[179] It may be of interest to recall the mediæval attitude toward

monopolistic exactions, as summarily stated by St. Antoninus, who was

archbishop of Florence in the first half of the fifteenth century:

"When monopolist merchants agree together to preserve a fixed price,

so as to secure an unlimited profit, they are guilty of sinful

trading." He maintained that they should not sell above the market

price, and should be prevented from so doing by law. See his "Summa

Theologica," III, 8, 3, iv, and II, 1, 16, ii. Present day moral

theologians lay down the same doctrine, and in addition condemn the

characteristic monopolistic methods as unjust. See Tanquerey, "De

Justitia," nos. 776, 777; Lehmkuhl, "Theologia Moralis," vol. I, no.

1119.

[180] Clark, "The Problem of Monopoly," p. 35.

[181] Final Report, p. 361.

[182] Report on the Petroleum Industry, pp. 22, 23.

[183] "Papers and Proceedings," pp. 158-194.

[184] Op. cit., pp. 20, 251.

[185] Op. cit., pp. 254-265.

CHAPTER XIX

THE MORAL ASPECT OF STOCK WATERING

In the last chapter we saw that a monopoly has no right to gains in

excess of the competitive rate of interest on its capital, except in

so far as these have been derived from superior efficiency. Now

superior efficiency is clearly present whenever the monopolistic

concern obtains surplus gains by selling its product at competitive

prices, or at the prices that would have prevailed under competition.

Evidently the surplus in such a case is due to the greater

productivity of the monopoly as compared with the average productivity

of competitive concerns. When, however, the monopoly charges prices

above the competitive level, its surplus gains cannot all be

attributed to unusual efficiency. A part if not all of them are the

result simply of the power to take; consequently they are immoral.

One of the means by which some monopolies have obtained unjust surplus

gains is overcapitalisation, or stockwatering. This practice is rarely

found in businesses that are subject to normal competition. So far as

the consumer is concerned, a corporation that cannot fix prices

arbitrarily has nothing to gain by inflating its capital. Unless it

develops exceptional efficiency, it cannot hope to obtain more than

the competitive rate of interest on its capital; if it does become

exceptionally efficient, it can take the resulting surplus gains

without arousing public resentment or criticism. In either case, it

will have no sufficient reason to deceive the public by exaggerating

the amount of its capital. When a competitive concern does water its

stock, the object will be to defraud investors. If the scheme is

successful the unjust surplus gains are taken by one set of

stockholders from another set of stockholders. Whenever anything of

this sort occurs, the deceptive devices employed are so crude and

obvious that they present no special problem for the moralist. Even as

practised by monopolies, stockwatering raises no principle that has

not been already discussed. It does, however, create some special

difficulties in the matter of applying the moral principles involved.

Consequently, it may with advantage be considered in a separate

chapter.

The general definition of overcapitalisation is capitalisation in

excess of the proper valuation of a business. What is the measure of

proper valuation? According to many corporation directors, it is

earning power. If a concern is able to get the prevailing rate of

interest on a capitalisation of ten million dollars, that is the

proper capitalisation for that concern, even though the money actually

invested might not have exceeded five million dollars. In the opinion

of most other persons, however, a company is overcapitalised when the

face value of its securities is greater than the money put into the

business plus the subsequent enhancement in the value of its land.

"The money put into the business," means that which has been expended

for labour, materials, land, equipment, and all other items and costs

of organising the concern, together with the sum that is necessary to

cover the interest not obtained by the investors during the

preparatory period before the business became productively operative.

The increase in the value of the land after its acquisition by the

company also deserves a place in the legitimate valuation, and may

reasonably be represented by an appropriate amount of securities.

Monopolistic corporations have as good a right, generally speaking, to

profit by the "unearned increment" of land as competitive concerns. In

brief, the proper measure of capitalisation is cost: either the

original cost, as just explained and supplemented; or the present

cost of reproducing the business.

_Injurious Effects of Stockwatering_

Stockwatering can become an instrument of unjust gains in two ways:

first, through fraud inflicted upon some of the investors; second,

through the imposition of exorbitant prices upon the consumers. The

former cannot occur so long as the process of inflation does not go

beyond earning power; for in that case all stockholders, barring

dishonest manipulation of the company's receipts, will obtain the

normal rate of interest on their investment. If, however, stock is

sold in excess of the earning power of the concern, those stockholders

who fail to obtain the ordinary rate of interest on their money are

unjustly treated in so far as they have been deceived. And those

officers or other members of the corporation who have profited by the

deception of and injury to these stockholders, are the recipients of

unjust gains. Daniel Drew inflated the capitalisation of the Erie

Railroad from seventeen millions to seventy-eight millions within four

years for the purpose of manipulating the stock market; owing to

excessive issues of stock, the American Shipbuilding Company was

thrown into bankruptcy to the great injury of all but one of its

stockholders;[186] because they issued securities to buy subsidiary

railway lines at exorbitant prices, and to provide extravagant

commissions and discounts for bankers, the directors of the 'Frisco

System forced it into a receivership, after having inflicted a net

loss of four million dollars per year upon the stockholders.[187] Many

other notable performances might be cited where stockwatering, both in

railroads and in industrial concerns, has defrauded investors of

millions of dollars, and enabled a few powerful directors to reap

corresponding enormous profits.

At first sight it would seem that stockwatering is of little or no

importance to the consumer. Since a monopolistic concern endeavours to

fix its prices at the point that will yield the maximum net profit in

any case, the amount of stock in existence would seem to be irrelevant

to the problem. Nevertheless, the presence of a large quantity of

fictitious capital whose owners are calling for dividends, sometimes

constitutes a special force impelling the imposition of higher prices

and charges. "It will happen at times that overcapitalisation does at

least cause a clinging to high prices. The managers of an

overcapitalised monopoly may have to face the fact that great blocks

of securities are outstanding, very likely issued by their

predecessors, and now held by all sorts of investors. They are then

loath to let go any slice of its profits. We have seen that often the

monopoly principle of maximum net profit is not applied in its full

sweep, especially in industries which are potentially subject to

public control. Where abnormal returns on the original investment have

been made, concessions to public opinion in the way of low rates and

better facilities are more likely to come when capitalisation has not

been inflated."[188] The United States Industrial Commission found

that as regards railroads: "In the long run excessive capitalisation

tends to keep rates high; conservative capitalisation tends to make

rates low."[189]

This indirect influence of stockwatering toward excessive rates and

prices becomes effective in two ways. The existence of fictitious

capital conceals from the public the high rate of return that is

obtained on the true valuation, thus preventing effective action for a

reduction in prices and charges; and it sometimes causes the

rate-making authorities to allow rates to be sufficiently high to

yield something to the investors in the inflated capital. If a trust

or a railroad has issued stock having a par value of twice the capital

invested, its rate of dividend on the entire capitalisation will be

only one-half the rate of interest that it is receiving on the

investment. If it pays, for example, seven per cent. on all its stock,

it will be getting fourteen per cent. on its genuine capital. While

the consumers of tobacco, or the patrons of a railroad, would raise no

outcry against seven per cent. dividends, they would probably begin to

agitate for an enforcement of the anti-trust laws, and for a reduction

in freight and passenger charges, if they realised that they were

providing for dividends of fourteen per cent. Nor is the public

adequately protected by government investigations of trusts and

regulation of railway rates. Despite the anti-trust laws, many

American monopolies have for many years received exorbitant profits

through excessive prices imposed upon the consumer; and in many of

these instances overcapitalisation and its resulting concealment of

real profits have been of considerable assistance to the extortionate

monopoly. In fixing railway rates, the Interstate Commerce Commission,

and the various state railroad commissions, have been seriously

hampered by their inability to determine the real investment of the

roads, and to separate the genuine from the fictitious capitalisation.

Not until the year 1913 did the national government begin the task of

making a valuation of interstate railroad property, and the work will

require several years. Very few of the states have made valuations of

the railroads within their borders. In the meantime it is certain that

many of the rates fixed by both the national and the state bodies will

continue, as in the past, to be higher than they would have been if

the true value of the railroads were known and accepted as the basis

of freight and passenger charges.

The second bad effect of stockwatering on the consumer is seen when

rate-fixing bodies deliberately permit the charges of public service

corporations to be high enough to include some returns on that portion

of the capitalisation which is fictitious. It is very difficult for

such authorities to resist entirely the plea of the "innocent

investor." Consequently, railroad commissions and other rate making

authorities, and even the courts, have occasionally made some

provision for dividends on the "water." Chairman Knapp of the

Interstate Commerce Commission admitted a few years ago that, in

considering the reasonableness of a given rate, this body took into

account the financial condition, and therefore the capitalisation of

the railroad.[190] In 1914 and 1915 practically all the great railway

systems of the United States made powerful, and in a measure

successful, appeals to the Interstate Commerce Commission for a rise

in rates on the ground that they were unable to pay the normal rate of

interest on their securities, and hence could not obtain on

advantageous terms new capital needed for improvements. Had the

capitalisation of the roads been kept down to the actual investment,

most of them would have been able to pay the competitive rate of

interest on all their stock, and still have a sufficient surplus to

command excellent credit.

_The Moral Wrong_

When prices or charges are made high enough to provide returns on

fictitious capital, the consumer is treated unjustly. As we have shown

more than once, the consumer cannot rightfully be required to pay for

the products of a monopoly at a greater rate than is necessary to

provide the competitive rate of interest on capital in the average

conditions of efficiency. If some concerns are able to sell at this

price, and still obtain surplus gains, they have a right thereto on

account of their exceptional productivity. But the capital upon which

a monopolistic concern has a claim to the prevailing rate of interest,

is genuine capital: that is, the actual investment as interpreted

above, not an inflated capitalisation. The consumers may justly be

required to pay for the use and benefit of actual productive goods;

but it is not just that they should be compelled to pay for the

supposed use of a capital that has no concrete reality.

The stockholders of the monopolistic corporation which imposes upon

the consumers exorbitant prices or charges through the instrumentality

of inflated capitalisation, can become guilty of this injustice in two

ways: by promoting the improper capitalisation; and by getting

dividends on stock for which they have not given a fair equivalent. As

a rule, the greater part of such guilt and responsibility rests upon

certain special and powerful groups among the stockholders. For

example; the J.P. Morgan syndicate which organised the United States

Steel Corporation received for that service securities to the value of

$63,500,000. "There can be no question," says the Commissioner of

Corporations, "that this huge compensation to the syndicate was

greatly in excess of a reasonable payment."[191] The syndicate was

able to exact this stupendous sum mainly because some of its members

were also in control of some of the companies that were brought into

the combination. "In other words, as managers of the Steel Corporation

these various interests virtually determined their compensation as

underwriters."[192] In the opinion of the minority members of the

Stanley congressional investigating committee, "such a sum bore no

relation whatever to the service rendered, the risk run, and the

capital advanced."[193] The majority of the committee characterised

the transaction in even stronger language. It is clear, therefore,

that the syndicate committed injustice toward the consumers both by

organising a monopoly which afterward imposed unjust prices, and by

taking millions of dollars in securities which its members did not

earn, and on which they received interest through the exorbitant

prices. While this transaction is exceptionally conspicuous, it is

substantially typical of the methods by which many powerful monopolies

have watered their stock to the detriment of the public, and the

advantage of a small group of directors and financiers.

_The "Innocent" Investor_

Is the State obliged to protect, or is even justified in protecting,

the innocent victims of stockwatering? That is to say, should

rate-making authorities fix the charges of public service corporations

high enough to return some interest to the purchasers of fictitious

securities? All the facts and presumptions of the case seem to demand

an answer in the negative. In the first place, it is impossible to

distinguish the "innocent" holders from those who were fully

acquainted with the questionable and speculative nature of the stock

at the time it came into their possession. In the second place, the

civil law has never formally recognised any such claim on the part of

even innocent investors, nor any such obligation on the part of

itself. It has never laid down the principle that any class of

investors in fictitious stock has a legal or moral right to obtain the

normal rate of interest on such stock through the imposition of

sufficiently high charges upon the consumers. Nor have the courts,

except in isolated instances, sanctioned any such principle. On the

contrary, the Supreme Court of the United States, in the case of Smyth

vs. Ames, declared that a railroad "may not impose upon the public the

burden of such increased rates as may be required for the purpose of

realising profits upon such excessive valuation or fictitious

capitalisation." In the third place, when we consider the matter from

the side of morals, we see that the innocent investors are not the

only persons whose rights are involved. If charges are placed high

enough to cover interest on fictitious capital, the cost and the

injury fall upon the consumers. The latter have a right to the

services of utility corporations, such as railways and gas companies,

at a fair price; that is, a price which will return to the capital put

into the concern the prevailing rate of interest, plus whatever gains

are obtained by exceptional efficiency. To require them to pay more

than this, is to compel them to give something for nothing; namely, to

provide interest on capital which does not exist, and from which they

receive no benefit. When, therefore, the State intervenes to secure

fair charges for the consumers, it should base them upon the capital

actually invested and used in the business of public service.

Frequently, however, the State has permitted overcapitalisation, and

charges sufficient to pay normal dividends thereon, for long periods

of years. Has it not thereby encouraged investors to cherish the

expectation that these high charges would be permitted to continue,

and that the fictitious stock would remain indefinitely as valuable as

when it came into their possession? Is it not breaking faith with

these investors when it reduces charges to the basis of the actual

investment? A sufficient answer to these questions is found in the

fact that the State has never officially sanctioned the practice of

stockwatering, nor in any way intimated that it would recognise the

existence of the fictitious stock when it should take up the neglected

task of fixing fair rates and charges. At the most, the civil law has

merely tolerated the practice, and the resulting extortion upon the

public. And there has never been a time when the greater and saner

part of public opinion did not look upon overcapitalisation as at the

least abnormal and irregular. Neither from the civil law nor from

public sentiment have the devices of inflating capitalisation received

that measure of approval which would confer upon investments therein

the legal or the moral status of vested rights. To the "innocent

investor" in watered stocks the maxim, _caveat emptor_, is as fairly

applicable as to the man who has been deceived into lending his money

on insufficient security, or the man who has been induced by the

asseverations of a highly imaginative prospectus to put his money into

a salted gold mine, or the man who buys stolen goods from a pawn shop,

or the man who because of insufficient police protection loses his

purse to a highwayman. In all these cases perfect legal safeguards

would have prevented the loss; yet in none of them does the State

undertake to make the loss good to the innocent victim.

Such seems to be the strict justice of the situation as between the

consumer and the innocent investor. It may sometimes happen that a

particularly grave hardship can be averted from the latter at a

comparatively slight cost to the former. In such a case equity would

seem to require that some concession be made to the investors through

the imposition of somewhat higher charges upon the consumer.

_Magnitude of Overcapitalisation_

Probably the majority of the great steam railroads, street railways,

and gas companies that were organised during the last quarter of the

nineteenth century inflated their capitalisation to a greater or less

extent. Since the year 1900 the trusts have been the chief exponents

and illustrations of the practice. According to President Van Hise,

"the majority of the great concentrations of industry have gone

through two or three stages of reorganisation, the promoters and

financiers each time profiting greatly, sometimes enormously."[194]

For example; in 1908 the "water" in the American Tobacco Company was

estimated by the Commissioner of Corporations at $66,000,000; the

United States Shipbuilding Company diluted its twelve and one-half

million dollars of capital with more than fifty-five millions of

"water"; the United States Steel Corporation contained at the time of

its organisation fictitious capital to the amount of $500,000,000; and

at least fifty per cent. of the common stock of the American Sugar

Refining Company represented no actual investment.[195] Owing to the

penetrating and widespread criticism, and the government

investigations and prosecutions of the last few years, the practice of

stockwatering has very greatly diminished. Perhaps the most flagrant

recent example is that of the Pullman Company, which according to the

testimony of R. T. Lincoln before the Federal Commission on Industrial

Relations, distributed among its stockholders $100,000,000 in stock

dividends between 1898 and 1910.

Nevertheless the temptation to inflate capital will exist until the

device is stringently prohibited by law. Both the nation and the

states ought to adopt the policy of forbidding the sale of stock at

less than par value, and restricting issues of stock to the amount

required for the establishment, equipment, and permanent betterment of

a concern, including a sum to cover the loss of interest to the

investors during the early period of the business. Any extraordinary

risks to which an enterprise is liable can be protected by the simple

device of allowing a correspondingly high rate of interest on the

securities. With such legislation enacted and enforced, neither the

investor nor the consumer could be deceived or defrauded; and the

financing and management of corporations would become less

speculative, and more beneficial to the community. The present chapter

may be fittingly closed with a moderate and significant statement from

the pen of Professor Taussig: "It is doubtful whether the whole

mechanism of irregular and swollen capitalisation was at any time

necessary or wise. Why not provide once for all that securities shall

be issued only to represent what has been invested?... It is

sometimes said that freedom, even recklessness, in the issue of

securities was a useful device, in that it enabled the projectors to

look forward to returns really tempting, and at the same time

concealed these returns from a grudging public.... A more simple and

straightforward way of dealing with the issue of securities might thus

have dampened in some degree the feverish speculation and restless

progress of railway development. But a slower pace would have had its

advantages also, and, not least, restriction of securities would have

saved great complications in the later stages of established monopoly

and needed regulation."[196]

FOOTNOTES:

[186] Cf. Ripley, "Trusts, Pools, and Corporations," pp. 207-210.

[187] See Report of the Interstate Commerce Commission on these

transactions.

[188] Taussig, "Principles of Economics," II, 385, 386.

[189] Final Report, p. 414.

[190] Final Report of the Industrial Commission, p. 413.

[191] Report on the Steel Industry, p. 38.

[192] Idem, p. 39.

[193] _Chicago Record-Herald_, July 29, 1912.

[194] Op. cit., p. 28.

[195] Cf. Van Hise, op. cit., pp. 29, 142, 149.

[196] Op. cit., II, 387, 388.

CHAPTER XX

THE LEGAL LIMITATION OF FORTUNES

If the taxation and other measures of reform suggested in Section I

were fully applied to our land system; if co-operative enterprise were

extended to its utmost practicable limits for the correction of

capitalism; and if the wide extension of educational opportunities,

and the elimination of the surplus gains of monopolies restricted the

profits of the business man to an amount strictly commensurate with

his ability and risks,--if all these results were accomplished the

number of men who could become millionaires through their own efforts

would be so small that their success would arouse popular applause

rather than popular envy. Their claim to whatever wealth they might

accumulate would be generally looked upon as entirely valid and

reasonable. Their pecuniary eminence would be pronounced quite as

deserved as the literary eminence of a Lowell, the scientific eminence

of a Pasteur, or the political eminence of a Lincoln. In such

conditions there could be no disconcerting discussion of the menace of

great fortunes.

In the meantime, these reforms are not realised, nor are they likely

to be even approximately established within the present generation.

For some time to come it will be possible for the exceptionally able,

the exceptionally cunning, and the exceptionally lucky to accumulate

great riches through clever and fortuitous utilisation of special

advantages, natural and otherwise. Moreover, a great proportion of the

large fortunes already in existence will persist, and will be

transmitted to heirs who will in many cases cause them to increase.

Can nothing be done to reduce the size and lessen the number of these

great accumulations? If so, is such a proceeding socially and morally

desirable?

_The Method of Direct Limitation_

The law might directly limit the amount of property to be held by any

individual. If the limit were placed fairly high, say, at one hundred

thousand dollars, it could scarcely be regarded as an infringement on

the right of property. In the case of a family numbering ten members,

this would mean one million dollars. All the essential objects of

private ownership could be abundantly met out of a sum of one hundred

thousand dollars for each person. Moreover, a restriction of this sort

need not prevent a man from bestowing unlimited amounts upon

charitable, religious, educational, or other benevolent causes. It

would, indeed, hinder some persons from satisfying certain unessential

wants, such as, the desire to enjoy gross or refined luxuries, great

financial power, and the control of immense industrial enterprises;

but none of these objects is necessary for any individual's genuine

welfare. In the interest of the social good such private and

unimportant ends may properly be rendered impossible of realisation.

Such a restriction would no more constitute a direct attack upon

private ownership than limitations upon the use and kinds of property.

At present a man may not do what he pleases with his gun, his horse,

or his automobile, nor may he invest his money in the business of

carrying the mails. The limitation of fortunes is just what the word

expresses, a _limitation_ of the right of property. It is not a denial

nor _destruction_ of that right. As a limitation of the amount to be

held by an individual, it does not differ in principle from a

limitation of the kinds of goods that may become the subject of

private ownership. There is nothing in the nature of things nor in the

reason of property to indicate that the right of ownership is

unlimited in quantity any more than it is in quality. The final end

and justification of individual rights of property is human welfare;

that is, the welfare of all individuals severally and collectively.

Now it is quite within the bounds of physical possibility that the

limitation under discussion might be conducive to the welfare of human

beings both as individuals and as constituting society.

Nevertheless the dangers and obstacles confronting any legal

restriction of fortunes are so real as to render the proposal socially

inexpedient. It would easily lend itself to grave abuse. Once the

community had habituated itself to a direct limitation of any sort,

the temptation to lower it in the interest of better distribution and

simpler living would become exceedingly powerful. Eventually the right

of property might take such an attenuated and uncertain form in the

public mind as to discourage labour and initiative, and thus seriously

to endanger human welfare. In the second place, the manifold evasions

to which the measure would lend itself would make it of very doubtful

efficacy. To be sure, neither of these objections is absolutely

conclusive, but taken together they are sufficiently weighty to

dictate that such a proposal should not be entertained so long as

other and less dangerous methods are available to meet the problem of

excessive fortunes.

Four of the nine members of the Federal Commission on Industrial

Relations have suggested that the amount of property capable of being

received by the heirs of any person be limited to one million

dollars.[197] If we assume that by heirs the Commission meant the

natural persons to whom property might come by bequest or succession,

this limitation would permit a family of ten persons to inherit one

hundred thousand dollars each, and a family of five persons to obtain

two hundred thousand dollars apiece. Would such a restriction be a

violation of the right of private ownership? The answer depends upon

the effects of the measure on human welfare. The rights of bequest and

succession are integral elements of the right of ownership; hence they

are based upon human needs, and designed for the promotion of human

life and development. A person needs private property not only to

provide for his personal wants and those of his family during his

lifetime, but also to safeguard the welfare of his dependents and to

assist other worthy purposes, after he has passed away. Owing to the

uncertainty of death, the latter objects cannot be adequately realised

without the institutions of bequest and succession.

All the necessary and rational ends of bequest and succession could be

attained in a society in which no man's heirs could inherit more than

one million dollars. Under such an arrangement very few of the

children of millionaires would be prevented from getting at least one

hundred thousand dollars. That much would be amply sufficient for the

essential and reasonable needs of any human being. Indeed, we may go

further, and lay down the proposition that the overwhelming majority

of persons can lead a more virtuous and reasonable life on the basis

of a fortune of one hundred thousand dollars than when burdened with

any larger amount. The persons who have the desire and the ability to

use a greater sum than this in a rational way are so few that a

limitation law need not take them into account. Corporate persons,

such as hospitals, churches, schools, and other helpful institutions,

should not, as a rule, be restricted as to the amount that they might

inherit; for many of them could make a good use of more than the

amount that suffices for a natural person.

So much for the welfare and rights of the beneficiaries of

inheritance. The owners of estates would not be injured in their

rights of property by the limitation that we are here considering. In

the first place, the number of persons practically affected by the

limitation would be extremely small. Only an insignificant fraction of

property owners ever transmit or expect to be wealthy enough to

transmit to their families more than one million dollars. Of these few

a considerable proportion would not be deterred by the million dollar

limitation from putting forth their best and greatest efforts in a

productive way. They would continue to work either from force of habit

and love of their accustomed tasks, or from a desire to make large

gifts to their heirs during life, or because they wished to assist

some benevolent enterprise. The infinitesimally small number whose

energies would be diminished by the limitation could very safely be

treated as a socially negligible element. The community would be

better off without them.

The limitation of inheritance would, indeed, be liable to abuse.

Circumstances would undoubtedly arise in which the community would be

strongly tempted to make the maximum inheritable amount so low as to

discourage the desire of acquisition, and to deprive heirs of

reasonable protection. While the bad effects of such a limitation

would not be as great as those following a similar abuse with regard

to possessions, they are sufficiently grave and sufficiently probable

to suggest that the legal restriction of bequest and succession should

not be considered except as a last resort, and when the transmission

of great fortunes had become a great and certain public evil.

It seems reasonable to conclude, then, that neither the limitation of

possessions nor the limitation of inheritance is necessarily a direct

violation of the right of property, but that the possible and even

probable evil consequences of both are so grave as to make these

measures of very doubtful benefit. Whether the dangers in question are

sufficiently great to render the adoption of either proposal morally

wrong, is a question that cannot be answered with any degree of

confidence. What seems to be fairly certain is that in our present

conditions legislation of this sort would be an unnecessary and unwise

experiment.

_Limitation Through Progressive Taxation_

Is it legitimate and feasible to reduce great fortunes indirectly,

through taxation? There is certainly no objection to the method on

moral or social principles. As we have seen in chapter viii, taxes are

not levied exclusively for the purpose of raising revenue. Some kinds

of them are designed to promote social rather than fiscal ends. Now,

to prevent and diminish dangerous accumulations of wealth is a social

end which is at least as important as most of the objects sought in

license taxes. The propriety of attempting to attain this end by

taxation is, therefore, to be determined entirely by reference to its

probable effectiveness.

The precise method of taxation available here is a progressive tax on

incomes and inheritances. By a progressive tax is meant one whose rate

advances in some definite proportion to the increases in the amount

taxed. For example, a bequest of 100,000 dollars might pay one per

cent.; 200,000 dollars, two per cent.; 300,000 dollars, three per

cent., and so forth. The reasonableness of the principle of

progression in taxation has been well stated by Professor Seligman:

"All individual wants vary in intensity, from the absolutely necessary

wants of mere subsistence to the less pressing wants which can be

satisfied by pure luxuries. Taxes, in so far as they rob us of the

means of satisfying our wants, impose a sacrifice upon us. But the

sacrifice involved in giving up a portion of what enables us to

satisfy our necessary wants is very different from the sacrifice

involved in giving up what is necessary to satisfy our less urgent

wants. If two men have incomes of one thousand dollars and one hundred

thousand dollars respectively, we impose upon them not equal but very

unequal sacrifices if we take away from each the same proportion, say

ten per cent. For the one thousand dollar individual now has only nine

hundred dollars, and must deprive himself and his family of

necessaries of life; the one hundred thousand dollar individual has

ninety thousand dollars, and if he retrenches at all, which is very

doubtful, he will give up only great luxuries, which do not satisfy

any pressing wants. The sacrifice imposed on the two individuals is

not equal. We are laying on the one thousand dollar man a far heavier

sacrifice than on the one hundred thousand dollar man. In order to

impose equal sacrifices we must tax the richer man not only

absolutely, but relatively, more than the poor man. The taxes must be

not proportional, but progressive; the rate must be lower in the one

case than in the other."[198]

The principle of equality of sacrifices which underlies the

progressive theory does not justify the levelling and communistic

inferences that have sometimes been brought against it. Equality of

sacrifice does not mean equality of satisfied, or unsatisfied, wants

after the tax has been collected. If Brown pays a tax of one per cent.

on his income of two thousand dollars, it does not follow that Jones

with an income of ten thousand dollars should pay a sufficiently high

rate to leave him with only the net amount remaining to Brown; namely,

1980 dollars. Equality of sacrifice means proportional equality of

burden, not equality of net resources after the tax has been deducted.

The object of the progressive rate is to make relatively equal the

sacrifices _caused by the tax itself_, not to equalise the sum total

of burdens or unsatisfied wants that exist among men.

Another objection to progressive taxation is that it readily lends

itself to confiscation of the largest incomes. All that is necessary

to produce this result is to increase the rate with sufficient

rapidity. This could be accomplished either by large steps in the

rate itself or by small steps in the income increases which formed the

basis of the advances in the rate. For example, if the Federal income

tax, which at present levies two per cent. on incomes of more than

three thousand dollars, and three per cent. on incomes of over twenty

thousand dollars, should thereafter progress geometrically with every

geometrically progressive increment of income, the rate on incomes

above $640,000 would be 96 per cent.! Or if the rate should progress

arithmetically with every ten thousand dollars of increase above

twenty thousand dollars, it would be 100 per cent. on incomes of over

$990,000!

To this objection there are two valid answers. Even if the rate should

ultimately reach one hundred per cent. it need not, and on progressive

principles it should not, effect confiscation of an entire income. The

progressive theory is satisfied when the successive rates of the tax

apply to successive increments of income, instead of to the entire

income. For example, the rate might begin at one per cent. on incomes

of one thousand dollars, and increase by one per cent. with every

additional thousand, and yet leave a very large part of the income in

the hands of the receiver. Each one thousand dollars would be taxed at

a different rate, the first at one per cent., the fiftieth at fifty

per cent., and the last at one hundred per cent. If the hundred per

cent. rate were applied to the whole of the higher incomes, it would

be a direct violation of the principle of equality of sacrifice. In

the second place, the progressive theory forbids rather than requires

the rate to go as high as one hundred per cent. While the sacrifices

imposed by a given rate are greater in the case of small than of large

properties, they become approximately equal as between all properties

above a certain high level. After this level is reached, additional

increments of wealth will all be expended either for extreme luxuries,

or converted into new investments. Consequently they will supply

wants of approximately equal intensity. For example, the wants

dependent upon a surplus of 25,000 dollars in excess of an income of

100,000 dollars, and the wants dependent upon a surplus of 75,000

dollars above the same level do not differ materially in strength. To

diminish these surpluses by the same per cent., say, ten, would impose

proportionally equal burdens.

Hence the rate of progression should be degressive; that is, it should

increase at a constant pace until a certain high level of income is

reached, then increase at a steadily diminishing pace, and finally

become uniform on the very highest incomes. For example; if the rate

increased one per cent. with every additional five thousand dollars,

reaching fifteen per cent. on incomes of seventy-five thousand

dollars, it should be on eighty thousand dollars, not sixteen but

fifteen and one-half per cent. On 85,000 dollars the rate should be

15-3/4 per cent.; on 90,000, 15-7/8 per cent.; on 95,000, 15-15/16 per

cent.; and on all sums of 100,000 and over, 16 per cent. The point at

which the increments in the rate began to decline would be that at

which differences in wants began to diminish, and the point at which

the rate became stationary would be that at which wants fell to the

same level of intensity.

_The Proper Rate of Income and Inheritance Taxes_

While the principle of equality of sacrifices forbids a rate of tax

that would reach or approximate confiscation, it gives no definite

indication of the proper scale of progression, or of the maximum limit

that justice would set to the rate. Under our Federal law the highest

rate on incomes is now 13 per cent.; under the Wisconsin law it is 6

per cent.; under the law of Prussia it is 4 per cent.; and under the

British act of 1909 it is about 8-1/2 per cent. Evidently a much

higher rate than any of these would be required to make any impression

upon swollen fortunes. The British government recently (September,

1915) made the maximum rate about 33-1/3 per cent. To be sure, this

is a war measure which probably will not continue after the

restoration of peace. However, if it were made permanent it could not

be proved to be unjust, provided that it were applied to the

_increments_ of income above a certain high limit, but not to these

incomes in their entirety.

Our present inheritance taxes are very low, averaging less than 3 per

cent. throughout the United States. Probably the highest rate is to be

found in Wisconsin, where bequests to non relatives in excess of half

a million dollars are subject to a tax of fifteen per cent. It is

clear that all the existing rates could be raised very considerably

without causing a violation of justice. Some years ago Andrew Carnegie

recommended a tax of fifty per cent. on estates amounting to more than

one million dollars.[199] No country has yet reached this high level

of inheritance taxes. Nevertheless we cannot certainly stigmatise it

as unjust either to the testator or his heirs, nor can we prove that

it is in any other manner injurious to human welfare. All that can be

said with confidence concerning the just rates of inheritance taxation

must take the form of generalisations. The increments of the tax

should correspond as closely as possible to the diminishing intensity

of the wants which the tax deprives of satisfaction; in the case of

each heir a certain fairly high minimum of property should be entirely

exempt; on all the highest estates the rate should be uniform, and it

should fall a long way short of confiscation; and the tax should at no

point be such as to discourage socially useful activity and

enterprise.

_Effectiveness of Such Taxation_

The essential justice of the measures is not the only consideration

affecting high income and inheritance taxes. There remain the

questions of expediency and feasibility. Under the first head the

objection is sometimes raised that taxes which appropriated a

considerable portion of the larger incomes and inheritances would

diminish very materially the social supply of capital. Immense sums of

money would go into the public treasury which otherwise would have

been invested in commerce and industry. Two questions are raised by

this situation: first, whether it might not be better for society to

have these sums devoted, through public works of various kinds, to

consumptive uses instead of to an increase in the supply of capital;

second, whether the reduction in the savings and capital provided by

the persons paying the taxes could be offset by increases in saving

among other classes. Even if it be assumed that the first question

should receive a negative answer, it is not improbable that the second

should be answered in the affirmative. In other words, the increased

saving which the poorer and middle classes would be enabled to make as

a result of the shifting of some of their burden of taxation to the

large incomes and inheritances, might very well counterbalance the

curtailment in the investments of the wealthy classes. Even if this

possibility were not fully realised, even if the net volume of capital

in the community were somewhat diminished, this disadvantage might be

more than neutralised by the wider social benefits of the taxation

policy.

With regard to the feasibility of very heavy income and inheritance

taxes, it is sometimes contended that neither of these measures can be

made effective toward the reduction of abnormal fortunes.[200] It is

held that the successful collection of these taxes requires the

co-operation of the persons affected by them; that if the rate should

go above ten or twelve per cent., the income receiver would evade the

tax in a great variety of ways, while the owner of a large estate

would transfer his property outright to a trust company, which would

after his death make the desired distribution. The man who urges

these objections is a very high authority on taxation, especially on

its administrative side; nevertheless his contentions are not

absolutely conclusive. In particular, it does not seem probable that

high inheritance taxes could be evaded by the simple devices that he

mentions. It ought not to be beyond the power of administrative

ingenuity to find methods of defeating such subterfuges. However, it

is altogether likely that the possibilities of evasion would be

sufficient to prevent the imposition of tax rates that approached

within measurable distance of the borderland of confiscation.

The sum of the matter seems to be that the reduction and prevention of

great fortunes cannot prudently be accomplished by the method of

direct limitation; that these ends may wisely and justly be attained

indirectly, through the imposition of progressive income and

inheritance taxes; but that the extent to which these measures would

be genuinely effective cannot be estimated until they have been given

a thorough trial.

FOOTNOTES:

[197] "Final Report," p. 32.

[198] "Progressive Taxation," pp. 210, 211; cf. Vermeersch,

"Quaestiones de Justitia," pp. 94-126.

[199] "The Gospel of Wealth," pp. 11, 12.

[200] Cf. Dr. T. S. Adams in "Papers and Proceedings of the 27th

Annual Meeting of the American Economic Association," pp. 234, sq.

CHAPTER XXI

THE DUTY OF DISTRIBUTING SUPERFLUOUS WEALTH

The correctives of the present distribution that were proposed before

the beginning of the last chapter related mainly to the apportionment

of the product among the agents of production. They would affect that

distribution which takes place as an integral element of the

productive process, not any disposition which the productive agents

might desire or be required to make of the shares that they had

acquired from the productive process. Such were many of the proposals

regarding land tenure, and all of those concerning co-operative

enterprises and monopoly. In the last chapter we considered the

possibility of neutralising to some extent the abuses of the primary

distribution by the action of government through the taxation of large

fortunes. These were proposals directly affecting the secondary

distribution. And they involved the method of compulsion. In the

present chapter we shall inquire whether desirable changes in the

secondary distribution may not be effected by voluntary action. The

specific questions confronting us here are, whether and how far

proprietors are morally bound to distribute their superfluous wealth

among their less fortunate fellows.

_The Question of Distributing Some_

The authority of revealed religion returns to the first of these

questions a clear and emphatic answer in the affirmative. The Old and

the New Testaments abound in declarations that possessors are under

very strict obligation to give of their surplus to the indigent.

Perhaps the most striking expression of this teaching is that found

in the Gospel according to St. Matthew, ch. 25, verses 32-46, where

eternal happiness is awarded to those who have fed the hungry, given

drink to the thirsty, received the stranger, covered the naked,

visited the sick, and called upon the imprisoned; and eternal

damnation is meted out to those who have failed in these respects. The

principle that ownership is stewardship, that the man who possesses

superfluous goods must regard himself as a trustee for the needy, is

fundamental and all-pervasive in the teaching of Christianity. No more

clear or concise statement of it has ever been given than that of St.

Thomas Aquinas: "As regards the power of acquiring and dispensing

material goods, man may lawfully possess them as his own; as regards

their use, however, a man ought not to look upon them as his own, but

as common, so that he may readily minister to the needs of

others."[201]

Reason likewise enjoins the benevolent distribution of surplus wealth.

It reminds the proprietor that his needy neighbours have the same

nature, the same faculties, capacities, wants, and destiny as himself.

They are his equals and his brothers. Reason, therefore, requires that

he should esteem them as such, love them as such, and treat them as

such; that he should love them not merely by well wishing, but by well

doing. Since the goods of the earth were intended by the Creator for

the common benefit of all mankind, the possessor of a surplus is

reasonably required to use it in such a way that this original purpose

of all created goods will be fulfilled. To refuse is to treat one's

less fortunate neighbour as something different from and less than

oneself, as a creature whose claim upon the common bounty of nature is

something less than one's own. Multiplying words will not make these

truths plainer. The man who does not admit that the welfare of his

neighbour is of equal moral worth and importance with his own

welfare, will logically refuse to admit that he is under any

obligation of distributing his superfluous goods. The man who does

acknowledge this essential equality will be unable to find any logical

basis for such refusal.

Is this obligation one of charity or one of justice? At the outset a

distinction must be made between wealth that has been honestly

acquired and wealth that has come into one's possession through some

violation of rights. The latter kind must, of course, be restored to

those persons who have been wronged. If they cannot be found or

identified the ill-gotten gains must be turned over to charitable or

other worthy objects. Since the goods do not belong to the present

holder by any valid moral title, they should be given to those persons

who are qualified by at least the claim and title of needs.

Some of the Fathers of the Church maintained that all superfluous

wealth, whether well or ill gotten, ought to be distributed to those

in want. St. Basil of Cæsarea: "Will not the man who robs another of

his clothing be called a thief? Is the man who is able and refuses to

clothe the naked deserving of any other appellation? The bread that

you withhold belongs to the hungry; the cloak that you retain in your

chest belongs to the naked; the shoes that are decaying in your

possession belong to the shoeless; the gold that you have hidden in

the ground belongs to the indigent. Wherefore, as often as you were

able to help men and refused, so often you did them wrong."[202] St.

Augustine of Hippo: "The superfluities of the rich are the necessities

of the poor. They who possess superfluities possess the goods of

others."[203] St. Ambrose of Milan: "The earth belongs to all; not to

the rich; but those who possess their shares are fewer than those who

do not. Therefore, you are paying a debt, not bestowing a gift."[204]

Pope Gregory the Great: "When we give necessaries to the needy, we do

not bestow upon them our goods; we return to them their own; we pay a

debt of justice rather than of mercy."[205]

The great systematiser of theology in the thirteenth century, St.

Thomas Aquinas, who is universally recognised as the most

authoritative private teacher in the Church, stated the obligation of

distribution in less extreme and more scientific terms: "According to

the order of nature instituted by Divine Providence, the goods of the

earth are designed to supply the needs of men. The division of goods

and their appropriation through human law do not thwart this purpose.

Therefore, the goods which a man has in superfluity are due by the

natural law to the sustenance of the poor."[206]

That this is the official teaching of the Church to-day is evident

from the words of Pope Leo XIII: "When one has provided sufficiently

for one's necessities and the demands of one's state of life, there is

a duty to give to the indigent out of what remains. It is a duty not

of strict justice, save in case of extreme necessity, but of Christian

charity."[207] Nearly thirteen years earlier, the same Pope had

written: "The Church lays the rich under strict command to give their

superfluity to the poor."[208]

The only difference between the Fathers and Pope Leo XIII and St.

Thomas on this question has reference to the precise nature of the

obligation. According to the Fathers, the duty of distribution would

seem to be a duty of justice. In the passage quoted above from St.

Thomas, superfluities are said to "belong," or to be "due" ("debetur")

to the needy; but the particular moral precept that applies is not

specified. In another place, however, the Angelic Doctor declares that

almsgiving is an act of charity.[209] Pope Leo XIII explicitly says

that the obligation of giving is one of charity, "except in extreme

cases." The latter phrase refers to the traditional doctrine that a

person who is in extreme need; that is, in immediate danger of losing

life, limb, or some equivalent personal good, is justified in the

absence of any other means of succour in taking from his neighbour

what is absolutely necessary. Such appropriation, says St. Thomas, is

not properly speaking theft; for the goods seized belong to the needy

person, "inasmuch as he must sustain life."[210] In a word, the

mediæval and the modern Catholic teaching would make distribution of

superfluous goods a duty of justice only in extreme situations, while

the Fathers laid down no such specific limitation. Nevertheless, the

difference is less important than it appears to be on the surface.

When the Fathers lived, theology had not been systematised nor given a

precise terminology; consequently, they did not always make exact

distinctions between the different classes of virtues and obligations.

In the second place, the Patristic passages that we have quoted, and

others of like import, were mostly contained in sermons addressed to

the rich, and consequently were expressed in hortatory rather than

scientific terms. Moreover, the needs of the time which the rich were

exhorted to relieve were probably so urgent that they could correctly

be classed as extreme, and therefore would give rise to an obligation

of justice on the part of those who possessed superfluous wealth.

The truly important fact of the whole situation is that both the

Fathers and the later authorities of the Church regard the task of

distributing superfluous goods as one of strict moral obligation,

which in serious cases is binding under pain of grievous sin. Whether

it falls under the head of justice or under that of charity, is of no

great practical consequence.

_The Question of Distributing All_

Is a man obliged to distribute _all_ his superfluous wealth? As

regards the support of human life, Catholic moral theologians

distinguish three classes of goods: first, the necessaries of life,

those utilities which are essential to a healthy and humane existence

for a man and his family, regardless of the social position that he

may occupy, or the standard of life to which he may have been

accustomed; second, the conventional necessities and comforts, which

correspond to the social plane upon which the individual or family

moves; third, those goods which are not required to support either

existence or social position. Goods of the second class are said to be

necessary as regards conventional purposes, but superfluous as regards

the maintenance of life, while those of the third class are

superfluous without qualification.

No obligation exists to distribute the first class of goods; for the

possessor is justified in preferring his own primary and fundamental

needs to the equal or less important needs of his neighbours. The

owner of goods of the second class is under obligation to dispense

them to persons who are in extreme need, since the preservation of the

neighbour's life is more important morally than the maintenance of the

owner's conventional standard of living. On the other hand, there is

no obligation of giving any of these goods to meet those needs of the

neighbour which are social or conventional. Here, again, it is

reasonable that the possessor should prefer his own interests to the

equal interests of his fellows. Still less is he obliged to expend any

of the second class of goods for the relief of ordinary or common

distress. As regards the third class of goods, those which are

absolutely superfluous, the proportion to be distributed is

indefinite, depending upon the volume of need. The doctrine of the

moral theologians on the subject is summed up in the following

paragraph.

When the needs to be supplied are "ordinary," or "common"; that is,

when they merely expose a person to considerable and constant

inconvenience, without inflicting serious physical, mental, or moral

injury, they do not impose upon any man the obligation of giving up

all his superfluous goods. According to some moral theologians, the

possessor fulfils his duty in such cases if he contributes that

proportion of his surplus which would suffice for the removal of all

such distress, provided that all other possessors were equally

generous; according to others, if he gives two per cent. of his

superfluity; according to others, if he contributes two per cent. of

his annual income. These estimates are intended not so much to define

the exact measure of obligation as to emphasise the fact that there

exists some degree of obligation; for all the moral theologians agree

that some portion of a man's superfluous goods ought to be given for

the relief of ordinary or common needs. When, however, the distress is

grave; that is, when it is seriously detrimental to welfare; for

example, when a man or a family is in danger of falling to a lower

social plane; when health, morality, or the intellectual or religious

life is menaced,--possessors are required to contribute as much of

their superfluous goods as is necessary to meet all such cases of

distress. If all is needed all must be given. In other words, the

entire mass of superfluous wealth is morally subject to the call of

grave need. This seems to be the unanimous teaching of the moral

theologians.[211] It is also in harmony with the general principle of

the moral law that the goods of the earth should be enjoyed by the

inhabitants of the earth in proportion to their essential needs. In

any rational distribution of a common heritage, the claims of health,

mind, and morals are surely superior to the demands of luxurious

living, or investment, or mere accumulation.

What per cent. of the superfluous incomes in the United States would

suffice to alleviate all the existing grave and ordinary distress?

Nothing like an exact answer is possible, but we can get an

approximation that will have considerable practical value. From the

estimates of family incomes given by Professor W. I. King, it appears

that in 1910 the number of families with annual incomes of less than

one thousand dollars was a little more than ten and three quarter

millions, and that the total incomes of those families receiving more

than ten thousand dollars a year amounted to a little more than three

and three quarter billions.[212] If each of the latter class of

families should expend ten thousand dollars per year for the needs of

life and social position, they would have left nearly two and three

quarter billions for distribution among the ten and three quarter

million families who are below the one thousand dollar level. So far

as the figures of Professor King's table enable us to judge, the

greater part if not all of this sum would be required to bring this

group of families up to that standard. Possibly an income of one

thousand dollars per family is not required to remove all ordinary and

grave distress; and possibly ten thousand dollars is not enough for

the reasonable requirements of some families. If both these

suppositions are true they will tend to cancel each other: the needs

to be met will be less, but the superfluous income to be distributed

will be less also. Whatever be the minimum and maximum limits of

family income that approve themselves to competent students, the

conclusion will probably be inevitable that the greater part of the

superfluous income of the well-to-do and the rich would be required to

abolish all grave and ordinary need.

_Some Objections_

The desirability of such a thoroughgoing distribution of superfluous

incomes appears to be refuted by the fact that a considerable part of

the capital and organising ability that function in industry is

dependent upon the possession of superfluous goods by the richer

classes. That surplus of the larger incomes which is not consumed or

given away by its receivers at present, constitutes no small portion

of the whole supply of savings annually converted into capital. Were

all of it to be withdrawn from industry and distributed among the

needy, the process might involve more harm than good. Moreover, the

very large industrial enterprises are initiated and carried on by men

who have themselves provided a considerable share of the necessary

funds. Without these large masses of personal capital, they would have

much more difficulty in organising these great enterprises, and would

be unable to exercise their present dominating control.

To the first part of this objection we may reply that the distribution

of superfluous goods need not involve any considerable withdrawal of

existing capital from industry. The giving of large amounts to

institutions and organisations, as distinguished from needy

individuals, might mean merely a transfer of capital from one holder

to another; for example, the stocks and bonds of corporations. The

capital would be left intact, the only change being in the persons

that would thenceforth receive the interest. Small donations could

come out of the possessor's income. Moreover, there is no reason why

the whole of the distribution could not be made out of income rather

than out of capital. While the givers would still remain possessed of

superfluous wealth, they would have handed over to needy objects,

persons, and causes the thing that in modern times constitutes the

soul and essence of wealth; namely, its annual revenues.

Nevertheless, the distribution from income would apparently check the

necessary increase of capital, lessen unduly the supply of capital for

the future. Were all, or the greater part of superfluous incomes

devoted to benevolent objects it would be used up for consumption

goods; such as, food, clothing, housing, hospitals, churches, schools.

Would not this check to the increase of capital cause serious injury

to society?

New investment would not be diminished by an amount equal to the whole

amount of income transferred to objects of benevolence. For the

improved position of the poorer classes that had shared in the

distribution would enable them to increase their productive power and

their resources, and therefore to save money and convert it into

capital. Again, their increased consuming power would augment the

demand for goods, bring about a larger use of existing capital

instruments, and therefore lead to an enlargement of the community's

capacity for saving. Thus, the new saving and capital would, partially

at least, take the place of that which was formerly provided by the

possessors of surplus income. In so far as a net diminution occurred

in the community's supply of capital, it would probably be more than

offset, from the viewpoint of social welfare, by the better diffusion

of goods and opportunities among the masses of the population.

The second difficulty noted above, that such a thorough distribution

of superfluous goods would lessen considerably the power of the

captains of industry to organise and operate great enterprises, can be

disposed of very briefly. Those who made the distribution from income

rather than from invested wealth, would still retain control of large

masses of capital. All, however, would have deprived themselves of the

power to enlarge their business ventures by turning great quantities

of their own income back into industry. But if their ability and

character were such as to command the confidence of investors, they

would be able to find sufficient capital elsewhere to equip and carry

on any sound and necessary enterprise. In this case the process of

accumulating the required funds would, indeed, be slower than when

they used their own, but that would not be an unmixed disadvantage.

When the business was finally established, it would probably be more

stable, would respond to a more definite and considerable need, and

would be more beneficial socially, inasmuch as it would include a

larger proportion of the population among its proprietors. And the

diminished authority and control exercised by the great capitalist, on

account of his diminished ownership of the stock, would in the long

run be a good thing for society. It would mean the curtailment of a

species of power that is easily liable to abuse, wider opportunities

of industrial leadership, and a more democratic and stable industrial

system.

Only a comparatively small portion of the superfluous goods of the

country could with advantage be immediately and directly distributed

among needy individuals. The greater part would do more good if it

were given to religious and benevolent institutions and enterprises.

Churches, schools, scholarships, hospitals, asylums, housing projects,

insurance against unemployment, sickness, and old age, and benevolent

and scientific purposes generally,--constitute the best objects and

agencies of effective distribution. By these means social and

individual efficiency would be so improved within a few years that

the distress due to economic causes would for the most part have

disappeared.

The proposition that men are under moral obligation to give away the

greater portion of their superfluous goods or income is, indeed, a

"hard saying." Not improbably it will strike the majority of persons

who read these pages as extreme and fantastic. No Catholic, however,

who knows the traditional teaching of the Church on the right use of

wealth, and who considers patiently and seriously the magnitude and

the meaning of human distress, will be able to refute the proposition

by reasoned arguments. Indeed, no man can logically deny it who admits

that men are intrinsically sacred, and essentially equal by nature and

in their claims to a reasonable livelihood from the common heritage of

the earth. The wants that a man supplies out of his superfluous goods

are not necessary for rational existence. For the most part they bring

him merely irrational enjoyment, greater social prestige, or increased

domination over his fellows. Judged by any reasonable standard, these

are surely less important than those needs of the neighbour which are

connected with humane living. If any considerable part of the

community rejects these propositions the explanation will be found not

in a reasoned theory, but in the conventional assumption that a man

may do what he likes with his own. This assumption is adopted without

examination, without criticism, without any serious advertence to the

great moral facts that ownership is stewardship, and that the Creator

intended the earth for the reasonable support of all the children of

men.

_A False Conception of Welfare and Superfluous Goods_

If all the present owners of superfluous goods were to carry out their

own conception of the obligation, the amount distributed would be only

a fraction of the real superabundance. Let us recall the definition

of absolute superfluity as, that portion of individual or family

income which is not required for the reasonable maintenance of life

and social position. It allows, of course, a reasonable provision for

the future. But the great majority of possessors, as well as perhaps

the majority of others, do not interpret their needs, whether of life

or social position, in any such strict fashion. Those who acquire a

surplus over their present absolute and conventional needs, generally

devote it to an expansion of social position. They move into larger

and more expensive houses, thereby increasing their assumed

requirements, not merely in the matter of housing, but as regards

food, clothing, amusements, and the conventions of the social group

with which they are affiliated. In this way the surplus which ought to

have been distributed is all absorbed in the acquisition and

maintenance of more expensive standards. All classes of possessors

adopt and act upon an exaggerated conception of both the strict and

the conventional necessities. In taking this course, they are merely

subscribing to the current theory of life and welfare. It is commonly

assumed that to be worth while life must include the continuous and

indefinite increase of the number and variety of wants, and a

corresponding growth and variation in the means of satisfying them.

Very little endeavour is made to distinguish between kinds of wants,

or to arrange them in any definite scale of moral importance. Desires

for purely physical goods, such as, food, drink, adornment, and sense

gratifications generally, are put on the same level with the demands

of the spiritual, moral, and intellectual faculties. The value and

importance of any and all wants is determined mainly by the criterion

of enjoyment. In the great majority of cases this means a preference

for the goods and experiences that minister to the senses. Since these

satisfactions are susceptible of indefinite increase, variety, and

cost, the believer in this theory of life-values readily assumes that

no practical limit can be set to the amount of goods or income that

will be required to make life continuously and progressively worth

living. Hence the question whether he has superfluous goods, how much

of a surplus he has, or how much he is obliged to distribute, scarcely

occurs to him at all. Everything that he possesses or is likely to

possess, is included among the necessaries of life and social

position. He adopts as his working theory of life those propositions

which were condemned as "scandalous and pernicious" by Pope Innocent

XI in 1679: "It is scarcely possible to find among people engaged in

worldly pursuits, even among kings, goods that are superfluous to

social position. Therefore, hardly any one is bound to give alms from

this source."

The practical consequences of this false conception of welfare are

naturally most conspicuous among the rich, especially the very rich,

but they are also manifest among the comfortable and middle classes.

In every social group above the limit of very moderate circumstances,

too much money is spent for material goods and enjoyments, and too

little for the intellectual, religious, and altruistic things of life.

_The True Conception of Welfare_

This working creed of materialism is condemned by right reason, as

well as by Christianity. The teaching of Christ on the worth of

material goods is expressed substantially in the following texts: "Woe

to you rich." "Blessed are you poor." "Lay not up for yourselves

treasures on earth." "For a man's life consisteth not in the abundance

of things that he possesseth." "Be not solicitous as to what you shall

eat, or what you shall drink, or what you shall put on." "Seek ye

first the kingdom of God and his justice, and all these things shall

be added unto you." "You cannot serve God and Mammon." "If thou

wouldst be perfect, go, sell what thou hast and give to the poor, and

come follow me." Reason informs us that neither our faculties nor the

goods that satisfy them are of equal moral worth or importance. The

intellectual and spiritual faculties are essentially and intrinsically

higher than the sense faculties. Only in so far as they promote,

either negatively or positively, the development of the mind and soul

have the senses any reasonable claim to satisfaction. They have no

value in themselves; they are merely instruments to the welfare of the

spirit, the intellect, and the disinterested will. Right life

consists, not in the indefinite satisfaction of material wants, but in

the progressive endeavour to know the best that is to be known, and to

love the best that is to be loved; that is, God and His creatures in

the order of their importance. The man who denies the intrinsic

superiority of the soul to the senses, who puts sense gratifications

on the same level of importance as the activities of mind, and spirit,

and disinterested will, logically holds that the most degrading

actions are equally good and commendable with those which mankind

approves as the noblest. His moral standard does not differ from that

of the pig, and he himself is on no higher moral level than the pig.

Those who accept the view of life and welfare taught by Christianity

and reason cannot, if they take the trouble to consider the matter,

avoid the conclusion that the amount of material goods which can be

expended in the rational and justifiable satisfaction of the senses,

is very much smaller than is to-day assumed by the great majority of

persons. Somewhere between five and ten thousand dollars a year lies

the maximum expenditure that any family can reasonably devote to its

material wants. This is independent of the outlay for education,

religion, and charity, and the things of the mind generally. In the

overwhelming majority of cases in which more than five to ten thousand

dollars are expended for the satisfaction of material needs, some

injury is done to the higher life. The interests of health, intellect,

spirit, or morals would be better promoted if the outlay for material

things were kept below the specified limit.

The distribution advocated in this chapter is obviously no substitute

for justice or the deeds of justice. Inasmuch, however, as complete

justice is a long way from realisation, a serious attempt by the

possessors of true superfluous goods to fulfil their obligations of

distribution would greatly counteract and soften existing injustice,

inequality, and suffering. Hence, benevolent giving deserves a place

in any complete statement of proposals for a better distribution of

wealth. Moreover, we are not likely to make great advances on the road

of strict justice until we acquire saner conceptions of welfare, and a

more effective notion of brotherly love. So long as men put the senses

above the soul, they will be unable to see clearly what is justice,

and unwilling to practise the little that they are able to see. Those

who exaggerate the value of sense gratifications cannot be truly

charitable, and those who are not truly charitable cannot perform

adequate justice. The achievement of social justice requires not

merely changes in the social mechanism, but a change in the social

spirit, a reformation in men's hearts. To this end nothing could be

more immediately helpful than a comprehensive recognition of the

stewardship of wealth, and the duty of distributing superfluous goods.

REFERENCES ON SECTION III

ELY: Monopolies and Trusts. Macmillan; 1900.

VAN HISE: Concentration and Control. Macmillan; 1912.

STEVENS: Industrial Combinations and Trusts. Macmillan; 1913.

RUSSELL: Business, the Heart of the Nation. John Lane; 1911.

GARRIGUET: Régime du Travail. Paris; 1909. The Social Value

of the Gospel. St. Louis; 1911.

HOBSON: Work and Wealth, a Human Valuation. Macmillan; 1914.

WEST: The Inheritance Tax. New York; 1908.

SELIGMAN: Progressive Taxation. Princeton; 1908. The Income

Tax. New York; 1913.

BOUQUILLON: De Virtutibus Theologicis. Brugis; 1890.

Also, the works of Taussig, Devas, Hobson, Antoine, Pesch,

Carver, Vermeersch, Nearing, and King which are cited in

connection with the introductory chapter.

FOOTNOTES:

[201] "Summa Theologica," 2a. 2ae., q. 66, a. 3.

[202] "Patrologia Graeca," vol. 31, cols. 275, 278.

[203] "Patrologia Latina," vol. 37, col. 1922.

[204] "Patrologia Latina," vol. 14, col. 747.

[205] "Patrologia Latina," vol. 77, col. 87. These and several other

extracts of like tenor may be found in Ryan's "Alleged Socialism of

the Church Fathers," ch. i; St. Louis, 1913.

[206] Op. cit., 2a. 2ae., q. 66, a. 7.

[207] Encyclical, "On the Condition of Labour," May 15, 1891.

[208] Encyclical, "On Socialism, Communism, Nihilism," Dec. 28, 1878.

[209] Op. cit., 2a. 2ae., q. 32, a. 1.

[210] Idem, q. 66, a. 7.

[211] A comprehensive, though brief, discussion of this question and

numerous references are contained in Bouquillon, "De Virtutibus

Theologicis," pp. 332-348. When Pope Leo XIII declared that the rich

are obliged to distribute "out of" their superfluity, he did not mean

that they are free to give only a portion thereof. The particle "de"

in his statement, "officium est de eo quod superat gratificari

indigentibus," is not correctly translated by "some." It means rather

"out of," "from," or "with"; so that the affluent are commanded to

devote their superfluous goods indefinitely to the relief of the

needy. In the Encyclical, "Quot Apostolici Muneris," he used the

expression, "gravissimo divites urget praecepto ut quod superest

pauperibus tribuant," which clearly declares the duty of distributing

all.

[212] "The Wealth and Income of the People of the United States," pp.

224-226.

SECTION IV

THE MORAL ASPECT OF WAGES

CHAPTER XXII

SOME UNACCEPTABLE THEORIES OF WAGE-JUSTICE

"It may be that we are not merely chasing a will-o'-the-wisp when we

are hunting for a reasonable wage, but we are at any rate seeking the

unattainable."

Thus wrote Professor Frank Haight Dixon in a paper read at the

twenty-seventh annual meeting of the American Economic Association,

December, 1914. Whether he reflected the opinion of the majority of

the economists, he at least gave expression to a thought that has

frequently suggested itself to every one who has gone into the wage

question free from prejudices and preconceived theories. One of the

most palpable indications of the difficulty to which Professor Dixon

refers is the number of doctrines concerning wage justice that have

been laboriously built up during the Christian era, and that have

failed to approve themselves to the majority of students and thinkers.

In the present chapter the attempt is made to set forth some of the

most important of these doctrines, and to show wherein they are

defective. They can all be grouped under the following heads: The

Prevailing-Rate Theory; Exchange-Equivalence Theories; and the

Productivity Theories.

I. THE PREVAILING-RATE THEORY

This is not so much a systematic doctrine as a rule of expediency

devised to meet concrete situations in the absence of any better

guiding principle. Both its basis and its nature are well exemplified

in the following extract from the "Report of the Board of Arbitration

in the Matter of the Controversy Between the Eastern Railroads and the

Brotherhood of Locomotive Engineers:"[213] "Possibly there should be

some theoretical relation for a given branch of industry between the

amount of the income that should go to labour and the amount that

should go to capital; and if this question were decided, a scale of

wages might be devised for the different classes of employés which

would determine the amount rightly absorbed by labour.... Thus far,

however, political economy is unable to furnish such a principle as

that suggested. There is no generally accepted theory of the division

between capital and labour....

"What, then, is the basis upon which a judgment may be passed as to

whether the existing wage scale of the engineers in the Eastern

District is fair and reasonable? It seems to the Board that the only

practicable basis is to compare the rates and earnings of engineers in

the Eastern District with those of engineers in the Western and

Southern Districts, and with those of other classes of railway

employés."

Six of the seven men composing this board of arbitration subscribed to

this statement. Of the six one is the president of a great state

university, another is a successful and large-minded merchant, the

third is a great building contractor, the fourth is a distinguished

lawyer, the fifth is a prominent magazine editor, and the sixth is a

railway president. The dissenting member represented the employés.

Since the majority could not find in any generally accepted theory a

principle to determine the proper division of the product between

capital and labour, they were perhaps justified in falling back upon

the practical rule that they adopted.

_Not in Harmony with Justice_

From the viewpoint of justice, however, this rule or standard is

utterly inadequate. It is susceptible of two interpretations. "Wages

prevailing elsewhere," may mean either the highest rates or those most

frequently occurring. According to the latter understanding, only

those wages which were below the majority rates should be raised,

while all those above that level ought to be lowered. In almost all

cases this would mean a reduction of the highest wages, as these are

usually paid only to a minority of the workers of any grade. The

adoption of the highest existing rates as a standard would involve no

positive losses, but it would set a rigid limit to all possible gains

in the future. According to either interpretation of the prevailing

rate, the increases in wages which a powerful labour union seeks to

obtain are unjust until they have been established as the prevailing

rates. Thus, the attorney for the street railways of Chicago dissented

from the increases in wages awarded to the employés by the majority of

the board of arbitration in the summer of 1915 because, "these men are

already paid not only a fair wage but a liberal wage, when the wages

in the same employment and the living conditions in other large cities

are taken into consideration, or when comparison is made of these

men's annual earnings with the earnings in any comparable line of work

in the city of Chicago."[214] In other words, the dominant thing is

always the right thing. Justice is determined by the preponderance of

economic force. Now, a rule such as this, which condemns improvement

until improvement has somehow become general, which puts a premium

upon physical and intellectual strength, and which disregards entirely

the moral claims of human needs, efforts, and sacrifices, is obviously

not an adequate measure of either reason or justice. And we may well

doubt that it would be formally accepted as such by any competent and

disinterested student of industrial relations.

II. EXCHANGE-EQUIVALENCE THEORIES

According to these theories, the determining factor of wage justice is

to be found in the wage contract. The basic idea is the idea of

equality, inasmuch as equality is the fundamental element in the

concept of justice. The principle of justice requires that equality

should be maintained between what is owed to a person and what is

returned to him, between the kinds of treatment accorded to different

persons in the same circumstances. Similarly it requires that equality

should obtain between the things that are exchanged in onerous

contracts. An onerous contract is one in which both parties undergo

some privation, and neither intends to confer a gratuity upon the

other. Each exchanger desires to obtain the full equivalent of the

thing that he transfers. Since each is equal in personal dignity an

intrinsic worth to the other, each has a strict right to this full

equivalent. Owing to the essential moral equality of all men, no man

has a right to make of another a mere instrument to his own interests

through physical force or through an onerous contract. Men have equal

rights not only to subsist upon the earth, but to receive benefits

from the exchange of goods.

_The Rule of Equal Gains_

The agreement between employer and employé is an onerous contract;

hence it ought to be made in such terms that the things exchanged will

be equal, that the remuneration will be equal to the labour. How can

this equivalence be determined and ascertained? Not by a direct

comparison of the two objects, work and pay, for their differences

render them obviously incommensurable. Some third term, or standard,

of comparison is required in which both objects can find expression.

One such standard is individual net advantage. Inasmuch as the aim of

the labour contract is reciprocal gain, it is natural to infer that

the gains ought to be equal for the two parties. Net gain is

ascertained by deducting in each case the utility transferred from the

utility received; in other words, by deducting the privation from the

gross return. The good received by the employer when diminished by or

weighed against the amount that he pays in wages should be equal to

the good received by the labourer when diminished by or weighed

against the inconvenience that he undergoes through the expenditure of

his time and energy. Hence the contract should bring to employer and

employé equal amounts of net advantage or satisfaction.

Plausible as this rule may appear, it is impracticable, inequitable,

and unjust. In the vast majority of labour contracts it is impossible

to know whether both parties obtain the same quantity of net

advantage. The gains of the employer can, indeed, be frequently

measured in terms of money, being the difference between the wages

paid to and the specific product turned out by the labourer. In the

case of the labourer no such process of deduction is possible; for

advantage and expenditure are incommensurable. We cannot subtract the

labourer's privation, that is, his expenditure of time and energy,

from his gross advantage, that is, his wages. How can we know or

measure the net benefit obtained by a man who shovels sand ten hours

for a wage of two dollars? How can we deduct his pain-cost from or

weigh it against his compensation?

So far as the two sets of advantages are comparable at all, those of

the employé would seem to be always greater than those of the

employer. A wage of seventy-five cents a day enables the labourer to

satisfy the most important wants of life. Weighed against this gross

advantage, his pain-cost of toil is relatively insignificant. His net

advantage is the greatest that a man can enjoy, the continuation of

his existence. The net advantage received by the employer from such a

wage contract is but a few cents, the equivalent of a cigar or two.

Even if the wage be raised to the highest level yet reached by any

wage earner, the net advantage to the labourer, namely, his

livelihood, will be greater than the net advantage to the employer

from that single contract. Moreover, the sum total of an employer's

gains from all his labour contracts is less quantitatively than the

sum total of the gains obtained by all his employés. The latter gains

provide for many livelihoods, the former for only one. Again, no

general rate of wages could be devised which would enable all the

members of a labour group to gain equally. Differences in health,

strength, and intelligence would cause differences in the pain-cost

involved in a given amount of labour; while differences in desires,

standards of living, and skill in spending would bring about

differences in the satisfactions derived from the same compensation.

Finally, various employers would obtain various money gains from the

same wage outlay, and various advantages from the same money gains.

Hence if the rule of equality of net advantages were practicable it

would be inequitable.

It is also fundamentally unjust because it ignores the moral claims of

needs, efforts, and sacrifices as regards the labourer. As we have

seen in the chapter on profits in competitive conditions, and as we

shall have occasion to recognise again in a later chapter, no canon or

scheme of distributive justice is acceptable that does not give

adequate consideration to these fundamental attributes of human

personality.

_The Rule of Free Contract_

Another form of the exchange equivalence theory would disregard the

problem of _equality_ of gains, and assume that justice is realised

whenever the contract is free from force or fraud. In such

circumstances both parties gain something, and presumably are

satisfied; otherwise, they would not enter the contract. Probably the

majority of employers regard this rule as the only available measure

of practicable justice. The majority of economists likewise subscribed

to it during the first half of the nineteenth century. In the words of

Henry Sidgwick, "the teaching of the political economists pointed to

the conclusion that a free exchange, without fraud or coercion, is

also a fair exchange."[215] Apparently the economists based this

teaching on the assumption that competition was free and general among

both labourers and employers. In other words, the rule as understood

by them was probably identical with the rule of the market rate, which

we shall examine presently. It is not at all likely that the

economists here referred to would have given their moral approval to

those "free" contracts in which the employer pays starvation wages

because he takes advantage of the ignorance of the labourer, or

because he exercises the power of monopoly.

No matter by whom it is or has been held, the rule of free contract is

unjust. In the first place, many labour contracts are not free in any

genuine sense. When a labourer is compelled by dire necessity to

accept a wage that is insufficient for a decent livelihood, his

consent to the contract is free only in a limited and relative way. It

is what the moralists call "_voluntarium imperfectum_." It is vitiated

to a substantial extent by the element of fear, by the apprehension of

a cruelly evil alternative. The labourer does not agree to this wage

because he prefers it to any other, but merely because he prefers it

to unemployment, hunger, and starvation. The agreement to which he

submits in these circumstances is no more free than the contract by

which the helpless wayfarer gives up his purse to escape the pistol of

the robber. While the latter action is free in the sense that it is

chosen in preference to a violent death, it does not mean that the

wayfarer gives, or intends to give, the robber the right of ownership

in the purse. Neither should the labourer who from fear of a worse

evil enters a contract to work for starvation wages, be regarded as

transferring to the employer the full moral right to the services

which he agrees to render. Like the wayfarer, he merely submits to

superior force. The fact that the force imposed upon him is economic

instead of physical does not affect the morality of the transaction.

To put the matter in another way, the equality which justice requires

is wanting in an oppressive labour contract because of the inequality

existing between the contracting parties. In the words of Professor

Ely: "Free contract supposes equals behind the contract in order that

it may produce equality."[216]

Again, the rule of free contract is unjust because it takes no account

of the moral claims of needs. A man whose only source of livelihood is

his labour does wrong if he accepts a starvation wage willingly. Such

a contract, however free, is not according to justice because it

disregards the requirements of reasonable life. No man has a right to

do this, any more than he has a right to perpetrate self mutilation or

suicide.

_The Rule of Market Value_

A third method of interpreting exchange equivalence is based upon the

concept of value. Labour and compensation are thought to be equal when

the value of one is equal to the value of the other. Then the contract

is just and the compensation is just. The only objection to these

propositions is that they are mere truisms. What does value mean, and

how is it to be determined? If it is to receive an ethical

signification; if the value of labour is to be understood as denoting

not merely the value that labour will command in a market, but the

value that labour ought to have,--the statement that wages should

equal the value of labour becomes merely an identical proposition. All

that it tells us is that wages ought to be what they ought to be.

In its simplest economic sense value denotes purchasing power, or

importance in exchange. As such, it may be either individual or

social; that is, it may mean the exchange importance attributed to a

commodity by an individual, or that attributed by a social group. In a

competitive society social value is formed through the higgling of the

market, and is expressed in market price.

Now individual value is utterly impracticable as a measure of exchange

equivalence in the wage contract. Since the value attributed to labour

by the employer differs in the great majority of instances from that

estimated by the labourer himself, it is impossible to determine which

is the true value, and the proper measure of just wages.

The doctrine that the social value or market price of labour is also

the ethical value or just price, is sometimes called the classical

theory, inasmuch as it was held, at least implicitly, by the majority

of the early economists of both France and England.[217] Under

competitive conditions, said the Physiocrats, the price of labour as

of all other things corresponds to the cost of production; that is, to

the cost of subsistence for the labourer and his family. This is the

natural law of wages, and being natural it is also just. Adam Smith

likewise declared that competitive wages were natural wages, but he

refrained from the explicit assertion that they were just wages.

Nevertheless his abiding and oft-expressed faith in the theory that

men's powers were substantially equal, and in the social beneficence

of free competition, implied that conclusion. Although the great

majority of his followers denied that economics had moral aspects,

and sometimes asserted that there was no such thing as just or unjust

wages, their teaching tended to convey the thought that competitively

fixed wages were more or less in accordance with justice. As noted

above, their belief in the efficacy of competition led them to the

inference that a free contract is also a fair contract. By a free

contract they meant for the most part one that is made in the open

market, that is governed by the forces of supply and demand, and that,

consequently, expresses the social economic value of the things

exchanged.

All the objections that have been brought against the rule of the

prevailing rate apply even more strongly to the doctrine of the market

rate. The former takes as a standard the scale of wages most

frequently paid in the market, while the latter approves any scale

that obtains in any group of labourers or section of the market. Both

accept as the ultimate determinant of wage justice the preponderance

of economic force. Neither gives any consideration to the moral claims

of needs, efforts, or sacrifices. Unless we are to identify justice

with power, might with right, we must regard these objections as

irrefutable, and the market value doctrine as untenable.

_The Mediæval Theory_

Another exchange-equivalence theory which turns upon the concept of

value is that found in the pages of the mediæval canonists and

theologians. But it interprets value in a different sense from that

which we have just considered. As the measure of exchange equivalence

the mediæval theory takes objective value, or true value. However, the

proponents of this view did not formally apply it to wage contracts,

nor did they discuss systematically the question of just wages. They

were not called upon to do this; for they were not confronted by any

considerable class of wage earners. In the country the number of

persons who got their living exclusively as employés was extremely

small, while in the towns the working class was composed of

independent producers who sold their wares instead of their

labour.[218] The question of fair compensation for the town workers

was, therefore, the question of a fair price for their products. The

latter question was discussed by the mediæval writers formally, and in

great detail. Things exchanged should have equal values, and

commodities should always sell for the equivalent of their values. By

what rule was equality to be measured and value determined? Not by the

subjective appreciations of the exchangers, for these would sometimes

sanction the most flagrant extortion. Were no other help available,

the starving man would give all he possessed for a loaf of bread. The

unscrupulous speculator could monopolise the supply of foodstuffs, and

give them an exorbitantly high value which purchasers would accept and

pay for rather than go hungry. Hence we find the mediæval writers

seeking a standard of _objective_ value which should attach to the

commodity itself, not to the varying opinions of buyers and sellers.

In the thirteenth century Albertus Magnus[219] and Thomas Aquinas[220]

declared that the proper standard was to be found in labour. A house

is worth as many shoes as the labour embodied in the latter is

contained in the labour embodied in the former. It is worthy of note

that the diagram which Albertus Magnus presents to illustrate this

formula of value and exchange had been used centuries before by

Aristotle. It is likewise noteworthy that this conception of ethical

value bears a striking resemblance to the theory of economic value

upheld by Marxian Socialists. However, neither Aristotle nor the

Schoolmen asserted that all kinds of labour had equal value.

Now this mediæval labour-measure of value could be readily applied

only to cases of barter, and even then only when the value of

different kinds of labour had already been determined by some other

standard. Accordingly we find the mediæval writers expounding and

defending a more general interpretation of objective or true value.

This was the concept of normal value; that is, the average or medium

amount of utility attributed to goods in the average conditions of

life and exchange. On the one hand, it avoided the excesses and the

arbitrariness of individual estimates; on the other hand, it did not

attribute to value the characters of immutability and rigidity.

Contrary to the assumptions of some modern writers, the Schoolmen

never said that value was something as fixedly inherent in goods as

physical and chemical qualities. When they spoke of "intrinsic" value,

they had in mind merely the constant capacity of certain commodities

to satisfy human wants. Even to-day bread has always the intrinsic

potency of alleviating hunger, regardless of all the fluctuations of

human appraisement. The objectivity that the mediæval writers ascribed

to value was relative. It assumed normal conditions as against

exceptional conditions. To say that value was objective merely meant

that it was not wholly determined by the interplay of supply and

demand, but was based upon the stable and universally recognised

use-qualities of commodities in a society where desires, needs, and

tastes were simple and fairly constant from one generation to another.

How or where was this relatively objective value of goods to find

concrete expression? In the "communis aestimatio," or social estimate,

declared the canonists. Objective value and just price would be

ascertained practically through the judgment of upright and competent

men, or preferably through legally fixed prices. But neither the

social estimate nor the ordinances of lawmakers were authorised to

determine values and prices arbitrarily. They were obliged to take

into account certain objective factors. In the thirteenth and

fourteenth centuries, the factors universally recognised as

determinative were the utility or use-qualities of goods, but

especially their cost of production. Later on, in the sixteenth and

seventeenth centuries, risk and scarcity were given considerable

prominence as value determinants. Now cost of production in the Middle

Ages was mainly labour cost; hence the standard of value was chiefly a

labour standard. Moreover, this labour doctrine of true value and

equality in exchanges was strongly reinforced by another mediæval

principle, according to which labour was the supreme if not the only

just title to rewards.

How was labour cost to be measured, and the different kinds of labour

evaluated? By the necessary and customary expenditures of the class to

which the labourer belonged. Mediæval society was composed of a few

definite, easily recognised, and relatively fixed orders or grades,

each of which had its own function in the social hierarchy, its own

standard of living, and its moral right to a livelihood in accordance

with that standard. Like the members of the other orders, the

labourers were conceived as entitled to live in conformity with their

customary class-requirements. From this it followed that the needs of

the labourer became the main determinant of the cost of production,

and of the value and just price of goods. Inasmuch as the standards of

living of the various divisions of the workers were fixed by custom,

and limited by the restricted possibilities of the time, they afforded

a fairly definite measure of value and price,--much more definite than

the standard of general utility. To Langenstein, vice chancellor of

the University of Paris in the latter half of the fourteenth century,

the matter seemed quite simple; for he declared that every one could

determine for himself the just price of his wares by referring to the

customary needs of his rank of life.[221]

Nevertheless, class needs are not and cannot be a standard of

exchange-equivalence. They cannot become a criterion of equality, a

common denominator, a third term of comparison, between labour and

wages. When we say that a given amount of wages is equal to a given

content of livelihood, we express a purely economic, positive, and

mathematical relation: when we say that a given amount of labour is

equal to a given content of livelihood, we are either talking nonsense

or expressing a purely ethical relation; that is, declaring that this

labour _ought to_ equal this livelihood. In other words, we are

introducing a fourth term of comparison; namely, the moral worth or

personal dignity of the labourer. Thus, we have not a single and

common standard to measure both labour and wages, and to indicate a

relation of equality between them. While class needs directly measure

wages, they do not measure labour, either quantitatively, or

qualitatively, or under any other aspect or category.

Aside from this purely theoretical defect, the canonist doctrine of

wage justice was fairly satisfactory as applied to the conditions of

the Middle Ages. It assured to the labourer of that day a certain rude

comfort, and probably as large a proportion of the product of industry

as was practically attainable. Nevertheless it is not a universally

valid criterion of justice in the matter of wages; for it makes no

provision for those labourers who deserve a wage in excess of the cost

of living of their class; nor does it furnish a principle by which a

whole class of workers can justify their advance to a higher standard

of living. It is not sufficiently elastic and dynamic.

_A Modern Variation of the Mediæval Theory_

In spite of its fundamental impossibility, the concept of

exchange-equivalence still haunts the minds of certain Catholic

writers.[222] They still strive to get a formula to express equality

between labour and remuneration. Perhaps the best known and least

vulnerable of the attempts made along this line is that defended by

Charles Antoine, S.J.[223] Justice, he declares, demands an objective

equivalence between wages and labour; and objective equivalence is

determined and measured by two factors. The remote factor is the cost

of decent living for the labourer; the proximate factor is the

economic value of his labour. The former describes the _minimum_ to

which the worker is entitled; the latter comprises perfect and

adequate justice. In case of conflict between the two factors, the

first is determinative of and morally superior to the second; that is

to say, no matter how small the economic value of labour may _seem_ to

be, it never can descend below the requisites of a decent livelihood.

Now, neither of these standards is in harmony with the principle of

exchange-equivalence, nor capable of serving as a satisfactory

criterion of wage justice. Father Antoine argues that labour is always

the moral equivalent of a decent livelihood because the worker expends

his energies, and gives out a part of his life in the service of his

employer. Unless his wage enables the labourer to replace these

energies and conserve his life, it is not the equivalent of the

service. If the wage falls short of this standard the labourer gives

more than he receives, and the contract is essentially unjust. In this

conception of equivalence, energy expended, instead of cost of living,

becomes the term of comparison and the common measure of labour and

remuneration. Energy expended is, however, technically incapable of

providing such a common standard; for it does not measure both related

terms in the same way. The service rendered to the employer is the

_effect_ rather than the equivalent of the energy expended; and the

compensation is a _means_ to the replacement of this energy rather

than its formal equivalent. Moreover, the formula does not even

furnish an adequate rational basis for the claim to a decent minimum

wage. A wage which is merely adequate to the replacement of expended

energy and the maintenance of life, is really inadequate to a decent

livelihood. Such compensation would cover only physical health and

strength, leaving nothing for intellectual, spiritual, and moral

needs. As Father Antoine himself admits and contends, the latter needs

are among the elements of a decent livelihood, and a wage which does

not make reasonable provision for them fails to comply with the

minimum requirements of justice.

The second factor of "objective equivalence" is even more questionable

than the first. To be _completely_ just, says Father Antoine, wages

must be not merely adequate to a decent livelihood, but equivalent to

the "economic value of the labour" ("la valeur économique du

travail"). This "economic value" is determined objectively by the cost

of production, the utility of the product, and the movement of supply

and demand; subjectively, by the judgment of employers and employés.

In case of conflict between these two measures of value, and in case

of uncertainty concerning the objective measure, the decision of the

subjective determinant must always prevail.

These statements are hopelessly ambiguous and confusing. If the

objective measure of "economic value" is to be understood in a purely

positive way, it merely means the wages that actually obtain in a

competitive market. In the purely positive or economic sense, the

utility of labour is measured by what it will command in the market,

the movement of supply and demand is likewise reflected in market

wages, and the determining effect of cost of production is also seen

in the share that the market awards to labour after the other factors

of production have taken their portions of the product. In other

words, the "economic value" of labour is simply its market value.

This, however, is not Father Antoine's meaning; for he has already

declared that the "economic value" of labour is never less than the

equivalent of a decent livelihood, whereas we know that the market

value often falls below that level. In his mind, therefore, "economic

value" has an ethical signification. It indicates at least the

requisites of decent living, and it embraces more than this in some

cases. When? and how much more? Let us suppose a business so

prosperous that it returns liberal profits to the employer and the

prevailing rate of interest on the capital, and yet shows a surplus

sufficient to give all the labourers ten dollars a day. Is "cost of

production" to be interpreted here as allowing only the normal rate of

profits and interest to the business man and the capitalist, leaving

the residue to labour? Or is it to be understood as requiring that the

surplus be divided among the three agents of production? In other

words, is the "economic value" of labour in such cases to be

determined by some ethical principle which tells beforehand how much

the other agents than labour ought to receive? If so, what is this

principle or formula?

None of these questions is satisfactorily answered in Father Antoine's

pages. They are all to be solved by having recourse to the subjective

determinant of "economic value"; namely, the judgment of employers and

employés. Thus his proximate factor of justice in wages, his formula

of complete as against minimum just wages, turns out to be something

entirely subjective, and more or less arbitrary. It is in no sense a

measure of the equivalence between work and pay.

Moreover, it is inadequate as a measure of justice. Should the

majority of both employers and employés fix the "economic value" of

the labour of carpenters at five dollars a day, there would be no

certainty that this decision was correct, and that this figure

represented just wages. Should they determine upon a rate of fifty

dollars a day, we could not be sure that their decision was unjust.

Undoubtedly the combined judgment of employers and employés will set a

fairer wage than one fixed by either party alone, since it will be

less one-sided; but there is no sufficient reason for concluding that

it will be in all cases completely just. Undoubtedly employers and

employés know what wages an industry can afford at prevailing prices,

on the assumption that business ability and capital are to have a

certain rate of return; but there is no certainty that the prevailing

prices are fair, or that the assumed rates of profits and interest are

fair. In a word, the device is too arbitrary.

To sum up the entire discussion of exchange-equivalence theories:

Their underlying concept is fundamentally unsound and impracticable.

All of them involve an attempt to compare two entities which are

utterly incommensurate. There exists no third term, or standard, or

objective fact, which will inform men whether any rate of wages is the

equivalent of any quantity of labour.

III. PRODUCTIVITY THEORIES

The productivity concept of wage justice appears in a great variety of

forms. The first of them that we shall consider is advocated mainly by

the Socialists, and is usually referred to as the theory of the "right

to the whole product of labour."[224]

_Labour's Right to the Whole Product_

We have seen that Adam Smith's belief in the normality and beneficence

of free competition would have logically led him to the conclusion

that competitive wages were just; and we know that this doctrine is

implicit in his writings. On the other hand, his theory that all value

is determined by labour would seem to involve the inference that all

the value of the product belongs to the labourer. As a matter of fact,

Smith restricted this conclusion to primitive and pre-capitalist

societies. Apparently he, and his disciples in an even larger degree,

was more interested in describing the supposed beneficence of

competition than in justifying the distribution that resulted from the

competitive process.

The early English Socialists were more consistent. In 1793 William

Godwin, whom Anton Menger calls "the first scientific Socialist of

modern times," laid down in substance the doctrine that the labourer

has a right to the whole product.[225] In 1805 Charles Hall formulated

and defended the doctrine with greater precision and consistency.[226]

In 1824 the doctrine was stated more fundamentally, systematically,

and completely by William Thompson.[227] He accepted the labour theory

of value laid down by Adam Smith, and formally derived therefrom the

ethical conclusion that the labourer has a right to the whole product.

"Thompson and his followers are only original in so far as they

consider rent and interest to be _unjust_ deductions, which violate

the right of the labourer to the whole product of his labour."[228] He

denounced the laws which empowered the land owner and the capitalist

to appropriate value not created by them, and gave to the value thus

appropriated the name, "surplus value." In the use of this term he

anticipated Karl Marx by several years. His doctrines were adopted and

defended by many other English Socialist writers, and were introduced

into France by the followers of Saint-Simon. "From his works," says

Menger, "the later Socialists, the Saint-Simonians, Proudhon, and

above all, Marx and Rodbertus, have directly or indirectly drawn their

opinions."[229]

Although Saint-Simon never accepted the doctrine of the labourer's

right to the whole product, his disciples, particularly Enfantin and

Bazard, taught it implicitly. In a just social state, they maintained,

every one would be expected to labour according to his capacity, and

would be rewarded according to his product.[230]

Perhaps the most theoretical and extreme statement of the theory that

we are considering is found in the writings of P. J. Proudhon.[231] He

maintained that the real value of products was determined by labour

time, and that all kinds of labour should be regarded as equally

effective in the value-creating process, and he advocated therefore

equality of wages and salaries. For the realisation of this ideal he

drew the outlines of a semi-anarchic social order, of which the main

feature was gratuitous public credit. Neither his theories nor his

proposals ever obtained any considerable number of adherents.

A milder and better reasoned form of the theory was set forth by Karl

J. Rodbertus.[232] Professor Wagner calls him, "the first, the most

original, and the boldest representative of scientific Socialism in

Germany." Yet, as Menger points out, Rodbertus derived many of his

doctrines from Proudhon and the Saint-Simonians. He admitted that in a

capitalist society the value of commodities does not always

correspond to the labour embodied in them, and that different kinds of

labour are productive in different degrees. Therefore, he had recourse

to the concept of a normal, or average, day's labour in any group, and

would have the various members of the group remunerated with reference

to this standard. This was to be brought about by a centralised

organisation of industry in which the whole product would ultimately

go to labour, and the share of the individual worker would be

determined by his contribution of socially necessary labour.