apparently due to the credit
system provided by the large landholders, to the scarcity of peasant
proprietors, and to general lack of initiative. It is especially
strong in Italy, Belgium, and Austria, and it has made a promising
beginning in Ireland. In every country in which it has obtained a
foothold, it gives indication of steady and continuous progress.
Nevertheless it is subject to definite limits. It can never make much
headway among that class of persons whose material resources are
sufficiently large and palpable to command loans on the usual terms
offered by the commercial banks. As a rule, these terms are quite as
favourable as those available through the co-operative credit
associations. It is only because the poorer men cannot obtain loans
from the commercial banks on the prevailing conditions that they are
impelled to have recourse to the co-operative associations.
_Co-operative Agricultural Societies_
The chief operations of agricultural co-operative societies are
manufacturing, marketing, and purchasing. In the first named field the
most important example is the co-operative dairy. The owners of cows
hold the stock or shares of the concern, and in addition to dividends
receive profits in proportion to the amount of milk that they supply.
In Ireland and some other countries, a portion of the profits goes to
the employés of the dairy as a dividend on wages. Other productive
co-operatives of agriculture are found in cheese making, bacon curing,
distilling, and wine making. All are conducted on the same general
principles as the co-operative dairy.
Through the marketing societies and purchasing societies, the farmers
are enabled to sell their products to better advantage, and to obtain
materials needed for carrying on agricultural operations more cheaply
than would be possible by isolated individual action. Some of the
products marketed by the selling societies are eggs, milk, poultry,
fruit, vegetables, live stock, and various kinds of grain. The
purchasing societies supply for the most part manures, seeds, and
machinery. Occasionally they buy the most costly machinery in such a
way that the association becomes the corporate owner of the
implements. In these cases the individual members have only the use of
the machines, but they would be unable to enjoy even that advantage
were it not for the intervention of the co-operative society. Where
such arrangements exist, the society exemplifies not only co-operative
buying but co-operative ownership.
Agricultural co-operation has become most widely extended in Denmark,
and has displayed its most striking possibilities in Ireland.
Relatively to its population, the former country has more farmers in
co-operative societies, and has derived more profit therefrom, than
any other nation. The rapid growth and achievements of agricultural
co-operation in the peculiarly unfavourable circumstances of Ireland
constitute the most convincing proof to be found anywhere of the
essential soundness and efficacy of the movement. Various forms of
rural co-operative societies are solidly established in Germany,
France, Belgium, Italy, and Switzerland. In recent years the movement
has made some progress in the United States, especially in relation to
dairies, grain elevators, the marketing of live stock and fruit, and
various forms of rural insurance. The co-operative insurance companies
effect a saving to the Minnesota farmers of $700,000 annually, and the
co-operative elevators handle about 30 per cent. of the grain marketed
in that state. In 1915 the business transacted by the co-operative
marketing and purchasing organisations of the farmers of the United
States amounted to $1,400,000,000.
The transformation in the rural life of more than one European
community through co-operation has amounted to little less than a
revolution. Higher standards of agricultural products and production
have been set up and maintained, better methods of farming have been
inculcated and enforced, and the whole social, moral, and civic life
of the people has been raised to a higher level. From the viewpoint of
material gain, the chief benefits of agricultural co-operation have
been the elimination of unnecessary middlemen, and the economies of
buying in large quantities, selling in the best markets, and employing
the most efficient implements. As compared with farming conducted on a
large scale, the small farm possesses certain advantages, and is
subject to certain disadvantages. It is less wasteful, permits greater
attention to details, and makes a greater appeal to the self interest
of the cultivator; but the small farmer cannot afford to buy the best
machinery, nor is he in a position to carry on to the best advantage
the commercial features of his occupation, such as borrowing, buying,
and marketing. Co-operation frees him from all these handicaps. "The
co-operative community ... is one in which groups of humble men
combine their efforts, and to some extent their resources, in order to
secure for themselves those advantages in industry which the masters
of capital derive from the organisation of labour, from the use of
costly machinery, and from the economies of business when done on a
large scale. They apply in their industry the methods by which the
fortunes of the magnates in commerce and manufacture are made." These
words, uttered by a prominent member of the Irish co-operative
movement, summarise the aims and achievements of agricultural
co-operation in every country of Europe in which it has obtained a
strong foothold. In every such community the small farm has gained at
the expense of the large farm system. Finally, agricultural
co-operation reduces the burden of interest by eliminating some
unnecessary capital, stimulates saving among the tillers of the soil
by providing a ready and safe means of investment, and in manifold
ways contributes materially toward a better distribution of wealth.
_Co-operative Mercantile Societies_
Co-operative stores are organised by and for consumers. In every
country they follow rather closely the Rochdale system, so called from
the English town in which the first store of this kind was established
in 1844. The members of the co-operative society furnish the capital,
and receive thereon interest at the prevailing rate, usually five per
cent. The stores sell goods at about the same prices as their
privately owned competitors, but return a dividend on the purchases of
all those customers who are members of the society. The dividends are
provided from the surplus which remains after wages, interest on the
capital stock, and all other expenses have been paid. In some
co-operative stores non-members receive a dividend on their purchases
at half the rate accorded to members of the society, but only on
condition that these payments shall be invested in the capital stock
of the enterprise. And the members themselves are strongly urged to
make this disposition of their purchase-dividends. Since the latter
are paid only quarterly, the co-operative store exercises a
considerable influence toward inducing its patrons to save and to
become small capitalists.
In Great Britain the vast majority of the retail stores have been
federated into two great wholesale societies, one in England and the
other in Scotland. The retail stores provide the capital, and
participate in the profits according to the amounts purchased, just as
the individual consumers furnish the capital and share the profits of
the retail establishments. The Scottish Wholesale Society divides a
part of the profits among its employés. Besides their operations as
jobbers, the wholesale societies are bankers for the retail stores,
and own and operate factories, farms, warehouses, and steamships.
Many of the retail co-operatives likewise carry on productive
enterprises, such as milling, tailoring, bread making, and the
manufacture of boots, shoes, and other commodities, and some of them
build, sell, and rent cottages, and lend money to members who desire
to obtain homes.
The co-operative store movement has made greatest progress in its
original home, Great Britain. In 1913 about one person in every three
was to some degree interested in or a beneficiary of these
institutions. The profits of the stores amounted to about $71,302,070,
which was about 35 per cent. on the capital. The employés numbered
about 145,000, and the sales for the year aggregated $650,000,000. The
English Wholesale Society was the largest flour miller and shoe
manufacturer in Great Britain, and its total business amounted to
$150,000,000. Outside of Great Britain, co-operative distribution has
been most successful in Germany, Belgium, and Switzerland. It has had
a fair measure of development in Italy, but has failed to assume any
importance in France. "There is every sign that within the near
future--except in France--the stores will come to include the great
majority of the wage earning class, which is a constantly growing
percentage of the total population."[155] Within recent years a
respectable number of stores have been established on a sound basis in
Canada and the United States. Owing, however, to the marked
individualism and the better economic conditions of these two
countries, the co-operative movement will continue for some time to be
relatively slow.
As in the case of agricultural co-operation, the money benefits
accruing to the members of the co-operative stores consist mainly of
profits rather than interest. In the absence of the store societies,
these profits would have gone for the most part to middlemen as
payments for the risks and labour of conducting privately owned
establishments. Forty-seven of the sixty million dollars profits of
the British co-operative stores in 1910 were divided among more than
two and one-half million members of these institutions, instead of
going to a comparatively small number of private merchants. The other
thirteen million dollars were interest on the capital stock. Had the
members invested an equal amount in other enterprises they could,
indeed, have obtained about the same rate and amount of interest, but
in the absence of the co-operative stores their inducements and
opportunities to save would have been much smaller. For it must be
kept in mind that a very large part of the capital stock in the
co-operative stores is derived from the members' dividends on their
purchases at such stores, and would not have come into existence at
all without these establishments. The gains of the co-operative
stores, whether classified as profits or as interest, are evidently a
not inconsiderable indication of a better distribution of wealth.
_Co-operation in Production_
Co-operative production has occasionally been pronounced a failure.
This judgment is too sweeping and too severe. "As a matter of fact,"
says a prominent London weekly, "the co-operators' success has been
even more remarkable in production than in distribution. The
co-operative movement runs five of the largest of our flour mills; it
has, amongst others, the very largest of our boot factories; it makes
cotton cloth and woollens, and all sorts of clothing; it has even a
corset factory of its own; it turns out huge quantities of soap; it
makes every article of household furniture; it produces cocoa and
confectionery; it grows its own fruit and makes its own jams; it has
one of the largest tobacco factories, and so on." Obviously this
passage refers to that kind of productive co-operation which is
carried on by the stores, not to productive concerns owned and
managed by the workers therein employed. Nevertheless the enterprises
in question are co-operatively managed, and hence exemplify
co-operation rather than private and competitive industry. They ought
not to be left out of any statement of the field occupied by
co-operative production. The limitations and possibilities of
co-operation in production can best be set forth by considering its
three different forms separately.
The "perfect" form occurs when all the workers engaged in a concern
own all the share capital, control the entire management, and receive
the whole of the wages, profits, and interest. In this field the
failures have been much more numerous and conspicuous than the
successes. Godin's stove works at Guise, France, is the only important
enterprise of this kind that is now in existence. Great Britain has
several establishments in which the workers own a large part of the
capital, but apparently none in which they are the sole proprietors
and managers. The "labour societies" of Italy, consisting mostly of
diggers, masons, and bricklayers, co-operatively enter into contracts
for the performance of public works, and share in the profits of the
undertaking in addition to their wages; but the only capital that they
provide consists of comparatively simple and inexpensive tools. The
raw material and other capital is furnished by the public authority
which gives the contract.
A second kind of productive co-operation is found in the arrangement
known as co-partnership. This is "the system under which, in the first
place, a substantial and known share of the profit of a business
belongs to the workers in it, not by right of any shares they may
hold, or any other title, but simply by right of the labour they have
contributed to make the profit; and, in the second place, every worker
is at liberty to invest his profit, or any other savings, in shares of
the society or company, and so become a member entitled to vote on the
affairs of the body which employs him."[156] So far as its first, or
profit sharing, feature is concerned, co-partnership is not genuine
co-operation, for it includes neither ownership of capital nor
management of the business. Co-operative action begins only with the
adoption of the second element. In most of the existing co-partnership
concerns, all the employés are urged, and many of them required to
invest at least a part of their profits in the capital stock. The most
notable and successful of these experiments is that carried on by the
South Metropolitan Gas Company of London. Practically all the
company's 6,000 employés are now among its stockholders. Although
their combined holdings are only about one-twenty-eighth of the total,
they are empowered to select two of the ten members of the board of
directors. Essentially the same co-partnership arrangements have been
adopted by about one-half the privately owned gas companies of Great
Britain. In none of them, however, have the workers obtained as yet
such a large percentage of either ownership or control as in the South
Metropolitan. Co-partnership exists in several other enterprises in
Great Britain, and is found in a considerable number of French
concerns. There are a few instances in the United States, the most
thoroughgoing being that of N. O. Nelson & Co. at Le Claire, Ill.
As already noted, the co-operative stores exemplify a third type of
co-operative production. In some cases the productive concern is under
the management of a local retail establishment, but the great majority
of them are conducted by the English and Scottish Wholesale Societies.
As regards the employés of these enterprises, the arrangement is not
true co-operation, since they have no part in the ownership of the
capital. The Scottish Wholesale Society, as we have seen, permits the
employés of its productive works to share in the profits thereof;
nevertheless it does not admit them as stockholders, nor give them any
voice in the management. In all cases the workers may, indeed, become
owners of stock in their local retail stores. Since the latter are
stockholders in the wholesale societies, which in turn own the
productive enterprises, the workers have a certain indirect and
attenuated proprietorship in the productive concerns. But they derive
therefrom no dividends. All the interest and most of the profits of
the productive establishments are taken by the wholesale and retail
stores. For it is the theory of the wholesale societies that the
employés in the works of production should share in the gains thereof
only as consumers. They are to profit only in the same way and to the
same extent as other consumer-members of the local retail
establishments.
The most effective and beneficial form of co-operative production is
evidently that which has been described as the "perfect" type. Were
all production organised on this plan, the social burden of interest
would be insignificant, industrial despotism would be ended, and
industrial democracy realised. As things are, however, the
establishments exemplifying this type are of small importance. Their
increase and expansion are impeded by lack of directive ability and of
capital, and the risk to the workers' savings. Yet none of these
obstacles is necessarily insuperable. Directive ability can be
developed in the course of time, just as it was in the co-operative
stores. Capital can be obtained fast enough perhaps to keep pace with
the supply of directive ability and the spirit of co-operation. The
risk undertaken by workers who put their savings into productive
concerns owned and managed by themselves need not be greater than that
now borne by investors in private enterprises of the same kind. There
is no essential reason why the former should not provide the same
profits and insurance against business risks as the latter. While the
employés assume none of the risks of capitalistic industry, neither do
they receive any of the profits. If the co-operative factory exhibits
the same degree of business efficiency as the private enterprise it
will necessarily afford the workers adequate protection for their
savings and capital. Indeed, if "perfect" co-operative production is
to be successful at all its profits will be larger than those of the
capitalistic concern, owing to the greater interest taken by the
workers in their tasks, and in the management of the business.
For a long time to come, however, it is probable that "perfect"
co-operative production will be confined to relatively small and local
industries. The difficulty of finding sufficient workers' capital and
ability to carry on, for example, a transcontinental railroad or a
nationwide steel business, is not likely to be overcome for one or two
generations.[157]
The labour co-partnership form of co-operation is susceptible of much
wider and more rapid extension. It can be adapted readily to the very
large as well as to the small and medium sized concerns. Since it
requires the workers to own but a part of the capital, it can be
established in any enterprise in which the capitalists show themselves
willing and sympathetic. In every industrial corporation there are
some employés who possess savings, and these can be considerably
increased through the profit sharing feature of co-partnership. A very
long time must, indeed, elapse before the workers in any of the larger
enterprises could get possession of all, or even of a controlling
share of the capital, and a considerable time would be needed to
educate and fit them for successful management.
Production under the direction of the co-operative stores can be
extended faster than either of the other two forms, and it has before
it a very wide even though definitely limited field. The British
wholesale societies have already shown themselves able to conduct with
great success large manufacturing concerns, have trained and attracted
an adequate number of competent leaders, and have accumulated so much
capital that they have been obliged to invest several million pounds
in other enterprises. The possible scope of the stores and their
co-operative production has been well described by C. R. Fay:
"distribution of goods for personal consumption, first, among the
working class population, secondly, among the salaried classes who
feel a homogeneity of professional interest; production by working
class organisations alone (with rare exceptions in Italy) of all the
goods which they distribute to their members. But this is its limit.
Distribution among the remaining sections of the industrial
population; production for distribution to these members; production
of the instruments of production, and production for international
trade; the services of transport and exchange: all these industrial
departments are, so far as can be seen, permanently outside the domain
of a store movement."[158]
The theory by which the stores attempt to justify the exclusion of the
employés of their productive concerns from a share of the profits
thereof is that all profits come ultimately from the pockets of the
consumer, and should all return to that source. The defect in this
theory is that it ignores the question whether the consumers ought not
to be required to pay a sufficiently high price for their goods to
provide the producers with profits in addition to wages. While the
wholesale stores are the owners and managers of the capital in the
productive enterprises, and on the capitalistic principle should
obtain the profits, the question remains whether this is necessarily a
sound principle, and whether it is in harmony with the theory and
ideals of co-operation. In those concerns which have adopted the
labour co-partnership scheme, the workers, even when they own none of
the capital, are accorded a part of the profits. It is assumed that
this is a fairer and wiser method of distribution than that which
gives the labourer only wages, leaving all the profits to the
manager-capitalist. This feature of co-partnership rests on the theory
that the workers can, if they will, increase their efficiency and
reduce the friction between themselves and their employer to such an
extent as to make the profit sharing arrangement a good thing for both
parties. Consequently the profits obtained by the workers are a
payment for this specific contribution to the prosperity of the
business. Why should not this theory find recognition in productive
enterprises conducted by the co-operative stores?
In the second place, the workers in these concerns ought to be
permitted to participate in the capital ownership and management. They
would thus be strongly encouraged to become better workers, to save
more money, and to increase their capacity for initiative and self
government. Moreover, this arrangement would go farther than any other
system toward reconciling the interests of producer and consumer. As
producer, the worker would obtain, besides his wages, interest and
profits up to the limit set by the competition of private productive
concerns. As consumer, he would share in the profits and interest
which would otherwise have gone to the private distributive
enterprises. In this way the producer and consumer would each get the
gains that were due specifically and respectively to his activity and
efficiency.
_Advantages and Prospects of Co-operation_
At this point it will perhaps be well to sum up the advantages and to
estimate the prospects of the co-operative movement. In all its forms
co-operation eliminates some waste of capital and energy, and
therefore transfers some interest and profits from a special
capitalist and undertaking class to a larger and economically weaker
group of persons. For it must be borne in mind that all co-operative
enterprises are conducted mainly by and for labourers or small
farmers. Hence the system always makes directly for a better
distribution of wealth. To a considerable extent it transfers capital
ownership from those who do not themselves work with or upon capital
to those who are so engaged; namely, the labourers and the farmers;
thus it diminishes the unhealthy separation now existing between the
owners and the users of the instruments of production. Co-operation
has, in the second place, a very great educational value. It enables
and induces the weaker members of economic society to combine and
utilise energies and resources that would otherwise remain unused and
undeveloped; and it greatly stimulates and fosters initiative, self
confidence, self restraint, self government, and the capacity for
democracy. In other words, it vastly increases the development and
efficiency of the individual. It likewise induces him to practise
thrift, and frequently provides better fields for investment than
would be open to him outside the co-operative movement. It diminishes
selfishness and inculcates altruism; for no co-operative enterprise
can succeed in which the individual members are not willing to make
greater sacrifices for the common good than are ordinarily evoked by
private enterprise. Precisely because co-operation makes such heavy
demands upon the capacity for altruism, its progress always has been
and must always continue to be relatively slow. Its fundamental and
perhaps chief merit is that it does provide the mechanism and the
atmosphere for a greater development of the altruistic spirit than is
possible under any other economic system that has ever been tried or
devised.
By putting productive property into the hands of those who now possess
little or nothing, co-operation promotes social stability and social
progress. This statement is true in some degree of all forms of
co-operation, but it applies with particular force to those forms
which are carried on by the working classes. A steadily growing number
of keen-sighted social students are coming to realise that an
industrial system which permits a comparatively small section of
society to own the means of production and the instrumentalities of
distribution, leaving to the great majority of the workers nothing but
their labour power, is fundamentally unstable, and contains within
itself the germs of inevitable dissolution. No mere adequacy of wages
and other working conditions, and no mere security of the workers'
livelihood, can permanently avert this danger, nor compensate the
individual for the lack of power to determine those activities of life
which depend upon the possession of property. Through co-operation
this unnatural divorce of the users from the owners of capital can be
minimised. The worker is converted from a mere wage earner to a wage
earner plus a property owner, thus becoming a safer and more useful
member of society. In a word, co-operation produces all the well
recognised individual and social benefits which have in all ages been
evoked by the "magic of property."
Finally, co-operation is a golden mean between individualism and
Socialism. It includes all the good features and excludes all the evil
features of both. On the one hand, it demands and develops individual
initiative and self reliance, makes the rewards of the individual
depend upon his own efforts and efficiency, and gives him full
ownership of specific pieces of property. On the other hand, it
compels him to submerge much of the selfishness and indifference to
the welfare of his fellows which characterise our individual economy.
It embraces all the good that is claimed for Socialism because it
induces men to consider and to work earnestly for the common good,
eliminates much of the waste of competitive industry, reduces and
redistributes the burdens of profits and interest, and puts the
workers in control of capital and industry. At the same time, it
avoids the evils of an industrial despotism, of bureaucratic
inefficiency, of individual indifference, and of an all pervading
collective ownership. The resemblances that Socialists sometimes
profess to see between their system and co-operation are superficial
and far less important than the differences. Under both arrangements
the workers would, we are told, own and control the means of
production; but the members of a co-operative society directly own and
immediately control a _definite amount of specific capital_, which is
essentially _private_ property. In a Socialist régime the workers'
ownership of capital would be collective not private, general not
specific, while their control of the productive instruments with which
they worked would be shared with other citizens. The latter would
vastly outnumber the workers in any particular industry, and would be
interested therein not as producers but as consumers. No less obvious
and fundamental are the differences in favour of co-operation as
regards the vital matters of freedom, opportunity, and efficiency.
In so far as the future of co-operation can be predicted from its
past, the outlook is distinctly encouraging. The success attained in
credit, agriculture, and distribution, is a sufficient guarantee for
these departments. While productive co-operation has experienced more
failures than successes, it has finally shown itself to be sound in
principle, and feasible in practice. Its extension will necessarily be
slow, but this is exactly what should be expected by any one who is
acquainted with the limitations of human nature, and the history of
human progress. If a movement that is capable of modifying so
profoundly the condition of the workers as is co-operative production,
gave indications of increasing rapidly, we should be inclined to
question its soundness and permanence. Experience has given us
abundant proof that no mere system or machinery can effect a
revolutionary improvement in economic conditions. No social system can
do more than provide a favourable environment for the development of
those individual capacities and energies which are the true and the
only causal forces of betterment.
Nor is it to be expected that any of the other three forms of
co-operation will ever cover the entire field to which it might,
absolutely speaking, be extended; or that co-operation as a whole will
become the one industrial system of the future. Even if the latter
contingency were possible it would not be desirable. The elements of
our economic life, and the capacities of human nature, are too varied
and too complex to be forced with advantage into any one system,
whether capitalism, Socialism, or co-operation. Any single system or
form of socio-economic organisation would prove an intolerable
obstacle to individual opportunity and social progress. Multiplicity
and variety in social and industrial orders are required for an
effective range of choices, and an adequate scope for human effort. In
a general way the limits of co-operation in relation to the other
forms of economic organisation have been satisfactorily stated by Mr.
Aneurin Williams: "I suggest, therefore, that where there are great
monopolies, either natural or created by the combination of
businesses, there you have a presumption in favour of State and
municipal ownership. In those forms of industry where individuality is
everything; where there are new inventions to make, or to develop or
put on the market, or merely to adopt in some rapidly transformed
industry; where the eye of the master is everything; where reference
to a committee, or appeals from one official to another, would cause
fatal delay: there is the natural sphere of individual enterprise pure
and simple. Between these two extremes there is surely a great sphere
for voluntary association to carry on commerce, manufacture, and
retail trade, in circumstances where there is no natural monopoly, and
where the routine of work is not rapidly changing, but on the whole
fairly well established and constant."[159]
The province open to co-operation is, indeed, very large. If it were
fully occupied the danger of a social revolution would be
non-existent, and what remained of the socio-industrial problem would
be relatively undisturbing and unimportant. The "specialisation of
function" in industrial organisation, as outlined by Mr. Williams,
would give a balanced economy in which the three great socio-economic
systems and principles would have full play, and each would be
required to do its best in fair competition with the other two.
Economic life would exhibit a diversity making strongly for social
satisfaction and stability, inasmuch as no very large section of the
industrial population would desire to overthrow the existing order.
Finally, the choice of three great systems of industry would offer the
utmost opportunity and scope for the energies and the development of
the individual. And this, when all is said, remains the supreme end of
a just and efficient socio-industrial organisation.
REFERENCES ON SECTION II
FISHER: The Rate of Interest. New York; 1907.
CASSEL: Nature and Necessity of Interest. London; 1903.
GONNER: Interest and Saving. London; 1906.
LANDRY: L'Intérêt du Capital. Paris; 1904.
MENGER: The Right to the Whole Produce of Labour. London;
1899.
CATHREIN-GETTELMAN: Socialism. St. Louis; 1904.
SKELTON: Socialism: A Critical Analysis. New York; 1911.
SPARGO: Socialism. Macmillan; 1906.
WALLING: Socialism As It Is. New York; 1912.
HILLQUIT-RYAN: Socialism: Promise or Menace? Macmillan; 1914.
SAVATIER: La Théorie Moderne du Capital et la Justice. Paris;
1898.
GARRIGUET: Régime du Travail. Paris; 1908.
FUNK: Zins und Wucher. Tübingen; 1868.
HOLYOAKE: The History of Co-operation. London; 1906.
FAY: Co-operation at Home and Abroad. London; 1908.
WILLIAMS: Copartnership and Profit-Sharing. Henry Holt & Co.;
1913.
MANN, SIEVERS, COX: The Real Democracy. London; 1913.
Also the works of Taussig, Devas, Antoine, Hobson, Nearing,
Willoughby, and Hitze, which were given at the end of the
introductory chapter.
FOOTNOTES:
[153] Professor Scott Nearing estimates the annual income derived from
the ownership of property in the United States; that is, land and all
forms of capital, at from six to nine billion dollars. Professor W. I.
King gives the combined shares of the national income received by the
landowners and the capitalists at more than six and three-quarter
billions in 1910. According to the Census Bulletin on the "Estimated
Valuation of National Wealth," the capital goods of the country were
in 1912 approximately $175,000,000,000.00. At four per cent. this
would mean an annual income of seven billion dollars. The lowest of
the three estimates, six billion dollars, is equivalent to more than
sixty dollars a year for every man, woman, and child in the United
States. If that sum were equally distributed among the whole
population, it would mean an increase of between forty and sixty per
cent. in the income of the majority of workingmen's families! Nor do
present tendencies hold out any hope of an automatic reduction of the
interest-burden in the future. In the opinion of Professor Scott
Nearing, "the present economic tendencies will greatly increase the
amount of property income paid with each passing decade." "Income," p.
199; New York, 1915. See especially ch. vii. According to Professor
Taussig, "the absolute amount of income going to this [the capitalist]
class tends to increase, and its share of the total income tends also
to increase; whereas for the labourers, though their total income may
increase, their share of income of society as a whole tends to
decline." "Principles of Economics," II, 205.
[154] "Lehrbuch der Nationaloekonomie," III, 517.
[155] Fay, "Co-operation at Home and Abroad," p. 340.
[156] Schloss, "Methods of Industrial Remuneration," pp. 353, 354.
[157] Cf., however, Mr. A. R. Orage's work, "National Guilds," London,
1914.
[158] Op. cit., p. 341.
[159] "Copartnership and Profit-Sharing," p. 235.
SECTION III
THE MORAL ASPECT OF PROFITS
CHAPTER XV
THE NATURE OF PROFITS
We have seen that rent goes to the landlord as the price of land use,
while interest is received by the capitalist as the return for the use
of capital. The two shares of the product which remain to be
considered include an element which is absent from both rent and
interest. The use for which profits and wages are paid comprises not
merely the utilisation of a productive factor, but the sustained
exertion of the factor's owner. Like the landowner and the capitalist,
the business man and the labourer put the productive factors which
they control at the disposal of the industrial process; but they do so
only when and so long as they exercise human activity. The shares that
they receive are payments for the continuous output of human energy.
No such significance attaches to rent or interest.
_The Functions and Rewards of the Business Man_
Who is the business man, and what is the nature of his share of the
product of industry? Let us suppose that the salaried manager of a hat
factory decides to set up a business of the same kind for himself. He
wishes to become an entrepreneur, an undertaker, a director of
industry, in more familiar language, a business man. Let us assume
that he is without money, but that he commands extraordinary financial
credit. He is able to borrow half a million dollars with which to
organise, equip, and operate the new enterprise. Having selected a
favourable site, he rents it on a long term lease, and erects thereon
the necessary buildings. He installs all the necessary machinery and
other equipment, hires capable labour, and determines the kinds and
quantities of hats for which he thinks that he can find a market. At
the end of a year, he realises that, after paying for labour of all
sorts, returning interest to the capitalist and rent to the landowner,
defraying the cost of repairs, and setting aside a fund to cover
depreciation, he has left for himself the sum of ten thousand dollars.
This is the return for his labour of organisation and direction, and
for the risk that he underwent. It constitutes the share called
profits, sometimes specified as net profits.
This case is artificial, since it assumes that the business man is
neither capitalist nor landowner in addition to his function as
director of industry. It has, however, the advantage of distinguishing
quite sharply the action of the business man as such. For the latter
merely organises, directs, and takes the risks of the industrial
process, finds a market for the product, and receives in return
neither rent nor interest but only profits. In point of fact, however,
no one ever functions solely as business man. Always the business man
owns some of the capital, and very often some of the land involved in
his enterprise, and is the receiver not only of profits but of
interest and rent. Thus, the farmer is a business man, but he is also
a capitalist, and frequently a landowner. The grocer, the clothier,
the manufacturer, and even the lawyer and the doctor own a part at
least of the capital with which they operate, and sometimes they own
the land. Nevertheless their rewards as business men can always be
distinguished from their returns as capitalists and landowners by
finding out what remains after making due allowance for rent and
interest.
It is a fact that many business men, especially those directing the
smaller establishments, use the term profits to include rent and
interest on their own property. In other words, they describe their
entire income from the business as profits. In the present discussion,
and throughout this book generally, profits are to be understood as
comprising merely that part of the business man's returns which he
takes as the reward of his labour, and as insurance against the risks
affecting his enterprise. Deduct from the business man's total income
a sum which will cover interest on his capital at the prevailing rate
and rent on his land, and you have left his income as business man,
his profits.
_The Amount of Profits_
In a preceding chapter we have seen that where the conditions of
capital are the same, there exists a fairly uniform rate of interest.
No such uniformity obtains in the field of profits. Businesses subject
to the same risks and requiring the same kind of management yield very
different amounts of return to their directors. In a sense the
business man may be regarded as the residual claimant of industry.
This does not mean that he takes no profits until all the other agents
of production have been fully remunerated, but that his share remains
indeterminate until the end of the productive period, say, six months
or a year, while the shares of the other agents are determined
beforehand. At the end of the productive period, the business man may
find that his profits are large, moderate, or small, while the
landowner, the capitalist, and the labourer ordinarily obtain the
precise amounts of rent, interest, and wages that they had expected to
obtain. That there exists no definite upper limit to profits is proved
by the history of modern millionaires. That there exists no rigid
lower limit is proved by the large proportion of enterprises that meet
with failure.
Nevertheless it would be wrong to infer that the volume of profits is
governed by no law whatever, or that they show no tendency toward
uniformity in any part of the industrial field. There is a calculated
or preconceived minimum. No man will embark in business for himself
unless he has reason to expect that it will yield him, in addition to
protection against risks, an income as large as he could obtain by
hiring his services to some one else. In other words, contemplated
profits must be at least equal to the income of the salaried business
manager. No tendency toward uniformity of profits exists among very
large enterprises nor among industries which are constantly adopting
new methods and new inventions. In businesses of small and moderate
size, and in those whose methods have become standardised, such as a
retail grocery store, or a factory that turns out staple kinds of
shoes, profits tend to be about the same in the great majority of
establishments. In such industries the profits of the business man do
not often exceed the salary that he could command as general manager
for some one else in the same kind of business.
Professor King estimates the total volume of profits in the United
States in 1910 as almost eight and one-half billion dollars. This was
27.5 per cent. of the national product, as against 24.6 per cent. in
1890 and 30 per cent. in 1900.[160] He interprets the fall in the wage
earners' share which has taken place since 1890 (53.5 to 46.9 per
cent.) as indicating a considerable increase in the share of those
business men who control the very large industries. "The promoters and
manipulators of these concerns have received, as their share of the
spoils, permanent income claims, in the shape of securities, large
enough to make Croesus appear like a pauper."[161] Moreover, even
outside this monopoly field, the more able and successful business men
seem to have obtained in recent years what might be termed a
relatively large share of the product of industry. The exceptionally
efficient undertakers, those possessing the imagination, foresight,
judgment, and courage to take full advantage of the recent
improvements in the industrial arts, and in the methods of production
generally, seem to have advanced in wealth and income more rapidly
than any other class that has been subject to the operation of
competition.
_Profits in the Joint-Stock Company_
Up to this point we have been considering the independent business
man, the undertaker who manages his enterprise either alone or as a
member of a partnership. In all such concerns it is easy to identify
the business man. Who or where is the business man in a joint stock
company? Where are the profits, and who gets them?
Strictly speaking, there is no undertaker or business man in a
corporation. His functions of ownership, responsibility, and direction
are exercised by the whole body of stockholders through the board of
directors and other officers. It is true that in very many, probably
in most corporations, one or a very few of the largest stockholders
dominate the policies of the concern, and exercise almost as much
power and authority as though they were the sole owners. Neither
these, however, nor any other officer in a corporation receives
profits in the same sense as the independent owner of a business. For
their active services the officers of the corporation are given
salaries; for the risks that they undergo as owners of the stock they
are compensated in the same way as all the other stockholders, that
is, through a sufficiently high rate of dividend. For example, in
railroads the bonds usually pay from four to five per cent., the stock
from five to six per cent. The bonds represent borrowed money, and are
secured by a mortgage on the physical property. The stock represents
the money invested by the owners, and is subject to all the risks of
ownership; hence its holders require the protection which is afforded
by the extra one per cent. which they obtain over that paid to the
bondholders.
While a corporation has no profits in the sense of a reward for
directive activity or a protection against risk, it frequently
possesses profits in the sense of a surplus which remains after costs
and expenses of every kind have been defrayed. These profits are
ordinarily distributed pro rata among the stockholders, either
outright in the form of an extra dividend, or indirectly through
enlargement of the property and business of the company. They are
surplus gains or profits having the same intermittent and speculative
character as the extra gains which the individual business man
sometimes obtains in addition to those profits which are necessary to
remunerate him for his labour, and protect him against risks. They are
not profits in the ordinary economic sense of the term.
FOOTNOTES:
[160] "The Wealth and Income of the People of the United States," 158,
160.
[161] Idem, p. 218.
CHAPTER XVI
THE PRINCIPAL CANONS OF DISTRIBUTIVE JUSTICE
Before taking up the question of the morality of profits, it will be
helpful, if not necessary, to consider the chief rules of justice that
have been or might be adopted in distributing the product of industry
among those who participate actively in the productive process. While
the discussion is undertaken with particular reference to the rewards
of the business man, it will also have an important bearing on the
compensation of the wage earner. The morality of rent and interest
depends upon other principles than those governing the remuneration of
human activity; and it has been sufficiently treated in chapters xii
and xiii. The canons of distribution applicable to our present study
are mainly six in number: arithmetical equality; proportional needs;
efforts and sacrifices; comparative productivity; relative scarcity;
and human welfare.
_The Canon of Equality_
According to the rule of arithmetical equality, all persons who
contribute to the product should receive the same amount of
remuneration. With the exception of Bernard Shaw, no important writer
defends this rule to-day. It is unjust because it would treat unequals
equally. Although men are equal as moral entities, as human persons,
they are unequal in desires, capacities, and powers. An income that
would fully satisfy the needs of one man would meet only 75 per cent.,
or 50 per cent., of the capacities of another. To allot them equal
amounts of income would be to treat them unequally with regard to the
requisites of life and self development. To treat them unequally in
these matters would be to treat them unequally as regards the real and
only purpose of property rights. That purpose is welfare. Hence the
equal moral claims of men which admittedly arise out of their moral
equality must be construed as claims to equal degrees of welfare, not
to equal amounts of external goods. To put the matter in another way,
external goods are not welfare; they are only means to welfare;
consequently their importance must be determined by their bearing upon
the welfare of the individual. From every point of view, therefore, it
is evident that justice in industrial distribution must be measured
with reference to welfare rather than with reference to incomes, and
that any scheme of distribution which provided equal incomes for all
persons would be radically unjust.
Moreover, the rule of equal incomes is socially impracticable. It
would deter the great majority of the more efficient from putting
forth their best efforts and turning out their maximum product. As a
consequence, the total volume of product would be so diminished as to
render the share of the great majority of persons smaller than it
would have been under a rational plan of unequal distribution.
_The Canon of Needs_
The second conceivable rule is that of proportional needs. It would
require each person to be rewarded in accordance with his capacity to
use goods reasonably. If the task of distribution were entirely
independent of the process of production, this rule would be ideal;
for it would treat men as equal in those respects in which they are
equal; namely, as beings endowed with the dignity and the potencies of
personality; and it would treat them as unequal in those respects in
which they are unequal; that is, in their desires and capacities. But
the relation between distribution and production cannot be left out
of account. The product is distributed primarily among the agents of
production only, and it must be so distributed as to give due
consideration to the moral claims of the producer as such. The latter
has to be considered not merely as a person possessing needs, but as a
person who has contributed something to the making of the product.
Whence arise the questions of relative efforts and sacrifices, and
relative productivity.
Since only those who have contributed to the product participate in
the distribution thereof, it would seem that they should be rewarded
in proportion to the efforts and sacrifices that they exert and
undergo. As an example of varying effort, let us take two men of equal
needs who perform the same labour in such a way that the first expends
90 per cent. of his energy, while the second expends 60 per cent. As
an example of varying sacrifice, let us take the ditch digger, and the
driver who sits all day on the dump wagon. In both these examples the
first man expends more painful exertion than the second. This would
seem to make a difference in their moral desert. Justice would seem to
require that in each case compensation should be proportionate to
exertion rather than to needs. At any rate, the claims of needs should
be modified to some extent in favour of the claims of exertion. It is
upon the principle of efforts and sacrifices that we expect our
eternal rewards to be based by the infinitely just Rewarder. The
principle of needs is likewise in conflict with the principle of
comparative productivity. Men generally demand rewards in proportion
to their products. The validity of this demand we shall examine in a
subsequent paragraph.
Like the rule of arithmetical equality, the rule of proportional needs
is not only incomplete ethically but impossible socially. Men's needs
vary so widely and so imperceptibly that no human authority could use
them as the basis of even an approximately accurate distribution.
Moreover, any attempt to distribute rewards on this basis alone would
be injurious to social welfare. It would lead to a great diminution in
the productivity of the more honest, the more energetic, and the more
efficient among the agents of production.
_The Canon of Efforts and Sacrifice_
The third canon of distribution, that of efforts and sacrifices, would
be ideally just if we could ignore the questions of needs and
productivity. But we cannot think it just to reward equally two men
who have expended the same quantity of painful exertion, but who
differ in their needs and in their capacities of self development. To
do so would be to treat them unequally in the matter of welfare, which
is the end and reason of all distribution. Consequently the principle
of efforts and sacrifices must be modified by the principle of needs.
Apparently it must also give way in some degree to the principle of
comparative productivity. When two men of unequal powers make equal
efforts, they turn out unequal amounts of product. Almost invariably
the more productive man believes that he should receive a greater
share of the product than the other. He believes that the rewards
should be determined by productivity.
It is evident that the rule of efforts and sacrifices, like those of
equality and needs, could not be universally enforced in practice.
With the exception of cases in which the worker is called upon
regularly to make greater sacrifices owing to the disagreeable nature
of the task, attempts to measure the amounts of effort and painful
exertion put forth by the different agents of production would on the
whole be little more than rough guesses. These would probably prove
unsatisfactory to the majority. Moreover, the possessors of superior
productive power would in most instances reject the principle of
efforts and sacrifices as unfair, and refuse to do their best work
under its operation.
The three rules already considered are formally ethical, inasmuch as
they are directly based upon the dignity and claims of personality.
The two following are primarily physical and social; for they measure
economic value rather than ethical worth. Nevertheless, they must have
a large place in any system which includes the factor of competition.
_The Canon of Productivity_
According to this rule, men should be rewarded in proportion to their
contributions to the product. It is open to the obvious objection that
it ignores the moral claims of needs and efforts. The needs and
use-capacities of men do, indeed, bear some relation to their
productive capacities, and the man who can produce more usually needs
more; but the differences between the two elements are so great that
distribution based solely upon productivity would fall far short of
satisfying the demands of needs. Yet we have seen that needs
constitute one of the fundamentally valid principles of distribution.
Between productivity on the one hand and efforts and sacrifices on the
other, there are likewise important differences. When men of equal
productive power are performing the same kind of labour, superior
amounts of product do represent superior amounts of effort; when the
tasks differ in irksomeness or disagreeableness, the larger product
may be brought into being with a smaller expenditure of painful
exertion. If men are unequal in productive power their products are
obviously not in proportion to their efforts. Consider two men whose
natural physical abilities are so unequal that they can handle with
equal effort shovels differing in capacity by fifty per cent.
Instances of this kind are innumerable in industry. If these two men
are rewarded according to productivity, one will get fifty per cent.
more compensation than the other. Yet the surplus received by the more
fortunate man does not represent any action or quality for which he is
personally responsible. It corresponds to no larger output of personal
effort, no superior exercise of will, no greater personal desert. It
is based solely upon a richer physical endowment by the Creator.
It is clear, then, that the canon of productivity cannot be accepted
to the exclusion of the principles of needs and efforts. It is not the
only ethical rule of distribution. Is it a valid partial rule?
Superior productivity is frequently due to larger effort and expense
put forth in study and in other forms of industrial preparation. In
such cases it demands superior rewards by the title of efforts and
sacrifices. Where, however, the greater productivity is due merely to
higher native qualities, physical or mental, the greater reward is not
easily justified on purely ethical grounds. For it represents no
personal responsibility, will-effort, or creativeness. Nevertheless,
the great majority of the more fortunately endowed think that they are
unfairly treated unless they are recompensed in proportion to their
products. Sometimes this conviction is due to the fact that such men
wrongly attribute their larger product to greater efforts. In very
many cases, however, the possessors of superior productive power
believe that they should be rewarded in proportion to their products,
regardless of any other principle or factor. Probably the true
explanation of this belief is to be found in man's innate laziness.
While the prevalence of the conviction that superior productivity
constitutes a just title to superior compensation, does create some
kind of a presumption in favour of its correctness, it must be
remembered that presumption is not proof. Weighing this presumption
against the objective considerations on the opposite side of the
argument, we take refuge in the conclusion that the ethical validity
of the canon of comparative productivity can neither be certainly
proved nor certainly disproved.
Like the rules of equality, needs, and efforts, that of productivity
cannot be universally enforced in practice. It is susceptible of
accurate application among producers who perform the same kind of work
with the same kind of instruments and equipment; for example, between
two shovellers, two machine operators, two bookkeepers, two lawyers,
two physicians. As a rule, it cannot be adequately applied to a
product which is brought into existence through a combination of
different processes. The engine driver and the track repairer
contribute to the common product, railway transportation; the
bookkeeper and the machine tender co-operate in the production of
hats; but we cannot tell in either case whether the first contributes
more or less than the second, for the simple reason that we have no
common measure of their contributions. Sometimes, however, we can
compare the productivity of _individuals_ engaged in different
processes; that is, when both can be removed from the industry without
causing it to come to a stop. Thus, it can be shown that a single
engine driver produces more railway transportation than a single track
repairer, because the labour of the latter is not indispensable to the
hauling of a given load of cars. But no such comparison can be made as
between the whole body of engine drivers and the whole body of track
repairers, since both groups are indispensable to the production of
railway transportation. Again, a man can be shown to exert superior
productivity because he affects the productive process at more points
and in a more intimate way than another who contributes to the product
in a wholly different manner. While the surgeon and the attendant
nurse are both necessary to a surgical operation, the former is
clearly more productive than the latter. When due allowance is made
for all such cases, the fact remains that in a large part of the
industrial field it is simply impossible to determine remuneration by
the rule of comparative productivity.
_The Canon of Scarcity_
It frequently happens that men attribute their larger rewards to
larger productivity, when the true determining element is scarcity.
The immediate reason why the engine driver receives more than the
track repairer, the general manager more than the section foreman, the
floorwalker more than the salesgirl, lies in the fact that the former
kinds of labour are not so plentiful as the latter. Were general
managers relatively as abundant as section foremen their remuneration
would be quite as low; and the same principle holds good of every pair
of men whose occupations and products are different in kind. Yet the
productivity of the general managers would remain as great as before.
On the other hand, no matter how plentiful the more productive men may
become, they can always command higher rewards than the less
productive men in the same occupation, for the simple reason that
their products are superior either in quantity or in quality. Men
engaged upon the more skilled tasks are likewise mistaken when they
attribute their greater compensation to the intrinsic excellence of
their occupation. The fact is that the community cares nothing about
the relative nobility, or ingenuity, or other inherent quality of
industrial tasks or functions. It is concerned solely with products
and results. As between two men performing the same task, superior
efficiency receives a superior reward because it issues in a larger or
better product. As between two men performing different tasks,
superior skill receives superior compensation simply because it can
command the greater compensation; and it is able to do this because it
is scarce.
In most cases where scarcity is the immediate determinant of rewards,
the ultimate determinant is, partly at least, some kind of sacrifice.
One reason why chemists and civil engineers are rarer than common
labourers is to be found in the greater cost of preparation. The
scarcity of workers in occupations that require no special degree of
skill is due to unusual hazards and unpleasantness. In so far as
scarcity is caused by the uncommon sacrifices preceding or involved in
an occupation, the resulting higher rewards obviously rest upon most
solid ethical grounds. However, some part of the differences in
scarcity is the result of unequal opportunities. If all young persons
had equal facilities of obtaining college and technical training, the
supply of the higher kinds of labour would be considerably larger than
it now is, and the compensation would be considerably smaller.
Scarcity would then be determined by only three factors; namely,
varying costs of training, varying degrees of danger and
unattractiveness among occupations, and inequalities in the
distribution of native ability. As a consequence, competition would
tend to apportion rewards according to efforts, sacrifices, and
efficiency.
How can we justify the superior rewards of that scarcity which is not
due to unusual costs of any sort, but merely to restricted
opportunity? So far as society is concerned, the answer is simple: the
practice pays. As to the possessors of the rarer kinds of ability,
they are in about the same ethical position as those persons whose
superior productivity is derived entirely from superior native
endowment. In both cases the unusual rewards are due to factors
outside the control of the recipients; to advantages which they
themselves have not brought into existence. In the former case the
decisive factor and advantage is opportunity; in the latter it is a
gift of the Creator. Now we have seen that this sort of productivity
cannot be proved to be immoral as a canon of distribution;
consequently the same statement will hold good of this sort of
scarcity.
_The Canon of Human Welfare_
We say "human" welfare rather than "social" welfare, in order to make
clear the fact that this canon considers the well being of men not
only as a social group, but also as individuals. It includes and
summarises all that is ethically and socially feasible in the five
canons already reviewed. It takes account of equality, inasmuch as it
regards all men as persons, as subjects of rights; and of needs,
inasmuch as it awards to all the necessary participants in the
industrial system at least that amount of remuneration which will meet
the elementary demands of decent living and self development. It is
governed by efforts and sacrifices, at least in so far as they are
reflected in productivity and scarcity; and by productivity and
scarcity to whatever extent is necessary in order to produce the
maximum net results. It would give to every producer sufficient
remuneration to evoke his greatest net contribution to the productive
process. Greatest "net" contribution; for a man's _absolute_ maximum
product may not always be worth the required price. For example: a man
who for a salary of 2500 dollars turns out a product valued at 3000
dollars, should not be given 3000 dollars in order to induce him to
bring forth a product worth 3300 dollars. In this case a salary of
2500 dollars evokes the maximum net product, and represents the reward
which would be assigned by the canon of human welfare. Once the vital
needs of the individual have been safeguarded, the supreme guide of
the canon of human welfare is the principle of maximum net results, or
the greatest product at the lowest cost.
It is not contended here that this canon ought never to undergo
modification or exception. Owing to the exceptional hazards and
sacrifices of their occupation, a combination of producers might be
justified in exacting larger compensation than would be accorded them
by the canon of human welfare on the basis of net results in the
present conditions of supply and scarcity. Unusual needs and
capacities might also justify a strong group in pursuing the same
course. All that is asserted at present is that in conditions of
average competition the canon of human welfare is not unjust. And this
is all that is necessary as a preliminary to the discussion of just
profits.[162]
FOOTNOTE:
[162] A very suggestive discussion of the psychology, the general
principles, and the practical limitations of distributive justice,
will be found in an article by Gustav Schmoller, entitled, "The Idea
of Justice in Political Economy." It is No. 113 in the Publications of
the American Academy of Political and Social Science.
CHAPTER XVII
JUST PROFITS IN CONDITIONS OF COMPETITION
We have seen that profits are that share of the product of industry
which goes to the business man. They comprise that residual portion
which he finds in his hands after he has made all expenditures and
allowances for wages, salaries, interest at the prevailing rate on
both his own and the borrowed capital, and all other proper charges.
They constitute his compensation for his labour of direction, and for
the risks of his enterprise and capital.
In the opinion of most Socialists, profits are immoral because they
are an essential element of an unjust industrial system, and because
they are not entirely based upon labour. Under Socialism the
organising and directing functions that are now performed by the
business man, would be allotted to salaried superintendents and
managers. Their compensation would include no payment for the risks of
capital, and it would be fixed instead of indeterminate. Hence it
would differ considerably from present-day profits.
To the assertion that profits are immoral a sufficient reply at this
time is that Socialism has already been shown to be impracticable and
inequitable. Consequently the system of private industry is
essentially just, and profits, being a necessary element of the
system, are essentially legitimate. The question of their morality is
one of degree not of kind. It will be considered under two principal
heads: the right of the business man to obtain indefinitely large
profits; and his right to a certain minimum of profits.
_The Question of Indefinitely Large Profits_
As a general rule, business men who face conditions of active
competition have a right to all the profits that they can get, so long
as they use fair business methods. This means not merely fair and
honest conduct toward competitors, and buyers and sellers, but also
just and humane treatment of labour in all the conditions of
employment, especially in the matter of wages. When these conditions
are fulfilled, the freedom to take indefinitely large profits is
justified by the canon of human welfare. The great majority of
business men in competitive industries do not receive incomes in
excess of their reasonable needs. Their profits do not notably exceed
the salaries that they could command as hired managers, and generally
are not more than sufficient to reimburse them for the cost of
education and business training, and to enable them to live in
reasonable conformity with the standard of living to which they have
become accustomed.
Efforts and sacrifices are reflected to some extent in the different
amounts of profits received by different business men. When all due
allowance is made for chance, productivity, and scarcity, a
considerable proportion of profits is attributable to harder labour,
greater risk and worry, and larger sacrifices. Like the principle of
needs, that of efforts and sacrifices is a partial justification of
the business man's remuneration.
Those profits which cannot be justified by either of the titles just
mentioned, are ethically warranted by the principles of productivity
and scarcity. This is particularly true of those exceptionally large
profits which can be traced specifically to that unusual ability which
is exemplified in the invention and adoption of new methods and
processes in progressive industries. The receivers of these large
rewards have produced them in competition with less efficient business
men. While the title of productivity does not entirely satisfy the
seeker for decisive ethical sanctions, it is stronger morally than any
opposing considerations that can be invoked. It is probably as strong
as some other principles that we have to accept as the best attainable
in the very difficult field of industrial ethics.
Nevertheless, it would seem that those business men who obtain
exceptionally large profits could be reasonably required to transfer
part of their gains to their employés in the form of higher wages, or
to the consumers in the form of lower prices. Both of these methods
have been followed by Henry Ford, the automobile manufacturer. Neither
of them is certainly demanded by the principles of strict justice;
they rest upon the feebler and less decisive principle of general
equity or fairness.[163] This concept is less definite than those of
charity and justice, and stands midway between them. It comes into
operation when an action is obligatory on stricter grounds than those
of charity, and yet cannot with certainty be required on grounds of
justice. Notwithstanding its vagueness, it is sufficiently strong to
make the average conscientious man feel uncomfortable if he neglects
its prescriptions entirely. It has, therefore, sufficient practical
value to deserve a place in the ethics of distribution. And it seems
to have sufficient application to the problem before us to justify the
statement that the receivers of exceptionally large profits are bound
in equity to share them with those persons who have co-operated in
producing and providing them, namely, wage earners and consumers.
In the field of profits the canon of human welfare is not only sound
ethically but expedient socially. It permits the great majority of
business men to obtain, if they can, sufficient remuneration to meet
their reasonable needs. Whether it requires society to _guarantee_ at
least this amount of profit-income is a question that we shall examine
presently. It encourages efforts, and makes for the maximum social
product by permitting business men to retain all the profits that they
can get in conditions of fair competition. Does it forbid any attempt
by society to limit exceptionally large profit-incomes? If the limit
were placed very high, say, at 50,000 dollars per year, it would not
apparently check the productive efforts of the great majority of
business men, since they never hope to pass that figure. Whether it
would have a seriously discouraging effect upon the activity and
ambition of those who do hope to reach, and of those who have already
reached that level, is uncertain. Among business men who are
approaching or who have passed the 50,000 dollars annual profit-income
mark, the desire to possess more money is frequently weaker as a
motive to business activity than the longing for power and the driving
force of habit. At any rate, the question is not very practical. Any
sustained attempt to limit profits by law would require such extensive
and minute supervision of business that the policy would prove to be
socially intolerable and unprofitable. The espionage involved in the
policy would provoke general resentment, and the amount of profits
that could be diverted either to the State or to private persons would
be relatively insignificant.
Thus far we have been considering the independent business man and
business firm, not the joint stock company or corporation. In the
latter form of organisation, the labour of direction is remunerated by
fixed salaries to the executive officers, while the risks of
enterprise and capital are covered by the regular dividends received
by the whole body of stockholders. Consequently the only revenues
comparable to profits are the surplus gains that remain after wages,
salaries, interest, dividends, rent, and all other expenses and
charges have been met. These are apportioned through one process or
another among the stockholders. On what ethical principle can they be
thus distributed? The general principle of productivity, or superior
productivity, is the only one available. If a corporation which uses
fair methods of competition can obtain surplus gains, while the
majority of its competitors fail to do so, the cause must be sought in
its superior business management. This superiority must be credited to
the whole body of stockholders, even though the great majority of them
are responsible for it only in a very remote way, through their
selection of the executive officers. The stockholders surely have a
better claim to these surplus gains than any other group in the
community. At the same time, they are, like the independent business
man, bound by the principle of equity to share the surplus with the
labourers and consumers.
_The Question of Minimum Profits_
Has the business man a strict right to a minimum living profit? In
other words, have all business men a right to a sufficient volume of
sales at sufficiently high prices to provide them with living profits
or a decent livelihood? Such a right would imply a corresponding
obligation upon the consumers, or upon society, to furnish the
requisite amount of demand at the required prices. Is there such a
right, and such an obligation?
No industrial right is absolute. They are all conditioned by the
possibilities of the industrial system, and by the desires,
capacities, and actions of the persons who enter into industrial
relations with one another. As we shall see later, this statement is
true even of the right to a living wage. When the industrial resources
are adequate, all persons of average ability who contribute a
reasonable amount of labour to the productive process have a right to
a decent livelihood on two conditions: first, that such labour is
their only means of sustenance; and, second, that their labour is
economically indispensable to those who utilise it or its product.
"Economically indispensable" means that the beneficiary of the labour
would rather give the equivalent of a decent livelihood for it than go
without it. While both these conditions are apparently fulfilled in
the case of the great majority of wage earners, they are only rarely
realised with regard to business men. In most instances the business
man who is unable to make living profits could become an employé, and
thus convert his right to a decent livelihood into a right to a living
wage. Even when no such alternative is open to him, he cannot claim a
strict right to living profits, for the second condition stated above
remains unfulfilled. The consuming public does not regard the business
function of such men as economically indispensable. Rather than pay
the higher prices necessary to provide living profits for the
inefficient business men, consumers will transfer their patronage to
the efficient competitors. Should the retail grocer, for example,
raise his prices in the effort to get living profits, his sales would
fall off to such an extent as to reduce his profits still lower. While
the consumers may be willing to fulfil their obligation of furnishing
living profits for all necessary grocers, they are not willing, nor
are they morally bound, to do so in the case of grocers whose
inability to command sufficient patronage at remunerative prices shows
that they are not necessary to the community. The consuming public
does not want to employ such business men at such a cost.
Nor is the State under obligation to ensure living profits for all
business men. To carry out such a policy, either by enforcing a
sufficiently high level of prices, or by subsidising those who fail to
obtain living profits, would be to compel the public to support
inefficiency.
In the foregoing paragraphs we have assumed that the inability of the
business men under consideration to get living profits is due to their
own lack of capacity as compared with their more efficient
competitors. When, however, their competitors are not more efficient,
but are enabled to undersell through the use of unfair methods, such
as adulteration of goods and oppression of labour, a different moral
situation is presented. Honest and humane business men undoubtedly
have a claim upon society to protection against such unfair
competition. And the consumers are under obligation to make reasonable
efforts to withhold their patronage from those business men who
practise dishonesty and extortion.
_The Question of Superfluous Business Men_
Although we have rejected as impractical the proposal to set a legal
limit to profit-incomes, we have to admit that many of the abler
business men would continue to do their best work even if the profits
that they could hope to obtain were considerably smaller in volume.
These men hold a strategic position in industry, inasmuch as they are
not subject to the same degree of constant competition as the other
agents of production.[164] Were the supply of superior business
capacity more plentiful, their rewards would be automatically reduced,
and the burden of profits resting upon society would be to that extent
diminished. On the other hand, the number of mediocre business men,
especially in the distributive industries, is much larger than is
necessary to supply the wants of the community. This constitutes a
second unnecessary volume of payments under the head of profits. Is
there no way by which these wastes can be reduced?
The volume of exceptionally large profits could be diminished by an
extension of the facilities of technical and industrial education.
Thus the number of persons qualifying as superior business men could
be gradually increased, competition among this class of men would be
intensified, and their rewards correspondingly diminished.
The profits that go to superfluous business men, especially in the
class known as middlemen, can be largely eliminated through
combination and co-operation. The tendency to unite into a single
concern a large number of small and inefficient enterprises should be
encouraged up to the point at which the combination threatens to
become a monopoly. That this process is capable of effecting a
considerable saving in business profits as well as in capital, has
been amply demonstrated in several different lines of enterprise. As
we have seen in a preceding chapter, the co-operative movement,
whether in banking, agriculture, or stores, has been distinctly
successful in reducing profits. Millions of dollars are thus diverted
every year from unnecessary profit-receivers to labourers, consumers,
and to the man of small resources generally. Yet the co-operative
movement is only in its infancy. It contains the possibility of
eliminating entirely the superfluous business man, and even of
diminishing considerably the excessive profits of the exceptionally
able business man.
FOOTNOTES:
[163] Cf. pp. 212, 213 of Castelein's "Philosophia Moralis et
Socialis."
[164] Cf. Hobson, "The Industrial System," chapter on "Ability."
CHAPTER XVIII
THE MORAL ASPECT OF MONOPOLY
The conclusion was drawn in the last chapter that the surplus gains of
corporations operating in conditions of competition, can justly be
retained by the stockholders as the remuneration of exceptional
productive efficiency. It is, of course, to be understood that the
proper allowance for interest on the capital is not necessarily the
amount authorised by the stipulated rate of dividend on the stock, but
the prevailing or competitive rate of interest plus an adequate rate
of insurance against the risks of the enterprise. If the prevailing
rate of interest is five per cent., and the risk is sufficiently
protected by an allowance of one per cent., the fair rate of return on
the investment is six per cent. The fact that a concern may actually
award its stockholders ten per cent. dividends, has no bearing on the
determination of the genuine surplus. If the actual surplus that
remains after paying all other charges and allowing ten per cent. on
the stock, is only 50,000 dollars, whereas it would be 100,000 dollars
with an allowance of only six per cent., then the true surplus gains,
or profits, are the latter amount not the former. No part of the
100,000 dollars can be justified as interest on capital. It must all
find its justification as profits proceeding from superior
productivity.
Bearing in mind this distinction between the actual rate of dividend
and the proper allowance for interest on capital, we take up the
question of the morality of profits or surplus gains in conditions of
monopoly.
_Surplus and Excessive Profits_
Several of the great industrial combinations of the United States have
obtained profits which are commonly stigmatised as "excessive." For
example, the Standard Oil Company paid, from 1882 to 1906, an average
annual dividend of 24.15 per cent. on the capital stock, and had
profits in addition at the rate of about 8 per cent. annually;[165]
from 1904 to 1908 the American Tobacco Company averaged 19 per cent.
on its actual investment;[166] and the United States Steel Corporation
obtained an average annual return of 12 per cent. on its investment
from 1901 to 1910.[167] A complete list of the American monopolies
that have reaped more than the competitive rate of return on their
capital would undoubtedly be a very long one.
Is it possible to justify such returns? Has a monopoly a right to take
surplus gains? Let us suppose a concern which is getting 15 per cent.
on its investment. Inasmuch as the risks are smaller than in
competitive enterprises, six per cent. is an ample allowance for
interest. Of the remaining 9 per cent., 4 per cent., we shall assume,
is derived from economies of production as compared with the great
majority of competitive concerns. This portion of the surplus, being
the reward of superior efficiency, may be retained by the owners of
the monopoly quite as justly as similar gains are taken by the
exceptionally efficient corporation in conditions of competition. The
objection that the monopoly ought to share these gains with the
public, since it limits individual opportunity in a socially
undesirable way, has some merit, but it can scarcely be urged on
grounds of strict justice. At most it points only to an obligation in
equity.
By what canon of distribution can the retention of the other 5 per
cent. of surplus gain be justified? Not by the titles of needs and
efforts, for these have already been satisfied through the salaries
paid to those stockholders who perform labour in the management of the
concern. These titles afford no basis for any other claim than that
which proceeds from labour. They cannot be made to justify claims made
on behalf of capital. Not by the title of productivity, for this has
already been remunerated in the 4 per cent. just considered. Not as
interest on capital, for ample allowance has already been made under
this head in the original 6 per cent. As we have seen in an earlier
chapter, the only reasons that give ethical support to interest on
capital are the sacrifice that is involved in some kinds of saving,
the possibility that interest is necessary in order to induce the
provision of sufficient capital, the certainty that the State would be
unable to enforce the abolition of interest, and some presumptive
considerations. Since all of these reasons and ends are satisfied by
the competitive rate of interest, none of them will justify the
exaction of more than the competitive rate. It is not possible to
justify a higher rate on either social or individual grounds.
Therefore, the only basis that is left upon which to defend the
retention of the five per cent. surplus that we are discussing, is the
power of appropriation. The monopoly possesses the economic strength
to take this five per cent. because it is able to impose higher than
competitive prices upon the consumer. Obviously such power has no
greater ethical sanction or validity than the pistol of the
highwayman. In both cases the gains are the product of extortion.
The conclusion that men have no right to more than the competitive
rate of interest, as interest, on their capital, and that a monopoly
has consequently no right to those surplus gains that are not produced
by superior efficiency, is confirmed by public opinion and by the
decisions of the courts. The monopolistic practice of taking more than
the usual rate of returns on capital merely because there exists the
power to take it, is universally condemned as inequitable. In fixing
the charges of public service corporations, the courts with practical
unanimity allow only the rate of return that is obtainable in
competitive conditions of investment.
The statement that the monopoly may retain those surplus gains which
are derived from superior efficiency assumes, of course, that fair
wages have been paid to employés, and fair prices to the sellers of
materials, and that fair methods have been used toward competitors. In
so far as any of these conditions is not met, the monopolistic concern
has no right to surplus gains of any sort. All three of the claims
just mentioned are morally stronger than the claim to superior rewards
because of superior efficiency.
_The Question of Monopolistic Efficiency_
So much for the moral principle. What proportion of the surplus gains
of monopoly are due to extortionate prices rather than to economies in
production, cannot be known even approximately. According to Justice
Brandeis, who is one of the most competent authorities in this field,
only a very small part of these gains are derived from superior
efficiency.[168] Professor E. S. Meade writes: "During a decade
[1902-1912] of unparalleled industrial development, the trusts,
starting with every advantage of large capital, well-equipped plants,
financial connections, and skilled superintendence, have not
succeeded."[169] On the other hand, President Van Hise thinks that,
"the weight of argument is strongly in favour of the increased
efficiency of large combinations of industry on the average."[170] The
difference of opinion existing among students of this subject is due
to lack of adequate data, particularly to the absence of such uniform
and comprehensive systems of accounting as would be required to
provide a basis for reliable general conclusions. Opposing particular
statements may be equally true, because based upon different
instances; but general statements are little better than guesses.
Let us approach the question from another side, that of prices.
Whenever the charges imposed by monopolistic concerns upon their
products are higher than those that would have prevailed under
competition, the surplus gains are obviously to that extent not due to
superior efficiency. They have their source in the arbitrarily made
prices. The Final Report of the United States Industrial Commission,
which was made at the beginning of the year 1902, declared that, "in
most cases the combination has exerted an appreciable power over
prices, and in practically all cases it has increased the margin
between raw materials and finished products."[171] Since the cost of
production had decreased during the preceding decade, this increase in
the margin, and the ensuing increased profits, necessarily involved an
increase in prices to the consumer. Taking the period of 1897-1910,
and comparing the movement of prices between eighteen important
trust-controlled products, and the same number of important
commodities not produced by monopolistic concerns, Professor Meade
concluded that the former were sold at a "much lower" relative level
than the latter.[172] His computations were based upon figures
compiled by the Bureau of Labour. According to the Commissioner of
Corporations, the Standard Oil Company "has taken advantage of its
monopoly power to extort prices much higher than would have existed
under free competition."[173] The same authority shows that the
American Tobacco Company used its power to obtain considerably more
than competitive prices on some of its products.[174] Excessive
prices, as measured by the standards of competition, were also
established by the United States Steel Corporation, the American Sugar
Refining Company, and the combinations in meat packing and in
lumber.[175]
A safe statement would probably be that the greater part of the
surplus gains of the most conspicuous American monopolies have been
due to excessive prices rather than to economies of production.
Let us turn from the subject of unjust monopoly gains to that of
unfair methods used by the great combinations toward their
competitors. These methods are mainly three: discriminative
underselling, exclusive-selling contracts, and advantages in
transportation.
_Discriminative Underselling_
The first of these practices is exemplified when a monopoly sells its
goods at unprofitably low rates in competitive territory, while
maintaining higher prices elsewhere; and when it offers at very low
prices those kinds of goods which are handled by competitors, while
holding at excessively high prices the kinds of commodities over which
it has exclusive control. Both forms of the practice seem to have been
extensively used by most of the monopolistic concerns of America.[176]
The Standard Oil Company has been perhaps the most conspicuous
offender in this field.[177] This practice is unjust because it
violates the fundamental moral principle that a man has a right to
pursue a lawful good without hindrance through illicit means. Among
the illicit means enumerated by the moral theologians are force,
fraud, deception, lying, slander, intimidation, and extortion.[178]
The illicit means employed in discriminative underselling are chiefly
extortion and deception. If the very low prices at which the monopoly
sells in the field which contains competitors were maintained outside
of that field also, and if they were continued not merely until the
independent concerns were driven out of business, but indefinitely
afterward, no injustice would be done the latter. For no man has a
natural right to any particular business. If a powerful concern can
eliminate competitors through low prices made possible by superior
efficiency, the competitors are not unjustly treated. They have no
more just cause of complaint than the inefficient grocer whose custom
is attracted from him by other and more efficient merchants. The
offence is at the worst contrary to charity. But when the monopoly
maintains the low and competition-eliminating prices only locally and
temporarily, when it is enabled to establish and continue these prices
only because it sells its goods at extortionate rates elsewhere, the
latter prices are evidently the instrument or means by which the
competitors are injured and eliminated. In that case the monopoly
violates the right of the competitors to pursue a lawful good immune
from unfair interference. The lawful good is a livelihood from this
kind of business; and the illicit interference is the unjust prices
maintained outside the competitive field.
In the preceding paragraph we have assumed that the extortionate
prices are operative at the same time as the excessively low prices,
but in a different place. Suppose that the former are imposed only
after the independent concerns are eliminated. The injustice to the
competitors remains the same as in the preceding case. Although the
extortionate prices are later in time, they are the instrumental cause
of the destructive low prices through which the competitors were
driven out of business. If the owners of the monopoly were not certain
of their ability to establish the subsequent extortionate prices, they
would not have put into effect the unprofitably low prices. Hence
there is a true causal connection between the former and the latter.
Although the connection is mainly psychical, through the consciousness
of the monopoly owners, it is none the less real and effective. Its
practical effectiveness is seen in the fact that the subsequent
possibility of imposing extortionate prices will induce men to lend
the monopoly money to carry on the process of exterminating
competition. The process is maintained by means of the extortionate
prices quite as effectively as though the two things were
simultaneous.
In so far as the patrons of the independent concerns are deceived into
expecting that the very low prices will be permanent, and in so far as
this impression causes them to withdraw their patronage from the
independents, the latter are injured through another illicit means,
namely, deception. The competitors have a right not to be deprived of
their customers through imposture.
What is the measure of extortionate prices in this connection? How can
we know that the high, competition-eliminating prices are really
extortionate? There are only two possible tests of just price. The
first is the proper cost of production,--fair wages to labour, fair
prices for materials, and fair interest on capital. If the monopoly
does not raise prices above this level, it obviously does not impose
extortionate prices, nor inflict injustice upon the eliminated
competitor. Moreover, if the monopoly has introduced economies of
production it may, as we have seen, justly charge prices somewhat
above the cost-of-production level. But it may not raise them above
the level that would have prevailed under competition. This is the
second test of just price. No possible justification can be found,
except one to be mentioned presently, for charging the consumers
higher prices than they could have obtained under competitive
conditions. At such prices the monopoly will be able to secure the
prevailing rate of interest on its capital, and all the surplus gains
that proceed from superior efficiency. A higher scale of prices will
be, therefore, extortionate, and the competitors who are eliminated
through its instrumentality will be the victims of injustice.[179]
The exception alluded to above occurs when the monopoly uses the
excess which it obtains over the competitive price to pay fair wages
to those labourers who were insufficiently compensated in competitive
conditions. In such a case the eliminated competitors would have no
just claim against the monopoly; for their elimination took place in
the just interest of the producers. The case, however, is purely
academic, since the discriminative underselling practised by our
monopolistic concerns has not been impelled by any such motive, nor
has it achieved any such result.
_Exclusive-Sales Contracts_
The second unfair method employed by monopolies toward competitors is
that of exclusive-selling contracts, sometimes called the "factor's
agreement." It requires the dealer, merchant, or jobber to refrain
from selling the goods produced by independent concerns, on penalty of
being refused the goods produced by the monopoly. The merchant is
compelled to choose between the less important line of wares to be had
from the former, and the more important line obtainable from the
latter. He will not be permitted to handle both. "Here is somebody who
has been buying goods, let us say, by way of illustration, from the
American Tobacco Company, and a rival producer comes in whom the
merchant likes to patronise. He buys goods for a time from the rival,
and an agent of the trust sends him a note to the effect that he must
not buy any more from that rival corporation; that, if he does so, the
trust will give all of its own goods, some of which the merchant is
obliged to have, to another agent. That will probably bring him to
terms."[180] By this method the independent manufacturer can be
deprived of sufficient patronage to injure him seriously, and perhaps
to drive him out of business.
This process is one of intimidation brought to bear upon the merchant.
Through fear of loss he is compelled to discontinue selling the goods
of the competing manufacturer. It is a kind of secondary boycott. As
such, it is an unreasonable interference with the liberty of the
merchant unless its object is to compel him to do something that he
may be reasonably required to do. In the case that we are considering,
the object of the pressure is not of that character; for to drive the
rival manufacturer out of business, or to assist in his expulsion, is
not a reasonable thing. The exclusive-selling contract which is forced
upon the merchant is quite as unreasonable as though its purpose were
to prevent him from, say, patronising manufacturers having red hair.
Being thus unreasonable, thus injurious to individual liberty, it
violates not only the law of charity but that of justice. It
transgresses the merchant's right to enter reasonable contracts with
the rival manufacturer, and if it results in a pecuniary loss to the
former it is an invasion of his rights of property. It likewise
violates the rights of the competitive manufacturer, since it is among
the unfair means which may not be used to prevent a man from pursuing
a legitimate good. It is an unfair means because it involves
unreasonable intimidation, uncharity, and injustice toward the
merchant. When the independent manufacturer is injured through such an
instrumentality, he suffers injustice quite as certainly at the hands
of the monopoly as though his property were destroyed through the
strong-arm methods of hired thugs.
_Discriminative Transportation Arrangements_
Concerning the third unfair method, discriminative advantages in
transportation, the United States Industrial Commission declared: "It
is incontestable that many of the great industrial combinations had
their origin in railroad discrimination. This has been emphasised many
times in the history of the Standard Oil Company, and of the great
monopolies dealing in live stock, dressed beef, and other
products."[181] The American Sugar Refining Company has been several
times convicted of receiving illegal favours from railroads, and has
paid in fines thousands upon thousands of dollars. Sometimes the
monopoly has openly been accorded lower freight rates than its
competitors, and sometimes it has paid the regular charges, and then
received back a part of them as a refund or rebate. At one time the
Standard Oil Company obtained rebates not only on its own shipments,
but on those of its rivals![182]
Special advantages of this sort necessarily involve injustice to the
competitors of the monopoly. If the low rates given to the
monopolistic concern are a sufficiently high price for the service of
carrying freight, the higher charges imposed upon the competing
concerns are extortionate; if the former rates are unprofitably low,
the difference between sufficient and insufficient freight charges is
made up by the independent concerns. In the former case the
independents pay the railroad too much; in the latter case they bear
burdens that should properly rest upon the monopoly. The monopolistic
concern is partly responsible for this injustice inasmuch as it urges
and often intimidates the railroad to establish the discriminating
rates.
All three of the practices that we have been considering are
universally condemned by public sentiment. They are all likewise under
the ban of statutory law. The first two have recently received
detailed and explicit prohibition in the Clayton Anti-Trust Act.
_Natural Monopolies_
Up to this point we have been dealing with private and artificial
monopolies. We turn now to consider briefly those natural and
quasi-public monopolies which are either tacitly or explicitly
recognised as monopolies by public authority, and whose charges are to
a greater or less extent regulated by some department of the State.
Such are, for example; steam railroads and municipal utilities. When
the charges made for the services of these corporations are
_adequately_ regulated by public authority, the owners of such
concerns will have a right to all the surplus gains that they can
obtain. In that case a contract is made between the corporation and
the public which is presumably fair to both parties, and which
represents the social estimate of what is just. If the public
authorities have not sufficiently safeguarded the interests of the
people, if they have permitted the charges to be so high as to provide
excessive returns for the corporation, the latter is under no moral
obligation to refrain from reaping the full benefit of the State's
negligence or incompetence. If, however, the unduly high rates have
been brought about through bribery, extortion, or deception practised
by the corporation, the inequitable contract thus arranged will not
justify the surplus gains thus produced. For example; if the
corporation deliberately and effectively conceals the real value of
its property through stockwatering, and thus misleads the public
authority into permitting charges which return twelve instead of six
per cent. on the actual investment, the corporation cannot forthwith
justly claim the surplus gain represented by the extra six per cent.
When the public authorities either fail entirely to regulate charges,
or do so only spasmodically and partially, the quasi-public monopoly
will not necessarily have a right to all the obtainable surplus gains.
For a long time the express companies of the United States were
permitted to exact what charges they pleased, and even yet the rates
on some of our railroads are not adequately regulated by the State. In
such cases the charges imposed on the public are not an adequate
expression of the social estimate of justice, nor an adequate basis of
legitimate surplus gains. In the absence of sufficient public
regulation, a quasi-public monopoly is morally bound to fix its
charges at such a level as will enable it to obtain only the
prevailing rate of interest on the investment, and such surplus gains
as it can produce through exceptional efficiency. In all such cases
the public service corporation is in the same moral position as the
artificial monopoly: it has no possible basis except superior
efficiency for claiming or getting any returns above the competitive
rate of interest on its capital. Its only possible reason for
obtaining more is the fact that it has the power to take more. This
fact has obviously no moral validity.
_Methods of Preventing Monopolistic Injustice_
How shall the injustices of monopoly be prevented in the future? So
far as quasi-public monopolies are concerned, all students of the
subject are now agreed that these should be permitted to exist under
adequate governmental regulation as to prices and service. The reason
is that in this field successful and useful competition is impossible.
Public utility corporations are natural monopolies, and must be dealt
with by the method of regulation until such time as they are brought
under the ownership and operation of the State. With regard to the
great industrial combinations which have become or threaten to become
artificial monopolies, there exists substantial agreement among
competent authorities on one point, and disagreement on another point.
All admit that the unfair competitive methods described in an earlier
part of this chapter should be stringently prohibited. No possible
reason can be found for legal toleration of these or any other
discriminative, uncharitable, or unjust practices on the part of
stronger toward weaker competitors.
The disagreement among students of monopoly relates to the fundamental
question of permitting or not permitting these combinations to exist.
According to the first theory, of which Mr. Justice Brandeis is the
most distinguished exponent, no new industrial monopolies should be
permitted, and those that we have should be dissolved. The basis of
this theory is the assumption that all the economies and all the
productive efficiency found in monopolistic concerns can be developed
and maintained in smaller business organisations, and that the method
of prevention and dissolution is the simplest means of protecting the
public against the danger of extortionate monopoly prices. Attention
has been called in a preceding paragraph to the impossibility of
determining whether the great monopolistic combinations have on the
average shown themselves to be more efficient than concerns subject
to active and adequate competition. It is significant, however, that
in the discussion of this subject which took place at the twenty-sixth
annual meeting of the American Economic Association, at Minneapolis in
1913, the economists who participated were practically unanimous in
holding that the superior efficiency of the trusts had not been
demonstrated, but was a matter of serious doubt, and that the burden
of proof of their alleged superiority had been definitely shifted upon
those who maintained the affirmative.[183] Probably the great majority
of the whole body of American economists would share these
conclusions.
On the other hand, the opponents of prevention and dissolution, of
whom Mr. George W. Perkins is probably the most conspicuous, point to
the obvious economies of large-scale over small-scale production, and
contend that these are sufficient reason for permitting and even
encouraging the great combinations. The power to oppress competitors
by unjust methods of business, and the public by extortionate prices,
should be kept under rigid control by supervision, and government
regulation of maximum prices. But the arguments advanced in favour of
this position are never conclusive. Most of its advocates fail to
realise, or at least to take adequately into account, the difference
between large-scale production and production by a monopoly. While the
large plant and the large business organisation have in many lines of
manufacture and trade a considerable advantage over the small plant
and the small organisation, there is not a scintilla of evidence to
show that the efficiency of magnitude increases indefinitely with
magnitude. There is no proof that the maximum efficiency is reached
only with the maximum size of the business unit. On the contrary, all
the evidence that we have points to the conclusion that in every field
of industrial and commercial enterprise, all the economies of
magnitude and of combination are obtained long before the concern
becomes a monopoly. There is not an industry of any importance in the
United States in which all the advantages of bigness and concentration
cannot be made operative in concerns that control as low as
twenty-five per cent. of the total product. The highest economy and
efficiency can be obtained without monopoly.
Indeed, this is admitted by the more reasonable advocates of the
regulation and price-fixing policy. While maintaining that
"concentration must go far in order to give the maximum of
efficiency," President Van Hise does not hold "that it should go to
the extent that the element of monopoly enters"; and he would have the
law "declare restraint of trade unreasonable that gets to monopoly,"
and fix the definite per cent. of business control which constitutes a
monopoly.[184] We are justified, therefore, in concluding that the
theory of prevention and dissolution (provided that the competing
units are not made so small as to destroy the certain economies of
magnitude) rather than the theory of permission and regulation,
indicates the sound economic and social policy of dealing with
monopolies.
_Legalised Price Agreements_
President Van Hise advocates the regulation policy in a modified form.
In substance his view is that, while no corporation should be
permitted to control the greater part of any product, monopolistic
price-agreements should be sanctioned and regulated by law. No amount
of restrictive legislation, he maintains, can secure universal
competition in the matter of prices. Experience shows that the
destructive results of cut-throat competition compel the more powerful
competitors to make price agreements in some lines of business.[185]
For example; all the retail grocers in a city are often found selling
certain staples at a uniform price for long periods of time.
Agreements of this sort should, in the opinion of President Van Hise,
be formally permitted by law, with the proviso that a government
commission should fix the maximum and possibly the minimum limits. And
he contends that the task of fixing fair maximum and minimum prices
would be much less difficult than is commonly supposed, and that it
would be much simpler and easier than the task of regulating railway
freight rates.
Whatever may be the merits of this plan, it is not likely to be
embodied in legislation in the near future. So far as we can see now,
the American people are committed to the policy of endeavouring to
restore genuine competition by prohibiting those predatory practices
to which the great monopolies mainly owe their existence. The attempt
will be made to give competition a fair opportunity to prevent both
monopolistic control of products and monopolistic fixing of prices.
Competition has not enjoyed any such opportunity during the last
quarter of a century. If this attempt should fail after a thorough
trial, the time will be at hand for the regulation of prices by the
government. Until that time has arrived (let us hope that it never
will arrive) the State will not, and should not, embark upon such a
large and difficult experiment.
FOOTNOTES:
[165] Report of the Commissioner of Corporations on the Petroleum
Industry, II, 40, 41.
[166] Report of the Commissioner of Corporations on the Tobacco
Industry, II, 26-34.
[167] Report of the Commissioner of Corporations on the Steel
Industry, I, 51. According to F. J. McRae, the expert accountant for
the Stanley congressional investigating committee, this concern
secured 40 per cent. on the _cost_ of its property.
[168] Hearings Before the Interstate Commerce Committee, U. S. Senate,
Part XVI, pages 1146-1166.
[169] _The Journal of Political Economy_, April, 1912, p. 366.
[170] "Concentration and Control," p. 20.
[171] Page 621.
[172] _The Journal of Political Economy_, April, 1912, p. 363.
[173] Report on the Petroleum Industry, II, 74.
[174] Report on the Tobacco Industry, II, 27.
[175] Cf. Van Hise, op. cit., pp. 140, 149, 153, 159.
[176] Final Report of the Industrial Commission, pp. 660-662.
[177] Report on the Petroleum Industry, I, 328-332.
[178] Cf. Lehmkuhl, "Theologia Moralis," I, No. 974.