In the course of the preceding pages we have repeatedly referred to
the necessity or desirability of governmental action, and have
emphasized the important part which it plays in our economic life
today. Every practical economic problem that confronts us calls in
some degree for the exercise of state activity. It is necessary for us
then, if we are to render sound judgment on these questions, to have a
clear opinion as to the proper sphere of government action, as to how
far the State should interfere in the economic activities of private
individuals. We cannot do better than to state first the main
functions of a modern state. The modern industrial system, as we saw
in the first section, is based upon certain fundamental
institutions--personal liberty, competition, and private property. The
first function of government is to guarantee to every individual the
rights of freedom, property, and contract; this involves the
maintenance of peace and order. These are often spoken of as “natural
rights”; rather they are rational rights, based upon expediency and
human welfare, and are created and maintained by society. Without the
constant support and intervention of government they would possess 164
little reality or significance. But in addition to guaranteeing these
fundamental institutions, modern governments grant individuals certain
privileges, as patents, copyrights, trade-marks, franchises, etc.,
designed to stimulate the economic activity of individuals.
A second group of functions undertaken by the modern state is
regulative. As we have seen, laws are made regulating the freedom of
contract, the conditions of labor, the conduct of business, methods of
banking and transportation, etc. The terms under which competitive
business may be conducted are laid down, and while freedom of industry
prevails for every individual it is only on condition that he conforms
to the rules of the game thus prescribed. But the conditions are not
merely restrictive; sometimes they are designed to promote enterprise,
as in the case of gifts, subsidies, protective duties, etc. In all
these ways the State interferes with the action of perfectly free
competition for the purpose of securing better or more equitable
conditions. A third group of functions embraces the direct
participation in industry by the Government itself, as the
post-office, gas, electric, and water works, canals, roads, sewers,
parks, etc. In other countries, when the functions of government are
more extended than in the United States, it conducts railroads,
telegraph and telephone systems, tenements, pawn shops, theaters,
industrial insurance, or various other activities. The line which
divides public from private enterprise varies greatly in different
countries.
This raises the general question, how far is it desirable that the
economic functions of government should extend? As to the necessity of
state activity in some form there can be no doubt. Production,
exchange, distribution, and to a smaller extent consumption, are all
social processes; they concern the whole of society, and must be
brought under social control. Montesquieu laid down the proposition
in the middle of the eighteenth century that taxes invariably 165
increase with the growth of liberty. Historically this has been
verified: the development of freedom in government and industry has
meant the realization of self-restraint by the imposition of
regulative law. But the modern State has gone further than this: it
has realized the necessity of taking an active part in modern
industrial life, for the equalization of the terms of competition, the
redress of grievances, and the furnishing of utilities, either because
it could do it better or because it was the only agency capable of
acting. The standpoint of this treatise has been one of moderate
individualism, believing in free competition and individual
initiative, but not frightened off by the bogey of socialism, if at
any point the interference of government seemed desirable or
necessary. To present the matter clearly it will be well to state
briefly the main theories that have been held as to the proper
function of government, arranging them in their logical, though not in
their historical, order.
At one extreme stands anarchism, which must be thought of not as
anarchy and riot, but as a philosophical theory of society. Scientific
anarchism contemplates an ideal state of perfect freedom, in which the
State, the coercive exercise of authority by man over man, would not
exist. According to this theory only the individual has rights; there
is no more divinity of right in a majority than there is in kings.
Government is an invasion of the right of the individual to do as he
will, and should be abolished; with its abolition would vanish the
various moral, social, and industrial evils to which it has given
rise, and human society would develop on a higher plane. Stated in its
extreme form anarchism is evidently too ideal for frail human nature
as at present constituted. Of more practical importance has been the
theory of extreme individualism as set forth by Herbert Spencer--a
view designated by Huxley as the night-watchman theory of the State.
According to this the functions of government should be limited to 166
the protection of life and property and the enforcement of contracts,
but should not include such things as education, regulation of
industry, local improvements, charities, coinage, etc. Private
initiative and competition are trusted to supply these things, while
the economic harmony of the interests of each individual with those of
society will prevent any wrong from being done. The keynote of the
whole theory lies in the view that government is an evil, though a
necessary one, and should consequently be restricted. Adam Smith’s
system of “national liberty” went somewhat further, as it added to the
three functions named above, the construction of public works and
buildings, etc.; but it excluded such activities as education and the
civil courts, which we regard as most suited to government management.
This theory had its origin in the reaction against the undue
interference with industry by the Government under mercantilism and
had thus a historic justification and value.
The theory most generally held by economists and writers in the United
States is probably the modified individualism set forth by John Stuart
Mill. According to him, freedom of industry or “laissez faire should
be the general practice; every departure from it, unless required by
some great good, is a certain evil.” Industry, he said, should be left
to individuals and the Government should never interfere unless there
is an antagonism between social and private interests. Individuals
following their own interests will always conduct business better than
the Government, which is inefficient, corrupt, and can fall back on
taxation to cover its mistakes. Individualism should therefore be the
rule and governmental action the exception. But Mill himself admitted
that there was no theoretical limit to the extension of governmental
functions, and in so doing is said to have opened the door to
socialism. Nevertheless, the basic idea is still that government is
an evil and an extension of its activities is on the whole undesirable. 167
Opposed to this view is the culture state theory, enunciated by
Roscher and very generally held in Germany, which regards the State as
a beneficent, positive and constructive force in our industrial life.
The advocates of this theory point out that the functions of the
Government change with progress, and that in our complex modern
industrial life it should seek to improve conditions positively, and
not leave the people to the mercies of a blind competitive struggle;
practically, it should regulate industry, conditions of work, housing,
etc., and should manage all public utilities which affect the life or
well-being of the citizens, as railroads, telegraphs, industrial
insurance, etc. Still further in the same direction goes the view
known as state socialism, of whom the best-known advocate is Professor
Wagner. This advocates individualism, but insists that it is
responsible for many injustices and evils, which it is consequently
the duty of the State to redress. For instance, the State should
correct the inequalities of wealth brought about by the distribution
of the social income under the present competitive system; this should
be done by the progressive taxation of inheritances and incomes, the
limitation of inheritance and bequest, the government ownership of
public utilities, as railroads, telegraph, telephone, coal mines, etc.
This theory stops just short of socialism, but enlarges the functions
of the State to the largest degree compatible with individualism.
Beyond this, and at the farthest extreme from anarchism, stands
socialism, which, however, demands a more careful examination than the
other views have received because of its present prominence.
Socialism may be briefly defined in the words of Professor Ely[49] as
“that contemplated system of industrial society which proposes the
abolition of private property in the great material instruments of 168
production, and the substitution therefor of collective property; and
advocates the collective management of production, together with the
distribution of social income by society, and private property in the
larger proportion of this social income.” Four features are involved
in this definition, namely, common ownership, production,
distribution, and private incomes. The cardinal and distinctive
element in socialism is the collective or social ownership of the
means of production, that is, of the land and capital. Instead of
having these owned privately as today, they would be owned by the
people as a whole, by the State, and used by them for production.
Socialists do not oppose capital, as is often said, but only the
private ownership of capital. But under such a system private business
as we know it today, individual enterprise for the sake of profit,
could not exist. It is often urged that socialism means a “grand
divide,” and that in such an event the shrewder and more thrifty would
shortly have the wealth of the idle or stupid members of society. But
just that is guarded against under socialism, for there would be no
private ownership of capital, and hence no one could get his
neighbor’s share; it would all be held under collective ownership.
With the abolition of private capital, there would disappear of course
all the economic institutions that have grown up around it, as credit,
banking, lease, hire, the stock and produce exchanges, etc.
Socialism also means the collective or social organization and
management of industry. Socialists criticise severely our present
methods of production, which they call planless and wasteful. They
point to the constant recurrence of crises as an evidence of mistakes
of the competitive system, which they say could be obviated under a
well-organized comprehensive scheme. They also urge the wastes of
modern capitalism, in the duplication of plants, advertising (which
amounts to $500,000,000 a year in the United States and serves little 169
useful purpose), traveling salesmen, multiplication of small stores,
etc. Finally, an artificial disharmony between the interests of
society and private individuals is promoted by our system of private
property and profit: a coal trust limits the supply, farmers rejoice
over small crops, and planters burn part of their cotton, in short the
bounty of nature is regarded as a calamity. Some truth may be admitted
in these criticisms, but in answer it may be said that some of them
are being corrected under individualism, while as to those that remain
the remedy offered is worse than the disease. The first and
fundamental question is the effect of socialism on the amount
produced, for as we have seen any diminution would mean a worse
economic condition of society, even though it were offset by a more
equal distribution. Under individualism the appeal to industry and
thrift is the self-interest of the individual, and under the stimulus
of this motive the production of wealth has been increased enormously.
It is doubtful whether the motives of altruism, desire for social
approbation, and similar ones suggested by the socialists would
promote industrial activity as efficiently as the individualistic
desire for pecuniary gain.
Moreover the difficulties of organizing and managing all industries
would be enormous. According to the socialist plan, statistics of
consumption would be gathered in advance, the idle changes of fashion
would of course disappear, and production could be accurately
calculated. But aside from the problem of securing an honest and
efficient administration, the work of organizing industry from a
centralized bureau would probably prove insurmountable. The
distribution of the labor force among various employments suggests
another difficulty. Under individualism the necessary distribution
takes place through the agency of wage payments and the choice of an
occupation is left free to the individual. As the wage-system would
disappear with the abolition of private capital, some other means 170
would have to be devised, as allotment by the Government. But more
important would be the selection of the managers of industry;
competition provides a process whereby the inefficient are eliminated
and the able put in charge. As socialism would be an industrial
democracy the selection of the captains of industry under that system
would probably be made by election. Is it likely that the voters would
place over themselves the ablest, that is the strictest, most
economical, and most energetic man? Taking men as we find them today,
this may well be doubted.
But it is as a scheme of distribution that socialism has been most
warmly urged. The inequalities and injustices of present methods are
pointed out and a more just system demanded. Socialists themselves,
however, are not agreed as to what constitutes justice. Needs and
merits have both been urged as bases of distribution, but suffer from
vagueness and difficulty in administration; most socialists today
agree that equality of income would best meet the requirements of
justice. They claim that talented persons have been endowed by nature
with their abilities and should use them as a trust for society and
not expect greater rewards than their less talented brothers. To this
individualists answer that the practical question is, how to secure
the greatest exercise of these gifts, and that is now done by
appealing to the motive of self-interest. Some writers even go further
and assert that the desire for inequality is the chief stimulus to
invention and enterprise. A crucial point in every socialistic scheme
is the determination of value under such a system; most socialists
follow Marx and say that this should be determined by the “socially
necessary labor time” required for the production of an article. Such
a measure leaves out of account entirely the aspect of utility or
demand, and would clearly be inadequate. Prices would be fixed by the
State and would be calculated in labor time, which would probably be 171
represented by labor checks, which would constitute the media of
exchange of the socialistic society.
Finally, in the definition given above, it was stated that private
property would exist in the larger proportion of the social income
after it was divided. There is no reason why this should not be true,
for, though private capital would be abolished, the State would not
interfere with the individual in the use of his income after it was
earned. If one man preferred fine clothes and another pictures and
books, it would be possible for the latter person to accumulate such
articles of enjoyment or consumption. He could even have tools for
private carpentering or a horse for riding, but under no circumstances
would he be permitted to use these for production or as instruments of
private gain. Socialism must stand or fall as a system of production
and distribution; it is not necessary to criticise minor points. On
these broad grounds it must be rejected, although it may fairly be
admitted that socialists have often proved themselves keen and useful
critics of existing institutions.
Many persons in this and other countries, who do not approve of
socialism, nevertheless believe in the extension of state ownership or
activity along particular lines. Thus Henry George, though in other
respects an individualist, did not believe in the private ownership of
land. Land is limited in quantity and yields, because of its monopoly
character, an “unearned increment” or rent, quite apart from the
return due the owner for improvements. He proposed that the Government
should confiscate this unearned increment by levying a single tax on
all land equal to it. He thought that this would provide revenue
sufficient for all government needs without resorting to other forms
of taxation; in this he was undoubtedly mistaken, but the main
interest in the scheme for us is economic, and not financial. The
reason for the scheme was that land, being a limited monopoly, would
be increasingly in demand as society progressed, and that consequently 172
the landlords would absorb in their increased rents most of the
enlarged production of the future. This assumes that rents always
increase and never decrease, which is historically untrue. Nor does
the growth and progress of society necessarily increase the demand for
land; it may be directed to other things, while improvements in the
arts of agriculture may actually decrease this demand. We must,
however, admit that there are many instances of unearned increments,
not only in the case of ground rents, but also of monopoly profits
from various sources; these might very properly be secured to society
by means of special and heavy taxes.
The municipalization of local public utilities has been advocated by
many persons who are not socialists, except in so far as they desire
an extension of governmental activity along these lines. They urge
this because the utilities in question--gas, water, electricity,
telephone, street railways, etc.--are by their very nature monopolies,
and because under private control they are often inefficiently or
dishonestly managed. A less drastic remedy for these abuses might of
course be found in regulation. Unrestricted private control of
municipal monopolies is advocated by few; the real issue is between
public regulation and public management. And this issue will depend in
the last analysis upon the question which can give the best results to
society.