BASES OF THE CAPITALISTIC SYSTEM
92. THE "CAPITALISTIC SYSTEM."--Modern industry is sometimes said to
be headless, because the numerous individuals engaged in it are not
systematically controlled or directed by a single agency. It is often
said to be planless, since laborers, employers, and other industrial
agents concentrate upon their individual desires and needs, rather
than upon the needs of the community or nation as a whole.
And yet there is in modern industry a certain regularity of outline,
and a general tendency to follow the economic laws discussed in the
preceding three chapters. This circumstance prevents us from
concluding that our industrial life is entirely a haphazard affair. It
may, indeed, be said that we have an industrial system. Because of the
great importance in it of capital, this system is commonly known as
the "capitalistic system." The underlying principles of this system
have already been mentioned or implied; nevertheless it will be to our
interest in this chapter to develop and organize these principles so
as to indicate just how they constitute the bases of capitalism.
93. ATTITUDE OF GOVERNMENT TOWARD INDUSTRY.--"It is the duty of the
government," Gladstone once said, "to make it easy for the people to
do right, and difficult for them to do wrong." According to the theory
of the capitalistic system, that is "right" which renders the
individual and the community stronger, happier, and more prosperous in
useful pursuits, while that is "wrong" which weakens or demoralizes
the citizen and the community. The chief economic function of
government is thus to discourage men from harmful and destructive
acts, and to encourage them in activities which are helpful and
productive.
Professor Carver points out that the method by which animals get their
living is either destructive, deceptive, persuasive, or productive.
Any one of these four methods may at least temporarily increase the
well-being of the individual, but only the productive method is
certain to benefit the community as well. A good government will
therefore seek to prevent people from advancing their individual
interests by killing, robbing, or deceiving their fellows. This
suppression of violence and fraud leaves open to individuals only the
productive method of getting a living, so that they cannot benefit
themselves without at the same time adding to the prosperity of the
community. From the standpoint of capitalism, thus, a good government
maintains an attitude toward industry which is primarily negative:
such a government hampers the economic activities of individuals very
little or not at all, so long as they do not practice harmful methods
of getting a living.
94. PRIVATE PROPERTY.--Most men are self-centered. In even a highly
developed society, men ordinarily will not work consistently except in
their own behalf, or in the behalf of a very few people for whom they
care intensely. This instinct of self-interest is the kernel of
industrial progress, but it can result in material prosperity only
when government suppresses violence and fraud. The lowest savages are
undoubtedly self-centered, but so long as they must rely upon brute
force to retain their possessions, there is little inducement to
acquire wealth. It is only when law suppresses robbery and fraud, and
otherwise protects the individual in his property rights, that the
acquisitive instinct will cause him to exert himself in productive
ways. Because it satisfies the individual's desire to secure the good
things of life, the institution of private property is the greatest
known spur to economic activity, It is only in those countries where
individuals are protected in their property rights that we find an
active, progressive, and prosperous people.
95. ENFORCEMENT OF CONTRACTS.--We have already seen that among the
members of a modern industrial society there is a high degree of
interdependence, corresponding, in an important sense, to the
interdependence between the parts of a machine. As we have seen, the
typical individual in industry is a specialist, concentrating upon one
particular kind of work, and depending upon his fellows to supply him
with goods and services which he cannot supply for himself. Now, such
a condition of interdependence could never have arisen were it not for
the fact that government fosters the spirit of confidence among
individuals. Many persons can be trusted to fulfill the agreements or
contracts which they make with their fellows, but many cannot. A prime
function of government, therefore, is to enforce contracts entered
into voluntarily and in legal form. This is clearly essential to our
material prosperity, for if men are to rely upon the word of those who
sell them goods or services, or to whom they sell goods or services,
all of the individuals concerned must be dependable.
96. COMPETITION.--A good government will shunt men into productive
activities, and it will insist upon the fulfilment of lawful
contracts. Subject to these two limitations, individuals are
relatively free to seek their own well-being. But an earmark of
economic goods is scarcity, that is, there are at a given time and
place fewer of them than are desired. Men must therefore compete with
one another for goods and services. The lower animals compete for food
with tooth and claw; among civilized men government tries to raise
competition to an ethical plane by tending to suppress all but the
productive methods of competition.
Where competition is so restricted and safeguarded, advocates of
capitalism assert that the results are overwhelmingly good. Where
there is free competition, _i.e._ free competition in productive
enterprise, employers commonly pay their laborers as high a wage as
they feel is justified under the particular circumstances, lest their
workmen abandon them for rival employers. Under similar conditions,
laborers will generally endeavor to render the best possible service,
so that the employer will prefer them to other laborers. This assumes,
of course, that competition is effective, _i.e.,_ that there is
neither an oversupply or an undersupply of either employers or
employees.
Where, again, there is free competition in productive enterprise, the
price of commodities produced by a given concern cannot rise too far,
for consumers will either buy those commodities of rival producers, or
will use substitutes. If, on the other hand, prices drop so low that
producers make little or no profits, they will withdraw from business.
Free and effective competition thus means rivalry in satisfying wants,
that rivalry being engaged in for the sake of private gain.
Competition tends to harmonize the interests of the individual with
the interests of the community, by making the success of the
individual depend primarily upon what he accomplishes for his fellows.
97. VALUE UNDER CONDITIONS OF FREE COMPETITION.--In a competitive
market, as we have seen, value depends upon scarcity and utility. No
one will ordinarily pay for a commodity unless it will satisfy his
wants, i.e. unless it has utility. But even though a commodity has
utility, no one will ordinarily pay for it unless it is so scarce that
he cannot get as much of it as he wishes without paying for it. Air,
for example, has great utility, but it is so abundant that it can
ordinarily be secured without payment. Hence it has no value.
Price, the measure of value in terms of money, will be determined,
under conditions of free competition, by the interaction of utility
and scarcity. Diamonds are high in price because they satisfy intense
desires and are scarce; bread is cheap because while possessing great
utility, it is relatively abundant. Skilled labor receives high wages
because in addition to its utility it is relatively scarce; unskilled
labor often receives low wages because while possessing utility it is
relatively abundant. This principle is of the very greatest
consequence, and in considering the programs of industrial reform we
shall come back to it again.
98. FREEDOM.--A large measure of personal liberty is a characteristic
of the capitalistic system, To an increasing extent, government is
restricting economic activity to productive channels, but with this
qualification, the individual is comparatively free to do as he likes.
The laborer is free to move about in search of work, free to seek a
better job, free to accept or to reject work offered him. He may
abandon his job when he chooses, and remain idle as long as he
chooses, or is able. He is repressed by no paternalistic government,
embarrassed by no feudal system. He is part and parcel of the
competitive system, guiding his own actions and accepting
responsibility for them. To a large extent, the employer is similarly
free to hire or discharge men as he sees fit, to initiate a new
business, or to withdraw from business altogether. In every case the
individual is free, so far as legal restrictions are concerned, to use
his money as he chooses. Whether it is hoarded, invested, or wasted is
largely a matter for him to determine.
99. BENEFITS OF THE CAPITALISTIC SYSTEM.--The material prosperity of
the modern world has been attained under the capitalistic system of
industry. The system was not invented, but has developed and spread
from small beginnings because the experience of centuries has proved
it to be the best known system which is applicable to human industry.
The starting point of all material prosperity has been the gradual
development of government which suppresses violence and fraud, which
enforces contracts, and which makes possible the rise of the
institution of private property. The inception of the Industrial
Revolution, and its spread beyond England to Europe, America, and,
later, to Asia, were possible only because these bases of capitalism
were already laid. To a large extent, thus, the steam engine, the
railroad, the steamship, the electric light, and countless other
inventions which have helped to revolutionize the world we live in,
may be traced directly or indirectly to individual freedom and to the
protection of property rights. In so far as science, art, and
literature depend, to a considerable degree, upon material prosperity,
we may go so far as to say that capitalism is the most important
single basis of modern civilization.
100. DEFECTS OF THE CAPITALISTIC SYSTEM.--But capitalism is not
without its defects. The lack of centralized control in industry
allows of planless production. [Footnote: During our participation in
the World War, it is largely true that much of the productive energy
of the country was organized and directed as a unit. This was a
temporary expedient, however, resorted to for the purpose of winning
the war.] Entrepreneurs frequently produce without adequate knowledge
of demand, and without knowledge of rival production. When business is
booming and profits are high, it often happens that so many
individuals go into business that eventually there is over-production,
i.e. there are more goods at a particular time than can be sold at a
profit. Crises, unemployment, and "hard times" are often the direct
result of this over-production. Malnutrition, disease, vice, crime,
and pauperism are often its indirect results.
In still other ways the capitalistic system allows of an uneconomical
expenditure of labor and capital. There is no adequate method of
directing labor and capital toward the production of durable and
helpful commodities, and away from the production of luxuries and such
harmful commodities as have not been made illegal. Under competitive
conditions, too, a number of shops or stores may exist in a community
that might easily be served by a single firm. This is wasteful
duplication, just as advertising is a waste when it goes beyond the
point of informing the public as to whereabouts and character of
commodities. Still another source of waste is traceable to an
excessive number of middlemen, each of whom adds to the price of the
product as it passes through his hands.
101. THE INEQUALITY OF WEALTH.--In all of the great industrial
countries of the world, including the United States, the existing
distribution of wealth is roughly in the form of a pyramid, i.e., at
the top or apex of the pyramid there is a relatively small number of
persons who enjoy large incomes, while at the base there is a large
number with relatively small incomes. This inequality is explained by
Professor Taussig on two grounds: First, it is likely that some
individuals originally secured an economic advantage over their
fellows because of inborn superiority of some kind. Second, the
economic advantage thus secured has been maintained from generation to
generation by inheritance. Where, for example, wealth is invested so
that the principal remains intact while a large annual income is
thrown off as interest, the heirs may live in affluence, regardless of
ability or desert. Thus we have a leisure class emerging as the result
of inborn differences between men, supplemented by the accumulation of
wealth and its transmission by inheritance.
102. THE QUESTION OF INDUSTRIAL REFORM.--It goes without saying that
great inequalities in the distribution of wealth are undesirable. If
any improvement is humanly possible, we ought not to rest content so
long as millions of our citizens have too few of the good things of
life, while others have much more than is necessary for comfort and
happiness. The test of an economic system is whether or not it
provides a good world to live in, and so long as large numbers of
individuals have fewer necessities and comforts than it is possible to
give them, our economic system must be considered defective. The
people as a group are both the means and the end of progress.
Democracy cannot rest upon any other basis than the greatest good to
the greatest number.
103. APPROACHING THE PROBLEM.--In approaching the problem of
industrial reform it is necessary to cultivate a fair and sane
attitude. We must attack all of the problems of American democracy,
certainly. But in so far as some of these problems involve the
integrity of the capitalistic system, we should distinguish between
ills which are clearly traceable to that system, and defects which
obviously would exist under any industrial system. Capitalism cannot
be discredited, for example, by pointing out that crime exists in all
capitalistic countries. Though capitalism may accentuate some types of
crime, our knowledge of human nature leads us to suspect that a
considerable amount of crime would exist under any known system of
industry. Again, criticism should be constructive; it is easy to point
out the defects of an institution, but it is quite another thing to
provide a good substitute for that institution.
The problem before us is a double one: First, can we remedy the
defects of the capitalistic system? And, if so, by what method shall
we proceed? Second, if the defects of capitalism cannot be remedied,
what industrial system shall be substituted for capitalism? It is not
a question of whether or not capitalism is faulty, but of whether it
is more faulty than the system that would be substituted for it. The
virtues of capitalism, most authorities believe, clearly outweigh its
defects, and though some other system may eventually prove to have as
great virtues with fewer defects, the burden of proof is upon those
who advocate other systems than capitalism. Until the advantage is
clearly shown to be on the side of a rival system, it will be wise to
retain capitalism.
QUESTIONS ON THE TEXT
1. Is it correct to speak of a "capitalistic system"?
2. What is the chief economic function of government?
3. Name the four methods of getting a living. Which will be encouraged
by a good government?
4. To what extent is the attitude of a good government toward industry
a negative one?
5. What is the relation of government to the institution of private
property?
6. What is the importance of laws requiring the enforcement of
contracts?
7. Why is there competition?
8. How does competition tend to harmonize the interests of the
individual with those of the community?
9. Why are diamonds high in price? Why is bread low in price?
10. What is the relation of capitalism to economic freedom?
11. What can be said as to the benefits of capitalism?
12. What are the chief defects of capitalism?
13. Outline the existing distribution of wealth.
14. On what two grounds does Professor Taussig account for this
situation?
15. What facts should be borne in mind in attacking the problem of
industrial reform?
REQUIRED READINGS
1. Williamson, _Readings in American Democracy_, chapter x.
Or all of the following:
2. Ely, _Outlines of Economics_, chapter ii.
3. Fetter, _Modern Economic Problems_, chapter ii.
4. Hobson, _Evolution of Modern Capitalism_, chapter i.
5. Seligman, _Principles of Economics_, chapter ix.
QUESTIONS ON THE REQUIRED READINGS
1. Define capitalism. (Hobson, page 1.)
2. How has the development of mines affected the growth of capitalism?
(Hobson, page 6.)
3. What is the relation of colonization to capitalism? (Hobson, pages
10-12.)
4. What is the relation of capitalism to a large labor supply?
(Hobson, pages 13-14.)
5. Define private property. (Ely, page 21.)
6. Discuss the theories of private property. (Fetter, pages 18-20.)
7. What were the earliest forms of private property? (Seligman, page
126.)
8. What was the effect of the domestication of animals upon the
institution of private property? (Seligman, pages 126-127.)
9. What are the limitations of private property? (Fetter, pages 20-
21.)
10. What is meant by the term "vested interests"? (Ely, pages 25-26.)
11. What is "fair" competition? (Ely, pages 29-30.)
TOPICS FOR INVESTIGATION AND REPORT
I
1. Suppose an unscrupulous individual fraudulently secured possession
of property belonging to you. What steps would you take to secure
justice?
2. What penalties are inflicted in your state for highway robbery,
embezzlement, theft, forgery, and similar crimes against property?
3. Suppose that you are a florist and that you have ordered a large
quantity of flowers from a greenhouse keeper for your Decoration Day
trade. Assume that you could not sell the flowers at a profit if they
arrived later than Decoration Day. Assume, also, that you have reason
to suspect that the greenhouse keeper will not be prompt in delivering
the flowers ordered. Draw up a contract (to be signed by him) which
would protect you against his tendency to carelessness.
4. Select for study an isolated rural district, a small town, or a
section of a suburb in which the community secures its supply of a
given commodity from a single shop or store. Compare the price of the
commodity, and its quality, with the price and quality of a similar
commodity in stores located in communities served by several competing
stores. What do you conclude as to the value of competition?
5. Make a study of bill-board advertising, listing the number of
advertisements inviting purchase of competing commodities. Write to a
bill-board advertising company for advertising rates, and draw your
conclusions as to (_a_) the cost of advertising, and (_b_) the waste
involved in advertising competing commodities.
Make a similar study of magazine advertising, writing to the
advertising manager of the magazine selected for study, in order to
secure advertising rates.
II
6. Relation of good government to economic prosperity. (Carver,
_Elementary Economics_, chapter vii.)
7. Competition. (Seligman, _Principles of Economics_, chapter x.)
8. Methods of struggling for existence. (Carver, _Elementary
Economics_, page 40.)
9. The development of economic freedom. (Seligman, _Principles of
Economics_, chapter xi.)
10. Distribution of wealth in the United States. (Taussig, _Principles
of Economics_, vol. ii, chapter liv; King, _Wealth and Income of the
People of the United States_, chapter ix.)
11. Place of machinery in the capitalistic system. (Hobson, _Evolution
of Modern Capitalism_, pages 27-29.)
12. The impersonality of modern life. (_Lessons in National and
Community Life_, Series B, pages 97-104.)
13. The extent of poverty in modern life. (Burch and Patterson,
_American Social Problems_, chapter xvi.)
B. PROGRAMS OF INDUSTRIAL REFORM