ECONOMIC FACTORS AND ORGANIZATION
_The purpose of this chapter is to show how wealth is created and
how it is distributed among the people._
[Sidenote: Primitive needs and modern needs.]
=The Economic Needs of Man.=—The most elementary needs of human beings
are for food, clothing, and shelter. Until these are satisfied no higher
needs can develop. In the lowest stages of barbarism men are content
with the satisfaction of these elementary needs alone; but as they
obtain a greater mastery over nature and are able to supply these wants
more easily, other and higher wants arise within them. As men and women
become more intelligent and more refined, they grow discontented with
the primitive and coarser kinds of food; they seek more presentable
clothing than the skins of wild animals; they replace their rude huts
with substantial houses of wood. Step by step, as the human race has
advanced in civilization, its needs have become more numerous and more
varied. Purely material requirements being satisfied, other and higher
demands arise. The spiritual and social aspirations make their
appearance. As mankind passes each stage in civilization it finds,
through the growing control over nature, that purely material wants can
be satisfied with less and less exertion. Men gain their daily bread
today with infinitely less effort than in primitive times. The chief
reason is that they have learned to act collectively in mastering the
forces of nature; in other words they have achieved a high degree of
economic organization.
[Sidenote: How the economic motives promote progress.]
=The Economic Motives.=—Self-preservation is the first law of nature.
The primeval instinct in man is to look out for himself, to protect
himself from hunger, thirst, and hardship. This, for the moment, is
more important to him than the satisfaction of his social and civic
needs. Hence the economic motive, the instinct which prompts him to
seek the means of getting a living, is extremely strong. This instinct
the lower animals possess as well, but it does not carry them beyond
the satisfaction of elementary wants. The birds of the air and the
beasts of the fields have never enlarged or raised the scale of their
needs beyond the simple requirements of food, drink, and shelter. No
matter how easily obtainable these become they make no progress to
anything higher. But mankind, endowed with superior mental faculties
and a spiritual nature, does not rest content with the easy earning of
a livelihood. The economic motive prompts men and women to move on, to
achieve wealth, to procure luxuries, and to gain such happiness as the
possession of worldly goods can bring. This economic motive, deeply
implanted in humanity, has been a great incentive to progress in
civilization,—probably the greatest of all incentives.
[Sidenote: The altruistic motive.]
Let it not be assumed, however, that because the economic motive is
strong in man he is an altogether selfish creature. There is also an
altruistic motive which impels him to help his fellow-men, even at
personal sacrifice. Men desire to gain wealth for themselves, but having
gained enough and to spare, they frequently devote much of it to the
assistance of those who have not been so fortunate. The higher our
civilization the more marked does this spirit of altruism or economic
unselfishness become.
[Sidenote: Economic goods.]
=The Subject-Matter of Economics.=—The study of economics does not
concern itself with all the possible wants and aspirations of men. It
deals only with the production, distribution, and consumption of those
things which satisfy man’s desire for (_a_) material objects and (_b_)
personal services. In other words economics is a subject which concerns
itself with the production, distribution, and consumption of _economic
goods_, a term which includes material possessions known as wealth and
also such personal services as have an economic value. Not all things of
a material sort are economic goods; air and sunlight, for example, being
free to all, require no effort on the part of man to obtain. They are
called free goods. We apply the term economic goods only to such things
and services as satisfy human wants and are not to be had free.
Requiring effort to produce, these economic goods are limited in supply
and hence have a value in exchange for other goods. For this reason they
are commonly spoken of as _wealth_. Certain personal services, those of
the physician, the lawyer, the foreman, the laborer, also have an
economic value in that they are limited in supply, satisfy material
wants, and can be exchanged for tangible goods. These services form a
part of the economic activities of society, a very important part. So
the study of economics includes these personal services as well.
[Sidenote: Present and future economic goods.]
=The Consumption of Wealth.=—All economic goods are produced for the
purpose of being used. This use is what the economist calls
_consumption_. Some economic goods are in finished form, ready for
immediate consumption at any time; others are in the form of raw
materials or half-finished products not yet ready to be used. Hence we
distinguish between present and future economic goods. Economic
organization strives to manage matters so that a sufficient supply of
economic goods will reach their finished form in time to fill the
demands that arise. This demand on the part of the consumers determines
the methods and amount of production. If there is no demand for a
particular kind of economic goods, these goods will not be intentionally
produced. On the other hand a vigorous demand will encourage production
and speed up the process of distribution.
[Sidenote: Demand and supply.]
So we get back, in the end, to the proposition with which we started,
that the purpose of economic activity and organization is to supply
human needs. Where the need is felt, the demand arises. When the demand
arises, the agencies of supply, namely production and distribution,
usually respond. One of the great tasks of economic organization,
therefore, is to estimate the probable demand and so influence
production and distribution that the supply will neither be excessive
nor fall short. If there is an over-supply of any commodity, prices
normally will fall. That means that goods may bring less than it costs
to produce and to distribute them. One reason for the organization of
industry on a large scale under great corporations is that supply can
thus be kept closer to demand. At any rate the consumer, by his greater
or smaller demand, virtually determines all activities of production and
distribution. He is the pivot of the whole economic system.
[Sidenote: The factors in demand.]
Whether the demand on the part of the consumer will be larger or smaller
depends on three factors. The first is the utility of the goods to him.
Economic goods do not have the same utility to all men at all times. The
utility of ice on a warm summer day may be considerable; in midwinter it
is next to nothing. The utility of eye-glasses to short-sighted men is
great; to men of normal sight they have no utility at all. Economic
goods may, therefore have a greater or smaller utility depending upon
the place, the time, and the consumer. Bear in mind, moreover, that each
consumer matches the utility of one commodity with the utility of other
commodities which he finds available, and his demand follows the
direction of the greater utility. A second factor in demand is the price
of the goods. When the price goes up, the demand ordinarily will go
down, because some customers will decide that the utility of their money
is greater than that of the goods at the increased price. Finally,
demand depends in part upon the purchasing power or wealth of the
consumers. In prosperous times, when people have plenty of income, the
utility of goods seems greater than the utility of money; in times of
depression and low incomes the reverse is true. The interaction of these
three factors determines the demand.
[Sidenote: What production means.]
=Economic Production.=—Production is the general term applied to all the
processes whereby economic goods are adapted to the satisfaction of
human wants. We are often told that no man can either create or destroy
a single atom of matter. Strictly speaking, therefore, production does
not mean the _creation_ of economic goods but the _utilization_ of
materials in such a way that they may satisfy the consumers’ demands.
This utilization may involve changing their form, as where iron is made
into tools or wool into cloth. The miner who takes coal out of the
earth; the farmer who makes two blades of grass grow where one grew
before; the mason who hews the stone for the building; the baker who
makes flour into bread; the manufacturer who takes leather and turns it
into shoes—all are engaged in production. So, also, are such workers as
statesmen, judges, lawyers, physicians, and teachers. They may not
directly produce commodities but their services are essential to the
smooth working of the processes of production. The only workers who do
not deserve to be called productive laborers are thieves, swindlers,
counterfeiters, and other parasites. They often work harder than would
suffice to earn them an honest living; but their labor is not
productive. They live on what others produce.
[Sidenote: Natural resources, labor, capital, organization, and
government.]
=The Factors in Production.=—There are five factors in production;
namely, (1) natural resources (including land); (2) labor; (3) capital;
(4) organization and management; (5) government. Natural resources,
without the application of labor to them, do not go far in satisfying
human wants. Men cannot live on soil, climate, rainfall, and minerals.
Nor can labor and natural resources, when one is applied to the other,
succeed in producing all the economic goods which people in an advanced
stage of civilization require. Capital is also essential—capital in the
form of machinery, or in the form of money to support labor during the
process of production. These three things, natural resources, labor, and
capital must be brought together, furthermore, and kept working in
unison. This is where organization, the fourth factor in production,
comes in. It borrows the capital, buys the raw materials, sets the labor
to work, and markets the products. Government is not commonly looked
upon as a factor in production, but it ought to be. Without the
protection and regulation which government affords we could not carry on
production at high efficiency. It is government that assures to labor,
capital, and organization their rightful shares in the joint production
and thus affords them the incentive to do their best.
[Sidenote: Land and its resources.]
=Nature’s Contributions to Production.=—Nature contributes to the
production of economic goods such things as land, timber, waterways for
transportation, minerals, coal and oil, the motive power of steam,—in a
word nature provides all the materials and the environment of
production. Hence it is fundamentally the most important of all the
factors. If one studies the history of those nations which have become
great in various periods in history, it will be found that the basis of
their material greatness was in practically every case the bounty of
nature. Civilization made its first advance in the fertile valleys of
the Euphrates and the Nile. Its progress since the dawn of history has
been conditioned by man’s success in discovering and using natural
resources.
Among the contributions of nature to production some, such as land, can
be brought under private ownership. So long as land was plentiful and
population scanty there was no occasion for private property in land.
When Caesar first came into contact with the Teutonic tribes he found
that land was not held in private ownership. Everyone took what he
wanted; when the land seemed to be growing exhausted the whole tribe
moved on to some other region. But as these tribes grew in number and
unoccupied land became less plentiful, common ownership gave way to
private ownership. The Anglo-Saxons had reached this stage before they
migrated to England.
[Sidenote: Rent.]
Land held in private ownership can be bought, sold, and leased. When it
is leased, the owner receives for its use a payment known as rent. Rent
may be defined as the return which is obtained by the owner of any form
of natural resource. This includes not only land but mines,
water-powers, trout-streams, and so forth. The return which is received
for the use of unimproved land is usually called _ground rent_, while
the return which results from improvements such as buildings upon the
land, fences, and drains is called _improvement rent_. Strictly
speaking, this is not rent, but a return upon invested capital. The
amount of ground rent paid for any piece of land depends upon its
relative fertility, if it is to be used for agriculture, and its
location. Location alone determines the ground rent of land in towns and
cities.
[Sidenote: What is labor?]
=Labor as a Factor in Production.=—What is labor? Is all muscular and
mental exertion entitled to be called labor? Mountain climbing involves
the most severe sort of bodily effort. Tourists do it for pleasure and
guides do it for pay. Is it labor in one case and not in the other? Some
men play chess for recreation; others make a living out of it; in either
case there is strenuous mental exertion involved. So where does labor
begin and end?
No exact answer can be given to that question. One man’s play is another
man’s labor,—gardening, fishing, acting on the stage, for example. But
economists usually define labor as “human exertion or effort directed
toward the creation of economic goods”. This includes mental as well as
physical exertion. All who are engaged in the production of material
things or personal services for the satisfaction of human wants are
engaged in productive labor.
[Sidenote: The economic importance of labor.]
Labor, of course, is of great economic importance. The natural resources
of the American continent were as great three hundred years ago as they
are today; yet they were practically useless in satisfying human wants
because the red man would not and could not bestow his labor upon them.
It remained for the white man to transform natural resources into
economic goods. This he has done not only by the use of muscular
exertion but by the application of intelligence. Labor is never an end
in itself; it is always a means to an end, and this end is the
satisfaction of human demands.
[Sidenote: The simple and complex forms of division of labor.]
=Division of Labor.=—In applying their labor to natural resources men
soon found that the best results could be obtained by apportioning
different tasks to different workers. This is called the _division of
labor_ and it has been one of the great factors in the progress of
production. In its simpler form, division of labor merely meant that
each workman confined himself to a simple occupation and carried through
all the processes of production in that particular trade. The
cloth-maker, the shoemaker, the implement-maker performed all the work
of making cloth, shoes, or implements from start to finish. This simple
division of labor was practiced in very early times. But as the world
moved forward a more complex division of labor developed and this is
particularly a feature of modern production. In this development the
individual worker is assigned to make only a part of a commodity. The
making of cloth is no longer a trade, but embodies a series of
trades—that of the wool-carder, the spinner, the weaver, the fuller, the
dyer, and the finisher. In the modern shoe factory one employee cuts the
sole, another trims it, a third turns the heels, a fourth sews the
uppers to the sole, and so on. There are more than twenty distinct
operations in the making of a factory shoe, each requiring special skill
on the part of the worker.
In the time of the Roman empire it is said that only thirty-seven
different trades and professions were in existence. Today the number
runs into the thousands. It would be practically impossible to make a
list of them all. This is the age of specialists. Men no longer call
themselves shoemakers but cutters, lasters, welters, sole-makers. Even
in the engineering profession we have electrical engineers, civil
engineers, mechanical engineers, locomotive engineers, stationary
engineers, mining engineers, marine engineers, and chemical engineers.
=Advantages and Disadvantages of Division of Labor.=—Division of labor
has brought many economic advantages. It enables the worker, by constant
practice at a single operation, to acquire skill and dexterity. It
enables almost every worker to find some task that he is able to do and
for which he has a special liking or aptitude. It stimulates the
invention of new processes and methods by reducing each operation to the
simplest possible form, at which point it can often be taken over by
machinery.
But the elaborate division of labor which marks modern industry also has
its defects. It increases the monotony and irksomeness of labor. It
prevents the development of all-round craftsmen, men who can turn their
hands to a variety of things. Hence when a worker in modern industry
loses his regular employment it is difficult for him to change to
anything else. Confining men and women to a single, simple task day
after day and year after year tends to narrow them; it certainly does
not conduce to the extension of their intelligence. No great inspiration
comes from his work to the man who spends his life in making the
nineteenth part of a pin.[13] Division of labor has come to stay,
however, and in spite of all these disadvantages the world is on the
whole far better for its coming. It has made the production of goods so
much easier that to give it up now would carry the world back to
primitive conditions and lower the standard of living.
Our aim should be to utilize all its advantages while reducing its evils
to the minimum. This we may hope to do by several methods; for example,
by reducing the daily hours of labor, by promoting vocational education,
by the restriction of child employment, by a better organization of the
labor market (see p. 418), and by providing wholesome recreation for the
workers.
[Sidenote: Labor is a service.]
=Is Labor a Commodity?=—Labor, as a factor in production, receives its
return in the form of wages. A generation ago it was customary to speak
of labor as a commodity and to say that the worker “sold his labor” for
wages. But labor is not a commodity. The seller of goods parts company
with them when he makes a sale; the worker is inseparable from his work.
The man who sells shoes cares not who wears them; but it makes some
difference to the shoe-worker how and where and for whom he labors. No
commodity, moreover, is so perishable as labor. The labor of one day
will not keep for sale the next. Hence sales of labor, if we call them
such, are in the nature of forced sales. In the case of nearly all
commodities, again, the supply can be diminished by stopping production,
thereby preventing a drastic fall in price. But the supply of labor
cannot be so easily cut down. The analogy between labor and commodities
is a poor analogy and it is much better to speak of labor as a personal
service. Workers contract with employers for the giving of this service
and should receive, in return, not only wages but various assurances as
to the conditions under which the service is to be rendered. The
Congress of the United States, in the Clayton Act of 1914, declared that
“the labor of a human being is not a commodity or article of commerce”
and that an organization of workers was not to be regarded, therefore,
as a “combination in restraint of trade.”
[Sidenote: The factors which cause wages to rise and fall.]
=Wages.=—The wages of labor depend fundamentally upon demand and supply.
But as the supply of labor is not susceptible to a quick and unlimited
increase or reduction, wages depend principally upon demand. When there
is an increased demand for economic goods, due to factors which have
already been explained (see p. 40), the quest for labor becomes more
keen on the part of employers; better terms are offered to the worker;
in other words wages go up and the conditions of labor are improved.
When the demand for economic goods diminishes the contrary takes place,
but in this case the decline in the rate of wages does not, as a rule,
keep exact pace with the decrease in demand. Organizations of labor
strive to keep wages up and often succeed, temporarily at least, in
doing so. During the years 1918-1920, when the demand for economic goods
expanded greatly, the wages of labor in the United States went up
promptly all along the line. When the turn in the tide came, about the
middle of 1920, wages began to fall slowly and their descent has been
very gradual. Wages, thus, incline to follow the general course of
prices but they show this tendency more clearly when prices are going up
than when they are coming down. This is altogether natural, for higher
wages conduce to a better standard of living, and when such better
standard has been achieved there is objection to any lowering of it.
[Sidenote: Nominal and real wages.]
This suggests that a distinction ought to be drawn between _nominal_ and
_real_ wages. Wages, of course, are not an end in themselves; they are
merely a means which enables the worker to satisfy his wants. The real
utility of wages depends, therefore, upon what they will purchase, and
this, again, depends upon the general level of prices. Even if wages,
reckoned in dollars, go up fifty per cent, the worker is no better off
if the general level of prices also goes up fifty per cent. A worker’s
nominal wages are what he receives in dollars; his real wages are
reckoned in terms of purchasing-power. The rate of wages should always
be studied, therefore, in connection with prices. An increase or
decrease in nominal wages may mean much or it may mean very little.
[Sidenote: The minimum wage level.]
There is a limit below which real wages cannot fall. This is the point
at which the worker can manage to maintain himself and his family. Just
where this point is, stated in terms of money, no one can say. It varies
in different parts of the country. Before the World War the statistics
showed that half the adult male workers in this country were earning
less than six hundred dollars a year, yet the standard of living among
American workmen was higher than that of the workers in any other
country. Today it is probable that these same workers are earning more
than a thousand dollars. This does not mean, necessarily, that the
standard of living has risen, for the amount of nominal wages needed to
maintain the pre-war standard is greater because of the rise in prices.
[Sidenote: How capital arose.]
=Capital.=—Capital is the third factor in production. In primitive
industry the application of labor to natural resources produced direct
and almost immediate results. The savages who gathered nuts and caught
fish with their hands, for example, gained the fruits of their efforts
at once. But these direct methods of satisfying their wants did not
carry mankind very far. It soon became apparent that men could produce
economic goods more easily and more abundantly by indirect methods, that
is by the use of tools, implements, machinery, and other labor-saving
devices. These made possible the utilization of minerals and other
natural resources which could never have been made to serve the wants of
man without using the appliances of indirect production. So, as
civilization developed, production came to be spread over a considerable
period of time, until today it often happens that a whole year
intervenes between the first step in production and the sale of the
finished article. Consider the articles of daily use, clothes, shoes,
furniture, books, and realize how vast has been the series of operations
necessary to produce each of them! Many workers have contributed their
share, and each of these has had to receive his wages long before the
goods passed into the hands of the ultimate consumer.
[Sidenote: What it includes.]
Now the factor which has enabled production to become indirect and
long-spread-out is capital. Capital consists of all the intermediate
things which men use in producing economic goods. It includes buildings,
materials, machinery, and the money which pays the wages of the workers.
The use of capital saves labor by enabling a given amount of it to
achieve vastly better results than would be the case if capital did not
exist. Capital is really stored-up labor in the form of economic goods
which have been produced but not consumed. In other words it is the
result of saving. If everything that the world produces were at once
consumed, there would be no capital.
[Sidenote: How the rate of interest is determined.]
=Interest on Capital.=—Interest is the return paid to the owner of
capital for its part in production. It is his recompense for saving his
economic goods instead of consuming them. Productive capital is
frequently in the form of material things but its value is reckoned in
terms of money and a certain per cent per annum is paid on this value in
the form of interest. Were it not so, there would be no strong
inducement for men to save, and capital would not be forthcoming. The
rate of interest depends, in a general way, upon the interaction of
demand and supply. If the demand for capital exceeds the supply, the
rate of interest will ordinarily go up, and _vice-versa_. But this does
not always take place because capital is sometimes obtained at a fixed
rate for a long period, and this rate, whatever it is, remains the same
for the duration of such period.
[Sidenote: Why organization is essential.]
=Organization and Management as a Factor in Production.=—When labor and
capital are brought into play upon natural resources the production of
economic goods is the outcome. But these three factors are in separate
hands and have to be brought into co-operation. Owners of lands, mines,
and forests control the natural resources; another class possesses the
capital; a third is in a position to furnish the labor. Organization
brings all three into joint action for the production of wealth.
[Sidenote: The forms of organization.]
This organization may take any one of several forms. The simplest form
of organization is represented by the individual employer, the man who
borrows capital (or provides it from his own savings), purchases the raw
materials, and hires labor to be applied to it. He is an organizer of
the productive process. This system of single employers was nearly
universal in the earlier stages of industry and trade. Next comes the
partnership. Two or more men assume the task of bringing natural
resources, capital, and labor together. The partners divide the work and
jointly assume all responsibilities of loss. Finally, and most common in
large-scale production nowadays, there is the joint stock company or
business corporation in which many persons participate. Each contributes
to the organization and takes a proportionate share of the risk.[14] The
nature and work of these corporations are explained in a later chapter.
------------------------------------------------------------------------
[Illustration:
THRIFT AND PROSPERITY. By Frederick Dielman.
_Copyright by Frederick Dielman. From a Copley Print, copyright by
Curtis & Cameron, Boston. Reproduced by permission._
]
THRIFT AND PROSPERITY
By Frederick Dielman
From a mosaic picture in the Albany Savings Bank,
Albany, N.Y.
A mosaic is a decoration formed out of small pieces
of natural stone or enamel, of various colors, set
in cement. This decoration measures fourteen feet by
seven and one-half, the figures being somewhat
larger than life size.
Under a fruit tree in a landscape suggesting
grain fields and meadows, is a group of figures.
The central and principal figure, the mistress
of a household with her distaff and spindle,
typifies industry and good management; behind
her on either side among the hollyhocks are
beehives—the conventional emblems of industry
and saving.
In the foreground on the left, a woman with a sheaf
of wheat at her feet and a sickle in her hand turns
toward the keeper of the flocks and herds. At the
right, a kneeling maiden lays a basket of fruit near
the sheaf of wheat, while a stalwart man, adze in
hand, bares his arm for work. All these figures
symbolize the different branches of agriculture. The
children and the young animals typify the way in
which each young generation is nourished by the
industry and thrift of its elders.
The whole impression of this picture is one of
industry, prosperity, thrift, and—by reason of these
three—happiness.
------------------------------------------------------------------------
[Sidenote: The nature of profits.]
=Profits.=—The return received by the organizers and managers of
productive enterprises is commonly known as profit. The amount of their
profit depends upon the degree of success with which they can produce
goods for less than the selling price. Every employer or organizer
assumes a considerable amount of risk. He obligates himself to pay
definite amounts for the use of capital, materials, and labor no matter
what the value of the finished products. If this value be less than the
cost of production, he loses; if it be more, he gains. Losses, if
continued, mean bankruptcy. Gains are profits and, if continued, make
him rich. It will be seen, therefore, that the employers or organizers
of production take more risk than those who supply the materials, the
capital, or the labor. [Sidenote: What determines the rate of profits.]
Their success, in other words their rate of profits, depends in general
upon the degree of managing and organizing ability which they display;
but it sometimes happens that profits will be high in all branches of
production for a time irrespective of the employer’s skill. The price of
the finished product may rise without an immediate and proportionate
increase in the cost of materials, interest, and wages. This situation,
while it continues, affords an opportunity for abnormal profits or
“profiteering” as it is often called. Abnormal profits may also be due
to the existence of a monopoly in a particular form of production.
[Sidenote: The economic importance of government.]
=Government as a Factor in Production.=—It has not been customary to
speak of government as one of the essential factors in production, but a
few moments’ reflection will show that its part in the process of
industry and trade is very important. To begin with, the government
determines what forms of production may be carried on and by what
methods. It forbids certain forms, such as the making of intoxicants,
and strictly limits others, such as the manufacture of narcotics. It
gives to some individuals and corporations the exclusive right to
produce certain articles under patents. It determines the forms of
business organizations, the responsibilities of employers, the rules
relating to partnership, and the powers of corporations. It sets a limit
upon the rate of interest by means of usury laws and through its banks
may virtually control the rate (see p. 438). The government, moreover,
makes rules for the conservation of natural resources and to some extent
fixes the relation between the employer and his workers. At times it
even fixes prices. It provides courts and commissions for the settlement
of disputes affecting production. Finally, the whole system of private
property rests upon the support of the government.
[Sidenote: Taxes as an element in cost.]
What return does the government get for these services to production?
Offhand, one might say that the government receives its return in taxes.
In a sense this is true, for taxes, like interest, wages, and profits,
must be paid from the selling price of goods. Taxes, indeed, must be
provided for before profits can be determined. But it is not usual, nor
is it accurate, to speak of taxes as a reward or return for services
which the government renders. Revenue in the form of taxation is
essential in order that a government may function properly, yet there is
no close relation between the rate of taxation and the amount of service
given. This whole question of taxation, in theory and in practice, will
be discussed further on.
SOME ESSENTIAL ECONOMIC ACTIVITIES
[Sidenote: The way in which each factor in production obtains its
share.]
=Exchange.=—It has been shown that several factors in production are
each entitled to their share. This share is reckoned in terms of money
because every producer gets his own return in terms of money. In other
words goods are exchanged for money, and money in turn is exchanged for
other goods or service. This mechanism of exchange engages the energy of
a great many individuals and institutions, such as wholesalers,
retailers, brokers, and banks. Economic goods would have relatively
little value if they could not be translated into money and thus
distributed from hand to hand. No one, as a rule, can live and flourish
by consuming exactly what he produces and nothing else. He must use his
share in what he produces as purchasing-power to secure whatever best
satisfies his own wants. Money is the lubricant which facilitates this;
in a word, it is the medium of exchange.
[Sidenote: Definition of value.]
=Value and Price.=—Exchange takes place on a basis of relative values.
He who sells goods or services receives something of assumed equal value
in return. But what is value? The term value is employed in two
different senses, value in use and value in exchange. By the former we
mean the intrinsic utility of a thing. Air and sunlight, for example,
have a high value in use; they are indispensable to life in fact; but
they have no value in exchange. When the economist speaks of value he
means value in exchange or market value, that is to say the ratio in
which one commodity or service will exchange for other commodities. If a
ton of coal can be exchanged for a large quantity of cloth, or food, or
labor, its value is high; if it can be exchanged for only small amounts
of these other commodities, its value is said to be low.
[Sidenote: Definition of price.]
But price is quite another thing. The price of a commodity is the ratio
at which it will exchange, not for all other goods and services but for
one specific thing, namely, money. Price is value expressed in terms of
the medium of exchange. We habitually translate our economic goods into
terms of money before we buy or sell them. A general rise or fall in
prices is quite possible, for this is merely another way of saying that
money will buy less or more of all other things. It is immaterial
whether we say that prices have gone up or that money has gone down; we
mean exactly the same thing.
[Sidenote: What determines the level of prices?]
=Competition and Monopoly.=—Exchange is conducted, for the most part,
under free competition. Buyers give as little as they can in money for
goods; sellers get as much as they can. When goods bring higher prices,
more will be produced until prices are forced down again; if prices
fall, production will decline until the reduction in supply serves to
bring them up again. This is the theory of free competition. In
practice, however, it does not always work so automatically. Some
things, such as diamonds and platinum, cannot be produced in unlimited
quantities no matter how much labor, capital, and organization we may
apply. Other things are _legal_ monopolies, or patented articles, which
can be produced by only one concern and are not subject to the direct
influence of competition. Still others are _natural_ monopolies due to
the fact that from the nature of things only one concern can produce the
goods or render the service. A telephone company, for example, has a
natural monopoly. Competition involves a complete duplication of the
service. It means that many subscribers have to put two telephones in
their stores or homes in order to get into full touch with other users
of telephones. The net cost of telephone service to customers cannot be
reduced in this way. Finally, some things are the subject of artificial
monopoly, that is to say, they are produced or distributed under
arrangements which restrict or eliminate competition (see pp. 386-388).
[Sidenote: The effects of monopoly.]
All these forms of monopoly interfere with free competition and they
cover a great many of the things which are in common use by the
people.[15] Recent investigations have shown that the number of
commodities which are either wholly or in large part controlled by
monopolistic combines is larger than people commonly realize. A certain
amount of legal monopoly is essential in order to encourage research and
invention.[16] Men will not strive to invent new machines and appliances
if the invention at once becomes common property. Natural monopolies
arise from the essential nature of things and it is difficult to see how
most of them can ever be avoided. We cannot very well have two competing
street railways on the same street, for example. There would then be
little room in the street for anything else. Artificial monopolies are
often objectionable because they enable a few persons or corporations to
obtain excessive prices from the public; but even an artificial monopoly
can in some cases be advantageous. Occasionally some corporation, by
producing things on a very large scale, is able to do it so cheaply that
small producers are driven out of business. The large concern then finds
that it has become a monopoly, but so long as it does not arbitrarily
raise prices the public is not injured by the mere fact that a monopoly
exists.
[Sidenote: The principle of freedom in economic relations]
=Freedom of Contract.=—An outstanding characteristic of modern economic
organization is the encouragement of private enterprise through freedom
of contract. By the laws of the land the worker is not forced to take
employment from anybody; he may contract with whomsoever he pleases. He
may even join with other workers in a union and make a collective
bargain, that is, a group of workers, large or small, may contract with
one or more employees or with a group of employers. The employer, on his
side, is not forced to hire anybody; he also has freedom of contract. It
is true, of course, that this legal theory of individual freedom does
not find complete exemplification in actual practice. The right of the
wage-earner to bargain collectively is not everywhere conceded by
employers; the right of the employer to hire non-union men is not
everywhere conceded by the unions (see p. 406). The landlord is not
obliged to rent his house, nor the tenant to stay against his will. Both
are bound by the terms of their contract and no more. Buying and selling
are conducted with similar freedom. All this affords a great spur to
private initiative. Everyone depends for his own prosperity and
advancement upon the skill with which he can use his freedom. A
well-known English writer, Sir Henry Maine, once declared that the
progress of civilization has been a movement _from status to contract_.
He meant that in primitive times all men had their careers virtually
determined for them by the station in which they were born. The child of
a noble became a nobleman; the child of a peasant remained a peasant
through life. In modern economic society the individual’s own efforts,
exerted through his freedom to contract with others for his own
advantage, count far more heavily in determining his ultimate station in
life.
[Sidenote: Why the institution of private property is maintained.]
=Private Property.=—Freedom of contract would prove a poor incentive to
progress were it not accompanied by a provision whereby industrious men
can enjoy the fruits of their labor and thrift. Hence we guarantee to
every man not only the right to earn but the right to save, for future
enjoyment, a portion of his earnings. These savings become his property
and within certain limits he may use them as he pleases. He may utilize
his savings during his own lifetime or leave them to his children when
he dies. Savings may take the form of private property in land and
buildings, or movable goods, or such investments as bonds, stocks,
mortgages, and bank deposits. Property in land and buildings is commonly
known as _real_ property or real estate. All other forms of property are
called _personal_ property. Sometimes we distinguish between two kinds
of personal property, _tangible_, which includes all goods and chattels,
and _intangible_, which comprises stocks, bonds, mortgages, notes,
deposits, and other obligations.
The institution of private property is the basis of our whole economic
system. No nation has ever enjoyed industrial prosperity for any length
of time without recognizing the right of private property. Destroy this
right and you take away what now constitutes the chief incentive to
labor, saving, and industrial efficiency. Under a socialistic system,
which would either abolish or largely curtail this right of private
property, it is argued that other incentives would take the place of the
motive now furnished by private property and that men would keep on
working and organizing even if private property were entirely abolished;
but this is a large question and its discussion must be relegated to a
later chapter.
[Sidenote: The right of private property is subject to restrictions.]
In any case most men are now agreed that the right of private property
cannot be left unfettered; it must be guarded against abuse. Society
cannot wisely permit it to stand as an obstacle to the general interest.
Even the right of private property, therefore, must bend to the good of
the community. Men are allowed to own property because their doing so
promotes the well-being of the whole people; the right should not go
further than that. It is for this reason that we place various
restrictions upon the right of private property, restrictions in the
interest of the public health, or for protection against fire, or for
the preservation of public morals. No one has the right to own and
maintain property that constitutes a public nuisance, such as an
unsanitary tenement house, for example, or a building that forms a fire
trap. The right of private property is entitled to respect only in so
far as it is exercised in keeping with its prime purpose, which is to
advance the interests of the whole people by giving each individual a
sufficient incentive to work and to save.
General References
H. C. ADAMS, _Description of Industry_, pp. 3-117; F. W. TAUSSIG,
_Principles of Economics_, Vol. I, pp. 1-110; H. R. SEAGER,
_Introduction to Economics_, 4th ed., pp. 1-121; R. T. ELY, _Outlines of
Economics_, 3rd ed., pp. 1-98; C. J. BULLOCK, _Introduction to the Study
of Economics_, pp. 115-179; 375-431; H. R. BURCH, _American Economic
Life_, pp. 1-37; 71-80; 315-335; T. N. CARVER, _Principles of National
Economy_, pp. 3-46.
Group Problems
=1. The effects of division of labor and the ways in which we may retain
its advantages while reducing its detrimental effects.= How division of
labor arose. The extent to which it is now carried in industry. Its
physical effects. Social, political, and economic effects. Its value.
How its defects can be overcome. The reduction of hours in certain
industries. Vocational education for the worker. The restriction of
child labor. The better organization of the labor market. Recreation for
the workers after work-hours. The merits and practical difficulties of
each plan. References: F. W. TAUSSIG, _Principles of Economics_, Vol. I,
pp. 30-48; _Thirteenth annual report of the United States Commissioner
of Labor on Hand and Machine Labor_ (for illustrative material); H. R.
SEAGER, _Introduction to Economics_, pp. 153-158; R. T. ELY, _The
Evolution of Industrial Society_, pp. 398-424. See also the references
given at end of chapters XX-XXI in this book.
=2. The justification of private property. References:= L. C. MARSHALL,
_Readings in Industrial Society_, pp. 144-223; 947-988; JOHN M. MECKLIN,
_Introduction to Social Ethics_, pp. 302-322; F. A. CLEVELAND and JOSEPH
SCHAFER, _Democracy in Reconstruction_, pp. 69-95; HERBERT SPENCER,
_Social Statics_, pp. 62-65.
Short Studies
1. =Our chief economic wants.= L. C. MARSHALL, _Readings in Industrial
Society_, pp. 9-15; 270-277; 828-833; C. J. BULLOCK, _Introduction to
the Study of Economics_, pp. 79-87.
2. =Economic ideals.= H. R. BURCH, _American Economic Life_, pp. 17-27.
3. =Is labor a commodity?= C. J. BULLOCK, _Introduction to the Study of
Economics_, pp. 432-436.
4. =The relation of wages to the standard of living.= H. R. BURCH,
_American Economic Life_, pp. 47-56; J. H. HAMMOND and J. W. JENKS,
_Great American Issues_, pp. 83-96.
5. =How capital is accumulated.= R. T. ELY, _Outlines of Economics_, pp.
116-130.
6. =The place of capital in modern agriculture, industry, and commerce.=
L. C. MARSHALL, _Readings in Industrial Society_, pp. 154-212.
7. =Natural monopolies.= C. J. BULLOCK, _Introduction to the Study of
Economics_, pp. 309-324.
8. =Freedom of contract.= L. C. MARSHALL, _Readings in Industrial
Society_, pp. 570-574.
9. =Thrift as a national asset.= F. A. CLEVELAND and JOSEPH SCHAFER,
_Democracy in Reconstruction_, pp. 244-262.
10. =The place of luxury in economic life.= T. N. CARVER, _Principles of
National Economy_, pp. 584-597.
Questions
1. Make a list of the chief human wants that existed a thousand years
ago. Also a list of the principal human wants of the United States
today. Name the ones that are freely satisfied by nature.
2. What is meant by “economic goods”? Which of the following things are
economic goods, and which are not: a phonograph record; opium; the
sunken Lusitania; a silver dollar; a Liberty bond; electricity; Mr.
Bryan’s skill as an orator; desert land in the middle of Africa; weeds
in a wheat field; a wide acquaintance among business men; a ten dollar
bill; a public park; a band concert; keen eyesight; a cask of rum? Give
your reasons in each case.
3. Give some examples of the production of economic goods (_a_) without
the use of labor or capital; (_b_) with labor but without capital; (_c_)
with capital but without labor.
4. Explain what one would mean by speaking of the “productive
consumption of wealth”. Give some examples.
5. Is division of labor carried as far in agriculture as in industry?
Are the evils of division of labor as great in country districts as in
towns and cities? What remedies would you suggest to counterbalance the
monotony of industrial labor?
6. Which of the various productive factors are most important in (_a_)
sheep raising; (_b_) banking; (_c_) the coining of money; (_d_) training
a brass band; (_e_) selling newspapers on the street?
7. How would you estimate the ground rent of a piece of land, situated
on the main business street of a large city, with a store built upon it?
8. Would an increase in the price of wheat lead to a rise in the general
rate of rental paid for farm land or would a rise in the general rate of
rental cause the price of wheat to go up?
9. Why is there more capital in the United States than in China although
the population of China is three times as large?
10. If all payment of interest were forbidden by law, would people
continue to save? If not, why does saving sometimes increase when the
rate of interest goes down?
11. Why are each of the following paid a high or a low rate of
remuneration as the case may be: (_a_) a locomotive engineer; (_b_) a
hod carrier; (_c_) a movie actor; (_d_) a member of the state
legislature; (_e_) a steeple jack; (_f_) a corporation lawyer?
12. To what different things may a fall in wages be due? A fall in
profits? If all large production could be eliminated, would we be worse
or better off?
13. If all men were of equal business ability and had the same
opportunities, would there be any business profits?
14. What are the advantages of a corporation as compared with a
partnership?
15. In what ways is democracy likely to enhance production to a greater
degree than despotism?
16. Can you think of something possessing value but not utility? Utility
but not value? Both value and utility but having no price?
17. What is meant by the saying that “competition is the life of trade”?
18. Make a list of all the natural monopolies that you can remember. How
may the evils of legal and artificial monopolies be lessened?
19. How is freedom of contract related to the institution of private
property? Do you think you would look forward to greater or less
happiness in life if all private property were now to be abolished?
20. Which of the following are proper limitations on the freedom of
contract or the right of private property: (_a_) a rule that billboards
must not be built of wood; (_b_) a provision that no one shall buy or
sell explosives without a license; (_c_) a regulation that no owner of a
city lot shall build on it any building costing less than ten thousand
dollars; (_d_) a requirement that no one sell cigarettes to persons
under sixteen years of age?
Topics for Debate
1. Labor contributes more than management to national prosperity.
2. High prices are an advantage (or a disadvantage) to the workers of
the United States.
3. Every earner of income should be required to save a certain portion
of his earnings each year, thus making all men capitalists as well as
workers.