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NEW YORK
THE CENTURY CO.
1904

Copyright, 1904, by
The Century Co.

The DeVinne Press

TO THE STUDENTS
OF THREE UNIVERSITIES
—INDIANA, STANFORD, AND CORNELL—
FOR WHOM, WITH WHOM, AND BY WHOSE AID
THIS BOOK CAME TO BE WRITTEN

PART I

PAGE
The Value of Material Things1-169

DIVISION A—WANTS AND PRESENT GOODS

CHAPTER

1The Nature and Purpose of Political Economy: Nameand Definition; Place of Economics Among the
Social Sciences; The Relation of Economics to Practical Affairs3

2Economic Motives: Material Wants, The PrimaryEconomic Motives; Desires for Non-material Ends,
as Secondary Economic Motives9

3Wealth and Welfare: The Relation of Men andMaterial Things to Economic Welfare; Some Important
Economic Concepts Connected with Wealthand Welfare15

4The Nature of Demand: The Comparison of Goodsin Man's Thought; Demand for Goods Grows Out
of Subjective Comparisons21

5Exchange in a Market: Exchange of Goods Resultingfrom Demand; Barter Under Simple Conditions;
Price in a Market30

6Psychic Income: Income as a Flow of Goods; Incomeas a Series of Gratifications[Pg viii]39

DIVISION B—WEALTH AND RENT

7Wealth and Its Direct Uses: The Grades of Relationof Indirect Goods to Gratification; Conditions of
Economic Wealth46

8The Renting Contract: Nature and Definition ofRent; The History of Contract Rent and Changes
in It53

9The Law of Diminishing Returns: Definition of theConcept of (Economic) Diminishing Returns; Other
Meanings of the Phrase "Diminishing Returns";Development of the Concept of Diminishing Returns61

10The Theory of Rent: The Market Value of theUsufruct: Differential Advantages in Consumption
Goods; Differential Advantages in Indirect Goods73

11Repair, Depreciation, and Destruction of Wealth:Relation to its Sale and Rent: Repair of Rent-bearing
Agents; Depreciation in Rent-earningPower of Agents Kept in Repair; Destruction of
Natural Stores of Material81

12Increase of Rent-bearers and of Rents: Efforts ofMen to Increase Products and Rent-bearers;
Effects of Social Changes in Raising the Rentsof Indirect Agents90

DIVISION C—CAPITALIZATION AND TIME-VALUE

13Money as a Tool in Exchange: Origin of the Use ofMoney; Nature of the Use of Money; The Value of
Typical Money98

14The Money Economy and the Concept of Capital: TheBarter Economy and its Decline; The Concept of
Capital in Modern Business108

15The Capitalization of All Forms of Rent: The Purchaseof Rent-charges as an Example of Capitalization;
Capitalization Involved in the Evaluatingof Indirect Agents; The Increasing Role of Capitalization
in Modern Industry118

16Interest on Money Loans: Various Forms of ContractInterest; The Motive for Paying Interest[Pg ix]131

17The Theory of Time-value: Definition and Scopeof Time-value; The Adjustment of the Rate of Time-discount141

18Relatively Fixed and Relatively Increasable Formsof Capital: How Various Forms of Capital May
Be Increased; Social Significance of These Differences152

19Saving and Production as Affected by the Rate ofInterest: Saving as Affected by the Interest Rate;
Conditions Favorable to Saving; Influence of theInterest Rate on Methods of Production159

PART II

The Value of Human Services171-355

DIVISION A—LABOR AND WAGES

20Labor and Classes of Laborers: Relation of Laborto Wealth; Varieties of Talents and of Abilities
in Men173

21The Supply of Labor: What Is a Doctrine of Population?Population in Human Society; Current Aspect
of the Population Problem184

22Conditions for Efficient Labor: Objective PhysicalConditions; Social Conditions Favoring Efficiency;
Division of Labor195

23The Law of Wages: Nature of Wages and the WagesProblem; The Different Modes of Earning Wages;
Wages as Exemplifying the General Law of Value205

24The Relation of Labor to Value: Relation of Rentto Wages, Relation of Time-value to Wages; The
Relation of Labor to Value215

25The Wage System and its Results: Systems of Labor;The Wage System as it Is; Progress of the Masses
Under the Wage System[Pg x]226

26Machinery and Labor: Extent of the Use of Machinery;Effect of Machinery on the Welfare and Wages
of the Masses236

27Trade-unions: The Objects of Trade-unions; TheMethods of Trade-unions; Combination and Wages245

DIVISION B—ENTERPRISE AND PROFITS

28Production and the Combination of the Factors: TheNature of Production; Combination of the Factors257

29Business Organization and the Enterpriser's Function:The Direction of Industry; Qualities of a Business
Organizer; The Selection of Ability265

30Cost of Production: Cost of Production from the Enterpriser'sPoint of View; Cost of Production from
the Economist's Standpoint273

31The Law of Profits: Meaning of Terms; The TypicalEnterpriser's Services Reviewed; Statement of the
Law of Profits282

32Profit-sharing, Producers' and Consumers' Coöperation:Profit-sharing; Producers' Coöperation; Consumers'
Coöperation292

33Monopoly Profits: Nature of Monopoly; Kinds ofMonopoly; The Fixing of a Monopoly Price302

34Growth of Trusts and Combinations in the UnitedStates: Growth of Large Industry in the United
States; Advantages of Large Production; Causesof Industrial Combinations312

35Effect of Trusts on Prices: How Trusts MightAffect Prices; How Trusts Have Affected Prices323

36Gambling, Speculation, and Promoters' Profits: Gamblingvs. Insurance; The Speculator as a Risk taker;
Promoter's and Trustee's Profits[Pg xi]333

37Crises and Industrial Depressions: Definition andDescription of Crises; Crises in the Nineteenth
Century; Various Explanations of Crises345

PART III

The Social Aspects of Value357-563

DIVISION A—RELATION OF PRIVATE INCOMETO SOCIAL WELFARE

38Private Property and Inheritance: Impersonal andPersonal Shares of Income; The Origin of Private
Property; Limitations of the Right of PrivateProperty359

39Income and Social Service: Income from Property;Income from Personal Services370

40Waste and Luxury: Waste of Wealth; Luxury381

41Reaction of Consumption on Production: Reactionupon Material Productive Agents; Reaction upon
the Efficiency of the Workers; Effects on theAbiding Welfare of the Consumer392

42Distribution of the Social Income: The Nature ofPersonal Distribution; Methods of Personal Distribution402

43Survey of the Theory of Value: Review of the PlanFollowed; Relation of Value Theories to Social
Reforms; Interrelation of Economic Agents412

DIVISION B—RELATION OF THE STATE TO INDUSTRY

44Free Competition and State Action: Competition andCustom; Economic Harmony through Competition;
Social Limiting of Competition422

45Use, Coinage, and Value of Money: The PreciousMetals as Money; The Quantity Theory of Money[Pg xii]431

46Token Coinage and Government Paper Money: Light-WeightCoins; Paper Money Experiments; Theories
of Political Money443

47The Standard of Deferred Payments: Function of theStandard; International Bimetallism; The Free-silver
Movement in America453

48Banking and Credit: Functions of a Bank; TypicalBank Money; Banks of the United States To-day462

49Taxation in its Relation to Value: Purposes of Taxation;Forms of Taxation; Principles and Practice471

50The General Theory of International Trade: InternationalTrade as a Case of Exchange; Theory of
Foreign Exchanges of Money; Real Benefits ofForeign Trade480

51The Protective Tariff: The Nature and Claims ofProtection; The Reasonable Measure of Justification
of Protection; Values as Affected by Protection491

52Other Protective Social and Labor Legislation:Social Legislation; Labor Legislation504

53Public Ownership of Industry: Examples of PublicOwnership; Economic Aspects of Public Ownership514

54Railroads and Industry: Transportation as a Form ofProduction; The Railroad as a Carrier; Discrimination
in Rates on Railroads525

55The Public Nature of Railroads: Public Privilegesof Railroad Corporations; Political and Economic
Power of Railroad Managers; Commissions to ControlRailroads534

56Public Policy as to Control of Industry: StateRegulation of Corporate Industry; Difficulties of
Public Control of Industry; Trend of Policy as toPublic Industrial Activity544

57Future Trend of Values: Past and Present of Economic Society;The Economic Future of Society555

Questions and Critical Notes565

Index595

PREFACE

This book had its beginning ten years ago in a series of briefdiscussions supplementing a text used in the class-room. Their purposewas to amend certain theoretical views even then generally questioned byeconomists, and to present most recent opinions on some other questions.These critical comments evolved into a course of lectures following anoriginal outline, and were at length reduced to manuscript in the formof a stenographic report made from day to day in the class-room. Thepropositions printed in italics were dictated to the class, to give thekey-note to the main divisions of the argument. Repeated revisions haveshortened the text, cut out many digressions and illustrations, andremedied many of the faults both of thought and of expression; but noeffort has been made to conceal or alter the original and essentialcharacter of the simple, informal, class-room talks by teacher tostudent. To this origin are traceable many conversational phrases andlocal illustrations, and the occasional use of the personal form ofaddress.

The lectures, at the outset, sought to give merely a summary of widelyaccepted economic theory, not to offer any contribution to the subject.While they were in progress, however, special studies in the evolutionof the economic concepts were pursued, and the manuscript of a book onthat more special subject was carried well toward completion. That work,which it is hoped some time to complete, was, for several reasons, putaside while the present text was preparing for publication. The economictheories of the present transition period show many discordantelements,[Pg xiv] yet the author felt that his attempt to unify the statementof principles, in an elementary text explaining modern problems, andconsistent in its various parts, helped to reveal to him bothdifficulties and possible solutions in the more special theoreticalfield. The unforeseen outcome of these varied studies is an elementarytext embodying a new conception of the theory of distribution, anoutline of which will be found in Chapter Forty-three. It is, in brief,a consistently subjective analysis of the relations of goods to wants,in place of the admixture of objective and subjective distinctions foundin the traditional conceptions of rent, interest, and price.

The beginning of the systematic study of economics, like the first stepsin a language, is difficult because of the entire strangeness of thethought, and it is not to be hoped that any pedagogic device can do awaywith the need of strenuous thinking by the student. The aim, however, inthe development of this theory of distribution, has been to proceed bygradual steps, as in a series of geometrical propositions, from thesimple and familiar acts and experiences of the individual's every-daylife, through the more complex relations, to the most complex,practical, economic problems of the day. The hope has long beenentertained by economists that a conception of the whole problem ofvalue would be attained that would coördinate and unify the various"laws,"—those of rent, wages, interest, etc. This solution has herebeen sought by a development of recent theories, the unit of the complexproblem of value being the simplest, immediate, temporary gratification.

Possibly some teachers will observe and regret the almost entire absenceof critical discussions of controverted points in theory, which make upso large a part of some of the older texts. The more positive manner ofpresentation has been purposely adopted, and only such reference is madeto conflicting views as is needed to guard the student againstmisunderstanding in his further reading. The author would[Pg xv] not have itthought that he doubts the disciplinary value of economic theory or itsscientific worth for more advanced students, for, on the contrary, hebelieves in it, perhaps to an extreme degree; but, for his own part, hehas become convinced of the unwisdom of carrying on these subtlecontroversies in classes of beginners. The inherent difficulties of thesubject are great enough, without the creation of new ones.

The fifty-seven chapters represent the work of the typical collegecourse in elementary economics, allowing two chapters a week, and athird meeting weekly for review and for the discussion of questions,exercises, and reports. The subject is so large that the text is, inmany places, hardly more than a suggestive outline. In class-room workit should be supplemented by other sources of information, such aspersonal observation by the students (many of the questions followingthe text serving to stimulate the attention); visits to localindustries; interchange of opinions; examples given by the teacher;study and discussion, in the light of the principles stated in the text,of some such problems as are suggested in the appended list ofquestions; collateral reading; the preparation of exercises and the useof statistical material from the census, labor reports, etc.; historyand description of industries; history of the growth of economic ideas.Suggestions, from teachers, of changes that will make the text moreuseful in their classes, will be thankfully received by the author.

Lack of space makes it impossible to mention by name the many sources towhich the writer is indebted. Special acknowledgment, however, isgratefully made to C. H. Hull, of Cornell University; to E. W. Kemmerer,now of the Philippine Treasury Department, and to U. G. Weatherly, ofIndiana University, who have read large portions of the manuscript, andhave made many valuable suggestions; to W. M. Daniels, of PrincetonUniversity, who has read every page of the copy, and to whom are due thegreatest[Pg xvi] obligations for his numerous and able criticisms both of theargument and of the expression; to R. C. Brooks, now of SwarthmoreCollege, for a number of the questions in the appended list, and forhelpful comments given while the course was developing; and to R. F.Hoxie and to A. C. Muhse, whose thoughtful reading of the proof haseliminated many errors. For the defects remaining, not these friendlycritics, but the author alone, should be held accountable.

No book on economics can to-day satisfy everybody—"Or even anybody,"adds a friend. But with this book may go the hope that what has beenwritten with love of truth and of democracy may serve, in its small way,both to further sound economic reasoning and to extend among Americancitizens a better understanding of the economic problems set for thisgeneration to solve.

THE PRINCIPLES OF ECONOMICS

PART I

DIVISION A—WANTS AND PRESENT GOODS

CHAPTER I

THE NATURE AND PURPOSE OF POLITICAL ECONOMY

§ I. NAME AND DEFINITION

1.Economics, or political economy, may be defined, briefly, as thestudy of men earning a living; or, more fully, as the study of thematerial world and of the activities and mutual relations of men, so faras all these are the objective conditions to gratifying desires. Todefine, means to mark off the limits of a subject, to tell whatquestions are or are not included within it. The ideas of most personson this subject are vague, yet it would be very desirable if the studentcould approach this study with an exact understanding of the nature ofthe questions with which it deals. Until a subject has been studied,however, a definition in mere words cannot greatly aid in marking it offclearly in our thought. The essential thing for the student is to seeclearly the central purpose of the study, not to decide at once all ofthe puzzling cases.

2.A definition that suggests clear and familiar thoughts to thestudent seem at first much more difficult to get in any social sciencethan in the natural sciences. These deal with concrete, material thingswhich we are accustomed to see, handle, and measure. If a mere child istold that botany is a study in which he may learn about flowers, trees,and plants, the answer is fairly satisfying, for he at once thinks ofmany things of that kind. When, in like manner zoölogy is defined as thestudy of animals, or geology as the study of rocks and the earth, thewords call up memories of many familiar objects. Even so difficult andforeign-looking a word as ichthyology seems to be made clear by thestatement that it is the name of the study in which one learns aboutfish. It is true that there may be some misunderstanding as to the wayin which these subjects are studied, for botany is not in the main toteach how to cultivate plants in the garden, nor ichthyology how tocatch fish or to propagate them in a pond. But the main purpose of thesestudies is clear at the outset from these simple definitions. Indeed, asthe study is pursued, and knowledge widens to take in the manifold andvarious forms of life, the boundaries of the special sciences become notmore but less sharp and definite.

Political economy, on the other hand, as one of the social sciences,which deal with men and their relations in society, seems to be a verymuch more complex thought to get hold of. We are tempted to say that itdeals with less familiar things; but the truth may be, as a thoughtfulfriend suggests, that the simple social acts and relations are morefamiliar to our thought than are lions, palm-trees, or even horses.Every hour in the streets or stores, one may witness thousands of acts,such as bargains, labor, payments, that are the subject-matter ofeconomic science. Their very familiarity may cause men to overlook theirdeeper meaning.

Many other definitions have been given of political economy. It has beencalled the science of wealth, or the science of exchanges. Evidentlythere are various ways in which[Pg 5] wealth may be considered or exchangesmade. The particular aspects that are dealt with in political economywill be made clear by considering two other questions, the place ofeconomics among the social sciences and the relation of economics topractical affairs.

§ II. PLACE OF ECONOMICS AMONG THE SOCIAL SCIENCES

1.Political economy, as one of the social sciences, may be contrastedwith the natural sciences, which deal with material things and theirmutual relations, while it deals with one aspect of men's life insociety, namely, the earning of a living, or the use of wealth. It istrue that political economy also has to do with plants and animals andthe earth—in fact, with all of those things which are thesubject-matter of the natural sciences; but it has to do with them onlyin so far as they are related to man's welfare and affect his estimateof the value of things; only in so far as they are related to the onecentral subject of economic interest, the earning of a living.

2.The social sciences deal with men and their relations with eachother. The word "social" comes from the Latin socius, meaning a fellow,comrade, companion, associate. As men living together have to do witheach other in a great many different ways, and enter into a great manydifferent relations, there arise a great many different social problems.Each of the social sciences attempts to study man in some one importantaspect—that is, to view these relations from some one standpoint.

Man's acts, his life, and his motives are so complex that it is notsurprising that there has been less definiteness in the thought of thesocial sciences, and that they have advanced less rapidly towardexactness in their conclusions, than have the natural sciences. Thiscomplexity also explains the discouragement of the beginner in the earlylessons in this subject. Usually the greatest difficulties appear in thefirst few[Pg 6] weeks of its study. The thought is more abstract than innatural science; it requires a different, I will not say higher, kind ofability than does mathematics. But little by little the strangeness ofthe language and ideas disappears; the bare definitions become clothedwith the facts of observation and recalled experiences; and soon the"economic" acts and relations of men in society come to be as real andas interesting to the student as are the materials in the natural worldabout him—often, indeed, more interesting.

3.Political economy is related to all the other social sciences, itbeing the study of certain of men's relations, while politics, law, andethics have to do with other relations or with relations under adifferent aspect. Politics treats of the form and working of governmentand is mainly concerned with the question of power or control of theindividual's actions and liberty. Law treats of the precepts andregulations in accordance with which the actions of men are limited bythe state, and the contracts into which they have seen fit to enter areinterpreted. Ethics treats the question of right or wrong, studies themoral aspects of men's acts and relations. The attempt just made todistinguish between the fields occupied by the various social sciencesbetrays at once the fundamental unity existing among them. The acts ofmen are closely related in their lives, but they may be looked at fromdifferent sides. The central thought in economics is the businessrelation, the relation of men in exchanging their services or materialwealth. In pursuing economic inquiries we come into contact withpolitical, legal, and ethical considerations, all of which must berecognized before a final practical answer can be given to any question.Nevertheless the province of economics is limited. It is because of thefeebleness of our mental power that we divide and subdivide thesecomplex questions and try to answer certain parts before we seek toanswer the whole. When we attempt this final and more difficult task, weshould rise to the standpoint of the social philosopher.

§ III. THE RELATION OF ECONOMICS TO PRACTICAL AFFAIRS

1.The ideal of political economy here set forth is that it should be ascience, a search for truth, a systematized body of knowledge, arrivingat a statement of the laws to which economic actions conform. It is notthe advocacy of any particular policy or idea, but if it arrives at anyconclusions, any truths, these cannot fail to affect the practicalaction of men.

Political economy, because defined as the science of wealth, has beendescribed by some as a gospel of Mammon. It is hardly necessary torefute such a misconception. Political economy is not the science ofwealth-getting for the individual. Its study is not primarily for theselfish ends and interest of the individual. (Certainly some of itslessons may be of practical value to men in active business) for manyeconomic "principles" are but the general statement of those ideas thathave been approved by the experience of business men, of statesmen, andof the masses of men. Some of its lessons must have educational value inpractical business, for political economy is not dreamed out by thecloset philosopher, but more and more it is the attempt to describe theinterests and the action of the practical world in which men must live.Many men are working together to develop its study—those who collectstatistics and facts bearing on all kinds of practical affairs, andthose who search through the records of the past for illustrations ofexperiments and experiences that may help us in our life to-day.

2.But, in the main, the study of political economy is a social studyfor social ends and not a selfish study for individual advantage. Thename political economy was first suggested in France when the governmentwas monarchical and despotic in the extreme. As domestic economyindicates a set of rules or principles to guide wisely the action ofthe[Pg 8] housekeeper or the owner of an estate, so political economy wasfirst thought of as a set of rules or principles to guide the king andhis counselors in the control of the state. The term has continued tobear something of that suggestion in it, though of late the term"economics," as being broader and less likely to be confused withpolitics, has very generally come into use. But in the degree in whichunlimited monarchy has given way to the rule of the people, theconception of political economy has been modified. In a democracy thereis need for a general diffusion of knowledge. The power now rests notwith the king and a few counselors, but in the last resort with thepeople, and therefore the people must be acquainted with the experienceof the past, must have all possible systematic knowledge to enlightenpublic policy and to guide legislation.

Moreover, with the growth of the modern state, with the interestincreasing importance of business, and of industrial and commercialinterests, as compared with changes of dynasty or the personal rivalriesof rulers, economic questions have grown in relative importance. In ourown country, particularly since the subjects of slavery and of States'rights ceased to absorb the attention of our people, economic questionshave pushed rapidly into the foreground. Indeed, it has of late beenmore clearly seen that many of the older political questions, such asthe American Revolution and slavery, formerly discussed almost entirelyin their political and constitutional aspects, were at bottom questionsof economic rivalry and of economic welfare. The remarkable increase inthe attention given to this study in colleges and universities in thelast twenty years is but the index of the greatly increased interest andattention felt in it by citizens generally.

To sum up, it may be said that in the study of political economy we areseeking the reason, connection, and relations in the great multitude ofacts arising out of the dependence of desires on the world of things andmen.

CHAPTER 2

ECONOMIC MOTIVES

§ I. MATERIAL WANTS, THE PRIMARY ECONOMIC MOTIVES

1.A logical explanation of industry must begin with a discussion ofthe nature of wants, for the purpose of industry is to gratify wants.An economic want may be defined as a feeling of incompleteness, becauseof the lack of a part of the outer world or of some change in it. Oftenthe question asked when one first sees a moving trolley car orautomobile or bicycle is: What makes it go? The first question to ask inthe part of the study of economic society here undertaken is: What isits motive force? Without an answer to that question one cannot hope tounderstand the ceaseless and varied activities of men occupied in themaking of a living. The question merits long and careful study, but thegeneral answer is so simple that it seems almost self-evident: Themotive force in economics is found in the feelings of men. It is men'sdesire to make use of men and things about them which calls forth allthe manifold phenomena studied in economics.

2.Wants among animals depend on the environment; that is to say, theutmost that creatures of a lower order than man can do is to take thingsas they find them. The imagination and intelligence of animals are notdeveloped enough to lead them to desire much beyond that which isordinarily to be obtained. And so the environment shapes and affects theanimal. The fish is fitted to live in the water and thrives there, andwe must believe, enjoys living there.[Pg 10] The horse and the cow like bestthe food of the fields, and so each species of animal, in order tosurvive in the severe struggle for existence, has been forced to fititself to the conditions in which it lives. After the animal has beenthus fitted, its desire is for those things normally to be found in itssurroundings. So different animals desire or want different things, butalways it is the environment that determines the want, and not the wantthat determines the environment.

3.In simpler human societies, wants are mostly confined to physicalnecessities; that is, in the earlier stages of society, man's wants arevery much like those of the animals. Man bends his energies to securingthe things necessary to survival. He feels the pangs of hunger and hestrives to secure food. He feels the need of companionship, for it isonly through association and mutual help that men, so weak as comparedwith many kinds of animals, are able to resist the enemies which besetthem. He needs clothing to protect him against the harsher climates ofthe lands to which he moves. For the same purpose, to protect himselfagainst the cold and rain, he needs a shelter, a cave, a wigwam, or ahut; for a house is but a larger dress.

4.In human society, wants develop and transform the world. In therudest societies of which there is any record, savages are found withwants developed in a great number of directions beyond the wants of anyanimals. Man is not a passive victim of circumstances; his wants are notdetermined solely by his environment; his desires soar beyond the thingsabout him. As men become more the masters of circumstances, theirdesires anticipate mere physical wants; they seek a more varied food offiner flavor and more delicately prepared. Dress is not limited byphysical comfort, for one of the earliest of the esthetic wants todevelop is the love of personal ornament. The rude hut or communal lodgeto protect against rain and cold becomes a home. Out of the earlier rudecompanionship develop the[Pg 11] noblest sentiments of friendship and familylife. Seeking to gratify the senses and the love of action, men developesthetic tastes, the love of the beautiful in sound, in form, in taste,in color, in motion. And finally, as the imagination and intellectdevelop, there grow up the various forms of intellectual pleasures—thelove of reading, of study, of travel, and of thought.

The various wants of man are sometimes classified as necessities,comforts, and luxuries, but all economists take care to emphasize thatthese terms have only relative meanings which, in the rapidly changingconditions of modern life, are changing constantly. The comforts of onegeneration, or of one country, become the necessities in another; andluxuries becoming comforts, are looked upon finally as necessities. Andas the desires grow, they more and more alter the world. Man has changedthe face of the earth; he has affected its climate, its fertility, itsbeauty, because, either for better or for worse, his desires haveimpressed themselves upon the world about him.

5.In human society the growth of wants is necessary to progress. Fromthe earliest times teachers of morals have argued for simplicity of lifeand against the development of refinements. We do not now raise themoral question, but there is no doubt that the economic effect ofdeveloping wants is in the main to impel to greater effort. They are themainspring of economic progress. In recent discussion of the control ofthe tropics, the too great contentedness of tropical peoples has beenbrought out prominently. Some one has said that if a colony of NewEngland school-teachers and Presbyterian deacons should settle in thetropics, their descendants would, in a single generation, be wearingbreech-clouts and going to cock-fights on Sunday. Certain it is that theenergy and ambition of the temperate zone are hard to maintain in warmerlands. The negro's content with hard conditions, so often counted as avirtue, is one of the difficulties in the way of solving the raceproblem in our[Pg 12] South to-day. Booker T. Washington, and others who arelaboring for the elevation of the American negroes, would try first tomake them discontented with the one-room cabins, in which hundreds ofthousands of families live. If only the desire for a two- or three-roomcabin can be aroused, experience shows that family life and industrialqualities may be improved in many other ways.

Not only in America, but in most civilized lands to-day, is seen a rapidgrowth of wants in the working-classes. The incomes and the standard ofliving have become increasing, but not so fast as have the desires ofthe working-classes. Regret has been expressed by some that the workersof Europe are becoming "declassed." Increasing wages, it is said, bringnot welfare, but unhappiness, to the complaining masses. If discontentwith one's lot goes beyond a moderate degree, if it is more than thedesire to better one's lot by personal efforts, if it becomes an unhappylonging for the impossible, then indeed it may be a misfortune. But amoderate ambition to better one's condition is the "divine discontent"absolutely indispensable if energy and enterprise are to be called intobeing.

It is a suggestive fact that civilized man, equipped with all of theinventions and the advantages of science, spends more hours of effort ingaining a livelihood than does the savage with his almost unaided hands.Activity is dependent not on bare physical necessity, but on developedwants—in the economic sense of the term. Such social institutions asproperty and inheritance owe their origin and their justification totheir average effect on the motives to activity. If society is todevelop, if progress is to continue, human wants—not of the grossersort, but ever more refined—must continue to emerge and urge men toaction.

§ II. DESIRES FOR NON-MATERIAL ENDS, AS SECONDARY ECONOMIC MOTIVES

1.The spiritual nature of man must not be ignored in economicreasoning. There has been much and just criticism of the earlierwriters and of their conclusions because so little account was taken bythem of any but the motive of self-interest in economic affairs.Generally it was assumed that men knew their own interest, and sought ina very unsympathetic way those things which would gratify their materialwants. Thus man in economic reasoning was made an abstraction, differingfrom real men in his lack of manifold spiritual and social elements.

2.The main classes of non-material wants that are secondarily economicare fear of temporal punishment; sentiments of moral and religious duty;pride, honor, and fear of disgrace; and pleasure in work for itself, forsocial approval, or for a social result. The first is best illustratedby slavery, where the slave is not impelled to seek wealth for his ownwelfare, but is driven by punishment to perform the task. The object isto create within the mind of the slave a motive that will take the placeof the ordinary economic motive. The feeling of religious or moral dutyleads men to act often in direct opposition to the usual economicmotive. The taboo is faithfully observed by the members of a savagetribe who suffer as a result the severest hardships. A religiousinjunction prevents the use of food that would save from starvation.Pride, either of family or of calling; the soldier's honor leading himto sacrifice not only his future but his life; the love of socialapproval, holding men to the most disagreeable tasks—these illustratehow strongly social sentiments oppose the narrower motive of immediateself-interest as generally thought of. Pleasure in work for work's sake,and pride in the result, may act as motives quite as strong in somecases as desire for the product that can[Pg 14] be used. And even where thisdoes not change the kind of work done, it comes in to influence theinterest and earnestness with which the work is performed.

3.Whatever motive in man's complex nature makes him desire things moreor less, becomes for the time, and in so far, an economic motive. Thesevarious social and spiritual motives sometimes work positively, in thedirection of magnifying man's desire for things; sometimes negatively,to diminish it. If we are to understand economic action, we must takemen as they are. A religious motive that leads men to refrain from theeating of meat or to eat fish in preference on certain days, is a factwhich the economist has but to accept, for it is sure to affect thevalue of meat and fish at that place and time. Moral convictions,whatever be their origin, whether due to the teaching of parents, tounconscious influences, or to native temperament, may be quite aseffective as the pangs of hunger in determining what men desire.Therefore, while these various motives are primarily social or moral orreligious, they may be said to be secondarily economic motives, and theymay become in certain cases the most important influences of which theeconomist must take account.

CHAPTER 3

WEALTH AND WELFARE

§ I. THE RELATION OF MEN AND MATERIAL THINGS TO ECONOMIC WELFARE

1.The gratifying of economic wants depends on things outside of theman who feels the wants. Man is to himself the center of the world. Hegroups things and estimates things with reference to their bearing onhis desires, be these what are called selfish or unselfish. If we werediscussing the economics of an inferior species of animals, things wouldbe grouped in a very different way. But economics being the study ofman's welfare, everything must be judged from his standpoint, and thingsare or are not of economic importance according as they have relation tohis wants and satisfactions. Things needful for any of the lower animalsare spoken of as "ministering to welfare" in the economic sense only incase these animals are useful to men. Examples are the mulberry-tree onwhich the silkworm feeds, the flower visited by the honey-bee. In thesame view some men are seen to minister to the welfare of other men andtherefore bear the same relation for the moment to the welfare of theothers as do material things. In any case we study man's welfare asaffected by the world which surrounds him.

2.Material things and natural forces differ in kind and nature. Thisis an axiom which we must take as a basis for reasoning in economics.Things have certain physical qualities quite apart from any action orinfluence of man.[Pg 16] They are operated on by mechanical laws; the force ofgravitation causes them to fall at a certain rate under givenconditions. They differ in specific gravity, reflect the rays of light,absorb or transmit heat. All these things are for man ultimate physicalfacts, but unless he knows these facts he cannot take full advantage ofthe favorable qualities of things or weigh properly their importance tohis welfare. Things differ in a multitude of ways in their chemicalqualities. Niter, charcoal, and saltpeter, combined in certainproportions, give certain reactions; different combinations give variousresults. Solids combine to form gases, and liquids unite to form solids,and these qualities and reactions of material things are for manultimate truths of chemistry. Likewise many things have certainphysiological effects. Sunshine acts on living bodies, whether plant,animal, or man, in certain ways. Some plants are nourishing to man,others are poisonous. If man were not on the earth, things would havethe same physical and chemical qualities, mechanical laws would be thesame as at present so far as we can conclude. Man cannot change thenature of things; but he can acquaint himself with that nature and thenput the things into the relations where a given result will follow.

3.As a result of these differences, things have different relations towants. These various qualities, physical, chemical, physiological, areimportant in an economic sense only as they produce psychologicaleffects, that is, as they affect the feelings and judgments of men. Wecome to some general thoughts which it will be well to define.

Gratification is the feeling that results when a want has been met.Feelings are hard to define in words; the best definition is found inthe experience of each individual. We can only say, therefore, thatgratification is the attainment of desire, the fulfilment of wants. Theword that has usually been employed in this sense in economic discussionis "satisfaction"; but by its derivation and general usage satisfaction[Pg 17]means "the complete or full gratification" of a desire, and this meaningis quite inconsistent with the thought in many connections in which theword is used. We shall therefore prefer here the word gratification, andits corresponding verb, gratify.

Wealth is the collective term for those things which are felt to berelated to the gratification of wants. The word is applied in economicdiscussion to any part of those things, no matter how small. We shallhave occasion later to define and discuss this term more fully.

Welfare, in an immediate or narrow sense, is the same as gratificationof the moment; in a broader sense, it means the abiding condition ofwell-being. We have here a distinction very much like that often madebetween pleasure and happiness. If we think of only the present moment,welfare is the absence of pain, and the presence of the pleasureablefeeling; but if we consider a longer period in a man's life or hisentire lifetime, it is seen that many things that afford a momentarygratification do not minister to his ultimate, or abiding, welfare.Moralists and philosophers often have dwelt on this contrast. Thedifference is illustrated by the thoughtlessness and impulsiveness of achild or savage as contrasted with the more rational life of those withforesight and patience.

Wealth, in the general economic sense, is judged with reference togratification rather than with reference to abiding welfare. It is thefirst duty of the economist not to preach what should be, but tounderstand things as they are. He must, in studying the problem ofvalue, recognize any motive that leads men to attach importance to actsand things. He will therefore take account of abiding welfare and ofimmediate gratification to exactly the degree that men in general do,and the sad fact is that the present impulse rules a large part of theacts of men. Whether tobacco or alcohol or morphine minister to theabiding happiness of those who use them does not alter the immediatefact that[Pg 18] here and now they are sought and an importance is attached tothem because of their power to gratify an immediate desire.

5.In studying the question of social prosperity, however, we must riseto the standpoint of the social philosopher and consider the moreabiding effects of wealth. Wants may be developed and made rational,and the permanent prosperity of a community depends upon this result.Any species of animal that continued regularly to enjoy that whichweakens the health and strength would become extinct. Any society orindividual that continues to derive gratification, to seek its pleasure,in ways that do not, on the average, minister to permanent welfare,sinks in the struggle of life and gives way to those men or nations thathave a sounder and healthier adjustment of wants and welfare. We touchhere, therefore, on the edge of the great problems of morals, and whilewe must recognize the contrast that often exists in the life of anyparticular man between his "pleasures" and his health and happiness, wesee that there is a reason why, on the whole, and in the long run, thesetwo cannot remain far apart. The old proverbs, "Be virtuous and you willbe happy," "Honesty is the best policy," and "Virtue is its own reward,"have a sound basis in the age-long experience of the world. Cynics orjesters may easily disprove these truths in a multitude of particularcases.

6.Wealth does not include such personal qualities as honesty,integrity, good health. Some economists speak of these as "internalgoods," but it is far better not to speak of free men or of theirqualities as wealth. Many difficulties arise from such a use of the termin practical discussion. One of the most important of all distinctionsto maintain in economics is that between material things and men. Onlyin the case of human slavery may persons be counted as economic wealth.It is a different thing, however, to consider human services as wealthof an ephemeral kind at the moment they are rendered. We are, thusmerely recognizing[Pg 19] that men may bear at the given moment the samerelation to our wants as do material things.

§ II. SOME IMPORTANT ECONOMIC CONCEPTS CONNECTED WITH WEALTH AND WELFARE

1.Utility, in its broadest usage, is the general capability thatthings have of ministering to human well being. The term is evidentlyone without any scientific precision. It expresses only a general oraverage impression that we have in reference to the relation of a classof goods to human wants. Every one would agree to the statement that"water is useful," thinking of the fact that it is indispensable to lifeand that it ministers to life in a multitude of ways. But what of waterin one's cellar, water soaking one's clothes on a cold day, waterbreaking through the walls of a mountain reservoir and carrying deathand destruction in its path? The poison that is doing what we at themoment desire, we call useful; that doing what we would prevent, we callharmful. Noxious weeds become "useful" by the discovery of some newprocess by which they can be worked into other forms, though they maystill continue to be noxious in many a farmer's fields. The utility ofanything, therefore, is seen to be of a relative and limited nature. Theterm "utility" in popular speech is very inexact. It can be employed ineconomic discussion only when carefully modified and defined.

2.Goods consist of all those things objective to the user which have abeneficial relation to human wants. They fall into several classes. Wemay first distinguish between free and economic goods. Free goods arethings that exist in superfluity, that is, in quantities sufficient notonly to gratify, but to satisfy all the wants that may depend on them.Economic goods are things so limited in quantity that all of the wantsto which they could minister are not satisfied. The whole thought ofeconomy begins with scarcity; indeed,[Pg 20] even the conception of free goodsis hardly possible until some limitation of wants is experienced.Practical economics is the study of the best way to employ things tosecure the highest amount of gratification. The problem itself arisesout of the fact that many things are used up before all wants dependenton them are completely satisfied.

A distinction is often made between consumption and production goods, orit may be better to say immediate and intermediate goods. Consumptiongoods are those things which are immediately at the point of gratifyingman's desires. Production goods are those things which are not yet readyto gratify desires; some of them, being merely means of securingconsumption goods, never will themselves immediately gratify desire.

3.Value, in the narrow personal sense, may be defined as theimportance attributed to a good by a man. The vagueness and inexactnessof the word "utility," or the word "good," disappears when we reach theword "value." It is not a usual relation or a vague degree of benefitsometimes present and sometimes absent, but it refers to a particularthing, person, time, and condition. Value is in the closest relationwith wants, and in this narrow sense depends on the individual'sestimate. From the meeting and comparison of the estimates ofindividuals, arise market values or prices, which are the central objectof study in economics.

CHAPTER 4

THE NATURE OF DEMAND

§ I. THE COMPARISON OF GOODS IN MAN'S THOUGHT

1.As wants differ in kind and degree, so goods differ in their powerto gratify wants. This general and simple statement unites the leadingthoughts of the two chapters preceding. Confirmation of its truth may befound in observation and experience. The purpose of this chapter is toshow how, starting from the general nature of wants and the nature ofgoods, we can arrive at an explanation of the exchange of goods.Recognizing the simple but fundamental fact stated at the opening ofthis paragraph, an exchange may be seen to be a rational and a logicalresult when men are living together in society.

2.Immediately enjoyable goods are the first objective things whosevalue is to be explained. Goods come into relation with wants in amultitude of ways. Some things will not gratify a want until after thelapse of a long time, as ice cut in December and stored for summer use.Other things will never themselves directly gratify a want, but will beof help in getting things that do; such are the young fruit treesplanted in the orchard, and the hammer that will be used to drive nailsin a house that will shelter men. Still other things are gratifyingwants at this moment, or are ready for use and will be used up in a veryshort time; examples of such are the food on the table and in thepantry, and the cigar in the pocket. All these things are called goods,because of their beneficial relation to man's desires, but the[Pg 22] relationis very immediate in some cases, very remote in others. The value of allgoods is to be explained, but the explanation will be more or lesscomplex according to the directness or indirectness of their relationwith wants. As it is the power of goods to gratify wants that alonecauses value to be attributed to them, those goods which are ripest,which are ready to gratify wants, are nearest to the source of anexplanation. The value of unripe enjoyments must be traced to someexpected gratification as its cause or basis. In order to attack thedifficulties one by one we will, therefore, in the following discussion,deal first with this class of ripe, consumable goods, as food, personalservices, enjoyments of any sort that are immediately available. Theexplanation of these cases of value must precede that of cases in whichthe relation to wants is less obvious and direct.

3.As the amount of any good increases, after a certain point thegratification that the added portions afford decreases. This is calledthe law of the diminishing utility of goods or of the decreasinggratification afforded by goods. The reason for the truth of thisproposition is found in the very nature of man and his nervousorganization. Any stimulus to the nerves, however pleasant at first,becomes painful when long continued or increased unduly. The trumpet toodistant at first for the ear to distinguish its notes, may swell topleasing tones as it approaches, until at length its volume and its dinmay become absolutely painful. If we were to express the degree ofgratification by a curve, we should see the curve rising gradually to amaximum, and then falling somewhat suddenly and becoming a negativequantity, when pain, not pleasure, resulted. The same change could beillustrated by any sensation or by any of men's activities.

The proposition must be understood as applying to the gratificationresulting from each added portion of the sensation. There is a maximumpoint in the gratification afforded by any nerve-stimulus. A man comingin from[Pg 23] the winter's storm and holding out his hands before the fire,feels an intense pleasure in the grateful warmth; a few moments later,the same heat becomes unpleasant. In winter we wish for a moderation ofthe temperature; on the sultry days of summer, we think of a cool breezeas the most to be desired of all things. Whether the temperature risesor falls, there is a point beyond which the change is no longer anaddition to, but a subtraction from, pleasure. A man, however hungry atfirst, may be made miserable if forced to eat beyond his capacity. Eachadded portion of the good consumed contributes to the gratification upto a certain point. The sum of these pleasurable sensations may becalled the total gratification, which finally reaches satisfaction orfullness. Then begins what may be called in algebraic phrase a "negativegratification" which, if it becomes large enough, will make the totalgratification a negative quantity. Each added portion, dose or incrementbeyond a certain point reduces thus the welfare of the user. One mayhave too much of a good thing.

4.Marginal utility is the gratification afforded by the added portionof the good. The marginal dose, increment, or portion is that which maybe logically considered as coming last in the case of any good or groupof goods divisible into small parts. In considering the strict theory ofthe case, in order to get at the principle involved, the doses may bespoken of as infinitesimally small. The marginal utility expresses theimportance that men attach to one unit of this kind of goods under theparticular circumstances at the moment existing, and not under certainconceivable conditions which do not in fact exist or need to be takeninto account by the persons affected. The marginal unit of a homogeneoussupply cannot be considered to have a greater utility than any otherunit at the moment, and therefore the product of the marginal utility bythe number of units, gives the total measure of importance of the supplythen and there, and this is the value.

The value of goods, as has been indicated, is the measure of thedependence felt by men on a portion of the outer world, as the conditionof gratifying their wants. From the very nature of wants, which residein feelings, a dependence that is not felt, a relation between thingsand gratification that is not recognized, can have no influence onvalue. Now, it is at this margin of supply that dependence is felt. Mendo not concern themselves about that which they have insuperfluity—unless, indeed, the excess causes them some discomfort. Itis well that they do not, for a wise direction of effort can only takeplace when men think mainly of their need of things that they want, andwant most, and direct their efforts toward securing them.

The diminishing utility of successive portions (doses or increments, asthey are called) may be represented by a curve of utility.

The diagram is constructed on the hypothesis that a tenth unit of acertain good would have a utility expressed as 36; a fifteenth unit of30, etc., and that the value of the whole supply is estimated accordingto these marginal units. Of course if the conditions were that "all ornone" was to be taken, the result would be different.

This diagram is frequently used, and it is important to guard againstsome misunderstandings. The marginal unit of any given supply—forexample, ten units—is not any particular unit, it is any one of the tenunits. In the presence of nine units of the good the person or personsfind all the various wants that are dependent on that good gratified tosuch a degree that the tenth unit has an importance expressed by 36. Butas this last or marginal unit of supply may be used for any of thepurposes, the importance of each and every unit likewise will beexpressed by 36. Any one of the units, when once present is, in alogical sense, a marginal unit. When, however, it is a question ofincreasing the supply, some one unit may properly be looked upon asmarginal. The dependence felt by men on the whole group is the productof the units by the marginal utility. As the number of units increases,the marginal utility decreases, until at length it may reach zero, andthe total value would be nothing. A point of maximum value evidentlywill be found somewhere between the two extremes.

Note carefully that on the one diagram are represented a large number ofmarginal utilities which never exist at one and the same moment. At anyone moment there is a given number of units and there is but onemarginal utility, and this is the same for each of the units. It isquite erroneous to say that when there are 30 units the utility of thetenth unit is 36; of the twentieth, 25; of the thirtieth, 19. It isequally incorrect to say that when there are 60 units the "totalutility" is equal to the area between the right angle and the[Pg 26] curvea-g, while the value is equal to the rectangle below and to the left ofthe point g. The curve from a-g but marks the height of marginalutilities that have no existence when the supply is 30. The "totalutility," often spoken of in this connection, if it has any existencecertainly cannot be calculated. The diagram must be understood asrepresenting indicatively at any given moment but one marginal utility,the same for every unit of like goods. The other perpendicular lines areexpressed in the conditional mood; they are what the marginal utilitywould be were the numbers of units different.

5.Since goods possess utility only as they gratify wants, it followsthat if wants change, the utility changes. Utility does not restunchanging in the goods as something "intrinsic," but it depends on therelation of goods to men. This truth, unrecognized for many centuries,is now seen to be fundamental to the whole problem of value. Theportions of a good added later do not appeal to the same man as theearlier portions. The man has been changed by what he has enjoyed. Inchanging his feelings, goods have also changed his wants. Hence, theadded portions of the good are changed in respect to their utility orpower to gratify a man's wants. Though physically and chemically,i.e., in every material way, they are exactly like the earlierportions, they cannot have the same want-gratifying power until he againchanges, for they are not in the presence of the same feelings.

Wants are constantly shifting; different kinds of goods are compared inman's thought and arranged on a scale at every moment according to theirfelt utility. An increase in the amount of a good will drop the marginalutility of the added portions down the scale of usefulness for the nextmoment. When we rise in the morning, we want our breakfast; thebreakfast eaten, another breakfast does not appeal to us. Our tasksdone, we take a boat-ride or go golfing; then, appetite returning, weare tempted to our dinner. And thus from hour to hour wants aregratified, are altered and[Pg 27] are shifted, until, wearied with the day'slabor and pastimes, we go to rest. In a well-ordered life, in anadvanced economic society, the means for gratifying our wants as theyarise are provided in advance. The changing series of desires is met bya changing series of goods. Life has been defined as a constantadjustment of inner relations to outer conditions. Economic life istherefore like physical life, a constant adjustment; and this adjustmentof goods but reflects the shifting and adjustment of feelings.

6.The substitution of goods in men's thought is the shifting of thechoice from a good that does not give the highest gratificationeconomically possible at the time, to another good that does. Theshifting that takes place on the scale of gratification makes itnecessary for man to shift constantly his choice of goods. This again isthe problem of "economy." Waste results when goods continue to be usedto secure a lower degree of gratification, if they might be used tosecure a higher. The change of choice may be because of a change in theman, or because of a change in the quality or the quantity of the goods;or because of a change in the ratio at which the goods can be secured.

§ II. DEMAND FOR GOODS GROWS OUT OF SUBJECTIVE COMPARISONS

1.Demand is desire for goods united with the power to give somethingin exchange. An example frequently given to show the difference betweendesire and demand is the hungry boy looking longingly at the sweetmeatsin the confectioner's window. He represents desire, but not until thekind-hearted gentleman gives him a nickel does he represent effectivedemand. Desire, therefore, must be united with power to give somethingin exchange before it can be called demand. It must be for somethingthat is attainable; yearning for something beyond reach, sighing for themoon, is desire that never can become effective demand.

2.Demand is the social aspect of the individual man's comparison ofutilities. It is the expression of the man's wish to substitute some ofhis goods for some one else's goods in order to get a highersatisfaction. This comparison is often made between two goods owned indifferent quantities. When men are constantly comparing things in theirown possession, it is a short step to compare their goods with theirneighbor's.

Demand for consumption goods is thus the manifestation of the man'sdesire to redistribute his enjoyments. In demand for goods men virtuallysay: "Part of what I have I am ready to give for part of what you have."The strength of their desire is expressed by the amount of their offer.When he makes this comparison and this offer, man enters into a social,economic relation with his fellows.

3.The law of individual demand is: The trader will reduce his stock ofa particular good to the point where its marginal utility equals that ofthe alternative goods. The greater the divergence in his estimates ofthe marginal utilities of two goods, the more ready is he to trade thelower utility for the higher one. Exchange is but the effort to adjustgoods to wants in the best way. The less useful (marginally viewed) istraded for the more useful. The greater the difference, in the onetrader's judgment, between the marginal utilities of the two goods, thegreater is the maladjustment, and the greater, therefore, is the motiveto seek readjustment by means of exchange. As the quantity of the goodparted with declines, its marginal utility increases; and as more of theother good is acquired, its marginal utility declines. The marginalutility of the two exchangeable units must come to equilibrium in theindividual's judgment. At this point demand ceases, not because anadditional unit of the one good could afford no gratification, butbecause it would afford less gratification than the other good in whichdemand must be expressed to be effectual.

4.Demand thus varies at different ratios of exchange between goods,and may be expressed graphically by a demand curve. This would show forany one man the decline of the marginal utility of each added portion ofa good, and these individual demand curves may be united into a demandcurve for a group of men. The demand curve expresses graphically what aman would be willing to pay at each particular stage in the increase ofgoods. We have here come to the very threshold of the subject of marketsand exchange.

5.Elasticity of demand, in the case of any good, expresses the degreein which a change in its ratio to other goods will increase the demand.Elasticity varies for different classes of men according to their wealthand to the cost of the goods. If strawberries are a dollar a box in thecity market, a slight fall in the price, say to seventy-five cents, willincrease the demand but slightly. But if the price is fifteen cents andfalls to ten, the increase in the demand will be marked, for the numberof consumers to whom a difference of five cents is important is thenvery great. The demand for the staples is comparatively inelastic. Acertain amount of simple food is necessary to support life; an increasein its price will not quickly check the demand. On the other hand, ifthe price of staple foods falls, no very great increase will take placein the demand.

CHAPTER 5

EXCHANGE IN A MARKET

§ I. EXCHANGE OF GOODS RESULTING FROM DEMAND

1.Exchange in the usual economic sense is the transfer of two goods bytwo owners, each of whom deems the good taken more than avalue-equivalent for the one given. The comparison of goods that hasbeen discussed above is a kind of exchange. When a person chooses onething rather than another, one form of gratification may be said to bementally exchanged for another. This is exchange in that person's mind,or subjective exchange. But the word "exchange" as usually employedmeans an exchange of goods between persons. It is objective exchange,and when the word is used without modification, it is to be understoodin the objective sense. In the last chapter were analyzed the motives ofthe individual man. Robinson Crusoe on his desert island would in verymany ways be acted upon by the same motives in reference to economicgoods that men are in society. Yet, it is exchange in society and thecomplicated problems arising from this transfer of goods from person toperson that constitute nearly the whole of the subject-matter ofpolitical economy.

Exchange is seen to arise out of the differences in the situations ofmen with reference to goods. The different subjective valuations giverise to demand, and demand leads to exchange. In early societiesdifferences in natural products were the most usual causes of exchange.Salt, though so essential to life, is found in few places. The metalsearly became[Pg 31] indispensable for weapons of defense or for the chase, andwere sought far and wide. Rare shells, feathers, jewels, and theprecious metals appealed in early times to a universal desire forornament. Products like these are the objects of a rude sort of exchangein the first simple efforts made to adjust possessions to wants. Withinthe tribe, differences in the skill and ability of men to produce arrowheads or weapons or ornaments, bring about the exchange of goods.

2.The advantage of exchange consists in the raising of thewant-gratifying power of goods to both parties. It generally wasassumed by medieval thinkers that if one party to an exchange gained,the other must lose. The mistaken idea prevailed that value is somethingfixed in the good, and unchangeable. Where the exchange is voluntary(and only that kind is here being considered), it is mutual advantageswhich make the exchange rational. Many false conclusions on practicalquestions still result from a failure to grasp this simple truth. Itfollows from this that the act of exchange is itself useful, for goodshaving a small importance to men are given a higher importance by beingbrought into better relations with wants. Merchants, peddlers, traders,and common carriers of all sorts, therefore, are adding to the utilityof goods. This idea has been only slowly apprehended, but is now one ofthe least disputed propositions in economics.

3.Barter is the exchange of goods without the use of money. Eitherone of the goods traded in cases of barter may be considered as sold,and either one as bought, according as the matter is looked at from thestandpoint of the one or the other party to the exchange. Demand,therefore, is supply, and supply is demand when the point of view isshifted from one party to another. The fisherman's demand for venison isexpressed in terms of fish; the hunter's demand for fish is expressed interms of venison. But to the fisherman the venison is the supply offeredto[Pg 32] him. The term "marginal utility" of a good, therefore, does notrefer merely to the demand of the consumer; for it expresses by a singlephrase the idea both of demand and of supply. The utility of the goodscomposing the supply is expressed in terms of the goods that representdemand and vice versa. The only way in which man can give definite,concrete, numerical expression to his desire for goods is to state it interms of other goods. In expressing numerically, in terms of otherobjects, an estimate of the utility of an apple, a horse or a house, oneinevitably gives expression to a ratio of exchange; demand for one goodis the offer of another good.

§ II. BARTER UNDER SIMPLE CONDITIONS

1.In isolated exchange, where only two traders engage in barter, theirestimates give respectively the upper and the lower figures of the ratioat which the trade can take place. Let us recall the fact that adifference in therelative estimates that men place on goods is thefirst essential of exchange. Those estimates may be expressed in aratio; we may say that A will give four apples for one orange, would beglad to give fewer, but will not give more; while B will give one orangefor three apples, would be glad to get more apples, but will not takefewer. The outside limits of the ratio at which the exchange must takeplace will, therefore, be one orange for three or four apples.

There is, in entirely isolated exchange, therefore, a lack ofdefiniteness in the price, much depending on what Adam Smith called the"higgling of the market." In the old-time American horse trade muchdepended on "bluff"; in such cases it was as important to be able tojudge character as to judge horses. A thorough analysis of the trade,however,[Pg 33] would probably show that the bargain is concluded at a pointwhich exactly balances the hopes of gain and fears of loss of one of theparties.

2.Where one-sided competition exists, the ratio of the exchange willbe somewhere between the estimates of the two buyers most eager for thelast portion offered. By competition is here meant the independentseeking of the same thing at one time by two or more persons. Wherethere is one market price paid by a number of buyers, it may be that notwo of the subjective estimates are alike; the exchange value may differfrom all of their estimates, and yet must correspond closely to two.Auction sales well illustrate the principle. If there is one ax to besold and ten possible buyers for an ax, and there is no combinationamong them, the bidding will go on until the estimate of the buyer nextto the most eager, has been reached. The most eager buyer can thensecure the ax by bidding just a little above his next competitor. But ifthere are ten axes and ten buyers who know that there will be ten axesoffered, the more eager buyers will refuse to bid much above the lesseager ones. A shrewd auctioneer, therefore, often conceals the fact thatthere is more than one of an article, and having sold it off, brings outa second or a third one of the same kind, thus keeping the buyers inignorance of the supply and getting somewhere near the estimate of themost eager buyer in each case. Advertisements of "a limited supply,""the last chance," "positively the last appearance," are meant tostimulate the demand of the patrons, and to lead them to buy at once. Ingeneral, therefore, where competition exists on one side, price is fixedwith greater definiteness than in isolated exchange. Not so much dependson shrewd bargaining, on bluff, or on the stubbornness of an individual.Far more depends on forces outside the control of any one man. Thebidders are impelled by self-interest to outbid their competitors, andthus the limits within which the market price must fall are narrowlyfixed.

If things already brought to market must be sold at any price that canbe secured, the buyers may be said to fix the price. This does not meanthat they can buy it for any sum that they wish, but it means that wheneach one is trying to get it as cheap as possible, their bids finallydetermine how much it will sell for. In such cases, therefore, thecompetition is for the moment one-sided.

If a part of the supply can be withdrawn and kept without great loss,this will be done if the price is low. Strawberries, fish, and meat maybe sold Saturday night at any price that will secure purchasers, butevery thing that can be kept with little or no depreciation will bewithheld from sale for a time. It may even be of advantage to the sellerto destroy a part of the supply, when the increased price of the smalleramount will give a larger total.

3.Where two-sided competition exists, the bidding goes on until aprice is reached where the least eager seller and the least eager buyerhave the narrowest possible motive to exchange. As the market ratiovaries from those in the minds of the individuals when they come to themarket, there is left a considerable margin to some and a very small oneto others. This difference between the market value and the ratio ofexchange at which any given individual would continue to exchange forthe good may be called themargin of advantage. Moreover, the buyerswill have a margin and the sellers a margin, and as that margin narrowsthere is less and less motive to continue the exchange until, finally,the margin disappearing, the buyer or seller, withdrawing from themarket, ceases to be an exchanger, at least for that particular part ofthe goods.

The least eager buyer and the least eager seller may be called themarginal pair. They are the buyer and the seller respectively havingthe narrowest margin of advantage. Their outside estimates are nearestto the market ratio. If the market ratio shifts slightly in eitherdirection, one of them will drop out of the exchange. It is evident thata buyer[Pg 35] who is taking ten units may be on the margin with reference tothe tenth unit, and yet may continue to be one of the most eager buyersto secure one unit. Thus, the marginal buyer is to be thought of as thatperson who, logically considered, is the least eager, or on the margin,with reference to a particular unit of supply, however eager he may bewith reference to any other unit of supply. It would be well to recallhere the discussion of the nature of wants and the variation in theintensity of demand.

4.Market values are built up on subjective valuations. The idea ofmarket values, therefore, is that of the want-gratifying power of goodsas expressed in terms of other goods, where there are various buyers andsellers. They are not an average of the subjective valuations, nor arethey made up of the extremes. They correspond closely with thesubjective estimates of two of the exchangers. The other parties to theexchange are willing to accept the market ratio, for it offers them moreinducements than it does to either one of the marginal pair.

§ III. PRICE IN A MARKET

1.A market is a body of buyers and sellers in such close businessrelations that the actual price conforms closely to the valuation of themarginal pair. The word "price" which we have used, may be defined asvalue expressed in terms of some commonly exchanged commodity. The termis used more broadly of anything given in exchange. The very terms ofthis definition imply that there can be but one price in a market. Thisis a somewhat abstract but a useful economic proposition. Very oftenwithin sound of each other's voices traders are paying different pricesfor a good. On the occasion of a break in the stock-market, excitedtraders within ten feet of each other make bids that differ by thousandsof dollars. Retail and wholesale merchants may be purchasing goods inthe same room at the same time at very different prices. But within agroup of buyers and sellers where competition is approximately complete,price is fixed with some degree of exactness. The more nearly the actualconditions approach to the ideal of a market, the less are prices fixedby higgling, and the more impersonal they become, the buyers and sellersbeing compelled to adjust their bids to the needs of the market, and notbeing able to vary them greatly one way or the other.

2.Markets are steadily widening through the improvement of means ofcommunication and transportation. The earliest markets were establishedon the borders between tribes, villages or nations as a common groundwhere strangers met to trade. At such markets were brought together fromsparsely settled districts a comparatively large number of merchants andcustomers. Buyers had the opportunity of wide selection both in kind andquality, and the sellers found a large body of customers gathered at onepoint. Throughout the Middle Ages purchases were made by the moreprosperous husbandmen in great quantities once a[Pg 37] year at the fairs ormarkets. As both the buyers and sellers came from widely separatedplaces, there was, in most respects, no combination, and the conditionsof a competitive market were present.

The number of buyers and sellers that can constitute a single market islimited both directly and indirectly by the means of transportation. Adense population cannot usually be maintained without easy means oftransportation to bring in a large supply of food, and to carry backmanufactured goods great distances. The remarkable growth in the meansof commerce since the application of steam to water traffic, and theinvention of the railroad, have made it possible for goods to begathered from most distant points. A market implies a commonunderstanding among traders. Modern means of communication such asnewspapers, post-offices, telegraph and cable, trade bulletins,commercial travelers, the consular service, and many forms of specialagencies, are diffusing information widely. As a result of thesechanges, there has been a widening of the village-market to the marketsof the province, of the nation, and finally of the world. While a partof every one's purchases continues to be made in the neighborhood, agreater and greater portion of the total business is done by traders whoare widely separated and who are indeed members of the world market.Various articles produced in the same locality may seek differentmarkets. The market for wheat may be in Liverpool, while that for fruitand eggs is in the village near the farm-house. If a given product ofany community is sold in different markets, the net prices secured mustbe very nearly equal.

3.Normal price is spoken of in contrast to market price when theactual market price results from exceptional circumstances and probablywill not be maintained. The term "normal price," much used in economicdiscussion, is the price which, apart from exceptional conditions, isexpected to prevail, and to which actual prices seem constantlystriving[Pg 38] to adjust themselves. As actual prices are nearly alwayseither more or less than so-called normal price, and only momentarilyever correspond with it, the term "normal" would appear to be somethingof a misnomer. Moreover, as the circumstances of production change, thisnormal price itself is altered so that what is normal one day may bequite abnormal the next. The thought of "normal price" is an abstractone, but despite the inaptness of the word it is not without somepractical validity. In determining whether he shall continue to producecertain goods, the business man is practically guided by his view ofnormal price. An example of departure from normal price as abovedefined, is found in the price of food when an expected ship has failedto arrive at a port with its cargo of grain. A scarcity amounting almostto famine might thus exist in a seaboard city, and the market pricewould rise; but as this would be due to an accident and would afford alarger gain than usual to those who happened to have a supply of grain,men would say that the market price was above the normal price. Thearrival of the expected ship would cause the market price to return tothe normal.

In review, we see that the market value of goods grows out of thedifferent personal estimates made by men. Market value itself being acomplex and difficult problem, it can be mastered only by dividing it.First, therefore, must be studied the more general and obvious motivesof men, the nature of wants and their effects on man's subjectiveestimates. The same simple motives that influence the subjectivevaluations made by individual men, may be traced to the conditions ofthe complicated market. It is their workings that are seen in theobscurest problems of market price.

CHAPTER 6

PSYCHIC INCOME

§ I. INCOME AS A FLOW OF GOODS

1.Satisfaction and gratification being only temporary conditions,economic wants appear in more or less regularly recurring series.Impressions are short lived, sensations are temporary, wants that havebeen satisfied recur. Wants recur for the same reason that they firstarose. No impression on the nerves or on the senses is lasting. Man'ssenses were developed for the purpose of bringing him into relation withthe outer world, of enabling him to survive in his struggle with theforces of nature. So, when a good has been enjoyed, the utility to thatperson of that thing or service for that particular moment, falls, itmay be even to zero. To keep wants satisfied is impossible; we cannot donext year's reading or next week's eating now; we cannot live the lifeof to-morrow. The best results in reading or eating come from taking theright amount day by day. But it is a need in the life of men that wantsshould recur after a time, otherwise there would be no motive foraction.

2.The economic ideal is that this series of recurring wants should bemet by a corresponding series of goods. It is evident that if a seriesor succession of goods varies, at different times, moments, andconditions, in its power to gratify wants, the closer the correspondencebetween the two series, that of wants and that of goods, the greaterwill be the total of gratification. We may liken man's life to a journeyin which the supplies of food are gotten at the stations.[Pg 40] If any one ofthese supplies fails, the traveler suffers the pangs of hunger, and iftwo or three supplies are at one point, they do not serve the needs ofman so well as if distributed along the way. This constant inflow ofgoods is one of the fundamental needs of life. The savage dimlyunderstands this need. Even the birds and the beasts adjust their livesto it either by travel or by toil. The spring and autumn migrations tonew feeding grounds are the attempts of the bird to gratify this seriesof wants as they arise. The ant, the bee, and the squirrel anticipate,and work to fill their storehouses against the days of need.

3.Objective income consists of the additional sums of goods acquiredby individuals or by society during the income period. The termnational or social income may be contrasted with individual or privateincome in the objective sense. The nature of the acquisition ofobjective incomes may, in some cases, be different if viewed from thesocial and individual standpoints. Society, as a whole, may be said toacquire income only when goods are produced; individuals may acquireincome by gift, bequest, theft, or other modes of transfer from otherindividuals. In many cases the two kinds of income, however, agree, theobjective income of society being the algebraic sum of the goodsacquired or parted with by all the individuals.

We should not understand that either social or private objective incomesinclude only material goods, for many utilities and labor services thatnever take on a material or money expression are included in eithercase. Indeed, we are close here to the conception of psychic incomewhich is to be developed more fully.

Income of money is not often the same as income of things. Usually manyof these subtler utilities are overlooked and omitted from therecognized money income. In this day the use of money is so common thatwe are sometimes led to ignore the value of things to which the moneyexpression is not given. The money income is merely the moneyexpression[Pg 41] of the value of currently acquired goods, and it is the onlymedium through which such varied sources of gratification can becompared.

4.Income in the logical sense must be a net addition, but the termgross income is not without popular and practical meaning. Gross incomeis sometimes spoken of in the sense of total receipts, as the total ofgoods secured; net income is the remainder after deducting expendituresand after replacing the goods employed to secure the income. In order toproduce some goods technically, men make use of other goods. While theyare storing up a supply of wood or coal it may be looked upon as theincome, but they may burn it to help grow hothouse plants. While theygather flowers with one hand, they destroy fuel with the other. Only thenet increase in value can be accounted income in the second period. Thegoods that come into a man's possession in any period are of many sorts:to get some he has destroyed many previously existing goods; while toget others he has not needed to use up the accumulations of the past orto mortgage the future. The one kind is gross, the other net income.

5.An income of consumption goods is a part of wealth, but not thewhole of it. The consumption goods, the "present goods" at the momentavailable, are the essential part of wealth for the moment's enjoyment.The only essential and immediate conditions of a series ofgratifications is a regular series of consumption goods. But many thingsexisting which could be used to secure a gratification are not in facttreated as consumption goods. A crop of corn is not all income. In atime of famine it could be used, but seed-corn was saved from last year,and some must be kept for next year. This is a part of wealth, but notof "present goods" as we understand the term.

Further, in the economic world there is much wealth that never cangratify any want directly; many forms of wealth never can be consumptiongoods. It is true that everything called wealth is expected tocontribute sooner or later in some[Pg 42] way to the sum of gratifications. Itis for that reason it is called wealth. It is, however, a mere figure ofspeech to say indirect want-gratifiers become want-gratifying goods. Forexample, the engine transporting a load of coal is indirectly gratifyingwants; if it is transporting a train-load of passengers, thegratification is direct. A machine making cloth for next year isgratifying wants only in a metaphorical sense. A field used to producefood is not a direct want-gratifier until it is transformed into aresidence site, a playground, or a tennis-court.

It is necessary therefore to recognize the distinction between presentand future incomes. The value of the mass of wealth in possession andyielding income, rests in large part upon its power of contributing toincome in some future period. Thus, any durable good may be looked uponas embodying a series of incomes ranging from present to future invarying degrees. This will be fully considered under the subject ofcapital.

6.Incomes are called funded or unfunded according to the sources fromwhich they are derived. Funded income arises from the possession ofwealth or of claims on wealth, such as lands, railroad stocks,government bonds, etc. The income is "funded" because it corresponds toan abiding fund of wealth. The income arising from current labor isunfunded, because there is no permanent fund of accumulated wealthcorresponding to it.

The idea of regularity connected with funded income is not essential tothe idea of income in general,i.e., we cannot refuse to call a thingincome because it occurs only this year. If it is part of the sum ofgoods that flows in, that is newly available for the man's use, it isincome. But funded income is the more abiding, for income from wagesstops when the man dies or fails to perform his work, while the incomefrom wealth continues after he ceases to be active. Thus, families withequal incomes may differ greatly in wealth, the one depending entirelyon salaries, the other on rents.

§ II. INCOME AS A SERIES OF GRATIFICATIONS

1.The value of consumption goods is derived from the pleasurablepsychic impressions which they aid to produce, and these psychic effectsconstitute the psychic income. The objective income is sometimes calledthe "real" income, but certainly it is not income in the most essentialsense. Things outside of men cannot be feelings, they can only call outor occasion feeling, and it is the attainment of pleasurable conditionsin mind or soul that is the aim of all economic activity. Materialincome and immaterial income are both related to and reducible topsychic income. Some portions at least of the objective incomes of goodsare continually by use becoming subjective incomes of enjoyment. Mentalk of material income as consisting of bushels of wheat, head ofcattle, etc., and of immaterial income as the uses that durable goodsyield directly or that men perform for each other,e.g., those of thesinger, physician, teacher, judge—all services that do not take onmaterial form. There was a long-standing dispute in economic literatureregarding the difference between productive and unproductive labor.Productive labor was said to be that which embodied itself in abidingmaterial form. The distinction led to some peculiar puzzles andparadoxes. The bartender mixing drinks, adds to the value of thoseingredients; in a minute that value is dissipated. According to thedistinction in question, he is a productive laborer because his servicesare embodied in material form, whereas the lecturer is regarded as anunproductive laborer because the results of his labor are not embodiedin material form. But whether or not the service has for a momentembodied itself in material form is of no essential economic import. Thepresence of the waiter is as essential to the well-served dinner as arethe polished silver and china, or as the well-cooked food. Thedistinction in question is not now made by economists, all labor thatcontributes to[Pg 44] value being regarded as productive. But a similardistinction is inconsistently preserved by many writers in the case ofmaterial things. A building used as a factory is called productive, butused by the owner as a dwelling it is called unproductive because theservice it renders does not appear in material form. But the use of thehouse, or that of land for a school ground or campus, secures a certaingratification, an immaterial good. Consistency requires that theservices of men and the use of material things be judged by theirpsychic results, the question whether the service takes on a material oran immaterial form being disregarded.

2.Only those things and actions that are in some causal relation togratifications can have value to man. This proposition of theory isdemonstrated every hour in practical life. The business man always istrying to trace a causal relation between things that do not and cannotthemselves directly satisfy wants, and things that do. The vineyard hasno value to Tantalus, unable to reach its fruit. A captive, chained to arock, attaches value only to the things within his reach. Men living insavagery and ignorance starve amid the possibilities of plenty. Chainedby their ignorance and improvidence to a little spot of earth, they donot see clearly, either in time or space, the economic relations aboutthem.

3.Man's foresight and knowledge enable him to think of many periods atonce, and thus his felt dependence on goods extends over a series offuture productive agents. In order to simplify the problem, we havespoken of the economic man as living only in and for the moment. If hehad no more knowledge, memory, or imagination than is necessary tocompare goods here, only present goods could have value to him. Even thehigher animals, and much more the savages, rise above that level ofimprovidence. With increased intelligence the economic life of manexpands, and he attaches importance to things which at the presentmoment have not, and cannot have, the slightest influence on hisimmediate[Pg 45] gratification. The extension of man's view works a momentouschange in his economic estimates. Of the thousands of forms of matter inthe world, only a comparatively few ever will make an immediategratifying impression on man's senses. But many of them are so connectedin his thought by chains of association with pleasures or uses, thatalmost instinctively and most intensely he attaches an importance tothem. In most cases it would require close thought to see that theservice attributed directly to them was but a reflection of thatperformed by some other good. Thus, more and more, the estimates placedby men on goods come to depend on knowledge and foresight, and not onimmediate impressions and feelings.

4.Things are causally related in varying degrees to the psychicincome, and have value only as their relation is known and felt. Theexplanation of value is not complete till value has been traced back toits source in gratification. Often the complex nature of the problem isignored. If one discusses the trading of a bushel of grain, to be usedby a hungry man for food, for a sheep to be kept for breeding, or forwool to be made into cloth next year, he may overlook the difference inthe grade of wants compared. In this case, a gratification of thepresent moment is compared with a gratification of a very different kindat a future time. The problem involved is complex because of differencesin time, in place, and in the nature of the want-gratifiers. The studentshould endeavor to reduce the problem of value to its simplest form byconsidering first the exchange, at the present moment, of immediatelyenjoyable goods. The logical starting-point in the theory of value is inthose goods that are in closest touch with feeling, and on this basismay be built up an explanation of values in which reason and forethoughthave a greater part. Starting from the proposition that psychic incomeis the foundation of all values, we shall go on, however, to tracecauses that give value to all the physical agents, and to the mostindirect of want-gratifiers.

DIVISION B—WEALTH AND RENT

CHAPTER 7

WEALTH AND ITS INDIRECT USES

§ I. THE GRADES OF RELATION OF INDIRECT GOODS TO GRATIFICATION

1.Goods may be ranked according to their technical relation to wants.The technical rank of goods (sometimes spoken of as the degree ofroundaboutness of the process) signifies the number of steps orprocesses that intervene between the agent used and the desired form. Ifone wishing the hickory-nut hanging above his head must first pick up astick to throw at it, the nut is removed one step from desire. But evenamong savages the processes are much more complicated. The Indian with acrude knife fashions his bow and arrow, fastens the flint and cord whichrepresent still other processes of industry, and shoots the bird whichsatisfies his hunger. In modern conditions the relations are vastly morecomplicated; only at the end of a long series do men arrive at the thingwhich gratifies their wants.

2.Goods may be ranked by their relation to wants in time. Therelation in respect to time is measured by the period that must elapsebefore the utility of an agent results in, is converted into,gratification. No agent or influence intervening, a thing may yet beremoved a long way from[Pg 47] gratification. A tree may not be fitted to bearfruit for ten years to come. Meantime, there are many other possibleuses for the tree: it may be used for fuel, or to make a canoe withwhich to catch fish, or to follow some other indirect method ofproduction. Evidently the technical and time relations of goods are verydifferent. The number of steps has no necessary relation to the time. Anumber of technical steps may be taken in half an hour, or a process ofa single technical step may last a year. In the mechanic arts thetechnical relations are of primary significance, but in economics thetime relations are mainly to be considered.

3.Economic goods may be classified as immediately enjoyable goods anddurable agents. Enjoyable goods are goods in a final form, producinggratification or just ready to give gratification the next moment, asthe cool draft of air made by a fan on a hot day, the cup of coffeesteaming on the table.

Many goods of just the same form as the foregoing may not be affordingcurrent gratification (except that afforded by thrift and forethought),but are kept because later they will gratify a more intense want orgratify a want better. Apples and potatoes are kept in a cellar so thattheir use is distributed throughout the winter; cider and wine are kepttill they get a quality that appeals more to the palate. Coal, wood, andstocks of goods, are thus kept in the form of enjoyable goods, destinedto be physically destroyed when at length they yield a gratification.Evidently they must be storing up meantime a certain additional utility,for otherwise there would be no reason why they should be kept for thefuture. Such goods as these are sometimes called unripened consumptiongoods, but until ripened they bear in part the character of durableagents.

Abiding sources of economic enjoyments are called durable agents. Theinhabited house is a source of continued gratification in each moment'sshelter it affords; but, further, it is the durable source of a seriesof future uses, as yet unripened.[Pg 48] The hammer, the hoe, the tree, thefield may all be considered as agents to secure consumption goods. Someof these are but one step removed from direct gratification, as the hoehelping the gardener to get food for his own use. Other agents are boundby many technical links to the ultimate gratification.

4.This classification of goods is abstract, in that it is aclassification, not of concrete goods, but of qualities shared in somedegree by nearly all goods. Most goods unite in some degree bothcharacters, but in varying measure. This is, therefore, a continuityclassification, the varying classes of goods grading from those whosedurableness is zero (just at the moment of consumption) to those mostdurable, which yield an endless series of uses or products. Yet theclassification is practical, corresponding as it does with thoughtswhich men have in the use of goods. By repairs and other methods goodsbecome, and are looked upon as, durable sources of a series of uses.

It is to be noted further that the enjoyable goods pass over intopsychic income, that is, they are the stream of objective utilities thatis each moment detaching itself as income from the great mass of wealth.The durable goods are those utilities which for the time remain, not yetripened or ready to be converted into psychic income.

§ II. CONDITIONS OF ECONOMIC WEALTH

1.The bounty and variety of the natural supply of indirect goods inthe material world are the prime conditions of a bountiful income tosociety. The effect of climate on the supply of goods available for manis complex. Climate is itself a direct source of gratification. Astemperature must be adjusted to man's need, climate satisfies wantsdirectly. Health, energy, the beauty of noonday woods and of sunlitclouds are conditioned on the favor of nature. Climate affects, further,the supply of material economic goods. All[Pg 49] the earlier civilizationsarose in warmer countries. But, after man had gained a certain masteryover the obstacles of nature, he was able to soften the harsher featuresof climate, and with better shelter and clothing, with better stocks ofwinter food and fuel, the more favorable features of the temperate zonecould be utilized. So civilization moved northward from Egypt and Indiato Greece and Rome, to northern Europe and America.

Soil conditions for vegetable life determine first the amount and kindof animal life. Animal life from one point of view is a parasite, livingon the vegetable; it is only the vegetable that has power to assimilatemost inorganic compounds. Water being a need of plant life, the amountof rainfall is one of the most important conditions of industry. Man,therefore, depends on the resources of the soil directly or indirectly;a fertile soil furnishes him either directly a supply of vegetable food,or indirectly a supply of animal food.

Natural supplies of metals, of coal, and of timber are importantconsumption goods, but they are also indirectly the condition for a vastvariety of other goods. The industry that could exist without iron,copper, and coal would be of a very low grade.

The variety of flora and fauna, and their fitness for man's needs,largely condition the possible production. If, in the course ofevolution, it had chanced that wheat and corn, the horse and the cow,had been crowded out in the struggle for existence, we should have had avery different civilization. The possibilities of civilization in Peru,and those of all the Indians on the American continent, were limited forlack of domestic animals. Animals that are fit for domestication are anecessary intermediate agent by aid of which man can appropriate andturn to his use the fertile qualities of the soil.

Not content with the material world about him, even when it is at itsbest, man alters it in many ways. He enriches the soil, improves thevarieties of animals, he even in some[Pg 50] slight degree affects theclimate, and by the use of a multitude of artificial bits of mattercalled tools, works profound changes in the world in which he lives.

2.A large part of the utility of goods is conditioned on motion andenergy. It has been said that man's power in production is limited tomoving things. The outer world is to man the sole source of motiveforces. He can bring things together and they produce the result.Further, it may be said that nearly every kind of utility is conditionedon motion. It is man's aim to secure a constant inflow of goods. Tosecure this either he must move to get the goods, or he must cause goodsto move toward him.

The law of "conservation of energy" helps to explain economic action;the supply of energy in the universe cannot be increased or diminished,but may take on new forms. So a limited supply in man's control may takeon various forms and so have different effects on gratifications. Oneand the same source of energy may be converted into the different formsof heat, light, motion, electricity, etc. But there must be some source.Man's desire is directed to getting force at the right place and in theright degree. If light or heat is too intense, it causes pain; the glareof the sun blinds instead of giving keener vision. A moderate forceapplied to any of the senses gives the maximum clearness or pleasure.Man is constantly endeavoring to secure forces from the outer world andto adjust motion so that it will directly or indirectly best serve hispurposes.

3.Among the main sources of power used by men are food, domesticanimals, and fuel. In eating food man stores up force in his own body.When he draws the bow he puts force into it to lie latent untilliberated at the right moment. There must be a source of energy likewisethat mental action may go on, and the power of sunbeams, stored for atime in food, is liberated in the processes of thought.

This first natural mode of liberating energy within their own bodiesdoes not satisfy the growing needs and aims of[Pg 51] men. Such a mode is"labor," which becomes at times painful and distasteful. In the earliestsocieties known, some sorts of domestic animals are found supplementingman's efforts and acting upon the material world to alter it for man.The dog joining in the chase guards his master's safety, and helps tobear his burdens. The draft-beast in the field turns the heavy soil, andaids in the final harvest. The trained elephant does the work of twentymen piling logs, loading ships, or carrying burdens.

Man further increases his control over the material world by makingother men do his bidding. Domestic slavery, where wife or child servesthe father of the family, or chattel slavery, where the vanquished toilsfor the victor, are all but universal in early communities. Such amethod of increasing one's control over the forces of the world requiresonly superior strength, no special intelligence in mechanics, and isthus one of the first crude devices in a primitive civilization.

Fuel has been, up to the present time, perhaps the most important sourceof energy. Fire in the hands of savage man gave him dominion over theforests and over the metals. In this age of steam the liberation of theenergy of the sun, stored up in coal in ages past, is still theindispensable condition of our developed industry.

4.The greatest and most exhaustless reservoirs of power for man's useare in wind and water. While the supply of fuel is being used at aprogressive rate and will soon approach exhaustion, there are elsewhereexhaustless stores of energy awaiting man's command. To make use of thewind for sailing a boat, only the simplest arrangements are needed; awindmill fixed at one place requires more ingenuity and machinery. Theenergy of the wind is derived from the sun and will last until the sunloses its heat. If some means can be found for equalizing the flow andfor storing the power of the wind, it may yet become a great agency ofindustry. The force of falling water, long used in a petty[Pg 52] way by theold water-mills, is just beginning to be employed on a large scale atsuch points as Niagara. Where fuel is high, as on the Pacific coast,wave motors have been successfully used in a small way, but wave motionis too irregular to serve well the needs for power. But the constantmotion of the tides offers, at some favored points, a source of powerthat will remain as long as the earth revolves upon its axis.

5.Man studies and compares the durable goods that give him commandover enjoyable goods, and attaches value to them. Thus energy is founddissipating itself throughout the world in ways useless to man, and inplaces where it cannot serve his purposes. As man grows in power ofcontrol over nature, he seeks to apply these forces in forms and atplaces he has selected. If he can arm himself with the energies of mineand torrent, he can react with giant strength on the material world. Heceases to accept passively its conditions, and to live on its grudginggifts; he becomes its fashioner, in a sense its creator. Hisintelligence and his wants are most important factors determining whatthe form of the physical world about him shall be.

But all the efforts of men in the most developed economy cannot make todisappear the differences in the quality of goods and agents. Desirablegoods to consume are limited in quantity, and they vary in quality;hence they have value and some higher than others. Likewise, durablematerial agents and sources of power are limited in number and vary inconvenience of location and efficiency. As men seek to gratify theirdesires, they attach importance to these agents of power. Each is valuedfor its service or its series of services. When anything is seen tocontain a series of uses, it becomes a rent-bearer, and the economicproblem of rent arises, one step more complex than the problem ofvaluing simple consumption goods.

CHAPTER 8

THE RENTING CONTRACT

§ I. NATURE AND DEFINITION OF RENT

1.The temporary use of materials and power and their sources isnecessary to bring most enjoyable goods into being. Indirect goods havevalue solely because they help to get direct goods. The apple-tree isvalued because it bears fruit, and the orchard because the trees givepromise of yielding a succession of crops for years to come. There arethus two problems of value in connection with durable goods: that of thevalue of a temporary use for a brief period, as for a year; and that ofthe value of a thing itself, the use-bearer, for a long series of yearsor in perpetuity. To explain what fixes the value of the temporary useis the problem of rent; to explain what determines the value oflong-continued use or of permanent control and ownership of a use-beareris the problem of capitalization.

2.The term rent is used in a number of senses, which must be carefullydistinguished. The original meaning of rent was any regular income orrevenue arising from wealth. The word comes from the low Latinrentafromrenda, in turn fromredditus, that which is given, yielded orgiven back, orrendita, that which is given or returned. The Frenchrendre (English render), to give or return that which belongs to one,is used very early. Chaucer used "rente" as an income. "Cattle had heenough and rente," cattle probably meaning property (chattels), andrente income. Rental is a collective term for a number of rents.[Pg 54] Thetotal yield of an estate was called its rental or rent-roll, and a listof the various sources of income, including all payments from tenants inmoney, produce or services, constituted its rental.

3.The popular meaning of rent is the amount paid for the use ofmaterial things which must be returned to the owners after the time ofuse agreed upon. We speak of the rent of a house, boat, etc., using theword as a synonym for hire. In the European languages the word is usedmore frequently in that sense. In the Frenchla rente means the incomefrom any kind of property; but corporate securities and national bondscame particularly to be calledles rentes, because they are a form ofinvestment yielding a permanent income. The one who has a perpetualincome from bonds or rents is called arentier. In German the termRente is used more broadly than in English, as an income of any sort,Grundrente meaning the rent of land, andCapitalrente the incomeusually in England called interest.

A restricted meaning has long been applied by economists to the word:the income yielded by lands, etc. This was put in contrast with interestfor money and capital, and with wages of labor. This meaning is nowbeing abandoned by economic students.

A wider meaning recently given to the word by many economists turns onthe supposed relation of some portions of price to cost of production.Thus, frequent use is made of the expressions: consumer's rent,producer's rent, buyer's rent, seller's rent, etc. In the well-foundedopinion of some recent critics this usage rests on a mistaken reasoning.However, in the midst of this wide variety of usage the student must beforewarned and alert. Doubtless agreement will at length be arrived at.Meantime, no economist can dictate what meaning is to be attached to theterm, but one may suggest the definition that seems to him mostexpedient. Throughout this work we shall endeavor to use the term rentuniformly and consistently as it is now to be defined.

4.The essential thought in rent, as we shall use it, is that it is thevalue of the usufruct as distinguished from the value of the use-beareror thing itself. The meaning of usufruct is the use of the fruits, orin legal phrase: "the right of using and enjoying the income of anestate or other thing belonging to another, without impairing thesubstance." The obvious fact is that fruits can be eaten withoutdestroying the tree, the harvest gathered without destroying the field.By a metaphor the word in legal discussion is applied to the use of anyproduct, and we shall employ it, as in common speech, in reference toone's own goods as well as to the goods of another.

The qualities whose use gives value are not usually indestructible, butthey are treated as undestroyed. There is a famous phrase used byRicardo, "rent is paid for the original and indestructible qualities ofthe soil." He said "indestructible," but the word is not apt. There aremany qualities in the fertile field thatmust be destroyed when it isused. Every economist since Ricardo's time has recognized this, and manyexcuses for the inaccuracy have been given. After every harvest, thefield is less serviceable than before, and if it is to be of the samegrade of efficiency, the fertile elements must be restored. We cannotassert that Ricardo meantundestroyed, for he was not quite clear onthe question. But it is evident that one can count as true income onlythat part of the value of product that remains after full repairs havebeen made. It is only by a fiction that most indirect agents can beregarded as indestructible. Things yielding rent are not indestructible,but generally they are preserved undestroyed.

5.A distinction must be made between gross and net, or true and falserent. Before the usufruct is estimated, allowance must be made forrepairs, depreciation, and for various expenses which absorb a goodportion of the gross product. When this allowance has been made, theincome may be considered as a net sum not due to the sale, or to[Pg 56] theusing up of any part of the thing rented. This is the essential thoughtin typical rent—that it is the value of the surplus, or net product, ofan economic agent leaving the agent itself unimpaired in efficiency. Thetotal product is sometimes called the "gross rent," but economic rent is"net rent." This thought is made clearer by the following discussion.

§ II. THE HISTORY OF CONTRACT RENT AND CHANGES IN IT

1.Economic rent (likewise called natural, competitive, and sometimesrack rent) is to be distinguished from contract rent. Economic rent isthe market value of the usufruct, and contract rent is the amount a manpays for the use of wealth by virtue of an existing agreement. The oneis impersonal or economic; the other is personal or legal, being fixedby agreements between persons. The rents usually spoken of are contractrents.

The two diverge more or less. If the contract has been lately made thetwo will be nearly the same. Contracts of long standing often bind thetenant or borrower to pay either more or less than the presentcompetitive price. If, after a time, the value of the use is greaterthan the contract rent, the tenant is fortunate in having his lease. Buthe is the loser if he is bound by lease or agreement to pay rent in alocality where land has become less valuable.

Economic and contract rent usually diverge also because of the agreementthat the owner, or lender, keep up the repairs and pay the taxes. Hereit is simply the difference between gross and net rent.

Custom may prevent the owner from charging all the usufruct of the agentis worth. If the contract rent is less than the economic rent, evidentlythe borrower enjoys a part of the usufruct, without charge, and to thatdegree is in the position of an owner. The usufruct in this case isdivided between the two parties. Such instances were numerous in[Pg 57] theMiddle Ages in the renting of land, and still are found in manycountries.

Contract rent is based on economic rent and tends to conform to itwhenever there is competition. The existence of economic rent is thebasis of the agreement to pay contract rent. Prospective hirers ofagents forecast what the use will be worth to them and make their bidsaccordingly.

2.The renting contract is the agreement of a borrower to pay for theuse of a thing and, at the end of the time, to restore it in goodcondition or pay for its complete repair. In practical business it isnecessary to have definite agreements to prevent disputes. Some providethat one party, some that the other party, shall keep up repairs. Theform of the renting contract is observed by men in estimating the usesof their own wealth where no contract exists. If they count the grossproduct of an agent as rent, it is bad bookkeeping. In many cases it isnecessary, therefore, to follow the form of the renting contract inorder to determine the net yield of indirect goods.

3.In early stages of industry the use of nearly all wealth isestimated under the renting contract. In the lower stages of culture,in hunting, fishing, or nomadic pastoral tribes, land is not recognizedas wealth to be exchanged or owned. But at a later stage, as in theMiddle Ages in Europe, land and the things pertaining to it, as ditches,houses, mills, cattle, stock, and the few simple implements, constitutedthe larger portion of the wealth. Land was granted to the tenant or serfin return for services. The contract was pretty strictly drawn and allitems were specified. It was not hard to hold the tenant to his contractto keep the land in about the same condition. There was a certainrotation of crops; the tenant was obliged to keep his stock up tostandard; and, moreover, he had a certain interest in the land becausehis contract rent (as explained above) was less than the economic rent.The landlord, therefore, could count[Pg 58] pretty surely on the undiminishedpower of his land and stock from one year to another.

At that time, truck and barter were the common modes of exchange, andrents were paid in products and services, not in money. The fruits ofthe soil were consumed on the spot instead of being sold as now. Landwas rarely, if ever, sold outright, so that there was no occasion toestimate its total selling value. It was thought of as a place on whichto live and as a source of livelihood. Its yearly use was all that wassubject to contract, sale, and exchange. Not the land itself but arentcharge on the land was sold, the term rent charge meaning an annual sumpayable out of the yield of an estate. Many medieval estates were sotied up by legal conditions that they could not be sold outright; allthat the owner could do was to sell or mortgage the annual rental. Thus,in the Middle Ages, it was all but universal to look upon most indirectagents as exchangeable only under the renting contract, as subject torenting but not to complete transfer and sale.

4.As industry developed, the renting contract remained almost whollyconfined to cases of renting lands and houses. The materials andappliances needed for manufacture and commerce are so manifold andvarying in quality that the rent-form of contract is very cumbersome anddifficult for exchangers to enforce. If a merchant about to embark on atrading journey wished to rent a ship and a stock of goods, the rentingcontract became most difficult to interpret. He must agree to repay theloan in goods of the same kind and quality as those received, a contractmost difficult to execute, and giving occasion to costly tests andcountless disagreements. It was much easier for the merchant to get hisloan under the interest contract,i.e., a money loan, with which tobuy the goods. With the growth of industry and commerce, wealthincreased in towns, taking many forms, as those of ships, wagons, tools,and stocks of goods, that could not conveniently be rented.

In England, the country which developed its industrial system earliest,the idea of rent, therefore, gradually became disassociated almostentirely from the use or hire of any wealth but land and real property.Because in the Middle Ages rent was associated almost entirely withnatural resources, they being the only important forms of wealth whichmen rented from others, there was fostered the idea that the essentialmark of rent is the connection with natural resources. It is a simpleexample of the association of ideas. In the transfer or loan of movablegoods, the rent contract was quite overshadowed by the other form ofcontract, that of a money loan. According to this explanation theessential and primary difference between renting wealth and borrowingmoney at interest is not in the kind of wealth whose use is thustemporarily transferred, but in the nature of the contract. But as formsof wealth differ in their fitness for transfer under the two forms ofcontract, there goes on a competition between them, as a result of whicheach becomes associated with certain groups of goods. In the Middle Agesthe renting contract was the dominant form, but it has beenprogressively displaced by loans in the money form, and its importanceis still declining.

5.The main forms of wealth whose usufruct is still sold under longrenting contracts are land and its more durable improvements. InEngland farms are let under long leases, a very common form being thethirty-year lease. Under the old, almost fixed, conditions inagriculture such a lease was equitable, but when prices are rapidlychanging and when new methods are being introduced, it gives rise togreat hardships. About twenty-five years ago, the great fall in theprice of agricultural products brought ruin to many of the tenantfarmers. The land troubles in Ireland have been largely about tenants'improvements. When the lease expired, the landlord could appropriate allthe improvements that the tenant had made. In America farms are letusually on shares, and from year to year, but the plan of a money rentis increasingly followed. The difficulty of getting an equitablearrangement between landlord and tenant is recognized[Pg 60] by all. Thelandlord must make the proper repairs or see that they are made; he mustspecify in the contract whether the products can be taken away or are tobe fed on the place so that the soil may not be impoverished, and hemust provide for the purchase of other fertilizers. On the other hand,the tenant under the renting contract has little motive for improvement,and many occasions for discontent. So in America, far more than in theolder countries, land changes hands by sale, the purchaser going intodebt for it, giving his note and paying interest on the loan rather thanrent for the farm.

Many less durable goods are rented for brief periods. Carriages arerented for the day, bicycles by the week or month. Sewing-machines,boats, guns, tents, and even diamond engagement rings, yield their joysunder the renting contract. People frequently hesitate between therenting and the purchase of a piano, and in some cases renting is themore convenient and desirable way of securing its use. The purchase of adress-coat or of a masquerade-suit to be worn but once, involves forsome an excessive and needless sacrifice. For a moderate sum itstemporary use may be had, and it is then returned, little the worse forwear, to the accommodating clothier.

A final word of caution may be given. Economic rent is not confined tothe cases of contract rent. It exists in every case where a more or lessdurable agent yields a use that is scarce and desirable. The owner whouses a thing himself gets the advantage in the product as clearly as ifhe collected rent from a borrower. Houses lived in by the owners, housefurnishings, clothing, books, all scarce and durable agents, areyielding rents in this logical sense. To the economist, therefore, theproblem of economic rent, as one of the grand divisions of the problemof value, remains of undiminished importance, for in these unceasingstreams of uses emanating from our environment, is found the basis forthe value of all durable wealth.

CHAPTER 9

THE LAW OF DIMINISHING RETURNS

§ I. DEFINITION OF THE CONCEPT OF (ECONOMIC) DIMINISHING RETURNS

1.The phrase "diminishing returns of industrial agents" is theexpression of the fact that there is an elastic limit to the utility anyindirect good can afford within a given time. Successive attempts toget additional services from a thing are usually in part successful, buteach additional service is gained with more difficulty, or a smalleradded service is gained for an equal expenditure of materials or effort.A book stands many hours untouched on the shelves of the library; butif, as often happens, two or more persons wish to use it at the samehour, time and energy are wasted. The book has a potential use duringthe twenty-four hours, but all this can be secured only at the cost ofthe greatest inconvenience. The greatest net uses, therefore, are seento be to the first user and in the first hour, for these uses cost theleast time and trouble. If the members of a family will take turns, onechair will serve for all of them; but if all are to be able to sit downtogether, a chair must be provided for each. Often it will happen thatonly one chair is in use, the other nine chairs being valued only fortheir potential uses. I knew two young men who owned a dress-coat inpartnership, and as they had different evenings free from business allwent well until both were invited to a reception which both were veryeager to attend.

Illustrations of this principle may be drawn from every class of durablegoods. The example generally given is that of a field used foragriculture. It was long ago seen that a larger crop could usually beobtained on the same area, only with greater effort or expenditure; butthis fact has been thought to be peculiar to the use of land. Theexamples given above have been purposely chosen from very differentfields, to show that the truth is a general one: a good that affords agiven service can be made to increase that service, ordinarily, only oncondition that men put forth greater effort, or sacrifice more goods.

The decreased utility is most clearly seen in the diminished effectwhich other agents produce when used in connection with the thing. Whenseveral are trying to use the same book, and are wasting time trying toget it, we often say their study hours are less fruitful because of thepoor library facilities. Again, we speak either of the diminishedreturns of the field, or of the labor applied to the field. Either theparticular thing is said to show diminished returns or the othercoöperating agents are said to show them.

2.As the agents used in connection with a fixed amount of any otheragent (for mechanical, chemical, physiological, psychological, and otherpurposes) increase, their objective effectiveness after a given pointdecreases. Objective or technical effectiveness means effectivenessindependent of the thought or estimate of men. It is not theeffectiveness to produce a feeling in men, but to produce results on thematerial world. In a mechanism, if one part is increased withoutincreasing the other parts, a point is reached where it does not add tothe result. If in the building of a bridge the weight of the floor isincreased beyond a certain point, the rest of the bridge being leftunchanged, the bridge is weakened instead of strengthened. If the weightof the iron in the framework is increased beyond a certain point withoutstrengthening the piers, the structure is weakened. If the pier isgreatly enlarged, the bridge may not be weakened, but there is an utterwaste of material and effort, and perhaps[Pg 63] the main purpose of thebridge is defeated by the damming up of the stream. A bicycle frame,like a chain, is no stronger than its weakest part. If the strength ofall parts of the wheel and frame is in equal proportion to the strainthey must bear, added weight to any single part weakens the wholemachine. The development of the modern type of bicycle, by manyexperiments, is a good example of the adjustment of materials accordingto the principle of technical efficiency.

A variation of the same principle is seen in chemical combinations.Exact proportions of materials must be used to get a certain result.Increase of one ingredient will not increase the desired product. Eitherthe added part is rejected, does not enter at all into the compound, orit unites to form another and different product.

That the same principle holds good of the psychological effects ofthings, we have already fully recognized in discussing wants andmarginal utility. A given amount of a good will affect the senses in apleasurable way, but an increase in the amount will not cause aproportional addition to pleasure of sight, sound, or smell. On thecontrary, such an increase may defeat the object entirely. Here we areat the threshold of the economic problem, for we have touched on"feeling."

3.The idea of economic diminishing returns arises when man recognizesthese technical facts and their relation to gratification, in his use ofa limited supply of indirect agents. All economy begins with scarcity.The varying effects produced by different agents therefore require to bestudied or the sum or direct goods of enjoyment will not be as great asis possible. Waste will take place. A bridge will have its maximum usewith a minimum outlay when the parts are in a certain proportion. Beyondthat point, the increase of any part may add something to the usefulnessof the bridge, but the agents must be taken from some other and greateruse.

The thought of economic diminishing returns always has reference tovalue. If a particular kind and amount of a certain material is used invarying combinations with other agents, the value of the added productwill not always be in the same proportion to the value of the addedagent. The bridge-builder must consider not only what the added materialwill add to strength, but what it will cost, and whether the result willjustify this expense. So the economic problem of diminishing returns ismore complicated than the mechanical one, for it contains not only thetechnical but other factors.

If the value of the product increases less rapidly than the cost of theagents successively added to secure it, a point must at length bereached where the value of the added agents and of the additionalproduct just balance; this is called the point of marginal utility.

If a certain value in labor, fertilizer, or material, be applied to anacre of land, it may be more than recovered in the value of the product.Further applications give a product increased not in equal proportion tothe former yield, and so on till the value of the last-added agent justbalances that of the added product. This is the best adjustmentpossible, and beyond this point there will be a deficit in value. Justwhere the equilibrium is found at any time is the margin of cultivation.

The term "cultivation" is taken from agriculture but must be understoodin the broader sense of utilization, as the principle is not confined tothe case of land or agriculture, but applies as well to the use offurniture, books, clothing, horses, or any other indirect agents.

4.There are two margins, the intensive and the extensive. The marginof utilization in the case of a single piece of wealth is called theintensive margin. Any form of indirect wealth, anything kept to use, maybe considered as containing a series of uses. Using one thing more andmore while uniting other things with it, is using it more intensively.

Getting more use out of the book by effort, out of the farm by applyingmore fertilizer, out of the house by putting more people into it, isintensive utilization. The earlier uses come easily, naturally; thelater ones are gotten with increasing difficulty.

When a number of agents are of different qualities, the point betweenthe one last used and the next unused is the extensive margin ofutilization. The best agents that are available are naturally usedfirst, but as they are more intensively used there is increasinginconvenience. Then recourse must be made to the inferior agents, whosefirst uses, however, are greater than the later, intensive uses, of thebetter grades. When the step is made to the use of agents that werebefore unused because inferior, it is extending the margin ofutilization. The intensive margin of use is in the particular thing; theextensive margin of use lies outside of this.

The relation of the two margins may be shown in a simple diagram. Letthe better grades of indirect agents be represented by longerrectangles, the upper parts of which represent the more accessible, moreeasily secured utilities. Each agent consists of many strata of uses.The best uses are grades a, b, and c, in M; but after M has beenutilized intensively[Pg 66] down to d, N will begin to be utilized at itshighest point. When utilization goes down to f, O comes into use, and soon. Therefore it will be seen that until the intensive margin takes ind, M is on the extreme margin of utilization, and N is just outside it;when the intensive margin falls to g and h, P is inside the extensivemargin, and Q is just outside.

The marginal utility or effectiveness of added agents tends to be equalon the intensive and the extensive margins. This is simply a case of thesubstitution of goods in the use of indirect agents. If the value of theadded product in the use of a particular good decreases, a point finallyis reached where it is better to transfer the outlay to another agent,to change from intensive to extensive utilization, to go over to the useof another field or of another machine not so good. The effectiveness ofthe labor or capital that men have to apply is being compared constantlyin the two cases, and to the extent that this comparison is perfect theeffectiveness of the agents tends to be equal on the margin in the twoapplications.

§ II. OTHER MEANINGS OF THE PHRASE "DIMINISHING RETURNS"

1.The phrase diminishing returns is sometimes taken as meaning merelya decrease in prosperity. Many ideas are connected with this phrase. Itis not self-explanatory. It suggests various thoughts according tocontext and these have not failed to give rise to different uses. Thestudent must be cautious if he is to think clearly about it. Ifpopulation declines, or industry changes from one place to another, orfrom one kind of goods to another, it is sometimes said that returns arediminishing in the deserted district.

2.A more common misuse of the term is to apply it to the exhaustion ofthe soil. If the soil of a district has been robbed of its fertilequalities and smaller crops are raised[Pg 67] than was the case fifty yearsbefore, it is said to be a case of of the increased difficulty in theextraction of natural stores in mining. The veins near the surface beingmined first, later the galleries must be cut deeper and greater expenseincurred to get the stores. But the conditions here are very differentfrom those we have considered under diminishing returns. Mines are usednot under the renting contract, but under the royalty contract, whichpermits and contemplates a progressive using up of the limited stores ofnatural resources.

3.Manufactures are often said to show increasing returns in contrastwith agriculture as an industry of decreasing returns. There is here aninconsistent shifting of thought. Agriculture is thought of as limitedto a certain area of ground, whereon evidently diminishing returns willtake place. But the fixed limit of ground-space is not thought of inconnection with manufactures. Taking the same view of manufactures,commerce, education, etc., that is, assuming each industry to beconfined to limited area of ground, each is seen to be subject todiminishing returns. Some ground-space is one of the essentials to carryon any business. If the attempt is made to accumulate a large library inone small room, a point is reached where much energy is wasted in tryingto find the books. In a university the psychical product, education, maybe limited by the need of space. The school-room, laboratory, or collegeclass-room could be used at midnight, it is true, but not conveniently;and as students increase, buildings must be added. The same is true ofany industry. We cannot conveniently increase the business of alumber-yard without a larger yard-space, or of a factory without alarger floor-space. But the added space may be gotten by spreadinghorizontally or piling up perpendicularly. A ten-story building on anacre lot represents ten acres of floor-space. Putting up higherbuildings is an expansion in area by the more intensive utilization ofthe land. Devices like elevators, and more compact appliances,[Pg 68] makepossible an increasing business in manufacture, trade, or commerce uponthe same area of land. All industries, if looked at consistently fromthis standpoint, are subject to the same condition, though it is truethis will make itself felt in varying degrees in different lines ofindustry. In agriculture some similar devices are possible by the use ofgreenhouses, but it is true that in it, on account of the need of sun,light, and air, the limits of space are more quickly felt, and are lesselastic than in most other industries. The difference, however, is oneof degree, and not of kind. Higher factories, larger stores, enablemanufacturers to adapt themselves to the law as applied to the surfaceof land, but not to escape its operations. Neither the law ofgravitation nor the law of diminishing returns is violated or brokenwhen materials are lifted to build the upper stories. Both "laws" are atwork, even when the building is rising from the ground. Men are merelyadapting their conduct to the conditions imposed by gravitation anddiminishing returns.

Manufactures usually are thought of as enlarging by increase of theamount of capital employed, without limitation as to the area covered.But even here a limit is reached in the amount of capital that can beemployed at any one location because of the difficulty of widening themarket. The question, however, is one of the advantages of largeproduction with large capital, not of the increasing use of a limitedarea of land. If manufactures and agriculture are to be compared withreference to their economic nature, it is essential to clear thinkingthat both be looked at with reference to the same conditions, and fromthe same point of view.

4.Technical diminishing returns are often confused with historicaldiminishing returns. The principle of technical diminishing returns isthat at any given moment the uses obtainable from any indirect agentcannot be indefinitely increased without increasing difficulty.Historical diminishing returns occur when, in fact, human effort is lessbountifully[Pg 69] rewarded in a later period than in an earlier one. Ifto-day a day's labor in agriculture produced less than fifty years ago,historical diminishing returns would have occurred. In fact, labor ismore bountifully rewarded in agriculture than fifty years ago, yet it istrue to-day that there are few fields or appliances which, if used moreintensively with the prevailing prices of labor and material, would notshow a diminishing return to the additional capital applied. Therefore,in the historical sense, increasing returns have prevailed, yet at everymoment it has been necessary to apply resources under the guidance ofthe principle of diminishing returns.

§ III. DEVELOPMENT OF THE CONCEPT OF DIMINISHING RETURNS

1.The law of "diminishing returns" was first recognized and expressedwith reference to the use of land in agriculture. There are severalevident reasons why this occurred. It is obvious to every farmer andgardener that he cannot indefinitely increase his crop, that two mencannot always produce twice as much as one man, and that in general theproduct does not always vary in proportion to the labor and materialsapplied. Moreover, the food supply is a fundamental factor in industryand in the welfare of states. The limit to the supply of food on a givenarea, cultivated by a given method, early appeared and became a seriouspractical problem.

The circumstances in Europe in the eighteenth century drew attention tothe subject. Population was increasing, and the pressure for food wasstrong. While all the forms of industry most common in cities wereincreasing, and the wealth of the cities was growing, poverty wasincreasing among the peasantry. Especially was this true in Englandduring the Napoleonic wars, 1793-1815, owing to exceptional conditions.The food-supply from abroad was cut off, and[Pg 70] when the English farmers,tempted by the high prices, took poorer land into cultivation, andsought to get larger crops from their older fields, a greatobject-lesson was presented on the principle of diminishing returns inagriculture.

2.This truth of diminishing returns in agriculture was confused withthe thought of historical diminishing returns. Circumstances of thetime led to the belief that because of lack of food misery must continueamong the masses of men. It was thought inevitable that the populationwould continue to increase and food become more scarce. The idea ofdiminishing returns became thus a prophecy of what would happen, asocial philosophy, that affected the thought of men on every practicalsocial question.

3.The application of the principle of diminishing returns was soonbroadened to include land in other than agricultural uses. This was anatural and inevitable extension of the thought. It was evident that anunlimited use could not be made of a limited area of land, in anyindustry whatever. There is no explanation of rent of business sites,residences, lots, wharves, waterfalls, etc., unless account is taken ofdiminishing returns. If it were possible to do an unlimited amount ofbusiness upon a limited area of land, it would never get more scarce andcould never rise in value. The idea of diminishing returns cameproperly, therefore, to be applied to land in all its uses. It is true,however, that the relatively large areas needed in agriculture make thephenomenon of diminishing returns much more striking in it than in mostother industries.

4. "Diminishing returns" should be broadly applied to all wealth havingindirect uses. The argument for this view may take both a negative and apositive form. Why should we say that the principle applies to land andnot to cases of other industrial agents? Why in the case of a waterfalland not in the case of the water-wheel? Why in the case of the field andnot in the case of the trees in the[Pg 71] field? Are they not all scarce anddesirable goods yielding a limited supply of uses?

Positively it can be argued that the concept of diminishing returns isindispensable to a reasonable explanation of the value of any indirectagents. Anything that could afford an infinite series of uses at oncewould be an infinite supply. If an infinite number of uses could begotten out of one hammer in all places at once, it would pound all thenails in the world. One wagon, one acre of land, one ax, one book ofeach kind, would serve for all men, and duplicates would be valueless.But in the case of every material thing there is a limit of convenientand economic use.

5.Diminishing returns of indirect agents is a special case of theuniversal law of the diminishing utility of goods. Diminishing returnshave to do with indirect goods, while diminishing gratification has todo with direct or consumption goods. They are two species or aspects ofthe same general principle. If the supply of certain indirect agents isincreased, thereby increasing consumption goods, the utility of theindirect agents per unit diminishes. In such a case a diminishing returnis the reflection, back to the indirect good, of the diminishing utilityof the direct goods it helps to secure. Any indirect agent, added to afixed amount of other agents with which it is technically used, iscredited with a diminished utility, just as an additional supply ofenjoyable goods, coming to meet a fixed demand, falls in value.

The concept of technical diminishing returns has reference to a limitedperiod of time. Though a definite agent may have bound up in it a longseries of uses, these cannot be secured at the moment. If a rent-bearer,such as a fruit-tree, were permanent, and men could wait througheternity for its yield, they would get an infinite yield of fruit. Butin any finite period, there can be only a limited yield.

The concept of diminishing returns is one aspect of the great economiclaw of proportionality, that is, it is one expression of thefundamental, axiomatic truth, that there is a best or proper adjustmentof means and ends. It is, therefore, the central and essential thoughtin political economy. On it depend all important conclusions withreference to the value of indirect goods. Out of it grow the importanteconomic theories of rent and capitalization.

CHAPTER 10

THE THEORY OF RENT: THE MARKET VALUE OF THE USUFRUCT

§ I. DIFFERENTIAL ADVANTAGES IN CONSUMPTION GOODS

1.Both rent and the value of durable wealth are based on the value ofthe fruits or products yielded by the wealth. Gratification, affordeddirectly or indirectly, is the basis of all values. The relation of mostkinds of wealth to wants is indirect; but gratification thus affordedindirectly is none the less the basis on which the usufruct of wealth isestimated. Men find the logical or causal connection between directgoods, or final product, and indirect goods, or agents.

To explain the value of the durable wealth, or rent-bearer, a stillfarther step in thought must be taken. The value of the rent-bearer isbased on the series of rents which it affords. To explain how theserents are added to give the value of the indirect agents is the task ofa theory of capitalization. This being the relation, a change in thevalue of the product changes the rent, and this in turn changes thevalue of the rent-bearer. The theory of rent, therefore, has to beginwith a review of the valuation of enjoyable goods.

2.In a group of consumption goods, all of the same quality, themarginal utility declines as the quantity increases. If the quantity ofan article capable of ministering to man's wants is very limited, itsvalue is high. If the supply of something of uniform quality, for whichthere is no substitute, is scanty, the value is estimated withoutreference to any other grade. If a fishing tribe caught very few fish,[Pg 74]but these were all equally good, and if no other food were to be had,fish would have a high ratio of exchange with every other kind of goods.

If the quantity increases, the value of each unit of the whole supplyfalls, as the importance attributed to its parts declines. If an Indianhunting-party met with unusual success, the value of buffalo meatdeclined. If there is a remarkable potato crop, potatoes fall in value.

3.In a series of consumption goods of different qualities, the lowergrades acquire value only as scarcity increases in the higher grades.If difference in quality between two grades of apples is marked andthere is a superabundant supply of the best grade, no importance isattached to the poorer. But if the better grade becomes scarce, theappetite for the poorer grade increases, and finally it, too, will beconsumed. In some years the small, knotty apples are allowed to rot onthe ground; in other years they are gathered and are sold at goodprices. But if there is an abrupt difference in quality, and hence inthe marginal utility of the two grades, the value of the better goodsmay rise considerably before there is any recourse to the poorer. If thedifferences in quality are very slight, the presence of the lower gradeshas the effect of limiting the increase of value of the higher grades.Practically in almost all kinds of goods there are gradations inquality. Complete uniformity is of the rarest occurrence. When did oneever see a basket of peaches that were all of the same size, ripeness,color, flavor, and perfection? If the step from the higher to the lowergrade is very slight, resort is immediately made to the next lowergrade, some of which is substituted for the higher.

There is an independent reason for the value of each grade of goods;each grade would have value if there were none of the other, but theymutually affect each other's value when they exist, side by side, in thesame market. The marginal utility of each is lessened by the presence ofthe other.[Pg 75] And thus, two or ten grades constitute for many purposes asingle supply as they shade into each other or are merged bysubstitution.

4.Goods of the lowest grades, having no marginal utility, are freegoods. This is a simple truth, but it has important bearings. There maybe said to be an "extensive margin of utilization" of many consumptiongoods. The poorer grades of apples, rotting on the ground, themultitudes of waste things not valued, are on the margin of utilization.When a lower grade is used, the margin is extended. The value of goodsis measured upward from the margin of utilization, but this is simply tosay that their value is measured from zero upward.

Likewise, there is an intensive marginal utility in consumption goods.As the better grade of apples becomes more scarce, they will be usedmore sparingly and kept to satisfy only the intenser wants. Thesuperiority of some consumption goods, either in quantity or quality,often is exactly analogous to the "differential advantage" spoken of byeconomists in the case of productive agents. The differential advantageof the highest grade over the grade of free goods, whose value is zero,evidently is the whole value of the highest grade.

§ II. DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS

1.Rent varies with the quality of the products yielded by agents,other things being equal. Let us take first a[Pg 76] simple case where theagent is the sole condition of the product. If there is but one treebearing a certain luscious fruit, or but one spring yielding a mineralwater, the rent of the tree or spring being equal to the value of theproducts must vary as the quality of the products varies. If two or moretrees are standing side by side, they will be compared with regard tothe difference in the quality of their fruits. If two fields differ inquality, greater importance will be attached to the field capable ofproducing the better grade or variety of fruit or product. A peculiarmineral quality in the soil may impart to wine a choice flavor that canat once be recognized by experts; while other fields, distant but a fewrods, cannot by any effort be made to produce wine of the same rarequality. There is said to be a marked difference in the success ofvineyards lying only a short distance apart on the shores of the largerlakes of New York. Nearness to the water moderates the temperature,often prevents frosts, and hence insures the ripening and quality of thefruit. In the Santa Clara valley, as in other parts of California, thereis a frostless belt, sharply marked off from the lands where it isunsafe to attempt to cultivate the delicate orange-tree and othersemi-tropical plants. In manifold ways differences in geologicalformation affect the use of land and the success of many industries. Onone side of a little creek is limestone land, on the other shale, thelimestone producing a crop larger and of better quality. When thepeculiar nature of the one field is found to be the cause of theexceptional quality of its fruits, the difference in value is attributedto it.

If there is but one grade of agent, it is, of course, valued withoutreference to any lower grade. The effect of the presence of lower gradesof agents is to lower the value of the higher, inasmuch as the lowergrades are substituted for the higher. There may be at first enough ofthe higher grade of agents to produce all the fruit wanted of the betterquality. If, then, there is an increasing demand, and the additional[Pg 77]yield can be secured only with greater effort, the value of the productwill rise. The presence of poorer grades, however, checks that rise,because use can be shifted to them. The value of grade one is not highbecause grades two, three, and four, which are worse than it, areavailable, but because they are not of better quality than they are.Poor as they are, their presence reduces somewhat the intensity ofdemand for the best grade. Indirect agents, therefore, are seen to besubject to just the same comparisons, substitutions, and estimates, whentheir value is considered, as are direct consumption goods.

2.The rents of two agents differ as do the quantities of goods yieldedby them, other things being equal. In the case just considered, thequantity remained the same while the quality differed; now is to beconsidered the case where the quantity differs while the quality remainsthe same. It is possible that one grade of agents is "poorer" because itproduces less fruit, not fruit of poorer quality. Consider first thestatic problem. If both agents yield fruits exactly alike, the value ofequal units at the same place and time must be equal, and the usufructswould vary in just proportion with the quantity of product. Now considerthe dynamic problem. If the desire for that fruit increases, rent wouldgrow as scarcity became more felt. The agents yielding, under theprevailing conditions, the largest product, would first be used; later,the poorer agents. The possibility of resorting to the poorer agentswould keep the better from rising so high.

3.When two agents are necessary to secure a product, the valueattributed to each is influenced by competing uses. The thought of oneagent independently producing a certain product is far too simple tocorrespond with reality. Two or more agents unite to produce a singleproduct, and each agent at the same time can be used for acquiring otherproducts. Complex as the problem appears, it is solved according to theprinciple of marginal utility at every moment in every market. Thedifferent uses, figuratively speaking, bid for an agent, and thus itsmarginal utility is determined just as is the price of a good by thebidding of buyers. Indeed, it is the bidding of buyers, indirectly. Themore urgent the use, the higher the bid. The felt importance isreflected from the consumption goods that are sought, to the agent thatwill aid to get them. Two or more agents that are mutually needed forthe acquiring of a product are complementary goods. A complementaryagent may be either other material agents or labor.

When labor is applied to an agent, either to improve the Quality or toincrease the quantity, it is subject to the law of diminishing returns.In the effort to increase the quantity of products, labor is appliedfirst more intensively to the better agents. If it meets withresistance, if returns diminish, it is transferred to any of the pooreragents that have in them uses of as high grade as those still in thebetter agent. The superior effectiveness of the earlier over the laterunits of the added agent is called the "differential advantage" of thetwo fixed agents. The result of a day's labor applied to a field may berepresented by 100, a second day's labor by 90 (it being only ninety percent, as effectual), a third day's labor by 75; but it is more usual tosay that the first field produces 10 more than the second and 25 morethan the third, the second 15 more than the third. To the agent fixed insupply is attributed the difference in the effectiveness of the agentthat is applied.

4.The marginal uses of indirect goods are free uses.[Pg 79] Here again isnoted the close parallelism in the process of evaluating direct andindirect goods. There is an extensive margin in the use of an indirectagent, a point in the gradation from the better to the poorer agentswhere the materials and forces are left unused and have no value. Landbeyond that point is free. Outworn goods in manifold forms, oldpictures, old machines, having no longer charms even for a rummage sale,form a no-rent margin of wealth. On every hand a great multitude ofthings unused and worthless differ by only a shade from things thatstill are used and valued. Every rubbish-heap, rag-bag, junk-shop, andgarret contains things once prized, now lingering on the margin ofutilization.

There is also in agents an intensive margin, beyond which are certainunexploited uses in the things that we already have. This is a moresubtle thought, but it has been already discussed in connection withdiminishing returns. These potential uses in agents, uses which in theexisting conditions lie outside the margin of utilization, of coursehave no value. We have noted that there is an equilibrium between thesetwo margins. Rent is measured from a zero point of utility either in agood, or in other poorer grades of goods.

A corollary of this proposition is that there is a limit to the rentalthat anything can yield under any given condition. Below the presentmargin of utility of any goods there exist great quantities of freegoods, unused goods, or unexploited uses. It is only uses above thismargin that yield rent. Rent is the difference between the value of thebetter grades and the value of the free goods. It is therefore due tothe limitation in the supply of indirect agents of the better quality,or to the scarcity of the more effective uses in those agents.

5.Rent may be redefined as the value of the scarce uses of wealthwithin a given period. Rent is the felt importance of the usufructs ofagents in securing gratification. It is measured by the marginal utilityof any particular grade[Pg 80] of agents in securing products. Thesedefinitions and the discussion throughout this chapter applies toeconomic rather than to contract rent. In fixing and agreeing oncontract rent, men are seeking to estimate the importance of indirectgoods, the importance that an agent will have in getting a product. Theyare bidding for the use of things, and what they bid is contract rent.Contract rent is based on the existence of economic rent. Economic rentdoes not depend on contract rent, but on the differences in theeffectiveness of agents to secure a given product. If there were notdifferences in the product, and no limits to the supply of indirectagents, rent could not exist; it would be inconceivable. But thesedifferences existing, economic rent inevitably arises, for men cannotkeep from attaching value to the things that affect their desires.Contract rent in turn appears wherever the use of wealth becomes anobject of exchange and agreement between men in a free society.

CHAPTER 11

REPAIR, DEPRECIATION, AND DESTRUCTION OF WEALTH: RELATION TO ITS SALEAND RENT

§ I. REPAIR OF RENT-BEARING AGENTS

1.The continued rent of indirect agents is dependent on the continualrepair of certain parts necessary for their efficiency. All earthlythings wear out or decay. Whenever man's hand is withheld, nature takespossession of his work, regardless of his purposes. Dust gathers onunused clothes, and moths burrow in them. Shut up a house, and windowsare shattered, roofs leak, and vermin swarm. To close a factory is tohasten the time when buildings and machinery will be piled upon therubbish heap. The most magnificent and solid works of man have crumbledunder the finger of time. The earth is strewn with ruins of giganticengineering works, aqueducts, canals, temples, and monuments, whoserestoration would be no less a task than was their first building.Everywhere vigilance and repairs are the conditions of continued uses ofwealth. Some works of nature, such as waterfalls, may appear to have acontinued use without repair, but they bear rent only when used withother things that must be constantly mended. A certain amount of laboron the banks of the mill-stream, and certain repairs on the dam, thewater-wheel, and the gates are necessary. By a fiction in businesscontracts the waterfall may be dealt with apart from those conditions toits use, and may be rented, as a field is, with the agreement that thetenant keep up the repairs.

The efficiency of land as mere standing-room usually does not seem to bedependent on repairs. But here again the land yields rent in connectionwith other rent-bearing agents (such as houses and other agents aboveground), which must be repaired. Standing-room on land is not a completeindirect agent; it is but one of the conditions for carrying on anindustry, and even it often requires repairs to make it usable. Rangingfrom these extreme cases of stableness and durability, indirect agentsvary to the extremes of fragility and ephemeralness.

2.Most of the qualities that contribute to make land fertile inagriculture being destructible, the constant repair of tilled land isnecessary to its continued fertility. If any things could be said to beindestructible, they would be some of the works of nature. In a sense,all matter is indestructible. Man cannot annihilate it, he can simplychange its condition. But in economic discussion it is the value ofthings that is being considered, and from this point of view everythingis in some degree destructible. The effects of bad husbandry areeverywhere apparent, and in many regions fertile fields have beenphysically and economically destroyed. In Asia, lands that oncesupported millions, perhaps hundreds of millions, of population are nowdeserts. Egypt, for a time reduced to a semi-desert condition, has onlyin the past century been restored to a certain extent by the use of newmethods and a return to the old ones. Many of the areas that were thegranaries of Rome can now hardly support a sparse, half-starvingpopulation. The lands, or at any rate, the elements that gave themvalue, have been destroyed.

Even in young America may be seen the effect of a failure to keep landin repair. As the new rich lands of the West were opened up, the oldlands in the East were allowed to wear out, and many of them wereabandoned. On the new lands in turn the same methods were followed,using up the first rich store of fertility with no attempt to keep upthe quality of the soil. This may have been the best policy for[Pg 83] thetime; it would not have been economical to employ Old World methods ofintensive husbandry when such rich extensive areas were being opened up.But the process was one destructive of natural resources. As settlementmoved westward, great forests fell in ashes, and the soil was robbed ofthe fertile elements which it had taken centuries for nature to storeup.

3.The machinery and appliances used in transportation andmanufacturing are all perishable in varying degrees. Take as an examplethe great agency for transportation, the railway. The roadbed, which isbut the natural soil excavated or filled to a better grade, is the mostpermanent part; yet every frost weakens, every rain undermines, aportion of it. Earthquake, landslide, and flood fill up the ditches, ortear down the embankments. Constant work is needed to keep it fit andsafe for use. Above this is the track, slightly less permanent, morefrequently changed. The ties rot, and even the rails of steel must be attimes replaced. The rolling-stock is still less durable, and thedifferent parts vary in length of life. It is said that the wheel-tiresare renewed four times, the boiler three times, and the paint seventimes, before a locomotive is entirely worn out. The oil used in thewheel, which is a necessary part of the running machine, has to beapplied every day.

There is a great difference in the length of life of manufacturingappliances. The building is fairly durable; yet an averagedepreciation-rate of one and one half per cent. a year must be allowedto offset a reduction in its value of over fifty per cent, in thirtyyears. Machinery differs greatly in durability; well-made, substantialmachinery depreciates about five per cent. yearly. The engines andboilers depreciate more rapidly than the running gear; the loose toolshave to be replaced every second to fourth year; while the materialsconsumed in the industry must be repaired and replaced at everyrepetition of the process of manufacture. If a factory is to bemaintained in its efficiency in accordance[Pg 84] with the terms of therenting contract, and is to continue its renting power, everything aboutit must be from time to time repaired and replaced.

4.Neglect or postponement of repairs must cause a falling off of therent-earning power. The neglect of repairs may have different resultsin the factory. The neglect of one kind simply reduces present rentalwhile not preventing the future restoration of the plant to its fullefficiency. If certain necessary tools wear out and are not replaced,the factory as a whole will be less efficient. Each part of the entireoutfit being needed in due proportion, the loss in rental willcorrespond not merely to the lost efficiency of the missing tools, butto the crippled efficiency of the remaining appliances. Failure to applyseed to the land causes the land as a whole to be useless for thatyear's crop. In other cases, neglect of repairs increases the expensesof repairs and cuts off future rental. The adages, "A stitch in timesaves nine," and "An ounce of prevention is worth a pound of cure," mustbe acted upon in every industry. The neglect to repair a roof causesdamage to an amount many times the cost of a new roof. Failure toreplace a bolt costing five cents may result in the rack and ruin of amachine worth many dollars. A handful of earth on a dike may save awhole country from destruction.

Neglect of repairs may be economical, however, when outer conditionshave first reduced the demand for the agent and consequently the rental.When the line of travel changes, it does not pay to keep an old hotel upto the same state of repair as when it had a great patronage. Oldfactories sometimes may better be allowed to depreciate while the priceof repairs is invested in more prosperous industries. In a decliningneighborhood the houses fall into decay, the owners seeing that "itwould not pay" to keep them up.

§ II. DEPRECIATION IN RENT-EARNING POWER OF AGENTS KEPT IN REPAIR

1.Even where repairs are thoroughly kept up and present rent isundiminished, future rents may be decreasing because of natural decay.Changes go on in the substance of things which cannot be prevented byany attention to repairs. The wood in a framework will decay, the metalscrystallize. There is also an unpreventable wear of parts that cannot bereplaced without replacing the whole machine. It is the aim of themodern manufacturers to make machines like the wonderful one-horse shay,every part of equal durability. The development in America of the systemof "interchangable parts" has greatly simplified and cheapened repairs,and has lengthened the working life of machines; nevertheless their lotis the scrap-heap at last. This general depreciation appears to benearly avoided in large factories where there is serial replacement ofthe parts, but occasionally some invention or some improvement ofprocess necessitates an almost completely new equipment. An old man oncesaid to me: "I have lived in this house forty years: it was well built,has been repainted regularly, has never been allowed to leak a drop, andit is as good as it ever was. I see no reason why it could not be keptto eternity if always kept in repair." But the same could not be said ofthe house now. In general, there is finally a termination of therent-earning power of wealth, and the whole has to be replaced.

2.A change in inventions and processes may reduce the rent of agents,independently of their material condition. Rent is dependent on theindirect relation of things to wants; that relation may be changed ifsome other agent is found fitted to serve these wants more directly. Notonly do the materials of houses change, but fashion and engineeringskill change, making the old mansions cheerless and inconvenient,[Pg 86] andaffecting their rent-earning power. At every moment, in a progressivesociety, many rent-earning agents are being thrown out of use. Themachinery in flour-mills has been almost completely changed, parts of itrepeatedly, while the roller process has been substituted for the oldmillstones. Water-power, because of its uncertainty, has been replacedin many places by steam-power, and in many places steam-power in turn,has been rivaled by water-power since the improvements in the generationand transmission of electricity. A change in the process of making paperthrew out of use much machinery that was only in part saved by itsremoval and adaptation to the making of coarser grades of paper. Manyminor inventions in the iron industry, still more the invention of theBessemer process, threw out of use great numbers of the old appliances.

3.A change in the outer conditions that give occasion to the use ofagents may cause depreciation. The exhaustion of materials on whichmachinery is employed may reduce its usefulness. A sawmill located inthe midst of a forest has a high-earning power while the forest lasts,but when the forest is cut off the mill itself declines in value. Unlessit can be removed to another forest and thus have its earning powerrenewed, it will have the value only of scrap-iron; it has become anindirect agent in the wrong place. Oil-boring machinery where a richsupply of oil is found has a high rental for a time, but when theoil-fields give out the machinery falls in value, being worth more orless than the cost of transporting it according as the next oil-field isnear or far. Changes in fashions, calling for different kinds ofproducts, cause a depreciation in the value of the old agents. Coarsesalt, evaporated by the sun, was used by our fathers, but the finerproduct of the steam process is driving out the product of the old solarplants. As homespun went out of use, much machinery still in goodphysical condition was cast aside. Changes in transportation workrevolutions in industrial methods. Many prosperous small forges on thecountry[Pg 87] roads of Pennsylvania became valueless after the building ofthe railroads. New forges were built at favored points where materialsand products could be shipped by rail.

4.The agents employed in any industry range from the more efficient,high rent, down to the less efficient, low rent, grades in a more orless regular series. It follows that as these changes are going on, theplace of agents on the scale of efficiency is constantly shifting. Thevarious agents represent all grades of efficiency. One depreciates,possibly is restored later and takes a high place, and again depreciatesuntil finally it is thrown out of use. One loom embodies the latestimprovements and corresponds to the most fertile field; another canstill be made to yield a little rent; the use of a third results incertain loss. A great mass of no-rent agents lie just below the marginof utilization in every industry. Some of these are permanentlyabandoned; some will be taken back into use when business conditionsimprove. When the iron industry is dull, many forges are out of blast;but when iron is again in demand, there is a gradual taking up of theabandoned forges, factories, and machines as they are brought within themargin of profitable utilization. Many agents not actually earning arent, may become rent-earning through a change in business conditions.

§ III. DESTRUCTION OF NATURAL STORES OF MATERIALS

1.A large part of industry is now conducted without regard to thepreservation of the source of income. A striking example of this is theuse, or rather the destruction, of the American forests. In the lastcentury the demand for lumber grew rapidly both on account of domesticneeds and of the needs of the older countries. Great quantities of woodhave been used and still greater quantities wasted, trees being girdled,the ground burned over, the timber destroyed in any way that would clearthe soil—timber which to-day would be of far more value than is thecleared land on which[Pg 88] it stood. Considering present needs andconditions, the labor seems to have been worse than wasted.

The direct effect of this destruction of the supply has been theincrease in the value of timber. To the settlers much of the timber wasworse than useless; they paid and labored to get rid of it; now thesupplies of lumber must be sought on the very margins of our territory:Florida, Maine, northern Michigan and Wisconsin, Washington, and Oregon.The supplies in Washington and Oregon are almost unavailable in theEastern states on account of the cost of transportation. ProfessorMarsh, thirty years ago, strikingly characterized the policy that hasbeen pursued: "We are breaking up the foundation timbers and thewainscoting of the house in which we live in order to boil our mess ofpottage."

The indirect effects of these changes are fully as great as the directones. Forests greatly affect climate, temperature, and soil; theyinfluence the humidity. They equalize the flow of streams, moderatefloods, and by preventing the washing down of the rich soil, keep themountain sides from becoming bare and sterile rocks. So, within the lasttwo decades, the people in America have begun to think of forestry. Itspurpose is to restore the forests to the condition of permanentrent-earners, to make the mountains yield not a temporary supply, but aperpetual crop of timber.

2.The extraction of coal and other mineral deposits reduces for futuregenerations a supply already limited. The coal deposits in the earthhave only recently been drawn upon. A small city like Ithaca probablyuses to-day a greater quantity of coal than was used in all Europe twocenturies ago. The large deposits of coal and their early development inEngland long gave a great advantage to English industry over that ofother countries. In England, however, has first been felt the fear ofthe exhaustion of the coal-supply. Professor Jevons, in 1861, soundedthe note of alarm; he prophesied that because the coal deposits ofAmerica were many times as great as those of England, industrial[Pg 89]supremacy must inevitably pass to America. Already the supremacy in coaland iron production has passed to America, and that in textiles soonwill come. In England the accessible supply of coal is limited, deepershafts must be sunk, and the coal gotten with greater difficulty and atgreater expense. Coal has risen in price in England within the last fewyears, and will continue to rise in the future. The coal deposits ofAmerica are thirty-seven times as great as those of England, but eventhese will soon be exhausted. And yet on the part of all except the coaltrust, there appears in America a thoughtless disregard for the future.Supplies of copper, iron, and lead in favored positions are likewiselimited, and are being rapidly centered in the hands of great companies.The increasing demand for these products insures a steadily risingincome from their annual use. The value of the mines, being based on theseries of incomes they will yield, may increase while their unusedtreasures dwindle in quantity.

3.The exhaustion of natural stores of material is due to civilization,but it threatens to put an end to industrial progress. The savage doesnot go deep enough to use up permanently the world in which he lives. Heuses the fruits that he finds, and those fruits are, almost withoutexception, renewed the next year. The only mines that were worked out inancient times were gold and silver mines, while the mines of usefulmetals were touched but lightly. Within the last century the earth'scrust has been exploited with startling rapidity. Scientific knowledgeand mechanical improvement have combined to unlock the storehouses ofthe geologic ages. At the ever-increasing rate of their use, manyimportant materials must be exhausted in the not far distant future.While it is probable that substitutes will be discovered for many ofthem, the outlook in some directions has little promise. To treatterminable incomes, exhaustible sources of supply, as permanent sourcesof income, leads alike to unsound theory and to reckless practice.

CHAPTER 12

INCREASE OF RENT-BEARERS AND OF RENTS

§ I. EFFORTS OF MEN TO INCREASE PRODUCTS AND RENT-BEARERS

1.While man destroys some agents of production he multiplies manyothers. We have noted many kinds of depreciation, destruction, andwearing out of wealth; but the normal thing in a healthy society is anincrease, on the whole, of rent-bearers. The increase of rents is due totwo causes: changes in the agents by which they become more efficienttechnically, or more numerous; and changes taking place outside of theagents, affecting the utility of the products. The first of these willbe considered in this section.

The increase of the efficiency of agents is usually the aim of theindividual producer, and thus is brought about an increase of the stockof wealth. In some cases, however, improvements such as the dredging ofharbors or as the protecting of forests, are made by men collectivelythrough the agency of governments. Somewhere, however, the desire forthese changes must arise in the minds of individuals. Increase of mostthings involves "cost" or sacrifice, in the psychological sense; thatis, man must strive, perhaps suffer, to get a certain result. This end,therefore, must be in itself desirable, and social organization must besuch as to present a motive to the men to make the needed effort.

2.Rent-bearers may be increased in quantity and improved in quality bythe adaptation of natural resources to man's purposes. To get food, menuse the tracts of land that under the conditions give the largestproduct. Other tracts[Pg 91] less fertile, or for some reason less available,are ditched, tiled, and diked, and fertilizers are carried up steephillsides to make a soil upon the very crags. In commerce andtransportation, new ways are opened by canals, railroads, and tunnels.An isthmian canal will raise the efficiency of ships plying between NewYork and San Francisco, enabling them to carry a greater amount offreight within a year. The tolls will represent to the users anexpenditure only partially offsetting the increased efficiency of theagents of transportation. By the building of wharves, the dredging ofharbors, and by many other methods, indirect agents are constantlygrowing in number and efficiency.

3.Rent-bearers may be increased by inventions and improvements thatmake machines stronger, quicker, and better. This proposition is notlogically different from the preceding. A machine is an arrangement ofmaterial things through which force may be indirectly applied to movematter. No fast line divides machinery as regards form, purpose, orcause of value, from the artificially improved natural agents that wehave been discussing. Just as a field is drained, plowed, and cultivatedto fit it better to yield a crop, so is the iron ore shaped into a formcalled a machine, better fitted to cut, carve, and weave as man wills.Machines are merely adaptations of natural resources.

Increase in machinery may be either in quality or quantity. The twocauses have in most cases the same result. If the quality or efficiencyof looms is doubled, it is as if their number had grown in likeproportion. In its economic function the beast of burden may notillogically be classed with inanimate machines. The horses in Americahave been remarkably improved of recent years by the importation ofthoroughbred stock from Europe. Ten or fifteen years ago the number ofhorses in the United States was found to have decreased, and there wasmuch comment on this evidence of a declining industry. It was not atonce recognized that there was embodied in horse-flesh more horse-powerthan ever before,[Pg 92] as a single Norman horse has the strength of severalMexican mustangs. Numbers alone are not the measure of efficiency.

4.The increase of wealth and the betterment of environment go on aswell through the increase in the number of appliances and through theirimproved arrangement, as through changes in their kind. A machine is anadjustment of various natural agents to each other so as to make a moreefficient agent, and machines in turn may be adjusted as parts of alarger system of production. The ideal of the modern factory system isso to arrange the machinery that no bit of material will make anunnecessary motion. The log, once started through the mill, is carriedautomatically from one machine to another until it emerges as a roll ofpaper or as a box of tooth-picks, ready for use. In an Americanwatch-factory one man tends twelve or fifteen automatic machines. Asmall brass rod is fed automatically to the machine; a piece is cut off,is picked up by a human-like metal hand; is put into a lathe, andshifted or held firmly while it goes through fifteen or twentyprocesses; and then is dropped into a box where it is ready for the"assembling" of the watch. As the machinery improves, factories makingallied products are grouped to make a system still more efficient.

As the number of agents increases they are distributed so as to be wheremost useful to the owner. A man having two umbrellas keeps one at hisoffice and the other at home; a student having two books of the samekind keeps one at his room and the other at the university; a farmerhaving two hoes keeps one at the barn and the other in a distant field,and by this distribution the agents are increased in efficiency.

The aim of a progressive society is to enlarge the environment, andconstantly to adapt it better to the service of wants. This is donelargely by mechanical agents, which capture the natural forces of theworld, put them into the right place at the right time, and make them dothe right thing, or which group and relate the materials of the[Pg 93] worldin the right ways. Some of the groupings in the chemical and physicalworld that do not fit man's purposes may be made to do so. The world inthis way becomes more and more a great workshop, better and betteradjusted to man's wants.

5.The betterment of the environment of society in some directionsreduces the rent of other parts. The wish of the individual is to raisehis own rent-bearers in efficiency, but in doing that he affects theagents owned and controlled by others. The ideal from a socialstandpoint is to increase not rent but the welfare of society, and thisis not always the ideal of individuals seeking their own interest.However, as the efficiency of some agents rises, it becomes unnecessaryand unprofitable to use the less fertile fields; they cease to berent-bearers, and the rent of the richer fields falls under theinfluence of the new supply of products. Some inventions suddenlyincrease the efficiency of free goods to such a degree that the lessefficient rented agents are thrown out of use, and the margin ofutilization is moved to a higher plane than it was on before. Improvedtypes of machinery more or less rapidly displace the older, lessefficient types, which, therefore, more or less completely lose theirrent-bearing power long before they are physically worn out. Whenimprovements in agriculture that are applicable to a considerable areaof land take place, and the product thus is increased and cheapened, thepoorer land is abandoned. Inventions and improvements thus graduallybecoming common property, increase the free goods and free uses notbearing rent and open to every one. One who improves the quality of amachine or the economy of a process may thus unintentionally injure someof the owners of low-rent agents, while unintentionally increasing thewelfare of the mass of men for whom the margin of utilization is thuslifted.

§ II. EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS OF INDIRECT AGENTS

1.Changes in the number and kind of competing resources may raise therents of particular agents. Rents may increase without increase in thequantity or number of a particular group of agents or without change intheir technical efficiency. As changes in the conditions of society mayreduce rents, so other changes may increase them. Agents of the samekind may diminish in number, either absolutely or relatively. If some ofthe competing machines are destroyed, the rents of the machines thatremain rise, while if new supplies are found, either in nature or byimproved industrial processes, the rents of the older agents fall.

2.The discovery of new uses for agents or for their products raisestheir rents. Farm land of the poorest kind often is found to containvaluable mineral deposits. Such a lucky find has lifted the mortgagefrom a farm in eastern Pennsylvania, from which, in two or three years,has been taken feldspar exceeding in value the agricultural products ofthe same land in the last fifty years. The discovery of building stone,coal, natural gas, or oil land may make the annual rent (or royalty) ofland tenfold its former total value. Fitness to produce nettles is notordinarily a virtue in land, but the discovery that certain fieldsproduce a superior quality of the nettle used for heckling cloth, causesthem to take on a new value. A mineral spring, because of the supposedor proved healing properties of its waters, may be as good as a mine tothe owner. Peculiar fitness for the cultivation of celery may convertmarsh land into a substantial source of income.

Social changes are constantly causing agents to shift from lower tohigher uses. As population grows and groups about new industries, farmland is used for residence lots, and in turn for business purposes.Rents therefore rise, and this[Pg 95] rise is reflected in the higher sellingvalue of the land. If a new demand arises for the product of anymachine, its rent rises, although it may continue to turn out the sameproduct as measured by number or quantity. For, if consumers increase, agiven supply of agents becomes relatively smaller than before.

3.A rise in rents due to social changes may be relatively permanent ortemporary. Business conditions sometimes change quickly. An urgentdemand for special machinery raises quickly its rent and value. It issaid that lace machinery is sometimes thrown out of use for severalyears, until a sudden renewal of the demand for lace causes the rentalto equal, in two years, more than the original cost. At such times thevalue of factories increases greatly, but after a few years ofprosperity business again collapses. Such prosperous periods are theopportunity of the business man and of the promoter to sell the factoryat its highest price. Machinery adapted only for a special product willnot sell as readily when less needed for its special use, as that which,like a turning-lathe, can be used for many purposes; but the morespecial the appliances needed for a certain product, the higher, moreabnormal will be their temporary value when they are suddenly needed.Land near the site of an exposition takes on a very great value andagain falls after the exposition is over. During the Boer War horses andmules rose in price in the United States on account of Britishpurchases.

A rise in the value of any agent at once causes an attempt to duplicateit or to find a substitute for it; this attempt, if successful, puts acheck or sets a limit to the rise. In this search for new devices theman who can see most quickly and clearly has a key to wealth. Some kindsof agents, as rare minerals or tools that can be produced only by highlyskilled labor, cannot be increased rapidly in number and remain high inprice for a long period; and favorably located building sites illustratethe same principle. In some cases,[Pg 96] it is true, the demand may be due tosome temporary cause, as in a period of unsound land speculation, butusually the growing value of location is due to a steady and abidingchange in population or business.

4.Such public utilities as are guarded from competition by franchises,often rise in rental with increase in population. The leading classesof public utilities referred to are waterworks, gas-works,street-railways, ferries, and wharves. This evidently is only a specialillustration of the principle just stated, where it is not easy to finda substitute for certain agents. Public franchises entitle the owners tospecial, sometimes exclusive, privileges, and protect them legally fromcompetition. Not all franchises are valuable; many street-railways areunfortunate ventures, the earnings being insufficient to pay expenses,to say nothing of interest on the investment. But when they pay greatly,their high value is due to the impossibility of competition. The cars,mules, dynamos, steam-engines, and other agents combined to furnishtransportation, have a special earning power because other similaragents are forbidden to be used in that market.

5.Industry abounds with cases of unearned increments of value due toaccidental and social causes raising the rents of wealth. The termunearned increment may be defined as an increase in rents (or value) ofagents, due to something other than the efforts or merits of the owner;in fact, it is that of which we have been speaking. In some casespowerful or wealthy men can bring about social changes in entirelylegitimate ways. The owner of a large factory, moving it into thecountry, may buy up surrounding land and found a city, convertingpasture lands and corn-fields into valuable building lots. Again, socialchanges are produced immorally, if not illegitimately, when wealthy menor influential politicians cause laws to be passed which inure to theiradvantage but which may ruin many other citizens.

In most cases, however, social changes are impersonally caused. Theindividual owner who profits by them is powerless[Pg 97] to affect the result.He can only adapt his conduct in some measure so as to reap anadvantage. He can strive to increase the number and quality and to getcontrol of such agents as he foresees will yield higher rents. In makingsuch a forecast there is chance of loss as well as of gain. The term"unearned increment" has been frequently used in recent years. It isoften assumed to be a peculiar thing, sharply in contrast to otherchanges in value. The foregoing hasty review may serve to suggest howmanifold and complex are the instances of it, and what an important partit plays in modern industry.

DIVISION C—CAPITALIZATION AND TIME-VALUE

CHAPTER 13

MONEY AS A TOOL IN EXCHANGE

§ I. ORIGIN OF THE USE OF MONEY

1.The exchange of goods by barter is extremely difficult in mostcases. Thus far we have not considered the subject of money and have sofar as possible avoided even the use of the term. Value in economicsdoes not depend on money, and is not necessarily connected with it.Things can be compared in their utility, their importance to our welfarecan be estimated, without the use of money. Many problems of economicscan be discussed pretty thoroughly and solved without the use of theword money or any term of similar meaning. But to-day it is impossibleto go very far in the discussion of economic questions without using theconcept of money, which is interwoven with every practical andtheoretical problem in economics. We have delayed to the farthest limitthe formal recognition of the subject; but we are now approaching thequestion of capital and interest, and it is no longer possible to avoida preliminary consideration of the money concept.

In considering the problem of exchange of consumption goods, we haveassumed that it is possible to weigh small differences in the marginalutility of goods, and that such[Pg 99] differences have influence on exchange.Now in exchange by barter such a small estimate is impossible. In barterthings are exchanged directly for each other in kind. If the two thingsdo not chance to coincide in value, the exchange cannot be completed. Anequivalent must be found, or a multiple, if the marginal utility of twogoods is to be equalized for either party by exchange. As in most casesthis adjustment must be very incomplete, many exchanges that otherwisewould be advantageous cannot take place. In the earlier stages ofdevelopment, this careful estimate of value is not found. Children donot make it. The typical trade of the small boy is a "trade even";Johnny exchanges his gingerbread for Jimmie's jack-knife. It marks anepoch in the industrial development of the boy when he begins to keepstore with pins, and no longer trades candy for apples, but both forpins, which have become the medium of exchange in his boy world. He thencan express values in much more exact terms. In our society mostchildren begin early to grow familiar with this conception; buttravelers find some savage tribes still in the earlier childish stage ofdevelopment, unable to grasp the thought of a general medium ofexchange. When, through lack of a medium of exchange, there is a failureto adjust utilities, there is a loss of the possible advantage in eachdefeated exchange. There is a further waste of time and of vain effortsto find something that will be accepted in exchange, and the lossoffsets a large part of the gain even when the barter is effected.

2.Some kind of enjoyable good in general use comes to be money, thatis, to be accepted as a medium of exchange. The difficulties justmentioned are met by the use of a medium of exchange. A medium ofexchange is simply one kind of wealth which is taken, not for itself,but to pass along, in the belief that it will enable the taker togratify his wants and distribute his purchasing power in a moreeffective way. Money is an "invention" in that it is a means of exchangethat came into use independently in a great[Pg 100] number of communities. Itis not an invention in the sense of a mechanical device suddenly hitupon, but rather in the sense of a social custom that grows as itsconvenience is tested by practice. Money is used, in some degree,everywhere except in the most primitive tribes. Historically viewed, themoney first used in any community is seen in every case to be acommodity capable of giving immediate gratification, a direct good inimmediate use. It then gradually comes to be used as money, which is anindirect agent. Still later, when the money habit is well established, akind of material having no utility except as a medium of exchange maycome to be used.

3.Money in its origin is that good which best unites the qualitiesthat make it easy to sell, to carry, to know, to keep, to divide, andunite. It is evident that if some one commodity is gradually to take onthis use as a medium of exchange there will be a choice; some thingswill be better fitted than others. First, this thing must have thequality of salability, or marketability. In the channels of exchange itis taken not because it is wanted for itself, but because it will helpto get something else that is wanted. To be sure of a ready sale in aprimitive community it must, however, be something that is generallydesired. Food and clothing, which supply the fundamental physical needs,are the most generally used and desired of all goods. But they do nothave the second quality of a good money material, that of great value insmall bulk, transportability. Food is bulky. The carrying of a venisonor of a bag of wheat on one's back a short distance requires an effortas great as that for the procuring of the food. Furs, however, have thisquality in a high measure, united with other qualities of money, as isshown by their general use in the exchanges of northern tribes. Thirdly,a thing must be recognizable; counterfeits must be easily avoided, andthe quality must be easy to test: this is the quality of cognizability.The love of ornament is universal in human societies, and gives value tomany[Pg 101] materials combining in a high degree the qualities thus far named.Fourthly, the money material, when taken in exchange, must remainwithout loss of quality, perhaps for long periods, until it can beexchanged again. Food does not answer to this requirement, being organicand perishable. But some of the metals, having value in small bulk,salability, cognizability, and durability, step by step displaced otherforms of money. Finally, money must be made of a material easy to divideand unite. It is a great convenience in small transactions to be able torepresent a fractional value by a small coin. The money material thus,likewise, is easily shifted to and from its money use. It is a very poormoney that has not this quality, yet a thing may serve for money inlarger transactions without it. Cattle, slaves, and land have been thusused, although they answer in a very rough way these fundamentalrequirements of the money material.

4.The changing material and industrial conditions of society changethe kind of money that is used. The money use, as has just been shown,is a resultant of a number of different motives in men. Things that havethe highest claim to fitness for money with a people at one stage ofdevelopment would have a low claim at another. As each of these stagesis passed, the thing used as money either increases or decreases in itsfitness. The final choice depends on the resultant of all theadvantages. The use of a material may become more general or less so.Shells used for ornament in poor communities cease to be so used in ahigher state of advancement, and thus their salability ceases. Furs,used at some stage of development as money in all northern climes, ceaseto be generally marketable when the fur-bearing animals are nearlykilled off and the fur trade declines. Tobacco was at one time inVirginia a great staple. Merchants were always ready to take it, and itsmarket price was known by all; but as it ceased to be the almostexclusive product of the province, it lost the knowableness andmarketability it[Pg 102] had before. In agricultural and pastoral communitieswhere every one had a share in the pasture, cattle were a fairlyconvenient form of money, but to-day would be a most inconvenient one; acity merchant exchanging goods for Poland China pigs and Texas steerswould envy the proverbial owner of a white elephant.

The value of the money material may fall so greatly as a result ofgreater production, as in the case of iron, tin, copper, that it becomesunsuitable. Again, as wealth grows, as exchanges increase, as the use ofmoney develops, as commerce extends to more distant lands, the heavier,less precious metals fail to serve the money need, especially in thelarger transactions. Thus, in a sense, different commodities compete,each trying to prove its fitness to be a medium of exchange; but onlyone, or two, or three at the most, can at one time hold such a place.Silver and gold, step by step, often making little progress in acentury, have displaced other commodities, and are the staple anddominant forms of money in the world to-day. Every community haswitnessed some stage of this evolution. Now nations are divided into twogreat groups, silver- and gold-using, in accordance with the metals theyuse as standards. The gold-using countries are the most advancedindustrially, requiring the most valuable money metal. Many countrieshave passed in the last century from the silver to the gold standard,and in an intermediate period have tried to use both standards. TheAsiatic and South American countries mainly use silver, while most ofthose in North America and Europe use gold.

While industrial changes thus affect the choice of money, in turn moneyreacts upon the other industrial conditions. If a new and moreconvenient material is found, or the value of the money metal changes toa degree that affects the generalness of its use, industry is greatlyaffected. The discovery of mines in America brought into Europe, in thesixteenth century, a great supply of the precious metals, and thischange in the use of money reacted powerfully on[Pg 103] industry. Money beingitself one of the most important of the industrial conditions, isaffected by and in turn affects all others.

§ II. NATURE OF THE USE OF MONEY

1.Money in all its money uses is an indirect agent, to be judged justas other indirect agents are. The key to this section is the thoughtthat the function of money is to serve as an indirect agent. Money isoften, by a figure of speech, called a tool. Literally a tool is a bitof material which, taken in the hand, is used to apply force to otherthings, to shape them or move them. Figuratively, this is just whatmoney does. A man takes it in his hand not to get enjoyment out of it,but to apply force, to move something, and that which he moves is theother commodity. Adam Smith aptly likened money to the road and wagonsthat transport goods, thus gratifying wants by putting things into amore convenient place. Money is only one of a multitude of forms ofwealth. It is not even the most "valuable"; it has value just as otherindirect agents have. The loss caused by taking away an indirect agententirely is greater than the benefit usually attributed to it. Itsutility in the extremest conditions is greater than its marginal utilityunder ordinary conditions. Food is not credited in the market withenormous value, but if starvation threatened, all else would be givenfor food. In a like manner, each individual values money according tothe importance of the marginal service it renders, but the marginalservice is far from measuring the loss that would be caused by theentire disuse of money. In a society without money, industrial processeswould be very different, and exchange would be hampered in almostinconceivable ways. It is true, therefore, that money is an economicfactor of high importance, but it is not so indispensable as many otherfactors to which far less value is attributed.

A poor community has little money because it cannot afford[Pg 104] more; itgets along with less money than is convenient just as it gets along withfewer indirect agents of every other kind than it could use. Pioneers ina poor community where the average wealth is low, cannot afford to keepa large number of wagons, plows, good roads, or school-houses. If thecommunity were wealthy enough it would have more of these and of otherthings, and great as is the convenience of money, poorer communitieshave to do with little of it. It is, therefore, a confusion of cause andeffect for poor communities to imagine that their poverty is due to lackof money.

2.Out of its use as a medium of exchange comes the use of money as acommon denominator of values. Money serves as a "common denominator,"for, as all other things can be expressed in terms of money, through itthe value of other things can be compared. The other things can beexpressed in money because they are constantly exchanged for it. Allthings being compared with money, can in turn be compared with eachother. Some consider this service as a common denominator to be theprimary and most important function of money. Sometimes a money ofaccount is found, which is not in use as a medium of exchange. Cattleand slaves have served as money of account while not used as a medium ofexchange in larger transactions. Money of account is used, as theshilling in New York, which for a century has not been in use at all asa medium of exchange. It is, however, only apparently a denominator ofvalue; the shilling represents five fourths of ten cents. The actualstandard is the dollar; the shilling is only a habitual form of speechand is mentally reduced to terms of the money in use. A decimal systemis a great convenience in the use of money as a common denominator, butnot indispensable. It is a striking fact that England, until a few yearsago the greatest industrial nation, still uses a money unit requiringcumbrous calculations.

3.Other uses of money are as a storehouse of saving[Pg 105] and as a standardof deferred payments. These uses grow out of those before mentioned.The standard of deferred payments is the unit of value in which debtsare agreed to be paid later. It is evidently most convenient, andtherefore almost inevitable, that the common denominator in which allvalues are expressed from day to day should continue to be taken as thevalue unit when the completion of the exchange is delayed a day, amonth, or a year. This will be more fully discussed at a later stage ofour study.

The use of money as a storehouse of saving was more common formerly thanit is now, when better ways than the hoarding of money are found for"laying up for a rainy day." In some measure, however, money is hourlyserving this use, which is still an important one. Money kept to be usedto-morrow or five years hence is a storehouse of value for twenty-fourhours or for five years. In either case it is being kept to complete ata later time its use as a medium of exchange. A thing ceases to bemoney, logically viewed, the moment its owner keeps it without thepurpose that it shall be spent ultimately. The typical miser is a manwho has lost his reason as regards the money use. Money must be deemed,therefore, to perform the same essential service as a storehouse ofsaving that it does as a medium of exchange. In either case it is to bekept only to the moment when it will afford the maximum of pleasure.

§ III. THE VALUE OF TYPICAL MONEY

1.The money use, historically considered, is a new use added to agood, and increases the demand for that good. The history of anyparticular kind of money may be traced back to a point where it was notmoney, since which the money use has been added gradually to the otheruses. The value of the material later to become money is determined, asis that of any good, according to its marginal utility in all possibleapplications. No new theory is required to explain[Pg 106] the value of thissame commodity as it gradually acquires the added use of a medium ofexchange. The new use influences demand for the thing just as do theother uses. What is here said must be understood as applying to typicalmoney, which is at the same time a commodity having other uses. Otherthings that are not typical money come later to be used as money, underlegal regulations.

2.A good that comes to be used as money continues to have a commodityuse along with the money use. When a thing is wanted for some qualitythat gives immediate gratification to the user, the explanation of itsvalue is simple. Ornaments, shells, feathers, food can be seen to have adirect want-gratifying power. The money use is one that works nophysical or visible change in goods, and to many minds it appears sodifferent from other utilities that it remains quite mysterious andincomprehensible. To persons accustomed to thinking on problems ofvalue, this case appears to be no more difficult than that of anythingelse having two or more uses. Cows are used for milk, for meat, and asbeasts of burden. Each of these uses is logically independent as a causeof value, yet all are mutually related, the values of cattle beingdetermined by the consideration of all their uses united into one scaleof diminishing utility.

3.The uses of money make it a rent-bearing form of wealth. The rentthat money yields is in the form of convenience and economy. This issometimes rendered directly as psychic income, as in enabling thetraveler to buy his dinner, for the money thus yields gratification justas does the carriage in which he rides. One may go for a day to theseashore without a parasol and suffer from heat, or without money andsuffer from hunger. In every case where money is retained for a time inpossession, there is expected from it a usufruct as great as, or greaterthan, can be secured from anything else for which it can be exchanged.This usufruct is a net surplus, or income, yielded by a sum of moneyundiminished in amount up to the moment it is spent, but[Pg 107] meantimeincreasing in the gratification it will help to secure. In many cases inpractical business money yields gratification only indirectly, as theobjective contract rent received as interest for borrowed money inbusiness uses, or as economic rent when the use of money in businessenables one to secure a larger income. Because money yields a rent menmake the sacrifice involved in keeping a stock of it on hand. On thisrent is based that part of the value of money that is derived from itsmoney use. As the use of money as a standard of deferred payment, orbasis of commercial obligations, does not require that it be owned bythe parties writing the contract, this use of money is a free good, asort of social by-product of the medium of exchange. When money is inuse in a community, any person may draw up contracts in terms of money,borrowing and lending, buying and selling wealth, later to be repaid inother wealth or services expressed in the circulating medium.

4.Money may be defined as a generally accepted material means ofpayment and medium of exchange. This, its primary and essentialfunction, may appear to be less important as new modes of balancingaccounts of wealth are devised. But its functions as a commondenominator of values and as a standard of deferred payment areincreasingly important in an advancing society. It is this expression ofthe value of all other things in terms of money which may well be deemedthe essential characteristic of the capitalistic age. In earlier periodswealth was thought of and expressed in concrete terms; now it isexpressed in money. The general use of money affects men's ways oflooking at wealth and speaking of it. Without appreciating the natureand function of money, it is impossible to grasp the significance ofcapital in modern industry, the consideration of which we are now toenter upon.

CHAPTER 14

THE MONEY ECONOMY AND THE CONCEPT OF CAPITAL

§ I. THE BARTER ECONOMY AND ITS DECLINE

1.The use of money prevails in very different degrees in various partsof the United States. The members of this class, representing nearlyevery state and territory in the Union, have lived amid very diverseindustrial conditions. Some know best the country where conditions aresimilar to those of a hundred years ago; some, the villages where may beseen the handicrafts and the small general store. Others know better thecities with their varied industries; while doubtless still others,through family relations, know of the methods of great wholesalebusiness, perhaps even of the larger commerce and foreign trade. Methodsdiffer in the different lines of business, and according as a man is afarmer, a merchant, or a banker, he has different ideas as to the use ofmoney and of the part it plays in modern industry. You come to thisstudy with different experiences and preconceptions; as a result everystatement produces a somewhat different impression on each of you. Thisis true in general of the statements made in political economy; but itis most strikingly true in the discussions of money. A city boy rarelysees a case of barter; whereas in many parts of the West and Southwest,and in the mountainous districts of the East, a large part of thebusiness is carried on in this way. Town and city in New York statediffer in this respect, but hardly more than do the rural districts ofthe different[Pg 109] sections of our country. Banks are very numerous in theEast, are few in the Northwest, and still fewer in the South. Men canunderstand each other better in a discussion if they are conscious ofthe fact that they do not instinctively take the same point of view.

2.The extent to which, on an average, money is used in differentcountries of the world, differs widely. Statements in political economymust be guarded; few of them can be taken as universally true. As thedifferent parts of one country may be contrasted, so may the differentcountries. The use of money in Siberia would be much less than that inMoscow and St. Petersburg, and again the average use in Western Russiais doubtless less than that in Austria. In Austria the money use is lessdeveloped than in Germany. While there is now little difference betweenGermany and France in this respect, France for a long time was the moredeveloped industrially and made greater use of money.

There is greater use of money in the cities of the outlying countriesthan in the rural districts. In the cities of Mexico banks and creditagencies are employed as in the American cities. The rural districts aremore backward and make far less use of money than is the case in theUnited States. The great ports of China are provided with all thefacilities of modern banking. In the great cities of India one can get abank draft that will be paid in any part of the world. But go a verylittle way out of the cities of China and India, and conditions greatlychange; money is far less used and principally as a storehouse ofsaving.

3.In a historical view the European nations are seen to begin with abarter economy and to pass through great changes as regards the use ofmoney. Here the view shifts from a comparison of different nations atthe same moment to a comparison of the same nation through a period ofcenturies. To understand, even in a measure, what is about them men mustknow out of what it grows. In the early Middle Ages money was usedchiefly in cities, and there[Pg 110] only to a limited extent. Almostuniversally a "barter economy" prevailed, or, as it has been called, a"natural economy," a term taken from the German "Naturalien," whichmeans natural products, enjoyable things, as opposed to money. Naturaleconomy, therefore, means that condition of society in which things areexchanged in kind. In the Middle Ages land was the great and dominantform of wealth. The prince himself was dependent on land for his income.The conquering chief or invader took possession of the land and parceledit out to his followers, and they in turn to their vassals. The incomeof the rulers was in the form of "Naturalien" (wheat, chickens, eggs),the kind and amount of which was fixed by contract or by immemorialusage. The landlord had land as his wealth and income-getter; the tenantreceived the use of the land in payment for his labor.

The condition of the serf appears to have been, under thesecircumstances, inevitably connected with the "barter economy" as appliedto the renting of land. A farm cannot be moved, and in medievalconditions its products mainly had to be used on the spot. If the serfwas to use and enjoy the land, he had to stay upon it. Having no moneyhe had to pay in labor or in products, for its usufruct. In those timesthe powerful man, politically, was also a wealthy man whose wealthconsisted of landed estates. Between the landlord and the serf existed alasting relation, inherited rather than voluntary, but similar in itsconditions to the renting contract. The villein had the use of thestock, pastures, fields, woodlands, provided he kept them undiminishedand undestroyed to transmit to his children. Under such conditions therewas great fixity of economic relations. While in some respects this wasa happy condition, it had its disadvantages. The renting contract, inconnection with a fixed rotation of crops and some communal modes ofcultivation, hindered improvements. The more intelligent cultivatorcould not change his methods for the better. It may be seen not only[Pg 111]that the use of money on a medieval manor was slight, but that theconditions for the growth of the money habit were most unfavorable. Theterms of agricultural contracts, the modes of speech, the habits andthought of the mass of the people, were therefore determined by theconditions of the barter economy. A change in these respects was slowlyworked by forces originating outside, in a very different industrialenvironment.

4.With the growth of cities developed a new class of wealthy men and anew view of wealth. The student of history knows of the conflict thatgrew up during the Middle Ages between the cities and the landedaristocracy. It found its cause in economic conditions. There wereobvious differences between the wealth of the feudal landlords, and thewealth that grew up in cities. One must be used mostly on the spot, theother can be moved. The fruits of one are perishable for the most part;the fruits of the other can be kept for a longer period. The methods ofagriculture are exceptionally stable; production by handicraftsmen isdependent on the peculiar skill of the workman, giving greater room forinvention and a premium on skill. The one industry may be carried on byservile labor; the other can be efficiently followed only by freeworkers having the ambition to excel.

The use of money grew up in the city. The density of population made iteasy, the growth of wealth made it possible, and the nature of theexchanges made it necessary. Whereas the relation of landlord and serfunder the renting contract continues from year to year, the relation ofthe buyer and seller of shoes, hats, etc., in the city, is temporary,these things forming only a part of man's economic needs. Barter with aparticular individual is much more inconvenient if exchange is onlyoccasional than where the contract is a continuing one, and there is anannual balancing and settlement of accounts. So, as city industry andcommerce grew the use of money increased, both in small[Pg 112] neighborhoodtrade and in the larger transactions with distant countries; and thusthe business methods of the cities grew into sharper contrast with thoseof the rural districts.

5.The loan and hire of wealth in medieval cities came to be expressedas a money loan. The loan of money and of other wealth expressed interms of money, began in the cities. The use of money and the expressionof the value of things in terms of money was common there throughout theMiddle Ages. Moreover, as the movable forms of wealth multiplied, theagreement to return borrowed wealth in kind became impossible in cities;the loan in terms of money became the only practicable thing. A merchantembarking on a trading expedition must have such a number and variety ofgoods, that he finds it both very difficult to rent them and wasteful intime to enumerate them and return them in like kind. It therefore becameusual to make a loan either of the things expressed in terms of money,or of money with which to buy the things, thereby reducing to a single,simple, easily interpreted contract, the indebtedness which theborrowing of a thousand different things occasioned.

Such a contract differed not in economic purpose, but only in form andterms of obligation, from the renting of wealth. The church writers,however, got much confused in regard to the nature of money loans. Theydid not see that it wasthings which the merchant wished to borrow.They did not see that the money loan was simply a more convenient modeof transferring the use of wealth from one person to another. Themoralists and lawmakers of that day said: Money is unfruitful, thereforetaking interest for it is robbery. We cannot follow here the controversyas to the justice of interest on money which involved other ideas thanthose mentioned, but even to the present time traces of the old fallacymay be seen more or less plainly in the economic theory as well ofconservative writers as of the socialistic opponents of interest. Theprincipal sum expressed in the loan contract was called the capital sum,fromcaput, head, and the amount[Pg 113] paid for its use was first calledusury, money for the use. How the word interest came to take its place,and the word usury came to meanexcessive interest is one of the mostinteresting chapters in economic history. The term capital then came tobe connected with city wealth, with movable forms of wealth, with thingssupposed to be peculiarly "the product of labor"; and interest wasassumed to be connected only with this capital. The term rent on theother hand was connected especially with the use of land. The connectionwas a historical accident, but it has had an important influence oneconomic theory.

6.The owners of city wealth and of country landed estates often wereopposed as well in social and political as in economic affairs. Thepractical economic questions of the Middle Ages and the practicalpolitical questions largely turned on these two groups of interests. Themen of wealth in the cities, the merchants and manufacturers, often werefound opposed to the landed aristocracy. This social division betweenthe commercial and agricultural classes doubtless helped to strengthenthe prejudgment as to the nature of the two kinds of wealth. Indeed, inview of the situation, it may have been in a measure justifiable andexpedient to contrast the thought of city wealth, which has come to becalled capital, with that of landed wealth. But even if it were, it isnow misleading and erroneous to continue the use of such concepts in anew country and in our modern conditions.

Indeed, for centuries the sharper features of the contrast have beensteadily softened. The money economy of the city gradually spread to therural districts, but never entirely displaced barter, which lingerseverywhere. Important steps toward a money economy were the commuting offorced or customary labor of the serfs into a money payment to the lord,and at the same time the substitution of money payments for payments inkind (use of lands, specified goods, etc.) to the peasants. Thus arose afree peasant[Pg 114] class receiving wages. But land continued to be rented andlanded estates to be hereditary throughout Europe. As they did not passfrom hand to hand as a commercial or marketable form of wealth, theirvalue was rarely, if ever, expressed in terms of money and as a ratio tothe rent they bore. The result was the fixing of the erroneous idea thatagricultural wealth is essentially different in the character of itsservice and yield from wealth used in manufactures. One phase of theerror was the idea held by the physiocratic writers and by Adam Smiththat in agriculture "nature labors along with man," while in manufacture"nature does nothing, man does all." This view was corrected by latercritics (Buchanan, Ricardo, and others), but the main portion of thefallacy persisted in the supposed contrast between the characters of theservices performed by natural resources and by artificially producedwealth.

§ II. THE CONCEPT OF CAPITAL IN MODERN BUSINESS

1.The development of the use of money and credit has led to theexpression of the value of all indirect agents, without distinction, interms of money. This is a capitalistic age. The development of a classof money-lenders has led to a transfer of all sorts of wealth fromowners to users by means of money. As in medieval Europe city wealth wasbought and sold, and measured and expressed, so in twentieth centuryAmerica are the farm, the waterfall, and the mine. Every purchase withmoney owned or borrowed is to-day called an investment of capital. Toinvest means to clothe, and an investment of capital is clothing moneyin any kind of wealth, whether it be a ship, a factory, or a farm.

Interest on money is the contractual form in which more and more the useof wealth is paid for. The borrower does not ask the wealthy man to buyfor him a factory and to rent it to him. It is not impossible for thetransaction to take that form; but in practice it is inconvenient. Thecapital[Pg 115] concept, the expression of wealth in the form of money, spreadsover almost the whole face of the economic world. In promissory notes,mortgages, capital stock, bonds, and many other forms, are expressed theobligations of borrowers bound to pay regularly a sum called interestfor the use of the multifarious wealth they have chosen to employ.

2.Capital to-day may be defined as economic wealth expressed in termsof the general unit of value. In economic discussion new conditionsmust be recognized and an attempt made to adapt definitions to thelanguage and needs of practical life. By this definition, capital, atany given moment of time, includes all economic goods in existence, whenthey are thought of in terms of their value. But things have differentdurations, some are parts of the capital of the world only for aninstant, others for a week, a month, or years. Most capital is composedof things durable in a large degree.

It has been seen above that there is no reason for keeping things unlessthey will increase in value, that is, unless a rental is logicallyattributable to them. Everything kept for a day, a month, a year, iskept because thus it will continually give off uses or by accumulatingthem it will become more useful. Hence, when interest is defined as thepayment for the use of capital, it is connected with all wealth that isexpressed in the capital form. In practical business and in theoreticaldiscussion this is the idea of capital that alone can be consistentlyfollowed. Capital is the value equivalent of a sum of money "invested,""clothed" in forms of wealth purchased and exchanged. Wealth has becomefluid in modern times; it was crystallized in medieval times. Under thenew conditions, wealth, expressed in the mobile form of capital, flowsinto the most distant corners of the industrial world.

3.Capital must not be identified with money although it is expressedin terms of money. While money and capital are not identical, neitherare they opposite or mutually contradictory.[Pg 116] Money is but one speciesof the genus capital. It is a particularly durable form when industry asa whole is considered, a particularly fleeting form in the individual'spossession, and a particularly important, though not necessarily themost important, form in its social significance. The things composingcapital are concrete things, scarce forms of wealth, some of which areyielding gratification at the present moment, or are destined to do soat some future moment; others of which are not themselves giving directgratification, but are indirect agents for the gratifying of wants. Tothis latter group belongs money.

The caution contained in this proposition may appear to some to besuperfluous, but it is most needed. The mind is so prone to identifythings that are expressed currently by the same words. The ease withwhich money and capital are thus confused has led to various popularfallacies on practical economic questions.

4.Renting wealth and borrowing capital have the same economic purpose,but the capital contract presents certain peculiar features. In theinterest contract for the loan of capital the interest always is andmust be expressed in money; the capital sum must be expressed as value;and the interest rate expresses the relation between these two values.In each of these features the interest contract is in contrast with therenting contract. While the rent itself may or may not be expressed interms of money, the value of the rented wealth is not so expressed, andthere is no rent-rate expressing the relation between the two values.

As here presented, the essence of the capital concept is in the mode orform of expression of wealth, not in the physical nature, the origin ofits value, or any peculiarity in the kind of wealth; the content of theconcept is limited only by man's thought of wealth, every good becomingcapital when it is capitalized, that is, when the totality of its usesis expressed as a present sum of values. The difference between thewealth concept and the capital concept is therefore subjective,[Pg 117] notobjective; it is a difference in the mode of man's thought regardingwealth. The rent contract and the interest contract are modes ofborrowing and lending which reflect this difference of conception. Intheir effort to express more exactly to themselves and to others therelative felt importance of their environment, men take in turndifferent points of view, and use different modes of expression. Themost developed and exact of these devices for the social expression ofvaluations, which became possible only with a money economy and widenedmarkets, is the capital concept, whose nature has been analyzed here.

Summarizing the thought of this chapter, it may be said that the capitalconcept has gradually developed with industry, and is now the mostwidely prevailing mode of expressing the quantity of wealth. It is usedin the discussion of all the most important problems of modern industry.The questions of income from wealth, of trusts and corporations, nearlyall that is most notable in the development of modern industry, requirethe use of the capital concept. Yet (returning to the thought with whichthis chapter started) in many of the outlying districts other modes oflooking upon wealth are employed. References to modern industry must beunderstood usually as applying to the most developed capitalisticconditions.

CHAPTER 15

THE CAPITALIZATION OF ALL FORMS OF RENT

§ I. THE PURCHASE OF RENT-CHARGES AS AN EXAMPLE OF CAPITALIZATION

1.From the twelfth to the sixteenth centuries the sale and purchase ofrent-charges was the most general form of borrowing and lending wealth.A rent-charge in the Middle Ages was a definite income that was to bepaid out of the rents of an estate, business house, manor, etc. Theproperty was said to be "charged" with the payment of that income, andsome estates were passed on for generations from father to son chargedwith a certain rent. It was thus possible for the owner of money to buya rent-charge, either one that had been created a generation before, ora new one created by some landowner for the especial purpose ofborrowing money to go on a crusade or of improving his estate or ofinvesting in other business. The transaction took this form: thepurchaser of the rent-charge paid a sum of money, called the capitalsum, and obtained in return a rent-paper entitling him to receivepermanently a given income. The house or land was security for the debt.The seller gave up the right to the rent as it came in year by year, andreceived in return a capital sum in hand. Generally he had the right torepay the sum whenever he wished and thus extinguish the rent-charge.Logically viewed, the purchaser bought an equitable part of the income,therefore an equitable part of that rent-bearing wealth. In effect itwas just like a loan except that the purchaser of the rent-charge[Pg 119] couldnot demand the repayment of his money. He could, however, sell therent-charge when he wished to get his capital out. Gradually it becameusual to sell and transfer rent-papers just as is done to-day withmortgages and bonds. Rent-papers thus came in the fifteenth century tobe negotiable paper in somewhat general use. There was a rise and fallof the value of the rent-paper with changes in the demand for investmentin rent-charges or with changes in the security.

2.The sale of rent-charges grew out of an industrial need of theexchange of safe permanent incomes for larger sums of wealth. Thecustom of the purchase of rent-charges grew up in the cities. Theincreasing wealth of cities, the growth of commerce and enterprise,caused rent-charges to be sold by the owners of houses and real estatein the cities, and the custom spread to the country. It is an instanceof the way income became more fluid in the cities during the MiddleAges. This kind of loan contrasted strikingly in the Middle Ages withthose loans made commonly by reckless kings, prodigal nobles, anddistressed peasants to secure consumption goods. Merchants needed largeamounts of wealth for their growing enterprises, and they felt that ifthey could get a capital sum down they could make it earn more than therent-charge. A perpetual income of one hundred units was thereforeexchanged for a sum at the moment of twenty or twenty-five times thatamount. As the wealth of the cities increased, there were some men whowished to retire from active business, and there were widows andchildren with property which they could not manage directly. Suchpersons either could not afford to take the risks of active business, orcould not judge of them, and they formed a class of lenders or investorsseeking some safe income. Between the two classes of active merchantsand capitalist lenders, each of whom saw his own advantage and followedit, the practice of buying and selling rent-charges thus grew up.

The practice was allowed by the church, though interest and the lendingof money were forbidden. The loan was substantially a loan of capitaland the rent-charge was substantially interest, but in the eyes of thechurch moralists there was a marked difference, in that the obligationto the purchaser of the rent-charge was secured by a permanent andsubstantial form of wealth, and the contract usually was favorable tothe borrowers. In its origin the practice was not merely an evasion ofthe law against usury, but a convenient form of contract. It doubtlesscame, however, to be used as a means of evading the law of the churchagainst usury, and thus became an entering wedge for the general use ofmoney loans.

3.Rent-charges had a market-value, varying with time and place, andexpressed as a number of years' purchase of the rent-charge. Thesellers of rent-charges were influenced by many motives: a lord wishedto build a castle, or go on a crusade; a farmer wished to improve hisestate; a merchant wished to embark on larger ventures. Opportunitiesthus opened in the cities for men of wealth to get a fixed income for apayment of ready money. In the cities, the buyers seeking a fixed incomewould bid down, or bid up, the value of the rent-charges, which thuscame to have a quotable market value. In time, greater and greateramounts were paid by the investors in return for the guarantee of agiven income. In rural districts the value of the charges was low, thatis, the capital sum was but ten or twelve times the value of the annualrent-charge; while in the cities it rose to twenty and even twenty-fivetimes the annual rent-charge.

A memento of this practice, probably, is the manner in which the pricepaid for land is spoken of still in England and the continentalcountries in a phrase quite unfamiliar to American ears, as a certainnumber of "years' purchase." If an estate is sold for twenty times theannual net rental it is said to be sold at twenty "years' purchase."This does not mean that the rental for twenty years only[Pg 121] is sold, butthat the rentalin perpetuity is sold for twenty times the annualrent; that is, the land is sold outright for twenty years' rent paid atonce. The estate is looked upon primarily as yielding a fixed income;the value of the permanent possession of the estate is thought of as acertain number of times the value of the income secured. "Years'purchase" means, therefore, the length of time required for the incometo amount to the purchasing price.

This attains the thought of the present value of the estate, or capitalsum in it, though the capital sum is thought of as a multiple of theincome, instead of the income being calculated as a percentage of thecapital value. Now at the rate of "ten years' purchase" an investment ofmoney in land affords an annual interest of ten per cent., as each yearthe rental is one tenth of the original investment; twelve years'purchase yields eight and one third per cent., twenty years' purchase,five per cent., and twenty-five years' purchase, four per cent. Increasein the number of years' purchase corresponds to a decrease in the rateof interest which the original investment of money, the capital sum, isexpected to yield. This is equally true whether the investment be in thelegal form of a purchase of the fee-simple of land, or in that of thepurchase of a rent-charge. We are brought to this conclusion: that thepresent value of the rents in perpetuity, of any given wealth, is thecapital value of the wealth; and that the reciprocal of the number ofyears' purchase is the rate of interest that an investment is expectedto yield.

4.The sale of rent-charges has gradually given place to the modernform of money loan. The conditions of the contract in the sale ofrent-charges were gradually changed for greater convenience. When thepurchaser (the lender) was given the right to require repayment of thecapital sum at the end of a specified time, the transaction was broughtstill closer to an ordinary loan. In this form, the sale of rent-chargesis still found in southern Germany, but the greater[Pg 122] simplicity of themoney loan, and of the sale outright, has led to the almost total disuseof the older form of transaction.

The purchase of rent-charges was long looked upon as a very differentthing from the loan of money, but to modern eyes it is not, and the olddistinctions between the moralities of the two kinds of income appearnow mainly quibbles, justified in a slight degree by certain socialfacts of the time. The rise of industry led to different ideas on thelending of money; the prejudice against it weakened in large classes ofthe population, especially in Protestant countries, and its use rapidlyspread. Not until 1830 did a decision of Rome remove all disapproval onthe part of the church. Rent-charges are instructive now as showing themode in which rents began to be capitalized in earlier centuries.

§ II. CAPITALIZATION INVOLVED IN THE EVALUATING OF INDIRECT AGENTS

1.The buying of any indirect agent is practically the purchasing of a"rent-charge." To account rationally for the market value of anything,its importance must be traced back to "gratification." We have examinedand accepted the proposition that if a good is not affording enjoymentat the present moment it is kept because it will yield a rent until itis used. If it is never to afford direct enjoyment, if it is never tomature physically into the class of enjoyable goods, the explanation forits value must be found in the fact that it is capable of yielding aseries of rents of enjoyable goods. In the last analysis the value ofanything must be found in its power of affording psychic income, aseries of psychic rents. Now when such a durable income is boughtoutright, what is the basis on which its value is estimated? What otherthan the rents it will afford? Exactly as did the purchasers of amedieval rent-charge, the buyer of the durable wealth pays a definitesum in return for the right to enjoy a series of future rents. As wasthe case with rent-charges,[Pg 123] however, the amount paid will be less thanthe full matured value of the rents. A long series, even a perpetualseries, may be exchanged for no more than ten, twenty, or twenty-fiveannual rents. While therefore the selling value of the good is the sumof the values of the rents, it evidently is that sum discounted.Immediately, when we have reached this point in the reasoning, ourproposition must suggest itself as self-evidently true in this form: thevalue of any good is the sum of the entire series of rents it contains,discounted, atsome rate, to their present worth. What determines therate of discount is a question that will call later for a fullerexplanation.

2.There are two modes of approach to the problem of interest: one fromthe side of income (rents); the other, from the side of the bearer(capital). The rate of interest expresses a relation between twovalues, the value of the income and the value of the sum loaned, whetherit consists of money or of other wealth expressed in terms of money; Butwhich of these values is primary in a study of the causes of value?Which is the base from which the other is derived by multiplying at therate expressing their ratio? The answer to this question cannot be amatter of indifference to the economic theorist. Universally heretoforethe study of interest has been approached from the side of capital. Acapital sum was said to be invested and to earn a certain interest, thatis, per cent., of that sum. The usage of speaking of the investment ofcapital as a sum given, and of "interest on capital" predisposes themind to this view.

But the approach from the side of income has been shown to be in someimportant cases the historical origin of the rate of interest, and weneed but reconsider reasoning that has gone before to see that this isthe logical order in all cases. Rent, or income, is a link in the chainof value, connecting gratification or psychic income, consumption goods,rent or usufruct value, and finally capital value. To one keeping inmind the logical cause of value, it becomes[Pg 124] inconceivable that capitalvalue could precede income, a view possible only when a fragment of theproblem is seen. This being true, the mere mention of a capital sumimplies the interest problem, and assumes the interest rate. The capitalis of that amount because the anticipated incomes, discounted at somerate, equal that sum. The capital sum is a certain number of years'purchase of the series of rents which can be secured by the use ofwealth in various industries. The owner of a number of dollars (or of anamount of other wealth expressed in dollars) has open to him variousinvestments. The value of any wealth is due to the possibility ofderiving incomes from it. If, however, the expected income fails to berealized, the capital loses its value, or it is revalued on the basis ofthe new rents. The investment is then said to be a losing one. Thus, ateach stage in the valuation of capital, before it is invested and atevery moment thereafter when the valuation is readjusted to the rentsrealized or expected, rents are logically primary, the source from whichthe capital sum is derived.

3.The capitalization of comparatively safe permanent incomes from realestate contains within itself all the factors for the independentdetermination of the interest rate, and is not to be explained merely byreference to "the prevailing rate of interest" in other investments.The value of land usually is explained simply as the capitalizing of itsrents at "the prevailing rate of interest." The rate is assumed to befixed by conditions in manufacturing and commerce, and if five per cent,can be gotten there the capitalist would never buy land unlessinvestment in it were made equally attractive. The cause of the ratethus is supposed to rest outside the transaction itself, the exchange ofland for other capital seeking investment. The economic student is safein assuming always that explanations of this sort are fallacious. Thecause of value in any one exchange or any one industry is not thus to bejuggled and shifted into another industry. It is true that the values ofgoods are so[Pg 125] wonderfully interrelated by substitution that as the priceof fresh beef will affect that of salt mackerel, so the capitalizationrate of machinery affects that of land; but the influence is not fromone side only, it is mutual. When anything has value, it must have initself an independent cause of value.

It can not be otherwise in the particular problem of value calledcapitalization. The first task of scientific study is to state clearlythe nature of the problem. In this case it is seen to be the exchange ofa present sum of wealth for a series of future rents. Whenever there areincome-bearers and buyers and sellers of them, there are the conditionsrequired for the determination of the market rate at which those futureincomes shall be discounted. Manufactures and commerce have no peculiarrelation to this process. By a flight of scientific imagination we mightassume that the stock of indirect agents in the world consisted only ofnatural food producers, and that this stock and its yield wereabsolutely unchangeable by man's will or efforts. Each man in such casewould have to stand with hands tied, and take the fruits as theymatured. Even in such a case there would be capitalization and a rate ofdiscount on future rents. The fruit-tree (that is, the whole futureseries of fruits) would bear a certain relation to one year's yield; thefield would bear a certain relation to its crop. Wherever there arebuyers and sellers of more or less durable agents of it matters not whatkind or origin, there are present the elements and causes for the fixingof a rate of time discount.

4.In practical business may be seen innumerable instances of thecapitalization of both permanent and limited series of incomes. Thesimplest case is the capitalization of an unvarying and supposedlyperpetual series of rents. Whatever the rate of time discountprevailing, rents infinitely distant become infinitesimally small whendiscount is compounded. The present rent is worth most, next year'sless, and so on in a decreasing series.

But social changes alter rental values, and so far as these changes areforeseen, these anticipated or expected rents are made the basis forpresent capitalization. Investors and owners alike may foresee that apiece of land used only for agriculture will, within a few years, betaken up for city lots, or will be needed for a factory or as the siteof a railroad station. The capitalized value would not in this case bebased upon a series of uniform rents each of the amount yielded annuallynow, but on the progressive series expected. In some cases the physicaloutput of an agent may decline while the price of the product increases.Modern foresters foresee that the selling price of the timber will begreater twenty-five years from now than it is to-day, and they thereforeestimate the rental value of the forest on the basis of the futureprice, thus justifying expenditure that would be unwise if presentprices were to continue.

Again the expected series of incomes may be declining, as the royalties(not typical rents) secured from mines. If the income is expectedsteadily to fall, and to disappear at the end of the twenty-fifth year,the value of the mine would be the capitalized sum of a limited anddegressive series of incomes.

Every exchange of a durable agent involves an estimate, rough andimperfect it may be, of that agent's future. The practical men, however,who are thus fixing the "capital value" of goods, are usually only dimlyconscious of the logical nature of the process. In fact the process goeson in a way much less analytical and conscious, much more empirical,than this analysis would indicate. Most men simply buy as cheap as theycan the agents which at the price they believe will add most to theirincome. The future changes are only roughly, not accurately estimated.The shrewd bargainer is the one who foresees more clearly than hisfellows the complex changes to come. Other men blindly follow. Theability and the inability to foresee such changes make men rich andpoor. In all this bidding for capital[Pg 127] the logical basis of the value isthe series of rents. When the agent is bought outright, the veryconcluding of the bargain fixes a relation between the expected value ofthe income and the value of the capital invested. In other words, theexchange of durable agents virtually wraps up in them a net income,which it is expected will unfold year by year when rents mature and aresecured. At the moment of the investment, the expected rents areexpressed as a percentage of the capital sum.

§ III. THE INCREASING ROLE OF CAPITALIZATION IN MODERN INDUSTRY

1.Where a system of exchange is highly developed, things are lookedupon as capital yielding an objective income rather than as wealthyielding immediate means of enjoyment. In the old organization ofindustry most men got most of their living from the things they raisedor made. At the present time goods are gotten in the most indirect ways;men seek wealth because it will yield them an objective or money income,knowing that if they can get the income, they can get other things byexchange. In business to-day, wherever there is a rental, it iscapitalized, has a market value, is bought and sold. Men compete in thepurchase of income-yielding agents. There is a continual contest injudgment among investors to secure the largest rent for the smallestoutlay. On the other hand, the owners of any rental strive to secure thelargest capitalization for it that they can. In this market for capitalit is money rents that are exchanged as an indirect means of arriving atgratifications.

2.The issue of capital stock is the putting of the incomes of wealthinto marketable form. Stock companies, or corporations, are businessenterprises which issue stock, or certificates of a share in theirwealth and income. Doubtless the convenience of the sale and transfer ofinvested capital[Pg 128] by the use of stock, has been one of several reasonsfor the large increase of this form of organization during the pastcentury. Originally the stock of a company taken collectivelyrepresented all the capital invested, and each share entitled the ownerto a given portion of the total income earned. The shares were issued inregular denominations in terms of money, and this amount expressed onthe face of the stock remained fixed. But as a business proves more orless profitable, the value of a share of its income rises and fallsregardless of the original amount of stock issued. At once there is adivergence between the nominal or face value and the market value of thestock. The nominal value is relatively permanent, the same year afteryear; it may increase by further issues, but rarely is it decreased. Butwhen stock is the only form of claim on the earnings that is issued, thefluctuations of the market value of the stock record the real value ofthe business, that is, the capital value of the rents it is expected toyield. But in present practice there are several forms (of which stockis but one) in which an investor may buy a share in the earnings of abusiness. Bonds usually do not give their owner a vote in the managementor make him in the technical legal sense a part owner in the business.Bonds representing money loaned to a company, and entitling their holderto regular interest payments, are nearest in form to the medievalrent-charge. Next stands preferred stock, which entitles the owners toshare first in the dividends, if there are any; and finally the commonstock, which gets a share only when the other claims are satisfied. Bythe multiplication and further variation of these readily salable claimson industrial incomes, the needs and desires of investors are met morefully and with greater precision.

3.Men seek to convert into marketable capital any increase of incomein their wealth or business. A man who invests a given capital sum inmachines, buildings, and materials buys them, as others do, at pricesthat represent their[Pg 129] usual, or market, earning power. If he succeedsexceptionally in his business, he makes the capital earn more than therents on which it was capitalized. The same material wealth becomesworth more because of the reputation of his products, and therefore thetrade-mark and good-will of the business can be capitalized. In thissense a good name can be sold, and is at least as much to be desired,even in a mercenary age, as great riches. Likewise, social changes, newneeds, the growth of population, increase the net income of wealth, orthe rents of a business. The basis of capital value is income, andwhatever be its cause, political or economic, material income can andwill be capitalized and added to the market value of the privilege,wealth, or industry on which the income is conditioned.

Notable cases of this sort arise in connection with public franchises.If a street-railway or a gas-company is given the exclusive right tooperate in a given locality, any income above average interest on theinvestment is capitalized either in the higher price of the stock or inadditional stock issued without the addition of any material to theplant. If the franchise is unlimited, the income may be capitalized aspractically perpetual; if the franchise is limited, and is to expire inthirty or forty years, only the limited series of privileged incomes canordinarily be capitalized. When, however, the managers are able to exertinfluence enough to have the franchise extended, and the investorsbelieve in the skill of the managers and perhaps in their power to bribethe legislators, the value of the stock continues higher than it couldusually be under a limited franchise. Such circumstances becloud thequestion whether the exceptional income arising under the franchiseshould go to the public or to the company. Granted, however, that thecompany is entitled to the income, the burden of proof is on those whoobject to the capitalizing of the income as is done in every otherbusiness.

4.The manipulation of dividends and the resulting[Pg 130] changes incapitalization open up great opportunities for the dishonest increase ofprivate fortunes. A great change in the market value of stock is madeby a comparatively small change in the income it regularly affords, forif the prevailing rate of interest on money loans is five per cent.,each dollar of dividends is capitalized at $20. It might seem that thedividend would be declared if earned, otherwise not. The matter is notso simple and impersonal, however. The control of corporations is vestedin the hands of a small group of directors who have both the opportunityand the temptation to withhold dividends when they are earned, to paythem with borrowed money if unearned, and in either case to keep thestockholders and the public in ignorance of the real condition andearning power of the business. The stocks can, by this manipulation ofdividends, be made a lottery for the legitimate investor, a trap for theunwary, and a source of unrighteous gain by men recreant to theirtrusts.

In this way it may be seen that an earning power not known to bidders inthe market does not enter into capitalization; a fictitious earningpower, however, is capitalized so long as the investors continue to bedeceived. Instances of this kind present problems not only of privatemorality, but of the preservation of free industrial institutions. Thesolution of these problems would perhaps be hastened if the a economicnature of capitalization were more clearly understood. Capital value inmodern industry is everywhere the expression of the serial rents ofwealth, discounted at a prevailing rate of time discount.

CHAPTER 16

INTEREST ON MONEY LOANS

§ I. VARIOUS FORMS OF CONTRACT INTEREST

1.Interest, the amount paid according to contract by one person toanother for credit given in terms of money, is but one expression of alarger problem, that of the difference in present worth of goods at twoperiods of time. This larger problem appears under several forms:first, as a difference in value, due to time, where there is no moneyexpression (to be considered in the following chapter); second, indiscount on a money loan for a short, definite time; third, in along-time money loan at a fixed rate of interest; fourth, in a creditloan—that is, the sale of the thing on credit in terms of money.

The last three cases involve interest more or less clearly.Time-discount, as will be more fully explained, is the basis ofinterest. The interest may be greater or less than the time-discount inthe goods, owing to miscalculation on the part of the borrower or to anunforeseen change in the conditions. Men bid for the use of wealth withthe intention of repaying it at some future time, and the interest theyagree to pay is based on their estimate of the discount of future rents,which they think is involved in the present valuations of the goods.Time-discount is involved in goods, however, in numberless cases wherethere is no contract interest. Even a Robinson Crusoe must recognize inhis consumption goods and in his various indirect agents differences invalue at different periods of time, of which he must take account.

2.Gross interest must be distinguished from net interest. The formsof wealth yielding incomes are so mutable, and are used under suchcomplicated conditions, that both in theoretical discussion and inpractice much care is needed to distinguish between the yieldattributable to the income-bearer, and that attributable to other wealthor services used in connection with it. That the sum paid as interest ona loan contains other elements is recognized constantly in practice. Asin the case of contract-rent allowance must be made for repairs anddepreciation, so in the case of contract-interest allowance must be madefor risk, or the average loss occurring in the industry. Money loaned inhazardous ventures must yield a higher rate of interest. Likewisecapital used by the owner in a hazardous venture must frequently earnvery high returns (not all logically interest) to offset the losses thatare likely to occur.

The lender must also, in estimating net interest, count the cost ofplacing, supervising, and collecting the loan. A pawnbroker lends onlysmall sums and spends much time and effort to keep at interest amoderate capital. Five thousand dollars loaned in sums averaging tendollars represents five hundred transactions, and yet if placed at fiveper cent, it yields but two hundred and fifty dollars a year. While,therefore, the borrower of a small sum estimates the economic interest(or anticipated gain in income) even higher than the oppressively highcontract-interest he may be forced to pay, the lender must credit alarge part of the gross interest to the labor he expends in carrying onthe business.

3.The most usual form of short-time loan is that made by a bank orbroker to business men on security of commercial paper. By commercialpaper is meant promissory notes given by customers of the merchants,bills of lading for goods that have been shipped to their customers, andvarious other evidences of indebtedness that may be offered the banksfor discount. When goods have been sold on time (as thirty, sixty, orninety days) the seller has the[Pg 133] choice between letting the time expireand collecting the bills direct from the customers, and discounting thebills for ready money at the bank. According to the conditions and needsof the particular business, either method may be chosen. In mostindustries there is need for larger capital at the seasons when theproduct is put upon the market. The merchant or manufacturer plans hisbusiness in the expectation of an average rate of discount at suchtimes, and if it chances that the discount rates are abnormally high, hehas no choice but to go on borrowing and paying the high interest out ofthe expected profits of his business. This risk of a change in theinterest rate is one of many chances he has to run.

4.Most debts in modern times are outstanding for a term of years andrepresent the lender's purchase of a claim on the earnings of someproductive enterprise. The simplest forms of long-time loans are thosemade on the security of real estate, which is mortgaged to the lenderfor the term of the debt. Usually the debtor is obliged to pay theinterest either annually or semi-annually, and often, but not always, ispermitted to reduce the principal by partial payments. These real-estatemortgages rest on the security of the particular mortgaged wealth, and,unlike most short-time loans in bank, are not personal obligationsresting on the general credit of the borrower. Most other long-timedebts share this character of being non-personal; if payment isdefaulted, only the particular wealth can be sold for payment, not thegeneral wealth of the borrower. Corporation bonds, issued by railroadsand other large stock companies, have increased greatly in number inrecent years. They yield an income fixed in advance, and are securedusually by mortgage on the entire property of the corporation issuingthem. The income of some special kinds of "preferred stocks" is soguaranteed as to make them for investors substantially the same asbonds. Another large class of long-time loans are those made bynational, state, and local[Pg 134] governments. Tens of billions of dollars ofpublic debts are now outstanding, held by private investors in everywalk of life.

The contract in the case of each kind of these loans provides for afixed term after which the borrower must repay or renew, and for a fixedrate on the nominal or par value of the loan. Nearly all the securities(bonds, certificates, evidences of indebtedness) are salable at a marketrate. It is therefore the income that is fixed, the selling price (orcapital value) fluctuating above or below the nominal sum except just atthe moment when it is payable. The long-time loan thus is very similarin its economic character to the old-time rent-charge.

5.The sale of goods on credit is a mode of lending and involvesinterest in a disguised form. In some cases merchants will not sellcheaper for cash than for credit, for fear of offending their main bodyof credit customers; but this is exceptional, as there are good reasonswhy such a difference should be made. The credit sale usually involvesinterest, and often at a very high rate. In many stores there are twoappreciably different prices, one for "slow pay," the other for "spotcash." If a bill paid at the end of the month is five per cent. morethan the cash price, the difference is equal to sixty per cent. perannum for the privilege of postponing payment. Such a rate of interestis paid only by the improvident, but that is a large class ranging fromfactory workers to college students. The cash discounts allowed bymerchants clearly express the time difference. On fifty to one hundreddollars of outstanding bills, many perfectly honest persons are payinginterest at the rate of seventy-five per cent. per annum. The merchantis forced to make this difference because he must seek not only to earninterest on the capital thus invested, but to recover the costs ofbookkeeping and collections, and the risk and loss of unpaid bills. Thediscounts allowed by manufacturers and wholesale houses measure in thesame way[Pg 135] the difference between cash and credit sales. Not unusual is adiscount of "six per cent, in ten days, five per cent, in thirty, orsixty net." The buyer allowing his bills to run for two months (six percent, for sixty days) pays thirty-six per cent, per annum for the use ofthat money. The difference is so great that it is impossible to carry onin this way a large business against strong competition. Such purchaseson credit frequently are made, however, by dealers in small towns.

6.Interest is often concealed under other forms which increase theapparent rate. This fact is well shown in the ways by which usury lawsfixing the legal rate of interest are evaded. A simple method is for thelender to charge a commission for making the loan, or, if it is a bank,to charge for a pretended cost of exchange to bring the money from someother city. Sometimes the borrower is required to keep larger depositswith the bank than he voluntarily would. Needing $5000, he is compelledto borrow $10,000 and to pay interest on twice as much as he ispermitted to use. Again the borrower, in periods of unusual demand formoney, is forced to make a long loan instead of a short one. When a onemonth's loan at ten per cent, would meet his need, he is forced toborrow for twelve months at six per cent., during ten months of whichtime four or five per cent, is the prevailing rate. In these and otherways the real rate, or burden of the loan, is made different from thatwhich is expressed.

§ II. THE MOTIVE FOR PAYING INTEREST

1.Interest for loans to obtain consumption goods is paid because theyare felt to have greater importance at the moment than an equal amount(either of goods or of money) will have in the future. A sudden stressof misfortune may impart to a thing at the moment far more than itsusual value. One standing face to face with starvation cannot[Pg 136] be worseoff a year hence; often there is good ground to hope that if the presentmisfortune can be relieved, the future better fortune will make itpossible to repay a loan with interest. In other cases, the object of aloan of consumption goods is to increase the future earning-power of theborrower. When the student borrows money that represents to him food,clothing, text-books, tuition, and other expenses incidental to a coursein college, the expenditure is intended to increase the effectiveness ofthe worker. When he borrows he has little earning-power, but with thatfaith in himself which makes the young American so interesting, hepictures himself four years later, sheepskin in hand, drawing amunificent salary with which he can easily satisfy the most exactingShylock. Such an expenditure is sometimes called "an investment ofcapital," but it should be called a consumption loan—nevertheless inmany cases a loan wisely made. To call this an investment of capital isto confuse man, the end of production, with material means.

Sometimes this higher estimate of the present good is unwise, viewed inthe light of wider experience. Goods that meet momentary desire make anexaggerated appeal to untrained minds. The child, the spendthrift, thesavage, cannot properly estimate the relative values of present andfuture. The improvident sometimes lightly agree to pay an exorbitantinterest for an immediate consumption loan, making a ruinous differencebetween present and future gratifications.

2.Interest on indirect agents is paid as a more or less indirect meansof securing gratification. This can be clearly seen when durable agentsare hired that produce gratification directly. A carriage bought withborrowed capital and used for the pleasure of the borrower is expectedto afford a utility greater than that to be gotten by the amount of theinterest in any other way. A spade bought with borrowed capital and usedto cultivate the owner's garden is expected to add products of greatervalue than the interest.

But how is it in case the agent is used to gratify persons other thanthe owner? The music-teacher who buys a piano on credit expects toincrease his earnings by a sum greater than the interest he has to pay.If the addition to his earnings exceeds the interest charge, it isbecause he has found a use for the borrowed capital greater than that onthe basis of which it was capitalized in the market. The amount of theinterest is secured through the pleasures and services the piano affordsto the patrons of the teacher. In the most complex cases of theborrowing and use of indirect agents, there is ultimately this samebasis for the interest: enjoyment afforded by the use of capital in theparticular period. To the borrower, what the capital makes possible isan addition to his income as great as, or greater than, the prevailinginterest. Most loans in our society are now of this sort. Money isborrowed to invest in business, to get better machinery or a largerstock; with this capital is secured a better or larger product, and theproduct finally being sold at a profit, the business man is at a pointwhere he can satisfy his wants without encroaching on his capital.Logically, therefore, the consumer of the product pays the interest inthe price, and the final consumer's enjoyment must be deemed the logicalsource of the money interest. The borrower's motive for paying intereston these indirect goods evidently is his hope of profit throughrealizing a greater money rent than he has contracted to pay for theiruse.

3.The money market in which short-time loans are made is peculiar inthat the money frequently is borrowed to pay debts, not for investment.In beginning the discussion of interest, it always is remarked that itis not money, but capital, that is borrowed and loaned. This cautionagainst the superficial errors that so easily beset the populardiscussion of interest is much needed, but it is well to note a peculiarcase which is apparently in contradiction to this statement. The usualmethod by which money is loaned in the great[Pg 138] industrial centers iscalled discount, which is the exchange of a certain sum of money for anote or other credit paper of a larger amount, the interest thus beingtaken out in advance. Much borrowing in the form of discount is for thesame purpose as other borrowing—to acquire control of more productiveagents, to embark on new enterprises. The peculiarity of the discountmoney-market is that an unusual number of loans are made to meetcontracts that have already been made. There is always a great mass ofoutstanding obligations, and merchants are compelled to renew theseloans on penalty of bankruptcy. This market for short-time loans is notconnected closely with the general market for loanable capital. When theneed is for ready money, other concrete capital cannot flow in to meetit. This special money demand, therefore, in time of greater or lessstress, may fluctuate rapidly, and the interest rate be temporarilyhigher or lower than the rate on long-time loans. This case is similarto that where two markets, as a retail and a wholesale one, exist sideby side, but slowly exerting a mutual influence.

4.In the long-time money loan the money generally is borrowed firstmerely as a medium of exchange to get control of indirect agents. Theborrower of a long-time money loan for productive purposes is alwaysseeking to gain by investing the money in wealth that will yield anincome larger than the interest he must pay. The borrower, therefore,invests in view of the rate of interest, of the market price of thegoods in which he plans to invest, and of the probable chances forearning profits in the business. This case, where certain goods whoseprice is known are approximately selected before the money is borrowedfor investment, is the type of loan to be kept most usually in mind ineconomic discussion.

Evidently the price of these goods, to control which is the real objectof the loan, is merely the sum of the expected rents they will yield,capitalized at the prevailing rate of[Pg 139] time-discount. The borrowerexpects either to make these particular goods earn rents larger thanthose on the basis of which they have been capitalized, or to transferthem to an economy where goods are capitalized at a higher rate than heis paying. The income yielded by these goods, if the borrower'sexpectation is fulfilled, is but the difference between present andfuture rents that has been wrapped up in their capitalization. As timeelapses and the rents emerge in wisely chosen investments, the borrowerhas a surplus large enough to pay the contract interest. It appears,therefore, that the motive of the borrower is to get control of futurerents at prices that already involve, in their capitalization, a rate ofdiscount somewhat greater than the interest he contracts to pay.

5.The rate of contract interest on money loans is adjusted at eachmoment in the money market by the bidding for money loans. This is atrue statement only if it is understood in a somewhat superficial sense.No error connected with interest is, however, more crude than the viewthat the interest rate is in any broad sense due to the quantity ofmoney. Some loans are made apart from the general market, by privateagreement between borrower and lender; but in nearly every such case therate agreed upon is seen to be closely related to that of the generalmarket to which either borrower or lender can resort if he wishes. Thegreater number of borrowers and lenders of money have a range of choicein their bargaining. The interest rate in modern developed money marketsis that rate which brings to equilibrium the demand for money loans andthe money capital available within the period. If the ready, loanablemoney in private hands, in banks, in insurance-company reserves, &c.,increases, a lower rate must be offered to borrowers; if the supplydecreases, a higher rate will be quoted. In the one case, more menborrow; in the other, fewer borrow and more seek to lend. Thus a rateresults, but a rate that is closely connected with larger set offacts—those, indeed,[Pg 140] which determine in the long run the rate ofcapitalization in the community.

6.The individual must adjust his business dealings to the market rateof interest. The market rate is fixed by the bidding of individuals,and every one has something to do with fixing it. In a multitude ofminutely small ways, as present and future goods are compared by men,the rate of interest is affected positively or negatively. But forpractical purposes the individual, counting for little in the midst ofmillions, must look upon the interest rate as beyond his influence.Therefore, while the rate is determined by each to some degree, all thatany one does is to buy or sell present goods, borrow or lend capital,use up or save wealth, according as his own estimate of time-value isless or more than the market rate. In fact, the estimates of individualsdiverge constantly from the market rate, but are brought into harmony bytheir actions with reference both to money loans and to the use andvaluation of the various forms of wealth. A Robinson Crusoe working onhis island and valuing future goods relatively to present goods higherthan before, consumes less; or, valuing them lower, consumes more. Thebusiness man who values indirect agents above the market rate borrows,and if he miscalculates and fails to make them earn the expected rent,he loses. In this experimental way many other acts are influenced by theprevailing interest rate and in turn affect it, thus aiding to formulatesociety's estimate of the value of present as compared with futurerents.

CHAPTER 17

THE THEORY OF TIME-VALUE

§ I. DEFINITION AND SCOPE OF TIME-VALUE

1.Time-value is the difference between the values of things atdifferent times. Things differ in value according to form, place,quality of goods, and according to the feelings of men, and—not leastimportant factor—according to time. The simplest and clearest case oftime-value is the difference noticeable in the same thing at differentmoments. Is this good worth more now or next week? Shall this apple beeaten now or next winter? These questions can be answered only aftercomparing the marginal utilities which differ according to the varyingconditions of the two periods.

All the other cases of time-value can, by the practical device ofsubstituting other goods of equivalent value, be reduced to the typicalcase of comparison of the same thing at different times. The comparisonmay be between very similar things, the one consumed being replaced by aduplicate. An apple borrowed now may be returned next year in the formof one of the same size and quality. The essential thing in thiscomparison is not physical identity, but equivalence in size, sort, andquality at the two periods. This is borrowing under the rentingcontract.

But two or more quite different things may be expressed in terms ofanother thing and so be made comparable. Money becomes the value-unitthrough which different things may be reduced to the same terms forcomparison. With this mode of expressing the value-equivalence ofvarious[Pg 142] goods, the interest contract first becomes possible, money (thestandard of deferred payments) being the thing exchanged (possibly onlyin name) at two periods of time. What is really compared are variousgratifications which may be produced by very different material thingsor services. In its last analysis comparison of values at differentperiods of time must be a comparison of psychic incomes, of two sums ofgratification. The comparison of the value of a bushel of apples withthat of a barrel of potatoes or a suit of clothes at the same momentappears simple enough. When all are expressed in terms of money, thecomparison of each with its value-equivalent at a later date becomeseasy. The simplicity and obviousness of time-value in the case of moneyloans at interest led men at first to recognize that phase of theproblem exclusively, and later the term "interest," not without muchconfusion of thought, was given a wider significance. Let us now see howlarge a part of the whole problem of time-value is outside of the moneyloan.

2.The problem of time-value is quite separable from the concepts ofmoney and capital, though usually connected with them in practice andtheory. It is true that the problem of time-value was first clearlyrecognized in connection with money and a formally expressed capitalsum. Misled by this fact, and taking a very narrow view, writersseventy-five years ago recognized but dimly the problem of time-value inconnection with the valuation of the incomes derived from land. It istrue, as has been shown above, that the mere putting of an estimate on adurable good such as land involves the process of capitalization, whichin turn implies a comparison of the values of the rents expected atdifferent periods. Diminishing returns in the use of agents involves aloss of time to secure the usufructs emerging. The relation of thesefacts was not clearly seen until of late.

The phenomenon of time-value as above defined may be[Pg 143] seen to be broadereven than that of capitalization. The difference in the value of thesuccessive rents of wealth must have been recognized and in some degreemeasured before there was any conscious calculation of capital value.Differences in value due to time are everywhere. The problem oftime-value often is present where money is not even spoken of or thoughtof. Money no more causes this time-difference in value than balancescause weight.

3.The problem of time-value is involved in repairs and depreciation,and in the use of consumption goods. It is possible, as we have seen,to increase the sum available for present needs, and to encroach uponthe future by postponing repairs on intermediate goods. The balancing ofthe cost of repairs against the future income is a never-ending task inpractical business. One making repairs must purchase the neededmaterials and labor at a capitalization determined by their expectedearning-power in other industries. If the repairs in question will notensure an annual saving as great as this expected rent, they will not bemade. When an industry is declining, it may, for the sake of putting thecapital into a better business, be good policy to let the machinery fallinto bad repair. The problem of time-value is involved in theapplication of one's energy to repairing one's own possessions. It is athought of wide bearings that numberless minor decisions in every pettybusiness involve, if they are correctly made, a measuring of the rate ofcapitalization.

As will be more fully shown in discussing the relation of the prevailingrate of interest to saving, the recognition of time-value is implied inthe use men make of consumption goods, in their postponement ofenjoyment, in their storing of goods for future use. The varyinggratifications yielded by consumption goods, and their values indifferent conditions cannot be explained without taking account ofdifferences in time. Wherever there can be a choice in the time atwhich, and consequently in the conditions under[Pg 144] which, a thing can beused, there is a choice presented between the different values.Time-value is present even in a period during which no goods continue toexist, as when a good is consumed at a moment of greater need, to bereplaced at a time when less valuable. If an apple is borrowed on thepromise to return an apple and a peach at the end of a year, the peachrepresents the time-difference in value but in the meantime there hasbeen no apple in existence. It is only in a figurative sense that it maybe said that interest is paid on that "capital." Interest is paidbecause of a difference in want-gratifying power, but during theinterval there is no material capital.

4.The problem of time-value is involved in much foolish pleasure, inprodigality, and in vice. Economics touches frequently on the bordersof ethics. If there were to be formulated an economics of personalconduct, it surely would give a large place to the comparison betweenpresent and future pleasures. Forethought, or prudence, is the virtue ofrecognizing not only future dangers to be avoided, but the greaterfuture joys to be gained in exchange for present pleasures. The recklessand the prodigal underestimate the future and barter all to gratify themoment's impulse. The drinker exchanges the hopes of worthy life for theexhilaration of the spree. Indulgence in social pleasures, if secured atthe price of lost sleep, weakened health, and debauched character, areloans from the future made by youthful prodigals at usurious interest.If no one ever paid more than a moderate rate of interest for thegratification of his present whims and impulses, most hospitals,drug-stores, and medical colleges would close, and half, if not all, theprisons would be empty.

Indeed, time difference in value is a universal phenomenon of life andconduct. Contract interest is but one phenomenal form of time-value, andthis in turn is but one phase of value. This section may serve tosuggest how much more varied and pervasive the fact of time-value isthan has[Pg 145] usually been recognized in popular or economic discussion ofthe subject of interest.

§ II. THE ADJUSTMENT OF THE RATE OF TIME-DISCOUNT

1.The fixing of the discount on future goods is, in its essentials,like the fixing of the market price of consumption goods. This problemappears to be one of the most difficult in economic theory; but reducedto its simplest terms, it is an aspect of exchange value, and itsultimate explanation must be found in a comparison of psychic incomes.There must be noted the conditions of demand and supply, the interplayand final equilibrium of the two forces. The declining and marginalutility to the two parties to exchange must be carefully analyzed. Onewho can do these things is prepared to find the answer to the problem oftime-value. Whenever a group of buyers and sellers meet, a ratio ofexchange commonly will be arrived at. The ratio of exchange betweenbuyers and sellers of present and future rents likewise is fixed at theestimates of a "marginal pair," at which point the amount offered andtaken comes to equilibrium, for at that point no motive exists for anyone to change sides.

2.Time-value as the premium rate on present goods is unlike theordinary market price, of goods only in the special nature of theutilities exchanged. The one peculiar need in the theory of thissubject is a clear understanding on this point. The goods exchanged, orcompared, are direct and indirect goods, or present and future goods,or, more generally speaking, two goods or groups of goods unequallydistant in time from present enjoyment. What are sold in a case such ascapitalization, involving an estimate of time-value, are present goodsor gratifications; what are bought are future gratifications, orindirect agents which stand for, typify, or make possible, futuregratifications. Practically every man in a market acts on the knowledgeof what the[Pg 146] exchange of direct and indirect goods means; yet abstractlystated, the thought seems at first difficult. In valuing any durablegood, the theory of time-value is implied. Every time a machine, ahouse, a book, a field, is bought, the distinction between direct andindirect goods is acted upon, for a choice has been made between presentenjoyment and future provision. Anything that endures is an indirectgood and implies in its valuation a premium rate on present goods.

The real nature of the exchange in time-valuation is made unclear by theuncertainty of life, leading men to work on to provide againstpossibility of mishaps; for the most part the world's treasures neverafford to their temporary owners the gratification that they typify, orcould give. The nature of this exchange is made unclear also by habit,under the influence of which the exchange in so many cases is notcarefully thought out, is not the result of a close comparison of theutilities of goods in present and future moments. The real nature ofthis exchange is made unclear by the indirect, or induced, gratificationderived from wealth. Wealth gives to its owner power, prestige, theesteem of his fellows, and pride in evidences of success and growingprosperity. Its very possession creates a new need and imparts to itanother utility, that of insuring against the misery of a decliningfortune one who has enjoyed wealth and power. Men make the greatestefforts up to the last moment of life to retain wealth that they willenjoy only in this subtle and indirect way. Thus every motive that leadsmen to postpone present enjoyment makes them bidders for indirect agentsand for future goods, and helps to determine the market rate of premiumon the present, and of discount on the future.

3.There being a limited number of indirect agents, their limitedpowers in a given period limit the supply of present goods. Theprinciple is familiar that value is always connected with relativescarcity. Now the desire for the present goods is indefinitely large. Ifthe right kind and[Pg 147] quality could be had at will, an enormously greateramount of present goods would be used. But the present goods aredependent on indirect agents. The psychic income of a civilizedcommunity is dependent on a favorable and extremely refined environment:houses, libraries, theaters, the agencies of travel, as well as thesources supplying the more material needs. These indirect agents, evenin the richest community, are limited in variety, in quality, and innumber.

But if indirect agents could produce an indefinitely large product atany given moment, the supply of present goods could be indefinitelyincreased. The supply of utilities, therefore, is limited by"diminishing returns" in the use of agents, making their maximum yielddepend upon the lapse of time. The uses any given material can yield ina limited period have an absolute limit: an acre of land with the mostperfect cultivation cannot feed the world; but remove the limit of time,wait an eternity, and the acre would yield an infinite crop. Theeconomic return of a given agent in a given period is reached muchsooner than the technical return. If agents are forced to yield morebountifully, it is at the sacrifice of utilities in other agents, and apoint of maximum net yield is found in any given period. Here also thelapse of time is the condition of the increase of the net utilitiesderivable from limited agents.

4.The rate of capitalization of income and the rate of contractinterest on money capital tend to unite into a single market rate. Aperson wishing to exchange present goods or income for future goods maybuy an income-bearer at its capitalized value, or he may create a newrent-bearer. Having saved a sum of money, either he may purchase afactory known to be profitable; or he may hire the services of men andunite them with materials and machinery to create a new industry or anew form of income-bearer; or he may loan his money to others to makeeither kind of purchase. In any one of the three cases it is evidentthat capitalization[Pg 148] (that is, the discounting of future rents in goods)is the primary and important fact making possible the emergence of asurplus, or net yield, over and above the value of the capital. Theexpected uses contained not only in whole industrial establishments, butin the particular materials and agents united to form new agents, arepurchased at their capitalized value; that is, the future uses have beendiscounted and have entered into the price of the goods as less thanthey will be when realized as actual rents. This is the crucial point inthe theory either of contract interest or of time value; for to explainthe rate of interest as due to the process of "producing" capital agentsout of other materials, is to beg the question involved. The surplusyielded by capital above its cost is but the realization of a net incomemade possible by the discounting of future rents.

A person wishing to make an exchange of the opposite kind to thatdescribed may sell his wealth for money; he may exchange for presentenjoyable goods his income at its capitalized value; or he may use upwhat he has, let it depreciate, fail to make repairs, convert it tovarious consumption purposes, and thus invade his earning power. Whenthe interest rate is five per cent., the sacrifice of any unit ofregular income permits the spending of twenty times that amount forpresent enjoyment. The advantages of these various methods tend toequilibrium. If the owners of developed productive agents hold them attoo high a capitalized value, investors will apply their efforts andsavings to duplicating these forms of wealth. If, in turn, any of theminor factors, as materials or uses of goods, are overvalued(overcapitalized) it will appear ultimately in a check in the demand forthem at these prices, and in a reduction in the demand for money loans.As it is possible for any investor and for any borrower to choose amongthese investments and loans, there is practically but one rate, the ratewhich expresses the general ratio of exchange between present and futureincome. Owners and investors[Pg 149] take the line of least resistance, get themost they can for their money, and choose whatever form is mostadvantageous. The interrelations between the various interest rates aretherefore close and constant. The market rate of interest thus extendsover all forms of wealth and pervades every phase of business. The valueof every durable agent is fixed with reference to a prevailing interestrate, through the discounting to their present worth of all the incomesit is believed to contain.

5.Where goods are sold at forced sale or sacrifice, it is equivalentto a contract loan at a high rate of interest. Market values beingdependent upon market conditions, the offer of goods at a given momentmay not find the usual or normal number of buyers or the usual demand.Just such conditions are most likely to exist at the times when businessmen feel an unusual need of money. Two courses are open to them in thisemergency, either to borrow the money at a very high rate of interest,holding the goods for better prices, or to sell the goods under theunfavorable conditions. The end of both courses is the same—to getready money; and the methods are not essentially unlike—the exchange ofgreater future values for present values. The sacrifice sale thusreveals the merchant's high estimate of the interest rate. The purchaserof some kinds of property in times of depression is securing them at alower capitalization than they will later have. The rise in value may beforeseen as well by seller as by buyer, but the low capitalizationreflects the high interest rate temporarily obtaining. A. T. Stewart issaid to have laid the foundation of his fortune when, being out of debthimself, he bought up the bankrupt stocks of his competitors in a greatfinancial panic. The high contract interest at such times is but thereflection of the high premium on present purchasing power. Here then isanother mode in which the prevailing rate of interest on money loans iskept in close harmony with the rate of time valuation.

6.The rate of contract interest on safe long-time loans[Pg 150] registerspretty nearly the prevailing rate of time-discount in the community.There are of course different capital markets, and the estimates putupon next year's income as compared with this year's is very differentin Montana, New York, and London. Because of the friction in thetransfer of investments from one locality to another, these differencesmay persist indefinitely; but within each capital market the interest onany particular loan must, for reasons readily seen, tend to conformpretty closely to the prevailing rate. Various groups of men living inthe same community have, however, varying estimates of time-value. Theincrease of safe long-time bonds issued by strong corporations and bywealthy nations as, for example, the New York Central Railroad, and thegovernment of Great Britain, gives a large number of choice investmentswhere the element of risk is almost entirely absent. Various agencieshave developed for making the loans, that is, for bringing the borrowerand lender together with the minimum of trouble and expense. Otherefficient, but somewhat more costly, agencies for bringing together theowners of loanable capital and men wishing to use capital aresavings-banks, building and loan associations, insurance companiesissuing endowment policies, and mortgage-investment companies of manykinds. While on the one side of the bidding are thousands of lendersoffering to exchange ready money for assured incomes, on the other arethousand of borrowers offering to exchange the promise of assuredincomes for ready money. If either of these classes got far out of touchwith the prevailing rate of capitalization, to which all the valuationsare adjusted, that class would lose greatly.

7.All the net usufructs actually yielded by wealth are rents; economictime-discount is never a realized income; it is merely a calculationform, or anticipation of the difference between present and futuregratifications. There has been much discussion as to what should be therelations in thought between rent and interest. Space permits here[Pg 151] onlyan indication of the view on this question involved in the foregoingtreatment. Rent, as the term is here applied, includes all the netproductivity attributable to the ownership and use of capital, whetherthe yield be in economic form (in an increment of value) or incontractual form. Even contract money-interest must be looked upon as aspecies of the genus contract rent, the peculiarity in the money loanbeing merely that the thing which it is agreed to return is a certainnumber of units of the standard money.

The term "interest," first applied in the Middle Ages to a payment forthe use of a money loan, came to be used more broadly by the earliereconomists as the income attributable to those goods which generallywere bought and sold in terms of money. In other words, interest wassupposed (though erroneously) to be uniquely connected with theparticular production instruments to which the term capital was narrowlyand mistakenly confined. Still more to add to the confusion, the terminterest was about this same time identified with the broad problem oftime-value. The terminology has remained ever since in this stage ofarrested development. Our suggestion is to retain the word interest inits original meaning, still almost universal in business circles, of acontractual payment on money loans, applying the term time-value (forlack of a better word) to the subtler economic problem.

Time-value is here understood to be that all-pervading difference in thevalues of uses and gratifications of wealth at different points of time.A comparison of the value of momently appearing uses of wealth is therent problem. Here are, therefore, very different aspects of the valueproblem. The rent conception is earlier grasped by men, is nearer inpoint of logic; the concept of time-value has only recently been clearlyrecognized. If men lived only in the moment, they would be concernedonly with rent; living in the future also, they are constantlyregulating their acts with reference to time-value.

CHAPTER 18

RELATIVELY FIXED AND RELATIVELY INCREASABLE FORMS OF CAPITAL

§ I. HOW VARIOUS FORMS OF CAPITAL MAY BE INCREASED

1.Men seek to increase income by increasing capital. Men may striveto increase their rents without expressing the rent-bearer in terms ofcapital. Peasant owners and small proprietors, toiling fondly on theirlittle estates, seeking steadily a larger crop, a larger income,accomplish wonders in bringing waste land to a high state ofcultivation. Working on the soil that is at once their livelihood andtheir home, they do not consciously reckon the value of the labor theyare putting upon it. No money can buy that which to them is beyondprice. But, in our money economy, efforts are largely directed towardthe increase of the capital sum. Investment takes the form of putting ina sum of money in the hope of getting an income bearing a certainrelation to it. The first thought is of the value of the wealthinvested, which has been carefully measured and expressed in dollars andcents. Wealth looked at in the older way was valued for what it didimmediately for its owner, for its concrete fruits; looked at in themodern way, it is valued as a marketable income-bearer readilyconvertible into a multitude of other forms. Thus investments come to bethought of in terms of general purchasing power, from which it isexpected to realize an income of a given percentage.

2.There are some classes of goods that can be increased without anynoticeable increase in difficulty. The extremest[Pg 153] examples areundiminished goods such as air, sea-water, the water of large rivers.These are free goods because, however much is used, the supply isimmediately renewed. But they are undiminished only in a relative senseand in reference to present need. The water in the Western rivers longflowed on, undiminished by the uses made of it. But progressingcivilization required more water for cities, for mining, and forirrigation, and now states and corporations are going to law over theseformerly undiminished free goods. Some kinds of goods are produced fromsuch very common materials that it might seem possible, by thesubstitution of agents, to produce an unlimited supply. How can bricksbe limited in number, being made as they are from one of the commonestmaterials on the earth's surface? But the largest clay banks are limitedin size; a large proportion of the places where bricks are needed arenot near a supply of clay of good quality; and after a brick-yard hasbeen used for a time there is increasing difficulty in getting out thematerial. While, therefore, bricks are scarce and hard to get from theoutset in some places, the scarcity grows more marked in many places atfirst well supplied. If materials are scarce in any degree, theircontinued use for one purpose increases their scarcity in all otheruses. Economic goods are goods having value; value implies scarcity, andan increasing demand means inevitably a higher value at some point. Thisis true of clay, stone, water, and the commonest kinds of labor.

It has long been customary for economists to talk of economic goods thatcould be increased indefinitely (meaning infinitely or, in any event,without any limit ever appreciable to man) without any increase in thecost or scarcity. This class of goods was considered to be very large.There is no such class of economic goods; it is evidently impossiblethat there should be. If they are already "scarce," increasing demandmust make them scarcer. There are, however, some goods that practicallycan be increased with so little difficulty[Pg 154] that their limitation is notof great social importance. Progress, population, prosperity, are notprimarily conditioned on their amount; limitation will be felt farearlier elsewhere. They are at one end of the scale; they are therelatively increasable goods.

3.There is a large class of goods whose increase is seen to be gainedwith increasing difficulty. This is seen most clearly in thediminishing returns from land. In the attempt to get some food-productsin greater quantity from a given area at a given time, increasingdifficulty is met with at once. This attempt continued for a series ofyears results in historical diminishing returns, as was strikinglyillustrated in English experience during the Napoleonic wars, when wheatrose in value because of the greater difficulty of producing the largersupply needed. Some replenishing agents will restore themselves if giventime; the forest will grow up if left untouched by man; the field willrecover its fertile quality if allowed to lie fallow. But thisself-replenishing of agents is a slow process, and time is costly. Mantherefore tries in other ways to force more uses out of goods, untilchecked by the increasing difficulty. The goods subject to "the law ofincreasing cost," as it was called formerly, were considered to be apeculiar class comprising only a small portion of wealth. But it can nowbe seen that the law may apply ultimately, though in differing degrees,to every kind of economic goods. Indeed, the principle just discussed isno more than one phase of the law of economic diminishing returns, whichhas a universal application to the realm of values.

4.There is a class of goods, natural agents and stores of materialswhich appears to be relatively fixed in quantity or which is increasableonly with much difficulty. The first part of this proposition expressesmildly the thought that long obtained among economists: it was said thatthe supply of certain things was absolutely fixed, the chief of thesebeing land used for agriculture. The idea as held by[Pg 155] Malthus andRicardo was modified by John Stuart Mill in somewhat inconsistent ways.Land, it was said, is a thing which "man cannot make," therefore itssupply is fixed. The second part of the opening proposition expressesthe view here held: the supply of no important class of goods isabsolutely fixed, in any reasonable sense. Most, if not all, belong tothe class that is increasable, although it may be with much difficulty.Even when the exact thing cannot be duplicated, as a bust by an ancientsculptor or an autograph of a dead author, many substitutes serving thesame or closely related wants, affect and limit the demand, and thusincrease the supply. Men cannot, it is true, increase the stores ofcopper in the earth, but they devise new processes to extract it fromores before worthless, and invent methods of procuring aluminium, whichyields some of the same utilities as copper. Even the supply of land, asis shown elsewhere, is constantly changing. Thus all kinds of wealth canbe increased in some degree; many kinds in the course of time are verygreatly increased with little or no direct effort, but the supply of allalike can be secured in larger amount at any given moment only at thecost of increasing difficulty.

§ II. SOCIAL SIGNIFICANCE OF THESE DIFFERENCES

1.Not the fixity of the physical amount of agents, but the economicsupply is significant. There is danger of confusion between these twoideas. The statement that "land" cannot be created and that therefore"the supply is fixed" involves a fallacy. The word supply means theamount that is available at the moment or during the period spoken of.The land in Greenland is not, and probably never can be, a part of thesupply of land in England. The land in America for centuries was not,but now has become, for some purposes, a part of the supply in the samemarket as the land of England. The question of importance in economic[Pg 156]discussion is not whether the physical material can be brought intoexistence, but whether the economic "supply" can be increased. Theexistence of coal-mines in Venus or Mars is of no economic importance tous, but coal-mines on the earth, yet undiscovered, present a potentialsupply that at any moment may be realized.

2.Discovery of new lands and of new natural deposits continuallyenlarges the economic supply of the agents most nearly fixed in physicalamount. This proposition states a historical fact. Any explanation ofthe economic occurrences of the last five centuries or of the immediatefuture, that ignores this fact of the increasing supply of many kinds ofland and natural resources in the markets of the civilized world, mustlead to false conclusions. The rate of this movement has been more rapidin the past century than theretofore, and perhaps more rapid than itwill be henceforward; but that this development will continue in largemeasure and for a long period, is not open to question. Undevelopedareas will be opened to the world, and new geologic realms will beexplored. Yet the notion criticized above is found in all the oldertext-books. The idea arose in England in the first quarter of thenineteenth century when land and food were rapidly rising in price, andit has vitiated a large part of both the economic theory and thepractical conclusions on this subject.

3.Invention, including new modes of transportation and new processes,increases the economic supply of most scarce goods and providessubstitutes for the others. Some inventions increase economic supply bymaking available the uses in goods that were before unavailable. Subsoilploughing annexes to agricultural land new layers of soil that are justas important as new acres added to the surface. If land could be usedthree times as deep, it would be as good for many purposes as if it wereof three times the extent. New trade routes and new means oftransportation add to the supplies available in the older countries aseffectively as if their areas were increased. The building of railroads[Pg 157]in western America had an effect on English rents identical in naturewith that which would have been produced had an equal area of somewhatless fertile land touching England, risen out of the ocean. Everycountry in Europe has repeatedly felt the shock of these great economicchanges which have compelled the recapitalization on a lower plane, ofnearly all kinds of their landed wealth. Where the same agents have notbeen multiplied, substitutes have been found that are just as effectivein meeting the economic need. It is the result, the gratification, thatman seeks: any particular good is but the means to an end.

4.Increasing wealth and new labor make possible the increase of theagents that appear most nearly fixed in supply. When the need arisesmen turn to new enterprises. The reclaiming of land in Holland is astriking but far from isolated example. Among the larger undertakings ofthis kind are the draining of the Haarlem Lake in 1840-58, by which40,000 acres of rich land were made available, and the draining of theZuyder Zee, which is adding 1,300,000 acres. Though there have been manyminor undertakings of the kind, the area reclaimed is relatively smallcompared with the whole area of the land in the world used foragricultural purposes. There are still great areas of fens, swamps, andmarshlands, such as those on the Jersey coast in this country, whichwith moderate effort could be reclaimed. While the possibility must berecognized, the increase of the area of available agricultural land bymeans of such physical changes is relatively small.

The work of the pioneer, as a producer of a supply of land, is, however,of the greatest importance. The pioneer annexes new areas to theeconomic world and to the market in which he has lived. This isrecognized of late by writers that perhaps do not fully mark itssignificance to economic theory. The work of the explorer and prospectoris that of a producer of mineral resources, and daily market quotationsreflect the changes in "the supply" of these natural stores.

5.Limitation of the supply appears first in the better qualities, andefforts to increase wealth are then directed to making available thepoorer grades. Great quantities of the poorer grades of wealth, even ofthose things that are relatively fixed in supply, lie unused. Greatareas on the edge of civilization still await the pioneer, theprospector, and the miner. Here is a source of wealth and a field forenterprise. The growth of society may cause some of the poorer agents intime to become the best. When men crossed the ocean to settle onManhattan Island, it was a wilderness; but the growth of commerce hascaused the land in New York city to become more valuable than that inLondon. Changes are still in progress, for of late the smaller ports tothe south have increased their trade at a more rapid pace than New Yorkhas.

The difference in increasableness of the various forms of wealth is ofimportance in considering various social questions such as the effectsof an increase of population, and the kinds of taxation most equitableand most favorable to the progress of society. Account must be taken ofthe fact that the number of bricks can be increased more easily than theamount of land; but there must not be overlooked the possibility ofincrease in any of these forms of wealth, nor the limits to the increaseof any one of them. When one wishes to save or increase wealth, he turnsto these great unappropriated fields, unused things or thingsimperfectly used, and tries to convert them into effective agents. Thedifferent forms of wealth may be ranged on a scale according to the easewith which they can be increased by effort. They may therefore beclassed as relatively fixed and relatively increasable. Some naturalresources belong at one end, and some at the other end of this scale. Nohard and fast line divides the different kinds of goods, but thedifference in degree of increasableness is a fact of great socialimportance, affecting the direction in which industry can and mustprogress.

CHAPTER 19

SAVING AND PRODUCTION AS AFFECTED BY THE RATE OF INTEREST

§ I. SAVING AS AFFECTED BY THE INTEREST RATE

1.In the case of consumption goods, present marginal uses are oftenless than future uses as judged at the present. The proposition thatfuture goods sometimes have a greater instead of a less value thanpresent goods may at first seem to deny the general fact of economicinterest, which is a premium on present over future goods. Thecontradiction is only apparent, however, and the proposition is merely aproper interpretation of the theory of interest. The assertion thatpresent goods have greater value than future goods, as we have acceptedit, requires two explanations. First, it means that this differenceexists when the two are judged and comparedat the present moment. Thefuture use when it matures may be much greater than the present use;indeed, the very existence of interest depends upon this surplus ofvalue arising by the lapse of time in the future use. Secondly, theproposition does not mean that every concrete good, or every use of thegoods, is worth more in the present than in the future; it means merelythat the demand for present goods preponderates so that a market rate infavor of present possession prevails. In a great many cases a particulargood may have a greater value to be kept for the future than to be usedat present, in which case it is kept, or it is exchanged for somethingelse having a higher value in the present. But this preference of thefuture over the[Pg 160] present cannot pass a moderate limit without condemningthe person to present misery, and at length to death. On the other handthe excessive preference of present over future would lead to the usingup and wearing out of wealth, to the present enjoyment of every possibleresource, on the penalty of future misery. Evidently somewhere betweenthese two extremes there must be, in each economy, a ratio of exchangebetween present and future, which in fact is the interest rate. Thisrate applied to utilities traces through each good a line analagous tothe isothermal line on the map, marking off a zone of utilities for thepresent and other zones for each period of the future. There is thus aclose relation between saving and the rate of time-discount.

Let us illustrate by the case of fruit stored in the cellar for futureuse. In the fall after the appetite for apples has been gratified up toa certain point, there still remains a large stock which affords lessgratification if consumed at once than if kept for a time. Thus wood,food, and clothing are stored in the summer for the winter's need. Eventhe animals act on this principle. Squirrels, bees, and ants store up inthe season of superfluity for the season of scarcity. The animalsrecognize with their feeble intelligence or by instinct, that a timewill come when these consumption goods will represent greater importanceto their welfare than they do at the moment. It results from the natureof wants and[Pg 161] the principle of diminishing utility that in many casessome portion of a large supply of present goods must be worth less nowthan at a future time. This part, the marginal, less necessary part,will be left for a future time, and it is to this part that our openingproposition refers. This is roughly illustrated by the diagram.

Things that cannot be kept, perishable goods, do not permit of thiscomparison. But if goods that can be kept continue to be used afterutility has fallen down the scale, their high value for the future iscast away. Man lives not alone in the present but, in a far greatermeasure than do any animals, he lives in the future also. His economiclife and his economic judgment comprehend a great number of periods atonce. With the aid of memory and imagination he forecasts the future,and compares it with the present. The diminishing utility of goods,therefore, is modified by this fact that a thing has want-gratifyingpower at different periods. Before man uses goods for an inferiorpurpose he will ask whether, if they are kept for the future, they willnot gratify a greater want.

2.The gradual rise of a consumption good with the lapse of time fromthe lower to the higher degree of gratification is the rent it yields.The difference in value of present and future rents is expressed by thediscount of the future use when it is capitalized at any earlier moment,and emerges in the rise in value as the thing approaches to the timewhen it can render the later use. Next year the unit whose use isdeferred will afford as much gratification as the earlier units do now,and more than if used at the present moment. The importance of anypresent utility is compared with its importance a year later, plusinterest at a rate which expresses the limit to which future uses arediscounted. Anything that makes men feel more the importance of futureuses causes them to value those uses more. But the pressure of presentwant is such that a present use of a lower order competes with a futureuse of a higher order. Only goods of[Pg 162] a lower order, nearer the margin,are reserved for the future. But just as the possibility of using athing for several different purposes at present causes it to be valuedmore highly than if it had but one use, so the possibility of reservingto the future a portion of a stock imparts to every unit a highermarginal utility.

3.The saving of present goods for future use is encouraged by themotive of gaining the interest. Many consumption goods grow into higheruses in the hands of the owner, whether he uses them for himself or not.Ice may be stored in midwinter when it is all but a free good and alittle labor serves to fill the ice-house. Kept until the summer months,the ice rises in value as the desire for it grows. Likewise the higherprice secured by the owner of a thing kept for sale to others, reflectsthe change in utility, and affords practically a rent which is themotive for investing capital in that business. Any saver or abstainerputs aside present wants only when the future good, with the addition oftime-value or of money interest, appears as large as the present good.Interest is therefore the equalizer of the value of things in differentperiods. Put into the scale of judgment when present and future arecompared, it helps to balance the disparity in the gratifications givenby economic goods in different periods of time.

4.The postponement of present wants results in bettering the economicenvironment for the future. Economic environment means simply theeconomic conditions in which men live, the stock of wealth, the supplyof useful things with which they are surrounded. This betterment may beonly temporary, only for the immediate future. Like the busy bee or theprudent ant, one may in summer store the cellar with consumption goodsto be consumed the following winter. But often there is a more lastingway of improving the economic environment by converting savings intodurable indirect agents. The accumulation of wealth that will yield itsfruits only after years of growth is the record, so[Pg 163] to speak, of thesuccessful competition of forethought with present desires. It meansthat the two periods have presented their respective claims and that menhave decided in favor of the future. Saving thus lifts society frompoverty to wealth by the progressive enlargement of the sources offuture utilities.

5.Abstinence is the faculty of mind that enables present wants to besubordinated to future wants. Abstinence may be considered as aquality, or faculty, of the mind, or as an act resulting from thatquality. There is little danger of confusion in this usage, but it iswell to note the distinction and the fact that the former is the primarymeaning. Abstinence expresses an act of the will, a choice made by man.It is the guardian of the future, so to speak, against the greediness ofthe present. For convenience we may speak of conservative abstinence asthat which keeps men from using up or invading their present stock ofresources, and of cumulative abstinence as that which impels them to addto that stock. There is no sharp dividing line, no abrupt break, betweenthese two, yet on the whole they differ. There is a quality of mind verylike the inertia or momentum of physical matter. The inertia of mindmakes men resist stubbornly the reduction of wealth and of inheritedsocial position; but it requires a more positive quality of mind to addto wealth at the cost of present sacrifice. Abstinence is embodied inindividuals, never elsewhere, and is found in most varying degrees ofstrength. Upon it depends the growth and betterment of man'senvironment.

§ II. CONDITIONS FAVORABLE TO SAVING

1.Political security and domestic order are essential to thedevelopment of saving. As saving results from a comparison of thefuture with the present, any lack of certainty regarding the futuredecreases the appeal it makes. Men employ roughly the theory ofprobabilities in this matter,[Pg 164] and count a utility only half as muchwhen there is but one chance in two of enjoying it. In countries wherethere are constant revolutions and border wars, as in Africa and SouthAmerica, and in lands where brigandage is common, as in Italy,Macedonia, and Bulgaria, the motive for saving is cut in two. Oppressiveand irregular taxation kills the motives of providence, and decreasesthe appeal made by the future. While the miserable subjects of the statelive from hand to mouth, the very sources of the public revenuedisappear. Improvidence grows upon such a people into a prevailingnational custom; ambition is wanting; industry is the sport of chance;economic order and economic prosperity are impossible.

2.Social institutions that give a motive to the individual areessential to saving. Among these institutions the most important arethe family and, closely connected with it, the institution of privateproperty which, in its ideal manifestation, places the responsibilityfor economic welfare on the individual or the family. Through it thestate says to men: "Save if you will; the wealth and its fruits shall beyours. But if you spend and consume all you can, you alone will sufferthe consequences." It is true that the institution of private propertynever is found in an ideal form. Dishonest public officials weaken anddefeat its benefits. Every propertyless family marks a failure in itspurpose. Private property is a favorite object of attack by socialreformers, but it never can be safely abolished in a civilized stateuntil some other incentive is provided, equally effective to make mensubordinate present desires to future welfare. Unless the mass of mencan be greatly changed, property creates the only motive that can inducesaving regularly and on a large scale. It diffuses responsibility forpresent consumption. It multiplies the motives for abstinence and thusincreases the welfare of all economic society.

3.Opportunity for the investment of small savings favors a spirit ofabstinence. The institution of small property,[Pg 165] peasant proprietorship,worked powerfully in this direction in many parts of Europe, and thesame effects have resulted in America from the wide diffusion ofproperty in land. If the decline in the number of small independentfarmers has somewhat weakened this influence in America, in other waysother agencies are effectively performing the same functions.Savings-banks, penny banks, building and loan associations,penny-provident funds, and other convenient means of investing smallsums, encourage men to reduce their tobacco bills, their candy bills,their saloon bills, and to lay aside for the winter's coal, for thechildren's education, for houses, for business investments, or for oldage. Probably no one thing has given a greater stimulus to saving thanhas the development of insurance and the endowment policies inconnection with it. While the great modern corporations have destroyedmany of the small business enterprises into which so much of the savingof the past was put, at the same time the increase of negotiable paper,of loans, and of stock in joint-stock companies, has opened up otherlarge fields for investors.

4.Variations in the rate of discount of the future react upon thespirit of saving in various ways. This very general propositionrequires more detailed discussion. In general, a high rate of interestgives a large motive to save, for as the discount on the future islarge, so is the reward for waiting. But this favoring motive may beoffset by other unfavorable conditions, and is, in fact, wherever thehigh rate continues. In countries backward economically, where war,brigandage, and political oppression prevail, the rate of interest isfrequently ten and twelve per cent. on the best secured loans. A highinterest rate does not of itself insure a high degree of cumulativeabstinence; it is only one of several factors. But in a new and favoredcountry like America, a high rate of interest is a strong stimulus tosaving. Again, interest may fall while saving continues at the same or agreater pace. Ordinarily a fall from six per cent. to five,[Pg 166] giving mena smaller motive for abstinence, would be expected to cause less saving,yet this is not always the case. Custom and example help to fix a habitof saving in individuals and cause them to continue saving at a lowerrate of interest. With the growth of wealth, the prevailing ideas as tothe amount needed for a competence change, impelling to greater saving.The tendency, however, of a fall in the rate of interest is to weaken,and that of a rise of the rate, other things being equal, is tostrengthen the motive to save. But the influence of the interest rate onsaving is relative to the character of men.

§ III. INFLUENCE OF THE INTEREST RATE ON METHODS OF PRODUCTION

1.The individual saver is enabled to improve the agents that he uses.The simplest case is presented when means of enjoyment are improved andmade more durable. If Crusoe on his island spends less time and fewerresources on gratifying his immediate wants, he may improve the qualityof his clothing and the convenience of his house and furniture. By thusputting his consumption goods into durable instead of temporary forms,he will increase eventually the sum of utilities enjoyed. Again,abstinence permits the tools of the laborer to be made more convenient.If the farmer spends less time in the garden and he and his family liveon plainer food, while he makes a plow, mends a rake, and builds a shed,he will be enabled thereafter to gather a greater crop with less effort.

2.Consumption goods, when saved, may be exchanged for services, andthese may be used to create durable agents. Various ways are open toone wishing to increase his stock of durable agents. He may foregoseeking immediate enjoyments while he makes durable agents himself. Orhe may make and save a stock of consumption goods, a surplus supply forthe future, and exchange it for durable agents.[Pg 167] Finally, one who hasaccumulated consumption goods can always exchange them for the servicesof those seeking subsistence and enjoyment; and thus in control of alabor force, he can direct it toward the production of new forms ofproductive agents.

3.In modern industry, saving frequently takes the form of money, whichis then loaned to productive borrowers. This is the typical form ofsaving in modern industry. As it is more and more the case that incometakes first the form of money, saving most conveniently takes the moneyform. The clerk on a salary of $60 a month spends $50 and saves $10which he lends to a neighbor or deposits in a savings-bank. The borroweris thus empowered to increase his stock of productive agents in themeasure that the lender has limited his consumption. The complexity ofthe process by which money saving becomes embodied through a money loanin new productive agents should not blind to its real nature. The moneyis saved as a means to the exchange of present goods for future income.Money even in our day is occasionally stored away for future use underhearthstones or in old stockings and hollow trees, but this is aprimitive and wasteful method, involving the loss of all the additionalrents that its exchange and investment would yield.

If the money saved by the thrifty saver is loaned to a thriftlessborrower, wealth is not increased, but merely changes hands. Theprodigal mortgaging his wealth, spending the money, and living beyondhis income, absorbs the savings of the other. One saves and adds towealth, the other consumes it. There is no net increase of goods, buttwo individuals have shifted positions; each has gotten his reward ofgrowing affluence or penury.

The "normal" end, however, of savings and loans is productive. Theborrower, in getting control of purchasing power, aims to put a newmachine where it will be useful, to remove obstacles, and to makeeconomic agents more effective. Along the border-land of industry theactive and[Pg 168] alert borrower seeks out opportunities to make new agentsearn a rental, and having found the opening, turns to the money marketfor the means to profit by it.

4.A fall in the rate of interest normally accompanies an increase inthe mass, efficiency, and valuation of durable economic agents. A lowerrate of interest means a higher capitalization of all incomes. It is notthat either can be called the cause of the other; rather both areaspects of the same thing, the interest rate merely registering thechange in capitalization. If the rate of interest has been five percent., an income of $100 has been capitalized at $2000. When the ratefalls to four per cent. the income is recapitalized at $2500. All alongthe line of investment there is an increase in the value of the durableeconomic agents.

Another phase of the change is the greater complexity of the processesof industry. Production becomes technically more complex when interestfalls. Rental, product, and present goods, bear a smaller ratio to thevalue of capital, and therefore it becomes advantageous to apply newlyformed capital to uses which before did not justify the investment.Where formerly the utility of a second tool did not justify its making,now it can be made to earn the smaller rental needed to balance itscapital value. One form, therefore, which the change takes, is amultiplication of the tools already used. Things are placed wherevermost convenient. Another form this change takes is the putting of newlinks into the chain of technical production. Cost of operationconstantly is compared with fixed charges, the interest with the capitalinvestment. Expensive improvements on railroads, the straightening ofcurves, the tunneling of mountains, the reducing of grades, thereplacement of lighter by heavier rails, have been made possible by afall in the rate of interest. A fall in the rate of interest disturbsthe equilibrium that has been arrived at, between the cost of operation,the amount paid for wages, coal, etc., and the income on permanentinvestment. If the rate of interest[Pg 169] has been five per cent. and fallsto four per cent. many permanent improvements before unwise becomeeconomical. One thousand dollars paid annually in wages then balanced aninterest charge on a capital investment of $20,000; now it balances theinterest charge on $25,000. It becomes a paying thing for the railroadto abandon or throw aside an enormous capital represented by the old,less perfect roadbed, and build a new one alongside of it. The changesof this kind one sees in traveling on the great and progressiverailroads, reflect in part the growth of traffic, but in part also achange of the interest rate, making it a net saving to increase thecapital investment in order to reduce the cost of operation per unit oftraffic.

The benefits of saving viewed broadly are not confined to the owner ofthe wealth saved, but are diffused throughout society, in the degreethat they increase and improve the industrial environment, and thusraise the efficiency of production. Such a change works the same resultsas would a magical increase in the fertility of the soil, an improvementin the richness and accessibility of natural mineral stores, or in thequantity and quality of artificial appliances.

PART II

THE VALUE OF HUMAN SERVICES

DIVISION A—LABOR AND WAGES

CHAPTER 20

LABOR AND CLASSES OF LABORERS

§ I. RELATION OF LABOR TO WEALTH

1.Labor is any human effort having an aim or purpose outside ofitself. It is difficult to define satisfactorily the term labor. Nodefinition will quite mark off all the cases. The efforts put forth bymen may be classified according as they are pleasant in themselves, andaccording as they have separable useful results. These two factorscombine to form four groups of actions.

The fourth combination is not found in rational life, for no motiveexists to do a painful act for a useless result. Let us consider theother three.

The first group comprises most of the sports, games, and pastimes foundin every land and time. In the mere putting forth of the powers of mindand muscle there is a joy felt by children and men of all races, andthis is heightened by companionship, emulation, and even by a spice ofdanger.[Pg 174] Play is not dependent on a useful objective result later to beenjoyed, but, like beauty, is its own excuse for being. The tiredstudent goes out-of-doors to bat the tennis-ball, making no change inthe material world, except to wear out his shoes and to lose the ball,but finding that hour rich in the joy of life. If properly chosen, playstrengthens and vivifies both soul and body, leaving an afterglow ofhealth and happiness. The choice of sports and temperance in theirpursuit are among the surest tests of wisdom in men and in societies. Alove of vigorous play no less than the power of sustained work, marksthe dominant and progressive peoples of the earth.

Acts in the second group give pleasure and at the same time leave anobjective result. The hunter gets more pleasure if he returns withwell-filled bags of game, but the distinction between the sportsman andthe "pot-hunter" is not hard to find. The one has his joy in the sport,the other in the material results of the sport. This kind of actionpresents some puzzling cases, but in general must be classed as labor,since labor is to be judged by the objective economic results ratherthan by the pleasure of the act itself.

In a third class are the acts that are painful in themselves, that aredone unwillingly, but that leave a pleasurable result. Unfortunately alarge part of the actions of men are of this class, which to most mindsis the typical labor.

There is thus labor that is pleasurable in itself and labor that ispainful though it leads to a desirable result. The social ideal clearlyis that all human labor should be made pleasurable. Social dreamers loveto picture a day when all shall find for effort a full reward in themere doing,—the reward of the artist, of the scholar, of the saint, inaddition to the objective result in economic wealth. Probably we areslowly nearing this ideal. Not only in the professions and in theesthetic arts, but in commerce, in mechanics, and in the humblest walksof life are found men free from envy,[Pg 175] rejoicing in their daily tasks.Such is the normal feeling of the healthy optimist. And yet in everyserious occupation there are numberless moments and occasions when thespirit flags and only hard necessity holds men to their tasks. Thedilettante does not go far or long or steadily; the real tasks of theworld are done by men that labor, now with joy, now wearily.

2.The agents of production compose two great species, material goodsand human services. Our discussion of consumption goods, rent, andinterest has been an analysis of the nature and uses of material goods.We now come to the other great species, human services, which comprisethose acts of men (one's own or other's) that minister to thegratification of wants. There are also misdirected efforts, and evildeeds which are "disutilities" to all but the doer.

The distinction between men and things is fundamental in modern economicdiscussion where each man is looked upon as free. It is not so clearwhere slavery exists and the master looks in the same way upon theservices of his cattle, of his chattel slaves, and of his land. Even inthe freest society, man's services are compared purely as to theirutility, with the uses of other parts of the material world. It is saidthat the price of mules at the Pennsylvania mines has been affected byimmigration, because a man and a mule sometimes representinterchangeable services. But in the study of political economy thedistinction between men and other material things must never be lostsight of; they are the two fundamental classes of economic agents, theone being solely a means to an end, the other being an end in itself.

3.Labor and material wealth are complementary and indispensable toeach other in most of their uses. The discussion of material wealth andits value apart from the subject of labor, of the problem of rent andinterest apart from that of wages, does not imply that this materialwealth would have the same value in real life if labor were absent. Asone field affects the value of another field, and one good,[Pg 176] bysubstitution, the value of another good, so does labor affect materialwealth. Some material wealth can be used apart from labor, but most ofit must be used in combination with some labor. Rent, therefore, is notdetermined in concrete cases apart from men and their services. It isallowable, however, in abstract analysis, to simplify the question byleaving out a difficult complication, and thus to set forth more clearlythe logical bearing and effect of a certain factor.

Each of two kinds of agents used together affects the utility of theother, and the value of the product. If neither can be credited with thewhole value, how is any distribution to be made between them? It is notpossible to measure their technical services in the product, but itusually is possible to gage their marginal utility under particularconditions. Flour, water, and labor are needed to make biscuits; butwater being a free agent, does not enter into the combination with anymarginal utility. A match also is almost indispensable to start the fire(and who has not seen the time when he would give far more for a matchthan for a bucket of coal), but as things usually are, the match iscredited with a value of a very small fraction of a cent. Again, how isto be measured the economic service of the tree and of the labor neededfor gathering its fruits? There is here suggested the superficial aspectof what is known as the problem of complementary values. Where two ormore things are indispensable to a product, how much shall be creditedto each?

4.Human service has the same general relation to wants that materialgoods have, affording gratification either directly or indirectly. Itis axiomatic that to be "economic goods" human efforts like materialgoods must afford utilities whose importance is felt. Many services givepleasure directly and are immediately consumed. A tropical potentate hasan attendant to fan him, and another to carry an umbrella; a humblecitizen is shaved, doctored, sung to, and[Pg 177] played for. The gratificationin such cases is directly produced in personal comfort, in theconsciousness of heightened beauty, in the feeling of self-esteem. Valueis thus created and consumed immediately, taking no material form apartfrom the consumer.

But the results of most human services may be seen to rest, at leasttemporarily, in some material form. Effort is put upon a material thingto be used later. The work of the waiter in spreading and arranging thetable is not an immediate service, for it is embodied in material forman hour or two before the meal. The service of cook no less than that ofgardener and butcher, is put into material form before it comes to theconsumer. The woodman fells, cuts up and splits a tree, and piles it atthe door, putting his labor into a utility to be consumed monthsafterward. The old economists used to class labor as productive andunproductive according as it was or was not embodied in material form.The classing of the services of cook, waiter, valet, etc., asunproductive seems, even from the old point of view, to have beeninconsistent, and the attempt to distinguish services by any such testis now wholly given up. Whether the service rests in material form for aweek, a month, a year, or as often happens, for a much longer period, isnot essential. The test of the productiveness of services is not theirembodiment in material form, but their appearance as psychic income,their ministry to wants. The most varied kinds of human activity may beunified by this thought in the concept of economic labor.

§ II. VARIETIES OF TALENTS AND OF ABILITIES IN MEN

1.As material things differ in their fitness to gratify wants, so domen differ in their powers of labor. The fields, hammers, plows, tools,and machinery of different kinds and qualities have been seen to gradeoff from the best to the poorest. The poorest, discarded or just aboutto be[Pg 178] discarded, are no-rent agents. The utility felt and recognized inthe better qualities is expressed in the rents they yield. Recognizingthe variety and inequality of human talent, some economists of latespeak of the "rent" of ability, meaning that, like land rent, thegreater utility (and corresponding reward) of some labor as comparedwith others, reflects the difference in the quality of agents. But thisexpression, though often met in contemporary economic writings, is oneto be avoided because it tends to blur the essential distinction betweenhuman and other agents. Pursuing the same analogy some economists havetalked of capitalizing the worker,—expressing in a lump sum the valueof the man as the present worth of the series of incomes which he may beexpected to earn in his working life. This, also, is to be avoided, forwhile possibly it is suggestive in studying some problems, it is on thewhole a misleading analogy, dimming the distinction between free-workersand owned and exchangeable wealth.

2.The physical strength of workers differs according to age,individual, race, and sex. Differences due to age are the most obvious.The child, at first weak, grows toward his maximum of physical strength,which he attains before his fullest intellectual capacity. The period ofmaximum physical working power lasts fifteen to twenty-five yearsaccording to the individual, and then gradually declines as the oldworker approaches again the inefficiency of the child. Mental efficiencydevelops more slowly and longer, the highest qualities of judgment andwisdom being the fruits only of a life rich in experiences. Families andstrains of stock differ notably in physical and mental powers; oneexcels in stature, another in development of muscle. The differenceswithin families are inexplicable, sometimes one brother excelling in onething, the other in another. The physically perfect man is a rareproduct. Among three thousand students are but two score endowed withthe remarkable combination of lungs, heart, muscle, nerve, andcharacter, that makes possible the finest athletes. The national and[Pg 179]racial differences in working power, even in the simplest tasks, aremarked but difficult to explain, as so many influences of customs,habits of life, and varieties of diet modify the result. We cannot tellhow much of the Englishman's great superiority over the East Indiaman isdue to individual, native differences of mind and body, how much to thesocial environment in which they have lived. Certainly, though, thedifference is not mainly one in size; in the Chinese War the littlebrown men of Japan outmarched all the others. Certainly fiber counts formore than bulk, and character for more than muscle.

A difference in the physical strength of the sexes is found in somedegree throughout the world, but it would appear to be far more markedin civilized than in savage communities. Compare the records at theVassar field-games with that of the men in any leading college: in thehundred-yard dash, fifteen seconds as against ten and a fraction; in thehigh jump, forty-eight inches as against six feet and over. The muscularforce of American college women as tested in the Yale and the Oberlingymnasiums is but one third that of men, that is, taking all thestudents, the weaklings and the little men along with the athletes, andthe women large and small. As to strength of back the average for men is154 kilograms, for women 54 kilograms; legs, average for men 186,average for women 76.5; right forearm, average for men 56, average forwomen 21.4. This is an abnormal difference. The natural and possiblestrength is more nearly attained by men than by women under our socialconditions. Women escape the physical toil which strengthens, but notthe mental strain which kills. Men carry more of the wood, but the womennot less of the worries. A fairer test is applied among peasants infield-work in France and Germany, where the strength of women is foundto be about two thirds that of men. American women should do and will domore to attain their natural strength when we attain sounder ideas ofeducation and saner modes of living.

3.Differences in intelligence are a resultant of native[Pg 180] talent andacquired ability. It is difficult to distinguish these two factorssharply. Two men sitting side by side in an examination, get the samegrade; one of them has had excellent preparation from childhood, and allthe opportunities that money, travel, and cultured associates can give;the other, under great difficulties, has prepared in a country districtschool with a little coaching now and then, and struggling against greatodds, has at last entered college. The same grade does not mean thattheir natural ability or even their efficiency in this particular class,is equal. Yet the grade is the best expression to be had of theirefficiency in the particular work. Native intelligence shortens the timeneeded for preparation in any calling; hastens new methods; decreasesthe cost of supervision; saves materials, tools, and time; diminishesloss from breakage; makes possible the use of finer machinery and betterappliances, and imparts those subtler qualities that distinguish thebest from the mediocre products. Education and native talent are in adegree interchangeable; one supplements the other. Education increasesadaptability; the trained mind will outstrip the untrained mind ofgreater power. It makes direction easier, fits for higher tasks, anddecreases the difficulty of coöperation. Any ability may be helped byeducation in the broad and true sense, though a fool cannot be made wiseby training, and though many a potential genius doubtless has beendwarfed in dusty school-rooms by stupid teachers.

4.The moral qualities of the worker are increasingly important associety grows more complex. The need of a particular moral quality isrelative to the special task in hand. Honesty is needed in the bankteller, but he need not spoil a good story. The champion broncho-busterof Arizona is not a Sunday-school superintendent. So, discipline,obedience, self-control, regularity, and punctuality are needed, formore and more in these days business is run by the watch; confidence,patience, good temper, in fact all the virtues in the calendar arenecessary at some time and[Pg 181] place, and most of them are needed all thetime in business. Places may be found in our developed society for thosewho are deficient in these qualities (it is fortunate that it is so),but these are the poorer places. Many men fail to examine the qualitiesnecessary for success, and do not understand the causes of their ownfailure. Blind to their own faults, they are dropped down one notchafter another in the scale of industry, and, equally blind to thevirtues of their successful rivals, they rail against the unjust fates.

5.Skill and capacity in industrial tasks is a resultant of manyqualities. The simplest task calls for a combination of force andjudgment,—even the digging of a ditch, the raising of a window, or thefitting of a stovepipe. For most industrial tasks rarer combinations ofqualities are required. The retail clerk must be neat, punctual, polite,and long suffering. A confidential clerk must have discretion, judgment,and other moral qualities in an unusual combination. The substitution ofqualities is possible within limits; a rare quality may make amends forthe lack of a commoner one, and a man may, because of peculiar fitnessin some regards, continue to hold a position for which in other ways heis little fitted. The rarest and most valued worker is one uniting manygood qualities and fitted to deal with emergencies. The economicefficiency of the worker often is no stronger than its weakest link. Astrong motive for training is offered by the fact that supplying someone lacking quality may raise the total efficiency in a remarkabledegree.

6.Biologic studies have of late made clearer the existence andcontinuation of the inequality of talents. The political philosophy ofthe eighteenth century was based on the idea of natural rights andnatural equality. Adam Smith, accepting the prevailing view, discussedwages on the assumption that all men had equal natural ability. It isstill a favorite assumption of radical social reformers that the naturalability of all men is equal, and that all the differences in successresult from political injustice. The study of[Pg 182] biology of late has madepatent the unending differences that prevail throughout the animateworld. No two members of the same family or species are just alike; notwo pigeons have wings of just the same length. Nature by numberlessdevices is experimenting constantly with variations on either side ofthe established mean. The accepted fact of biologic evolution rests onthe foundation of inequality in structure and powers, making possibleselection and adaptation. Men in all their qualities of mind and bodydisplay this kaleidescopic variety. In all life there is inequality, andthe whole drama of human history as well as that of biologic evolutionmust be meaningless or illusory to the man who does not see this truth.Accustomed now to this point of view, we as inevitably think of thenatural inequalities in men as did Adam Smith of their equality.

This fact does not force to the conclusion that industrial inequality asit exists to-day, the great disparity of incomes, correctly or justlyreflects the degree of difference in men's qualities, either native oracquired. It does not follow that a thousand-dollar income representsten times the ability of a hundred dollar one—far from it. But to thosewho ignore the inequality of men, the whole problem of industrialremuneration must remain a mystery. A crude socialism is possible onlyto those who are blind to the enormous differences in human capacity.

7.The scarcity of human services, relative to wants, is thefundamental fact in the problem of wages. It is clearly seen that somequalities of service are scarce. Most women will confess that theycannot warble as Patti could, most men will admit that they have not themercantile ability of John Wanamaker. The man of mediocre capacityrecognizes even through the fog of his self-esteem that there is areason for the high value of certain rare services. But it must also berecognized that the commonest services have value only because they arescarce. There are many things to be done if there were labor enough todo them. There is[Pg 183] no need to "make work," in the popular sense; it ishere, but labor is lacking to do it. It is true there may be a temporarysuperfluity of human labor at a time of an industrial crisis. There isat all times a superfluity of "useless" human agents whose qualities aresuch that they have no net utility. The ignorant, insane, feeble-minded,vicious, drunken, and debauched, can give to the world only negativeutilities. But services that are in any degree useful are nearly alwaysin demand, and the higher services are so rare that they are in greatdemand. The proverb, "There's always room at the top," is seen to betrue when conditions are thus analyzed. There is a large, thoughlimited, supply of the commoner kinds of services at the bottom of thescale, but in every branch of human effort there is a never-ending lackof that higher qualification and training required for the bestresults.

CHAPTER 21

THE SUPPLY OF LABOR

§ I. WHAT IS A DOCTRINE OF POPULATION?

1.The supply of labor means here not the number of workers availablein any one industry, but the number available in the whole field ofindustry. The individual employer thinks of the supply of labor asconsisting of the men seeking employment in his special industry. Inthis view it is the demand by the employers that apportions the workersamong the various occupations. The social view of the supply of labor,however, looks at the whole field. The demand for labor is then seen tobe represented not by human employers, but by resources and agentspresenting opportunities and demanding labor to employ them. The richacre, the tool, the machine, all material wealth needing the human touchto give it a higher utility, represent a demand for labor in this broadsense. The thought of a supply of labor is therefore relative to that ofthe demand embodied in resources. A million men are a great or a smallsupply of labor according as they occupy a little island or a largecontinent, according as they are equipped with a small or a large supplyof agents.

2."Supply of labor," as an economic problem, presents a large andcomplex case of diminishing returns. The population of differentcountries and of different sections of a country is seen to bear ageneral relation to their resources. An unintelligent race with littlewealth and poor machinery is doomed to remain few in numbers. Mountains,districts poorly watered, the frozen regions of the North, are sparsely[Pg 185]populated because natural resources are lacking. If food productionalone is thought of there are apparent exceptions to this statement, butthere are no absolute contradictions of it. A favored harbor may makepossible a flourishing commerce on a rocky coast; an unfertile soil maysupport a large population when great deposits of coal or iron insure byexchange great food-supplies. Productivity must be measured under modernconditions by the purchasing power that is possible in the environment.The connection of wealth and resources with the extent of the populationis in itself a recognition of diminishing returns, of an objective limitto the number of men that can occupy a certain area and employ a givenstock of agents.

3.Each species of the lower animals is seen to have a relatively fixedhabitat limited by its food-supply and by its enemies. The rocks tell astory of a slow and steady change that has gone on in the earth and inthe species of animals that inhabit it. History records some rapidchanges due to convulsions of nature or to interference by man with thenatural conditions. But the usual condition is an equilibrium ofnumbers, long maintained, though each species appears to have in itselfa capacity for unlimited increase. Why this contradiction? The limit setby the food-supply is seen in a simple case when herbivorous animals areplaced on an island from which they cannot escape, and where there areno dogs, wolves, weasels, or foxes. Substantially this experiment wasunintentionally tried on an enormous scale with the rabbit in Australia.This peculiar and long-isolated continent contained none of the rabbit'sancient enemies. The rabbits became a pest, devastated great areas, werehunted, trapped, poisoned, and great numbers of them died of starvationoutside the fences erected to stop their advance. In the imaginaryisland they would increase up to the point where starvation would bringabout an equilibrium between the number of animals and the food supply.The destruction of one kind of animal by another limits numbers inanother[Pg 186] way. The number of lions is limited by the number of their preyin the region where they roam. The number of deer, therefore, is limitedin two ways, by the amount of their food and by the number of lionswhich catch the deer. The more numerous the lions, the fewer the deer;the fewer the deer, the greater the supply of vegetable food; as thepressure increases on one side, it decreases on the other, until anequilibrium is reached.

Throughout nature each species of animal keeps its customary place,changing little despite its efforts to increase and to crowd into thehabitat of other species. Even the slow-breeding elephant, with a periodof gestation of three years, and producing one calf at a birth, wouldcover the entire earth and leave no standing-room in a few centuries ifevery calf born could live to full age. The myriads of frogs born everyspring, the swarms of insects, the countless plants, are struggling tofind a foothold on the crowded earth. Of the vastly greater number ofseeds and embryos, only one in a multitude ever comes or could come tomaturity. Here are the undisputed facts on which rests a biologic"doctrine of population," so to speak, for the vegetable and loweranimal world. Because of the limited powers of the soil, no form oflife, animal or vegetable, can continue to increase even for a singlegeneration, without meeting enormous forces of opposition, which destroygreat numbers and set a limit to the increase of the species.

4.A doctrine of human population is a reasoned explanation of thecauses determining the number of people in the world. Man in hiseconomic life is constantly struggling with the problem of the scarcityof goods. If in any given environment men continue long to increase,they must, like the lower animals, meet limits in the capacities of theresources they use. The supply of labor force which is thus brought tobe combined with the material agents must meet with diminishing returnsunless these agents also continue to increase at a like rate. Therelation of population to resources[Pg 187] thus presents probably the mostfundamental problem in the realm of economics. It is a problem of greatcomplexity, bristling with difficulties, and incapable of exactmathematical treatment; but it is capable of rational study. There is agreat difference between a purely fatalistic view of this question andthe view that is to be reached by a consideration of the motives,causes, and physical influences at work; It is possible to find someprinciples in the chaos of prejudices and contradictions that thesubject presents. The fruit of a century of discussion of the economic,social, and biologic factors involved, is a rational, if not a final,doctrine of population.

§ II. POPULATION IN HUMAN SOCIETY

1.In the earlier stages of human history, population is limited mainlyby biologic factors. The biologic stage continues so long as there areno artificial restraints put on the birth-rate, and no deliberatedestruction of offspring for the purposes of limiting the size of thefamily. There the limits are all objective; they are found in scantinessof the food-supply, or in destruction by enemies, animal or human. Eachspecies has an average or normal birth-rate, great or small. Just whythis varies, why the rabbit produces a score of young in a year, and theelephant but one in three years, is a question capable of a rationalanswer, but it is one for the natural scientist rather than for theeconomist. Each species is impelled by instinct to realize thisbirth-rate, to bring into existence as many young as possible.

No human society known to us is so primitive that it has not passed thisstage, but many societies have risen but little above it. In most savagetribes, where starvation, disease, and war are constantly at work, thedifficult task is to maintain the population. Few of those born arriveat maturity. The custom of the adoption of captives from hostile tribesis widespread, because the efficiency and even the survival of the tribedepends upon keeping up its number of warriors.

2.War for the possession of limited resources is the first rude socialremedy for an excess of population. War is the normal condition of mostprimitive tribes. Its cause usually appears to be standing feuds andancient enmities, but the deeper and abiding cause is the struggle forhunting-grounds, for pasturage, for natural resources. The rude industryand economy of hunting, fishing, or pastoral peoples, or of those in theearlier stages of agriculture, requires a large area for a smallpopulation. Distant excursions and frequent forays, when food fails,develop rival claims to favored districts, and war is the onlysettlement. Fighting under these conditions is an activity of sucheconomic importance that much of the energy of the tribe must bestrenuously given to it. The ceaseless loss of life in savage wars isalmost incredible to modern minds. The invasion of the Roman Empire bythe Teutonic tribes, the later successive inundations of medieval Europeby the fierce pastoral tribes from central Asia, are more recent andfamiliar examples of the economic and political effects of the increaseof population and of the outgrowing of resources by barbarian peoples.When the custom arises of capturing enemies and reducing them to slaveryinstead of killing them, forces are set into operation to reorganizesociety and to create new checks on the growth of population.

3.Volitional control of population begins by the destruction ofoffspring before or after birth. The population problem ceases to besimply biologic, and takes on its sociological aspect, when theawakening intelligence of man first grasps the mystery of birth, andwhen the first attempts are made in any way to regulate family relationsor to interfere with the growth of numbers. The student of primitivepeoples finds in the methods applied to prevent the birth of children analmost inconceivable brutality. The same methods to a large degreepersist in savage communities to-day. Infanticide was generallypracticed in ancient times among peoples of advanced civilization, as,for example, in Sparta and Rome,[Pg 189] where not only deformed and weakchildren, but unwelcome ones, commonly were destroyed. The practice, ifnot legalized, is at least permitted even to-day by public opinion ingreat portions of India, China, and other densely populated districts ofthe world. It is one of the dark spots on our own civilization.

4.The pressure of increase of numbers on resources is confined byindividual industry and by private property to special portions of thepopulation. A condition of communism, where all the members of thetribe or family share equally, means that all enjoy together when foodand wealth are abundant, and all starve together when it becomes scarce.Along with a fierce enmity for other tribes, is found in many earlysocieties a close approximation to tribal communism. Private propertyalters the nature of the struggle for subsistence and of the motives forlimiting population. Society divides into a number of partiallyindependent classes or family groups, each holding its share of wealthapart, not in common with the tribe. A society with private property islike a ship divided into a number of water-tight compartments. Incommunistic conditions if population increases, all sink together intowant. The self-interest of those having private property keeps them fromdividing their property, and starvation is confined to the propertylessmembers. This acts in two ways: it increases the motive for theproduction of wealth; it gives a motive for the limitation of theconsumers of the wealth. A smaller family with larger resources means awider margin between numbers and misery. This converts the problem ofpopulation from a material one of a balance of food and physical needs,to a psychic one of a balance of motives in the minds of men. When thisstage is reached, the extreme objective limit of the birth-rate or ofincrease of population is no longer attained in the well-to-do classes,although it may still continue to be in the less provident.

5.Volitional control is effective in very different degrees indifferent families and industrial classes.[Pg 190]The possession of propertyis both a sign of forethought and an incentive to it. Concern for thewelfare of children is one of the most powerful motives, especiallyafter social distinctions become marked. It may become abnormallystrong, leading parents to sacrifice their own welfare or their ownlives foolishly for their children, as is done often in the accumulationof property. Among the classes with property the provision for thechildren depends not only upon the amount of wealth, but upon the numberamong whom it is to be divided. It is simple division: wealth thedividend, number of children the divisor.

Among the poorer classes very different motives operate. After the firstfew years the parents' income is increased by the earnings of thechildren, both on the farm and in the factory districts if the laws donot prohibit child labor. Moreover, when the children are grown, theirwages will depend on the general labor market, not upon the number oftheir brothers and sisters. So, according as the family income is fromrents or from wages, the motives of the parents differ.

Postponement of marriage must be classed as a mode of volitional controlof population. The average age of marriage, both of men and women, ishigher in the classes of greater wealth and ambition than in the poorerclasses. The contrast in this regard between civilized and savagepeoples is likewise noteworthy. The failure to marry, from whatevercause, is, in the social view of the question, volitional control. It israre that the motive is directly and immediately the wish to avoidparenthood; now it is religious zeal, again it is disappointedsentiment; here it is conflicting duty, and there it is the individualselfish wish to retain an undivided income for one's own enjoyment. Bycountless strands of motive in the form of sentiments, socialinstitutions, and interests, the primitive impulses of humanity arefirmly bound; and in varying degrees, in different classes, the enormouspossibilities of reproduction are controlled by human volition.

§ III. CURRENT ASPECT OF THE POPULATION PROBLEM

1.Changes in population are resultants of many forces: those favoringa high birth-rate and low death-rate, and those limiting births orsurvival. Whether the population on the whole shall grow, stand still,or diminish, depends upon the relative strength of contending forcesmaking for life or death. But this control may lose its cruder aspectand may be waged in the realm of motive. More and more it is volitionthat controls in human society the growth of population; less and lessit is the objective limit of the food-supply. Dire need resulting inill-health and even in starvation, is still acting in some portions ofsociety, but less to-day than ever before. The growth of population inthis stage is not "fatalistic," as there is no inevitable tendency toincrease or to decrease. It depends on the interaction of a number offorces, clearly distinguishable, by which population actually is keptfar within the limits of food resources. Volitional control is not by acentral and unified despotism determining human action, but it is bymotives of the most complex sort, diffused throughout society and actingupon every member of it.

2.The desire to maintain and raise the standard of life is the mosteffective motive limiting population in our society. The phrase"standard of life" expresses the complex thought of that measure ofnecessities, comforts, and luxuries considered by any individual to beindispensable for himself and his children; that measure which he willmake great sacrifices to secure. This standard differs from land toland, and from time to time. In the Asiatic countries it is so low thatit touches in large classes the minimum of subsistence. Despite adverseinfluences and the uninterrupted series of famines, the population ofIndia in the last century under English rule increased from two hundredmillions to three hundred millions. Such a population "lets out all theslack" of income, and never takes up any. The great public[Pg 192] works ofirrigation, forestry, and transportation, and the development ofindustry under English rule, gave an opportunity for a higher standardof living; but it was used instead to permit the existence of a greaternumber of men in the same old misery. These facts have a bearing uponthe question of Oriental immigration to America. The emigration ofmillions of Chinese from their native land would leave no void in theirnumbers. Peopling their own land constantly down to their own standardof living, they have the power, if they are tempted hither in greatnumbers, to people this continent also to the same density.

The American standard of living, while it differs in different classes,is on the whole the highest found anywhere in the world. The increasingappeal to individual selfishness in the last twenty-five years, thegreater ease of travel and taste for it, the multiplied and costlypleasures and pastimes, make children a greater and greater burden. Theabnormal conditions of city life increase the sacrifice required tosupport children, and take away a large part of the value of theirservices in the home. In the greater cities are whole areas larger thanthe city of Ithaca where children are not admitted to the apartmenthouses, where no one who has a child can rent rooms. Despite theincreasing incomes of the masses of the population, the number ofchildless homes is increasing, and while the standard of comfort grows,the size of the average family dwindles.

3.Great improvements in medical and in sanitary science are decreasingthe death-rate and thus partly neutralizing the effects of a lowerbirth-rate. The death-rate in a community is a fairly good index of itsgeneral welfare. The death of a large proportion of the children beforethey arrive at maturity indicates poverty or ignorance. The death-ratein the Middle Ages, especially in cities, was tremendously high, butduring the last hundred years has steadily decreased. The race of manwhich, ever since the beginnings of volitional control, probably has hada smaller death-rate relative to the[Pg 193] total number of individuals cominginto existence than has any other species of living creatures, hasto-day a far lower rate than ever before. Even in the most miserableindustrial population where one half the children die before they arefive years old, the death-rate is much less than among the young of thelion or the eagle.

4.Volitional control is acting with the greatest force in the morecapable classes and thus threatens to reduce the quality of thepopulation. The quality of population is of more import than itsquantity, alike in its economic, its social, and its ethical results.The productive force of a population is not measured merely by numbers."Who" make up the population at any moment is no more a matter ofindifference than "how many." One new-born child represents a negativeaddition to society, unintelligent, incapable, foredoomed to become aburden; another, with energy, thrift, inventive genius, comes to enrichand uplift his fellow-men. Quality counts for much.

The average number of children reaching maturity in the families of theAmerican colonists was six; the average number to-day in families ofAmerican descent is about two. Since many of these do not live tomaturity, and of those who do survive many do not marry, the stock doesnot maintain itself in numbers. Much larger families are found among thepoor whites of the mountains, the foreign population, the rate negroes,and, in general, in the lower ranks of labor. Forces are at work tosterilize or reduce in number the more intelligent elements of thepopulation. The "new woman" movement, tempting into "careers," takesaway from family life many of the women most worthy to become themothers of succeeding generations, Self-interest is at war with thesocial interest. The individual asks, "Am I bound to sacrifice mycomfort and happiness to the general good?" If this continues, theresult must be a steady decline in the proportion of the population bornof the successful strains of stock, and a steady increase of thedescendants of the mediocre and duller-witted elements.

5.Population increased at an unprecedented rate throughout Christendomin the nineteenth century, but the pace is now slackening. Thenineteenth century saw a great increase in the food-supplies availablefor Europe. The resources of the American continent were hardly toucheduntil the great Western movement of population began and new agencies oftransportation brought American fields thousands of miles nearer toEuropean markets. The improvement of machinery and of other economicequipment in Europe likewise aided to increase production rapidly.Population followed, though not with equal step. Europe had a populationof 200,000,000 in 1800, nearly 400,000,000 in 1900. The increase inEngland was from 12 to 18 per cent, each decade; it had 8,000,000 in1800 and 30,000,000 in 1900. The United States had 5,000,000 at thebeginning of the century and 75,000,000 at the close, an increase ofover 30 per cent, each decade. Recently there has been a notable declinein the rate of increase in all the countries of Europe. France isalready at the stationary stage, and England probably will have reachedit by the middle of the century. The rate of increase by decades hasfallen in America from thirty-three to twenty-four since the Civil War.Though the movement of the population is still upward, large classes arestationary or declining in numbers.

Population should increase more slowly than wealth and resources ifprogress is to go on. It has done so in the past century, and there isno probability of a too rapid increase in Christendom in the nearfuture. A stationary or declining population, while not desirable, isnot an impossibility. But this does not destroy the significance of thefact that there is inherent in humanity a great potential power ofincrease, the realization of which would be disastrous, the control ofwhich is an important and ever-present condition of the social welfare.

CHAPTER 22

CONDITIONS FOR EFFICIENT LABOR

§ I. OBJECTIVE PHYSICAL CONDITIONS

1.The efficiency of labor, in its broadest sense, is its ability torender services or produce things that minister to welfare. Theefficiency of labor is a resultant of many influences. In part itdepends on the physical and mental powers of men; in part on thingsoutside of the worker that either stimulate and strengthen him, or givehim more favorable conditions in which to work. These are respectivelythe subjective and the objective factors of efficiency. In its broadersense, therefore, the phrase "efficiency of labor" implies any and everyinfluence that makes for a larger and better supply of goods.

2.The efficiency of labor is limited objectively by the abundance andquality of material resources. Material resources include both thosecalled natural (as the field and its fertile qualities), and thosecalled artificial (as improvements and machinery). According as theseresources are more or less developed, as labor is employed in a fertileor a barren field, with a sharp tool or a dull one, with a highlydeveloped machine or a poor one, the product is more or less. Ifresources were much more abundant than at present, many goods now scarcewould become almost, or quite, free. In the last chapter it was shownthat an increase of the labor in a limited area or with a limited supplyof indirect agents results in a decline in the relative bounty of theenvironment. A certain part of the result is thought of as[Pg 196] due tomaterial agents, a certain part to labor. "Efficiency of labor" isthought of in the narrower sense as the part of the product that islogically attributable to labor,—the laborer's contribution to thevalue of the product,—as apart from rent, the part attributable tomaterial resources.

3.The laborer's efficiency is greatly affected by the quality of hisfood, clothing, and shelter. Usually workmen that are getting goodwages enjoy abundant food and creature comforts; poorly paid workers goscantily fed. The question arises: which is cause, which effect? Somemaintain that all that is needed to make workmen more efficient is tofeed them well. In some cases this is probably true. The Porto Ricansenlisted in the American regular army are reported to have increased atonce in strength, weight, and vigor; the Filipino recruits, thanks tothe American army rations, soon outgrew their uniforms. Some employersin Europe pay their workmen an extra sum on condition that it is spentfor meat. But if wages increase, it is by no means certain that more orbetter food will be bought or if it is that the workmen's powers will beincreased. There is a limit to the benefits of increasing food. There issome reason to believe that in America great numbers of our people,perhaps even many manual laborers, would be better off if they boughtsimpler and less costly food. The maximum of health and vigor may beattained with moderate outlay, and beyond that point richer fooddoubtless does more harm than good. Poor judgment in the selection offood is shown in many workers' families, and there is no appreciation ofits influence on health.

A few years ago an experiment in the feeding of pigs was tried on theCornell farm. Four groups of six pigs each were put in four differentpens and fed four different rations. Though alike in breed and age; thegroups began at once to differ in character. One group squealed more;another scratched more; another waxed fat faster. Every week they wereweighed, and finally were butchered, hung[Pg 197] up, and photographed. At thatsame time, at the Elmira Reformatory Mr. Brockway was experimenting onsome criminals of the lower class. They were given daily baths, specialphysical exercises, and were fed on a specially bountiful diet.Scientific philanthropy stopped there, but photographs "before andafter," reproduced in the printed reports, show the great physicalimprovement that resulted, and a marked change occurred likewise indisposition and intelligence. Many laboratory experiments have been madeof late to test the chemical nature and the physiological effects offoods. It is becoming more fully recognized that the quality andquantity of food, and the cooking of it, have a great influence on theeconomic quality of the worker.

The effect of the quality and amount of clothing, while of coursevarying with the climate, is in general of less practical importance.Loss of heat and energy, dulling the powers, stiffening the muscles,causing illness with many trains of evils, make ill-clad workmeninefficient. The cost of clothing enough for comfort is, however,comparatively small, the amount spent for ornament is comparativelyhigh. Even more important in its effects on efficiency is housing. Theconditions in the factory and in the home make for health or fordisease.

4.The growth of society is, for the average man, making some of theconditions of efficiency more difficult, others more easy, to secure.In agricultural and sparse populations fresh air, sunshine, good water,and unbounded natural playgrounds for children, where they can grow intostrong and efficient manhood, are free goods. As population grows moredense, these things become more difficult to secure; men are broughtinto unnatural conditions, the evils of slum and factory life develop,and the housing problem appears.

The character of the housing and working places could well be left toindividuals in early times. If the individual chose to live and work inunsuitable places and under unsanitary conditions, it was usually hisown fault and he bore[Pg 198] the consequences. When the unsanitary conditionsabout each family are visited upon its neighbors, society must deal withthem. Engineering, sanitary science, and medicine must be directedagainst the evils; factory and tenement-house legislation must seek tomake possible a decent life in the cities, the factories, and the homes.Indeed, in many places the development in these and other directions hasenabled the mass of the workers to enjoy blessings impossible to themost favored in the past.

§ II. SOCIAL CONDITIONS FAVORING EFFICIENCY

1.The first social condition for the workers' efficiency is politicalsecurity. For the same reason that this condition is favorable to thegrowth of capital, it is essential if men are to labor in the presentand for the future. As the framers of the Constitution expressed it, thefunction of government is to insure domestic tranquillity, provide forthe common defense, and insure the blessings of liberty to the citizen.Directness and certainty of reward are more essential than mere size ofreward in insuring action and effort. There must be a close relationbetween work and the fruits of work. Political insecurity weakens thisrelation and makes the reward dependent on chance.

2.The prevalence of standards of honesty in private and publicbusiness is a condition to high efficiency. Corruption in governmenthas the same effect as political insecurity; in fact, it is but anotherform of it. We are accustomed to the thought that in an Asiaticdespotism a worker beginning a task is uncertain whether he will reapthe reward, as public officials may at any moment seize upon the fruitsof his labor. But in our own country similar evils are not entirelylacking. Assessments often are unfair, and justice sometimes is bought.Men in high executive positions are able to make or mar the fortunes oftheir followers. Sometimes a legislator from a country town goes[Pg 199] to thestate capital poor and returns rich. Such things becoming generallyknown tend to break down the motives to industry. They breed the notionthat wealth is more dependent on chance or jobbery than on efficientservice. Dishonesty in private business means the use of energy not toproduce wealth, not to add to the sum for all to enjoy, but to get itfrom some one else. Public corruption and commercial dishonesty alikeentail on the industrious not only the immediate loss, but the fargreater cost of weakened character, relaxed energy, and decreasedefficiency of labor.

3.Custom and social ideals that raise or depress hope and ambition,affect efficiency. The institution called caste, which fixes the placeof the worker and makes it impossible to rise out of the social positionin which he is born, and disgraceful to do any work reserved to othercastes, is deadening to energy. It exists in some form throughout theworld, and where it is not called by that name, the same caste spirit isat work. The European peasants in the Middle Ages lived under the shadowof it. Where slavery exists the master class at times feels itshardships. "It is not so hard to live," says the hungry Creole daughterin "The Grandissimes," "but it is hard to be ladies.... We are compellednot to make a living. Look at me: I can cook, but I must not cook; I amskilful with the needle, but I must not take in sewing; I could keepaccounts; I could nurse the sick; but I must not." Nowhere in the worldis there less caste than in America, but it is here. The negro's lowmeasure of industrial virtues is partly the cause of the prejudiceagainst him, but in turn doubtless inherited class feeling is in somemeasure the cause of his inefficiency. To close to a worker all but themenial occupations is to take from him the most powerful motives foreffort. The thought is paralyzing. The race problem in America is inpart one of caste sentiment, whatever can or cannot be done about it.

Democracy makes for the efficiency of American industry[Pg 200] not less thando the great natural resources. If America is to surpass the world inall the great industrial lines, it will be largely because of her ideasand institutions. They lead to greater energy and to a faster workingpace in all grades of labor than is found anywhere else in the world.There is danger that as the West is closed to settlement something ofthe spirit of enterprise will be lost. To Western eyes already the youngmen in the older East seem to be trammeled by social conventions. In anolder community there is less of hopeful ambition; one's positiondepends more on what his fathers achieved; in the new community, more onwhat he does himself. If it is true, as wise students declare, that thefrontier has been the nursery of our democratic ideas, we may well askwhat effect the closing of the frontier will have on our nationalsentiment and on our material prosperity.

4.Custom and national temperament affect the efficiency of labor bydetermining the normal period of labor time. After the bare necessitiesof life are provided for, the worker has a wide or narrow margin ofproductive energy to use as he pleases. If four hours' work a day wouldenable him to live, will he work longer or will he stop? The answer isdetermined by the balance of utility and disutility. Will additionalhours of labor yield more gratification than idleness yields? Does thepain of toil repel more than its fruits attract? The use made of sparetime differs according to climate, race, and temperament. In the tropicsthe margin is converted usually into loafing, in the temperate zoneslargely into objective forms of enjoyment. Individual differences areplainly seen when each man labors on his own field. The prudent man, inthe old maxims, makes hay while the sun shines and ploughs deep whilesluggards sleep. In the modern larger organization of industry, workinghours are much the same for all workers in the establishment. Individualpreferences are still expressed, however, in irregularity of employment.In the South some manufacturers[Pg 201] have found that on an average thenegroes will work in a factory not more than five or six hours a day,working ten hours for four days and lying off two days a week. Such astandard of working hours is the mark of the primitive stage of wantsand industrial qualities, although a shortening of the hours of manuallabor, as incomes increase above bare subsistence, is in accord with arational valuation of leisure. A moderate change in that directioncannot but increase rather than diminish the efficiency of labor.

§ III. DIVISION OF LABOR

1.Division of labor is a term expressing that complex arrangement ofindustrial society whereby individual workers are enabled to applythemselves to the production of certain kinds of goods, securing othersby exchange. The term "division of labor" is simple, but the thought isa complex one. Its full discussion would cover the whole field ofpolitical economy, but only its most essential aspects can here betouched upon. Division of labor and exchange are counterparts andmutually determine each other. Division of labor depends on the extentof the market, and in turn widens its limits. The number of articlesthat any one would care to produce at one time and place depends uponthe opportunity to exchange them. These two aspects of industry thus areinseparable in thought and practice. The worker finds division of laborexisting as a social institution and, according as he adapts himself toit wisely or foolishly, it increases more or less his efficiency.

2.Division of labor is primarily between individuals, but appearsbetween trades, territories, and nations. In division of labor betweentrades, each worker applies himself to the production of some product orgroup of products and secures other goods by exchange. A special form ofthis is territorial division of labor, arising out of differences insoil, climate, and natural products, when each community[Pg 202] develops in ahigh degree some one class of products to exchange in distant or foreigntrade. Division of labor beginning because of such natural differences,becomes fixed by habit and training, by the advantage of a larger andregular labor supply, by the economy of nearness to related andtributary industries, and by the use of waste products where industry isconducted on a large scaled. The natural advantages in another districtmust be large to enable it to start successfully against these acquiredeconomies, and territorial division of labor thus tends to continue forlong periods when once established.

3.Division of labor increases efficiency by: (a) increasing skill; (b)saving time; (c) saving tools and materials; (d) improving quality; (e)increasing knowledge; (f) stimulating invention; (g) encouragingenterprise; (h) economizing talent. There is a tradition that aningenious lecturer in one of our universities was accustomed to give tohis class eighty reasons why division of labor was of advantage. It isnone too many, as every reason for the modern, as contrasted with theprimitive, organization of industry should be included. The phrasedivision of labor is but a synonym for specialization, a word thatexpresses all that is most characteristic of our complex industrialsociety. The headings just given may serve, however, to suggest theleading phases of the subject. Repetition of the same task trains themuscles, forms a mental habit, and gives the swiftness and deftness oftouch calledskill. Specializationsaves time by making unnecessarythe physical change of place for the worker, the frequent shifting oftools, and the mental readjustment required for the undertaking of a newtask. Specializationsaves tools for, either each kind of work must bemost ineffectively done, or there must be provided for each worker acomplete set of tools which thus will be used rarely and will rust outrather than wear out. If a few tools are thoroughly used, they yield alarger income on the investment, and require less care and repairs inproportion[Pg 203] to their uses. In fact this fuller economic use of machineryand plant where a large product is turned out at one place, is a primefactor in the advantages of large production, a subject to be treatedelsewhere much more fully than is here possible. By specialization ismade possible aquality of goods never to be secured by the lessskilled efforts of the Jack-of-all trades. The specialist steadily growsinknowledge of his materials and of the best processes, and he gainsa power of delicate observation and facility in meeting new difficultiesthat are impossible when attention is divided among a number of tasks.By dividing and simplifying processes, specializationstimulatesinvention. The most complex machines have been developed gradually bycombinations and adaptations of simple tools, and the more a process issubdivided, the greater is the chance of hitting upon a device to repeatmechanically the few simple movements. Division of labor increases themotives of emulation andenterprise, by making possible the more exactcomparison of results. Iteconomizes talent by giving to each thehighest task of which he is capable, while fitting the less efficientworkers into the minor places made possible by subdivision. In anAmerican wagon-factory, a one-armed man operating a machine is turningout as large a product and earning as high wages as any other employee.The same advantages of specialization are found with modifyingconditions in educational and professional lines. The marvelous progressof science in recent years has been made possible by each worker's doinga few things and doing them well.

4.The individual worker, to attain his highest economic efficiency,must select from the occupations made possible by division of labor theone for which his talents are best fitted. It seems unnecessary tostate this almost axiomatic truth, yet the slight reflection given tothe choice of an occupation by most young people gives to this statementa very practical bearing. The world is filled with industrial misfits,[Pg 204]"round men in square holes," good carpenters spoiled to make poordoctors. It so often happens that the natural aptitude of the youth isthe thing last or, in any event, least considered. Unreasoningimitation, family traditions, parental wishes, class pride, socialprejudice, childish whim, are often decisive of the life career. Happilyin some cases, before too late, the man "finds himself," but too oftenthe poverty of the family and the obstacles to education preclude theexercise of intelligent choice. It is of importance to society as wellas to the individual that talent should be discovered in time, thattasks should be fitted to aptitudes, that each member of society shouldattain to his highest efficiency. The approach to this ideal, madepossible by popular education, the decline of caste, the spread ofgenuine democracy, the progress of social justice, will increase notonly the workers' efficiency, but society's abiding welfare.

CHAPTER 23

THE LAW OF WAGES

§ I. NATURE OF WAGES AND THE WAGES PROBLEM

1.Wage in the broad sense is the income due to labor, in distinctionfrom that due to the control of material agents. The uses of materialagents, studied under the subject of rent, are sometimes called"material services." The adjective refers to the source or bearer of theuse, and does not imply that the service is to be thought of as amaterial thing. In its last analysis a service is never a materialthing, but a psychic effect on men and their wants. Material servicesand human services are merely specific kinds of the genus services (orutilities), and it would doubtless be a better usage to speak of labor'sservices and wealth's uses. Wages bear the same relation to man'sservices that rent does to the material uses of wealth. Wages are morelike rent than like interest in that neither wages nor rent areexpressed as a percentage. While rent is the value of the uses ofthings, wages is the value of the services of men. In discussinginterest, wealth is capitalized; but, in discussing wages, men arethought of as affording utilities for a time, as is wealth under therenting contract. The resemblance thus is very close between rent andwages, but not so close between wages and interest.

Despite this interesting analogy, it is not well to speak, as some do,of "the rent of labor"—as well might one speak of the wages of wealth.Such a usage only beclouds the[Pg 206] distinction between two concepts,suggesting identity where there are important differences. The aim ofscientific classification is missed when contrasts are thus concealedunder a single term.

2.A law of wages is a statement of the relation of the general causesof value to the value of human services. In real life no one agent isvalued independently of other goods. The felt importance of a gooddepends on the degree to which other wants are gratified. If men arestarving, they attach less importance to ornaments; if cold, moreimportance to clothing and fuel, being willing to part even with someneeded food to secure them. That is, man's desire for each thing isaffected by his general condition and by the existence of other goodsand wants. A similar relation exists between the values of indirectagents, and must exist between wages and rent.

We are to discuss the law of wages. An economic law does not state acommand; it is not a political law; it states merely an observedrelation. Things do not need to happen actually according to any law ofwages that can be formulated, but they will happen in the measure thatthe assumed conditions exist. The law states a tendency of wages, justas the law of gravitation states a tendency and does not predictpositively whether a given object will fall at a given moment. The "lawof wages," therefore, is to be understood as a hypothetical statement ofthe value that will be attributed to labor under a given set ofconditions.

3.Economic wages are the value of human services in the broad sense;contract wages are the goods paid by one wages man to another accordingto an agreement. In discussing rent and interest, we have becomefamiliar with this important distinction between economic and contractvalues. Economic wages are fundamental, the primary subject oftheoretical study. Contract wages are the wages paid by one man toanother in accordance with an agreement, and may not at this momentcoincide with economic wages.[Pg 207] When the contract was made, one party mayhave been ignorant or helpless, and have failed to get all he now could;or meantime the conditions may have changed. But contract wages arebased on economic wages and tend to conform to them. If one personperforms services for another without expecting to receive economicgoods or services in return, it is a gift, not wages. A workman can getas contract wages the amount of his economic wage if free competitionexists and he acts intelligently. Of course, these are importantconditions.

Real and nominal wages must be distinguished: real wages are the rewardof labor as measured in goods and enjoyments; nominal wages are thereward expressed in terms of money, whose purchasing power varies fromtime to time and from place to place.

4.Human services, being one of the conditions of psychic income, bearthe same relation to wants that material goods bear. As the materialagents that are fitted to gratify wants are scarce, labor is applied tothe outer world to change and adapt it, thus making it answer desirebetter. Labor, thus, in many of its applications merely supplements thebounty of nature. Men have a use to and for each other; they have arelation to other men's welfare similar to that borne by materialthings. The different human actions have all grades of relation togratification, from harmful to helpful, just as things have. Accordingto their relation to this scale services therefore become ranked eitherhigh or low in the estimation of men. Some acts are negative services,to use the term service in a paradoxical sense; they are things to beavoided and escaped. Value then is attributed to the services of menaccording to their rank in this scale, just as it is to the uses ofagents in the case of rent.

Scarcity is the condition of value in labor, as it is of value in anygood; but scarcity is a relative term. The commonest kinds of laborwould not ordinarily be called scarce, but compared with their possibledesirable uses, they are scarce,[Pg 208] and this fact is the key to a largepart of the wage problem. The question is: how and in what degree doesthis scarcity cause value to attach to labor?

§ II. THE DIFFERENT MODES OF EARNING WAGES

1.The self-employed laborer earns wages in the broad economic sense.In this sense the isolated workman, Robinson Crusoe on his island, earnswages, but these wages could not be measured at all exactly. They are apart of an indivisible income, and there is no way to determine how muchshould be attributed to the uses of the wealth employed and how much tothe labor. The independent farmer, producing on his own farm nearlyeverything he consumes, may be said to earn wages in the broad sense.These can, moreover, be estimated, because they can be compared withwhat he could get by working for some one else. The farmer, therefore,attributes a certain part of his income to the farm as rent and acertain part to his own labor as wages.

2.The wages of self-employed labor are often simply the value of thematerial product it secures by exchange. Labor has value indirectlybecause embodied in products. The worker value of these products isreflected to the labor which secures them. The wages of the fishermanday by day, as he follows his vocation, are simply the market value ofthe fish he catches day by day. The gold-miner, working with simpletools in the days of placer-mining, earned wages exactly expressed bythe gold he washed out.

The independent worker with few tools does not think of attributing anyconsiderable part of his income to his tools. The umbrella-mender's"kit" is so small that his true wage is little less than his totalreceipts. The tinker, the shoemaker, and the tailor, who went from houseto house in the old days, thought only in the vaguest way of marking offfrom their incomes a part to be counted as the rent of their littleoutfit of tools. Until very recent times the capital invested[Pg 209] in toolscommonly was small, and usually was owned by the handworker who thusreceived an undivided income, of which wages were by far the largerpart. It was inevitable, therefore, that labor alone should have beenthought of as the cause of the value of goods produced by the artisansin the towns and cities. This error, small at first, was magnified asthe capital investment of modern industry grew, and it persists in manyfallacious notions that still taint modern economic theory.

3.Contract wages, paid by an employer, rest on the same cause ofvalue, the direct or indirect effect of labor in the gratifying ofwants. When contract wages come to be spoken of, the personal elementof bargaining between man and man comes in to obscure somewhat theimpersonal causes that are operating. If the fisher and the miner bringtheir products to the general markets, the impersonal part of theproblem is uppermost and the wages are recognized to be the market valueof the material products. But if an employer hires a number of workmen,and the labor of each becomes merged and lost to view in a complexproduct, the uncritical mind stops, loses all hold on a guidingprinciple of value, and sees only the superficial fact of a personalbargain between employer and workman. Such a view overlooks the logicalcause of value, and the network of impersonal forces which enwraps andbinds the personal acts.

To begin with the simplest case: workers often are temporarily employedto produce for others means of gratification at once consumed. Thebarber shaves his patron, the ferryman takes the traveler across theriver, the boy carries a message, the surgeon sets a broken bone. Eachperforms a useful service, but produces no long-abiding material resultoutside of the beneficiary, and no separable, salable material good.When each is paid according to the value of the gratification afforded,the first step is taken toward the regular contract-wage relationbetween man and man.

In ordinary domestic service the only condition not present[Pg 210] in thecases just given is the more abiding character of the contract relation.The employer does not hire a coachman each time he wishes to take aride, but having summed up the advantages of a coachman's services, hebuys them by the month or the year. The price is determined in themarket for coachmen of the needed ability, qualities ranging from stupidto bright, from weak to strong, and from drunk to sober. Instead ofbuying flowers from day to day, a wealthy man hires a gardener tocultivate them in a conservatory. The average market price of flowersinfluences the wages paid to the gardener, his wages being but the sumof the values (or of his contribution to the values) of flowers,well-kept lawn, and garden products. According to the conditions of eachhousehold and of the general market, the one or the other mode of buyingthese utilities is the more advantageous.

4.The payment of the laborer to produce goods for exchange is the mostcommon modern case of wages. The relation of wages to the value of theproduct is in this case more complex, for the employer is directing thelabor to gratifying the wants of others, not his own wants. It is thedesire of prospective customers for the product, and the chance ofexchanging it, that will eventually enable the employer to recover theamounts paid to laborers. Labor is only one of the elements enteringinto the product. Within limits it may be substituted for the otherelements, fewer machines being used and more laborers, or vice versa. Nomore will be given for any labor than it is expected to add to the valueof the product. As employers test by experience the contribution of themarginal labor to the value of the product, labor is constantly comparedwith the value of other things.

When industry becomes complex, the connection between the wages and thevalue ultimately realized in the product may be broken for a time, butrarely for a very long time. Because of miscalculations, labor isemployed on things that[Pg 211] prove to be quite valueless, and on otherthings that have a much greater value than was expected. When months oryears intervene before the value of the labor is realized in the sale ofthe product, the employer must forecast the outcome as best he can, andemploy labor only when the wages promise to be recovered. These arecomplicating facts, but in any logical view they do not falsify theprinciple that wages are determined by their prospective contribution tothe utility of goods.

5.The wages paid by the various methods of remuneration—as, by time,by the piece, by premium for output—all conform in a general way to theeconomic value of the service. Many methods are employed to measure theservices of wage workers. If time is used, a general or average outputis assumed, and the workman must come up to that standard if he is tohold his place. If payment is by the piece, the price per piece must beenough to make possible the prevailing time-wage to workers of thatgrade if the supply is to be maintained in that industry. Theconvenience of the different methods of payment varies from industry toindustry, and even from task to task within the same factory, so thatnow one, now another method is followed. In any case, however, the aimis to find some convenient measurement of the rate of labor, and of itscontribution to the value of the product.

§ III. WAGES AS EXEMPLIFYING THE GENERAL LAW OF VALUE

1.Each grade of labor is a potential supply of desirable things andits wage is determined in essentially the same way as if it were anactual supply. If all the various psychic goods that labor produceswere spread out before men in visible form, some would be in greatdemand, some would exchange in a very unfavorable ratio with others. Theexchange would come to equilibrium at a point where each buyer hadadjusted his supply of enjoyments in the most[Pg 212] favorable way, had sodistributed his purchasing power as to get those kinds and amounts ofservices which afford him the highest possible sum of enjoyment.

In this situation the real wages of some being so much more than thoseof others, the low-paid workers will have a motive to change theiroccupations. But the various laborers have limited abilities and cannotchange at will and, despite the unfavorable ratio, they may be compelledto continue at the same work. Just as apples cannot become peaches orsheep become horses when there is a change in their price, so theunskilled workman cannot become skilled quickly, if he ever can, and thepossibility of changing occupations within any reasonable period is verysmall indeed. Labor is constantly trying to adjust itself, to get intothe better-paid industries. It moves, it emigrates, it seeks trainingand education. Especially the workers between the ages of fifteen andtwenty-five choose the callings that promise the highest reward. Withinlimits an adjustment is possible, but these limits are not wide and notquickly shifted, and the wages of labor continue diverse in differentoccupations for an indefinite time.

2.The term general rate of wages can be used only of a certain gradeof labor and of the rate for the average worker. Every grade and kindof ability has its rate of wages. To be sure, it is sometimes convenientto speak in a broad but inexact way of "a general rate of wages," whencomparing different countries and periods. When it is said that the rateof wages is higher in America than in England, in England than inFrance, in France than in India, the comparison is between men of thesame occupation in the different countries;e.g., the unskilledlaborer or the mechanic gets more here than the same grade of laborergets in England. There is no such thing as a general rate of wagesextending throughout all industries.

The different grades of ability differ more markedly in wages than doindustries compared as wholes. In[Pg 213] the manufacture of cloth all gradesof ability are required, from the highly paid artist and engineer, downto the roustabout in the yard. The industries of manufacturing,commerce, and education alike require the coöperation of bookkeepers,janitors, carpenters, and superintendents. It is easy in most cases topass from any grade of occupation in one industry to a correspondinggrade in another industry; but it is difficult to pass from a lowergrade to a higher grade in the same or another industry.

Abstractly considered, that is, wherever free competition exists, thereis a constant tendency toward a state of equilibrium; each workman ismoving into the industry where he earns the highest possible amount, andwhere he receives just what his fellow-men estimate his importance tobe, judged by the service he performs. Each man's place is determined byhis specific gravity, just as the place of liquids poured into a glassis determined by their density. There is much reason to believe thatthis condition is approached actually in a far greater degree than isthought by those who come to the question with preconceived notions ofwhat ought to be, or of what they would like to see. This principle ofthe economic wage does not preclude the questioning of the justice ofexisting institutions, but it is a guide in the discussion of allpractical problems of wages.

3.The law of wages may be stated thus: in any state of the labormarket the wages of any labor or class of labor is equal to its marginalcontribution—that is, to the value of its products. Each agent inindustry, whether it be a plough, a horse, or a man, is valued inconnection with other agents, never apart or isolated. It is not thetotal service any one of them performs that can be got at; all that canbe got at is the utility attributed to the last unit of supply. Theirmarginal contribution determines their importance. Each agent isconsidered in combination with other things at a given moment underexisting conditions of supply.

This statement of the law of wages is broad, and appears[Pg 214] to be modifiedin many ways in practice: by changes in industry, by ignorance on thepart of the worker, by unequal skill in bargaining; but the law of wagesjust stated allows for these modifications, and is a guide amid thecomplexity of facts, for it gives a place to the influence of tradeunions, caste, and everything else that affects the labor-supply. Thelaw of wages is but the general law of value, working itself out amidthe special conditions accompanying the gratification of wants by humaneffort.

CHAPTER 24

THE RELATION OF LABOR TO VALUE

§ I. RELATION OF RENT TO WAGES

1.The law of wages must be considered in connection with otherfar-reaching influences. One may use the sentence, "the marginalproductivity of labor determines wages," without having a trueunderstanding of its meaning. Memorizing a definition is only the firststep toward economic reasoning. Till that definition becomes a realthing in the student's thought it helps him but little. The law of wagesis an abstract statement of the logical relation of wages to utility; itis not a concrete statement of the industrial conditions in which laborworks, yet these are more nearly in the nature of true causes of value.The marginal utility is itself determined by forces and conditionsoutside of labor that are constantly changing. The more thorough is thestudent's knowledge of the actual conditions of industry, the morecorrectly he can apprehend the relations of wages to other incomes, andthe more wisely he will apply the abstract law to practical life.

2.The marginal productivity of labor is affected by the relativeabundance and efficiency of natural resources. If land suddenly becomesmore abundant through the opening up of new continents, the lower gradesof agents are sooner or later abandoned. Labor having more of a choiceas to the place where it is to be used, spreads itself over the bettergrades and takes on a greater marginal productivity. The marginal unitof labor working on better soil than before[Pg 216] produces more, and wagesexpressed in produce are higher. Ground rent, on the other hand, is lessunder these conditions. If, however, the land is fixed in area, andpopulation increases, no other change taking place, the principle ofdiminishing returns applies. The marginal laborers (the last arrivals orthe growing generation) being compelled to work with less efficientresources on a poorer quality of land, produce less than was the rulebefore, and a smaller product therefore is attributed to all thelaborers of that grade. They get lower wages and more goes as rent tothe owners of the land. By shifting of occupations this reduction may besomewhat moderated and equalized among the workers in other industries.In both these cases, wages vary more than does the physical amount ofthe total product. In the first case, wages are a larger proportion of alarger product; in the second case, the product is larger (there beingmore laborers) but wages are a smaller proportion of it.

3.The unwarranted assumption that a disproportionate increase inpopulation is sure to occur, gave rise to the subsistence theory, oriron law of wages. This assumption is now seen not to correspond withwhat is occurring in the civilized world. A hundred years ago, however,when the poorer classes of Europe appeared to be increasing with littlerestraint, it was not strange that thinkers should look upon thisincrease as inevitable. According to the subsistence theory, thequestion of population was simply a question of food; it was believedthat men surely would multiply up to the point where they could notfurther increase their numbers, and starvation wages would be the rule.It was this way of looking at things that gave to political economy thename of the dismal science. When population is limited in large measureby volitional means instead of by war, starvation, and other materialmeans, the problem changes and the error in such a theory of wagesbecomes clear.

The "standard of living" theory of wages is a refined form of thesubsistence theory. This theory is that wages[Pg 217] must rise to meet thecost of any standard that the laborers may set, and below which theywill refuse to multiply. This is probably a fragmentary truth, but isquite inadequate as a theory. A high standard of living and all thesocial institutions and customs that aid in keeping the population fromtoo rapid increase, are factors in determining ultimately the marginalproductivity of labor and, hence, the height of wages. If theserestraining influences suddenly were withdrawn, a reduction of wageswould follow slowly because of the diminishing returns of materialagents. But the standard of living is merely a partial and negativefactor. No limitation of the number of workers can raise wages abovetheir productive contribution and, in the present state of industry, aconsiderable falling off in population might be expected to result in aloss of enterprise, of coöperation, and of capital. The positive factorin wages is productivity.

4.An increase of population more rapid than that of the artificialindustrial agents would reduce marginal productivity. Labor makes useof many kinds of agents besides the so-called natural resources. Ifpopulation is stationary while tools are allowed to wear out or if anincreasing population, while opening up a proportionate supply of landfor food, fails to accumulate a proportionate stock of other tools, themarginal productivity of labor must diminish. Labor would be moreimperfectly equipped with spades, hoes, wagons, horses, cattle,machinery. These artificial agents help in getting not only manufacturedproducts, but food products. The equipment of labor must keep pace withthe number of workers or they will be forced to the lower, or lesseffective, uses in the tools. On the other hand, the growth of scienceand invention, and the growth of wealth faster than the population,equipping labor as it does with more efficient implements, cause themarginal productivity of labor to rise, and hence also the wages.

5.The "wage-fund theory" was an imperfect perception of this truththat wages are influenced by the efficiency[Pg 218] of the industrialequipment. As the subsistence theory took a partial view, looking atagricultural land alone as the determinant of wages, so the wage-fundtheory looked alone at a portion of the capital in the hands ofemployers which was the fund from which wages were paid. The large partplayed in discussion by this doctrine and the strong hold it had onthought is somewhat puzzling now; for if one begins to doubt its entiretruth it is difficult to be quite just to its merits or to state it in aform that is plausible. The theory was that wages depended on the amountof capital that, in some way not clearly seen, was set apart byemployers for the payment of wages. The capital making up the fund outof which wages were supposed to be paid, was only a very small part ofall capital, even in the narrow sense in which that term was then used.It was assumed that this wage fund, once set aside, was necessarily paidout to laborers, wages being therefore determined by simple division:laborers were the divisor, the wage fund the dividend, and the averagewage the result. When the theory is thus baldly expressed, it appears tobegin and end on the surface of the facts; and the wage fund appears tobe rather the arithmetic sum of variously determined payments than, inany sense, the cause of wages.

The abler wage-fund theorists did not fail at times to see, though toodimly, as the determining causes behind the employers' action, certainother things, such as the material facilities, the desires of consumers,the capabilities of the workers, and the resulting value of the labor.The element of truth which still should be recognized in this theory isthat the relation of labor to its equipment influences its efficiency,and determines the part of the product to be set aside for wages. Inthat sense, wages are related to the abstinence of capitalists and tothe supply of "capital," but capital understood not as a special fund ofthe employers, but, in a broader sense, as labor's entire environment ofindirect agents.

§ II. RELATION OF TIME-VALUE TO WAGES

1.The services of labor, whether for one's self or others, have a moreor less immediate relation in time to the gratifying of wants. Whileall human efforts to which the term services is applied have a relationto wants, there is much diversity in their nearness to the gratificationfor which they are destined. The process may be technically roundabout,to use the language of recent economists. One may break a stick from atree, pick up a stone and drill a hole in it, catch an animal, cutthongs, tie the handle to the stone, and use it as a weapon to killother animals for food, the first step being taken with the last objectin view. But a still more essential relation we have seen to be therelation in time. Some things, some goods, are used at once, some aftera long interval; some are durable, others perishable. Labor produces asong or a glass of lemonade to be consumed on the instant; it isemployed on bridges, monuments, railroads, or interoceanic canalslasting for centuries. In all these cases the general object sought isthe same though very different intervals of time must elapse before thegratification matures.

2.As different periods of time must elapse before services areenjoyed, the expected value of all products but those immediatelyavailable is discounted in advance. The services that affordgratification immediately, and those that afford gratification at alater time, are judged and compared at one and the same moment. Alleconomic life centers in the present. This difference in the time ofservices surely cannot be ignored. If Robinson Crusoe, at work on hisisland with his limited supply of energy, continues to provide for nextyear's enjoyment, neglecting the present, present goods become scarceand their utility rises as compared with the future goods the same laborsecures. To escape inconvenience, and in the extremest case to escapestarvation,[Pg 220] Crusoe would be compelled to restore the equilibriumbetween the wants of the two periods by shifting his labor back to thepresent. So in each little economic group and in our complex societythere is constant rivalry of present and future wants, competing for thelimited present supply of labor. The present says, "Give me your laborand I will give you the fullest enjoyment." The future says, "I willgive you a greater gratification, but you must wait for it." A givenlabor force thus making possible a wide range of choice among presentand future services, labor is distributed according to the prevailingrate of time-value, which, as we have seen, is approximately expressedby the rate of interest. If the rate of interest is high, it means thatthe present is urgent and will not easily yield to the future. If therate is low, it implies that the present is comparatively well providedfor, and that future wants are given more consideration.

3.The employer in hiring labor and producing goods takes account ofthese time differences. In the preceding paragraph has been noted theinfluence of time differences in the simplest problem of economic wages.Interest is likewise taken account of in the bargains between workmanand employer, by which contract wages are fixed. The employer of laborworks subject to a prevailing rate of interest. If he ignores it he mustlose. He should direct a given amount of labor to products that maturenext year only when their expected selling price is greater than that ofproducts that can be marketed this year. This difference due to time canno more be ignored than can any other difference in the cost ofproducts. If the employer keeps the future goods to sell later, theywill normally increase in value as they approach maturity; if he marketsthe goods at once, he normally must pass on to the purchaser the benefitof the discount he has made on their future value. That is to say, it isnot the employer of labor, the purchaser of labor as such, who gains bydiscounting the future value[Pg 221] of labor; it is the investor of capital(whether employer or later purchaser) who secures the rent as itmatures.

4.Hence all wages paid for help on products that are remote are basedon the present worth, or discounted value, of the future gratificationto which the labor contributes. The idea is held in one form or anotherby all radical socialistic writers, that the laborer does not get thefull value of his products. In the sense that is here discussed, he doesnot. He does not get what the product will sell for in the future. Hegets the probable future value at its present worth, discounted at theprevailing rate. That part of the employer's gains corresponding to thisdiscount on labor is economic time-value.

Nor is this discount of future services dependent on a political systemor on private property or on the wage system, as some have assumed. Itis a universal truth. It is in the nature of wants that present andfuture should differ. A communistic or socialistic state would have totake account of this difference, else the whole social economy would beirrational and there would be no principle by which to apportion in timethe productive forces of the community. Contracts to pay interest andcontracts to pay wages might be forbidden and made criminal by formallaw, but time-value would persist.

5.Wages and rent are coördinate species of the value problem;time-value is a different kind of problem, bearing to both the otherproblems a similar relation. A close examination of the problems ofrent and wages serves to bring out the close parallelism of these twoforms of income as here defined. Rent is the value of the usufruct ofwealth, wages are the value of the usufruct of labor. The bearer of theuse in one case is material goods, in the other is human agents.Different in the source of use, they are in large measure alike in theform of contract, or nature of the calculation. Together rent and wagescomprise the value of all currently arising uses; they are the twocoördinate[Pg 222] species of the genus "value of uses." The two groups of usesare closely interrelated in practice, each acting and reacting on thevalue of the other.

Time-value is a different genus of the value problem. Having to do withtime differences, it must be found in connection with every use that isnot immediate, whatever be the bearer of that use. Its application torent is more frequent and obvious, as only the uses of material agentsare capitalized, that is, sold in perpetuity. Moreover any service oflabor that is not at once consumed is fixed in material form and appearsthenceforward as wealth whose uses are yielded as rent or as consumptiongoods.

§ III. THE RELATION OF LABOR TO VALUE

1.Labor is a cause, but only one of the causes of value. A cause issome one condition which is seen to be necessary to the existence of athing, and usually that condition which brings the thing about, otherthings being assumed. In what sense ought a cause of value be spoken of?In one sense it is in the minds of men—it is their wants; again, lookedat objectively it is in the nature of the good—it is the quality thatfits it to gratify the want. But if both these causes are operative, andlabor is applied to fit goods better to gratify wants, labor appears asthe cause of value. Personal causes are so much more evident, anexplanation through personal causation is so much more satisfying in theearlier stages of scientific inquiry, that labor long continued to belooked upon as the one source of value. This erroneous view has neverquite ceased to influence economic thought, and a great deal of efforthas been directed to formulating theories of value based upon it. Thecruder form of the error has now almost disappeared, but in variouslittle recognized ways it still persists.

2.Economic production is the origin, or genesis, of value finding itssource either in objective things or in services.[Pg 223] The writers of fiftyyears ago defined economic production as the application of labor to thecreation of wealth. But as there are two factors in production, man andmaterial things, so there are two productive sources of value. In somecases the origin of value is attributable to man's action; in othercases scarce uses arise in objective things without man's action. Broadas is this definition of production, it does not include the enjoymentof free goods, as in the case of the care-free darky basking in the sun.Anything that, causing a feeling of greater importance to attach to athing, changes it from a free good to a scarce good or makes it morescarce, is a cause of its value. A large rainfall causing a greater cropof grain may be thought of as producing utility. The regular surplus ofvalue attributable to the waterfall or to the railroad, is the productof the material services of wealth. Production through human action isthe more obvious and is the more usually thought of; the part ofmaterial agents must be recognized if the fallacies of the labor theoryof value are to be avoided.

3.Human activity is directed to shaping and arranging things so as toincrease their want-gratifying power. Human and non-human agents arecombined in different proportions in various products. In one thing moreland and machinery are used, in another more labor is used. But eitherof these two great classes of agents may touch the vanishing point inthe production of value. While it is true that man's part is the moststriking aspect of production, yet there may be value without labor. Thestudy of rent puts this abstractly, but in a clear light. In actuallife, however, a part of the value is usually attributable to rent, apart to labor.

But in what sense is even this part attributable? Not in the sense thatthe labor is the original source of value which imparts that value toits products. The usufruct of wealth is the basis of rent; the need topay rent is not the cause of value in the product. Likewise, product isthe basis of[Pg 224] wages, labor is not the origin of value. Labor, like theforces and qualities of wealth, is the cause of technical changes. Thesechanges, if favorable, cause the goods to take on a higher value whichis reflected back to the labor. The labor itself has not apredetermined, ascertainable value, but only a resultant, derived value.An exception to this statement appears on a superficial view of thevalue of labor hired under the wage contract to make a particularproduct. The labor having a market value because of a large number ofwell-known alternate uses, can be diverted to a particular use only oncondition of a definite payment. Labor here, as viewed by the employer,appears to have an original value; products, a derived value. But in thelogical view, labor is seen to impart technical qualities to the goods;in turn, the goods to impart value to the labor. Man hunts throughoutindustry for those things to which his labor can be applied usefully. Heforesees in them the changes that will increase the value. It is only ashe has judged rightly that the value taken on by the things is reflectedback to the labor attributed to it.

4.Labor being of many qualities and receiving many rates of pay, thereis no unit of labor that can be used as a measure of value. The idea offinding in a "unit of labor" an objective standard of value to which thevalue of all other things could be reduced has been a very attractiveone. This fallacious hope animates every one beginning to think of thevalue problem. The thought was so plausibly formulated by Ricardo thatit continued for a long time to be the generally accepted doctrine ofvalue. Although most writers reject the formal statement of the labortheory of value, use is frequently made, even now, of the phrase "unitof labor," suggesting the thought that labor is the standard by whichthe value of all goods may be measured. This unit of labor of thetext-books may be seen to be either labor arbitrarily assumed to be ofuniform quality and quantity, as a day of unskilled labor (in that formquite incomparable as[Pg 225] to amount with other qualities), or a givenamount of money invested in labor of different grades at its marketvalue. It is only by expressing labor in terms of its value that thevarious grades of skilled and unskilled labor can be reduced to ahomogeneous unit, which is but a unit of money wages. This should notdeceive us into the belief that in any peculiar sense labor can be usedas a unit of value. It is equally valid and convenient to speak of unitsof machinery and of units of land. In terms of capital a factory sitecan be expressed as a multiple of a potato patch not less perfectly thancan a sculptor's labor as a multiple of a ditch-digger's.

Scarcity of things desired is the one objective condition of value. Thethings that labor can produce and the labor to produce them beingscarce, labor takes on a value. All things at last become comparable interms of psychic income in each individual's judgment, but as yetneither in this comparison nor in the market values that are fixed inexchange, has any absolute standard been found by which the utility ofall goods or the welfare of all men can be measured.

CHAPTER 25

THE WAGE SYSTEM AND ITS RESULTS

§ I. SYSTEMS OF LABOR

1.The wage system is the organization of industry wherein some men,owning and directing capital, buy at their competitive value theservices of men without capital. The wage system is a method oforganization never found completely realized. A community made upentirely of independent small farmers, living each on his little patchof ground, does not have any essential feature of the wage system. Solong as they continue to be independent small farmers, owners of smallcapital, self-employing workers, the wage system does not exist incomplete form. Some men with capital in every community are working forwages, while others, as independent producers, are their own employers.Society is not sharply divided into two classes, one controlling all theworking capital, the other quite without resources. The wage system maybe spoken of as prevailing to-day not as the exclusive, but as thetypical, or dominant, form, while side by side or along with it is foundindependent production. It is clear that the wages here spoken of arecontract wages. The wage system implies a money contract betweenemployer and employed. The relation or bond between them is that of awage payment.

The wage system cannot be judged properly apart from questions to belater considered, such as private property and the enterpriser's part inindustry; but some consideration of the subject properly belongs here.The wage system[Pg 227] has become of recent years in America the dominant formof industry. The theory of wages is applied most frequently in thediscussion of contract wages, and there are certain practical relationsbetween the results of the wage system and the theory of wages.

2.The wage system, historically considered, is seen not to havedisplaced a system of independent labor. This question should be viewedin historical perspective. As far back as history can be traced, themasses of workers have been subordinate. Civilization began withdirection, with obedience to superiors on the part of the mass of men.Within the family, in the rudest tribes, the women and children weresubject to the will of the stronger, the head of the family. Among theAryan races the family system was widened, and the patriarch of thetribe secured personal obedience and economic service from all membersof the community. Chattel slavery, the typical form of industrialorganization in early tropical civilization, seems to have been one ofthe necessary steps to progress from rude conditions; students to-dayincline to view it as an essential stage in the history of the race. Butas conditions changed with industrial development, chattel slaverybecame a hindrance to progress, a disadvantage to higher industry.

3.Serfdom for rural labor and many limitations on the workman'sfreedom in the towns, were the prevailing conditions in medievalEurope. Serfdom was both a political and an economic relation. The serfwas bound to the soil; the lord could command and control him; but theserf's obligations were pretty well defined. He had to give services,but in return for them he got something definite in the form ofprotection and the use of land. Between the lord and the serf continueda lifelong contract, which passed by inheritance from father to son, inthe case both of the master and of the serf. In the towns conditionswere better for the skilled workmen, but many things bore heavily on themass of the workers shut out from special privileges. There were[Pg 228] strictrules of apprenticeship; gild regulations forbidding the free choice ofa trade or a residence; laws against immigration; settlement laws makingit impossible for poor men to remove from one place to another;arbitrary regulation of wages, either by the gilds in the towns or bynational councils and parliaments, forbidding the workmen to take thecompetitive wages that economic conditions forced the employers to pay;combination laws forbidding laborers to combine in their own interest.It is not an attractive picture, but, as far as is possible in a fewwords, it is a truthful picture of the conditions that existed beforethe coming of the modern system.

4.Many continuing limitations on the freedom of the worker are not theresults of the wage system or a part of it, but are opposed to itscomplete workings. The worker's ignorance is a limitation, preventingthe choice of an occupation for which he might naturally be fitted.Neglect of children by parents is a limitation, preventing industrialtraining and the development of qualities that would make it possiblefor the child to excel. The faults of human nature cannot be attributedto any "system"; and if they are remediable, it is by education andbetter social opportunity. Trade unions often forbid boys to becomeapprentices, and forbid the choice of a trade except under conditions soexacting that to many they are impossible. Such limitations are made bythe privileged few in their own interest, but they are annoying andopposed to the interests of the many. The typical wage system would beone in which all such hindrances were lacking, in which there were nosocial or political limitations on free competition except such as wouldhelp in educating and training the worker. The wage system should bejudged by what it is, not by things directly opposed to its spirit.

§ II. THE WAGE SYSTEM AS IT IS

1.Under the wage contract the worker gets in a definite sum at oncethe market value of his services. Under the wage contract the employertakes the risk as to the future selling price of the product. That he isthe one best prepared to assume the risk will be made clearer in thediscussion of the employer's function. Wage payment, therefore, is aform of insurance to the workingman; he gets something definite insteadof taking chances he is ill prepared to take. Wage payment is a form ofcredit to the laborer whose labor has not yet produced the distantgratification. The employer advances to the workman the value of thefuture gratification, discounting it at the prevailing rate of interest.The darker side of the wage bargain is that the "cash nexus," as Carlyleexpressed it, is too often the only bond between the parties. When thewages are paid, the employer considers his obligations discharged. Thereis a lack of fellowship and sympathy in it all. Work should be a bond ofcommunion between men, but as it is, the laborers in some greatfactories and their employers live in entirely different worlds. Thegreat inequality of their condition makes mutual understandingdifficult. They are master and man, "boss" and hireling, not co-workers,each with a worthy part in the noble tasks of industry.

2.The wage-earner gets the competitive value of his services, securingin most cases much more than a bare subsistence. At the present timecompetition is in a large measure active among employed as well as amongemployers. A believer in the subsistence theory of wages must, underthese conditions, expect wages to fall to the starvation level. Butaccording to the law of wages here presented, it is to be expected thatwages can and will remain indefinitely above that level, falling orrising as conditions change. The increase in material wealth of itselftends to increase the[Pg 230] wages of the workman. The laborer, though withoutresources and even though not contributing to the increase of capital bysaving, thus shares in the benefit of increasing capital. It is truethat under some conditions the workman is at a disadvantage in makingthe wage contract; labor must be applied from day to day or it is lost,and the laborer must work to live. While this does not determine therate of wages in the long run in any occupation nor to any great extentexcept among the lowest grades of labor, it does give an advantage forthe moment to the employer, and enables him to exercise at times a harshpower over the workmen in his immediate neighborhood. A single workmanis thus very often at a disadvantage, but it must not be overlooked thatin a large degree the competition for good workmen is effective betweenemployers in different trades and in distant localities.

3.Increase of efficiency due to the sacrifice of parents or topersonal exertion, goes to the individual worker. The most essentialpractical feature in any industrial system is the appeal to the ambitionof each man. This appeal is made where a premium is placed on increasingefficiency, by insuring to it a higher return. This result is possibleand in large measure is attained under the wage system. Little lessimportant is the appeal to family affection to make possible by itssacrifices each worker's best preparation.

An offsetting disadvantage appears in the loss to the laborer in thedecline of his powers. As he gains in wages if he increases inefficiency, so he loses if his strength fails from accident or in thecourse of years. This loss falls upon him, not, as is sometimes said tohave been the case under serfdom or slavery, upon his owner (as if thatsecured to the slave immunity from suffering). It is true that ingeneral under the wage system the worker has no guarantee against lossof work or, what is equally important, against sudden changes inindustry. He may be, and often is, a victim of invention and of changesin machinery[Pg 231] or industrial processes, by which the masses of men arethe gainers.

4.Liberty of the worker in his choice of work and outside of workinghours makes for happiness, character, and progress. Opinion is almost aunit as to the truth of this statement. The present wage system is thefreest condition for the mass of men that ever has existed. Theirreligious, political, and personal convictions, are for the most partinviolate. There is a true but much misused maxim that liberty has itsdangers. Freedom means freedom to make mistakes. Intelligence and strongindustrial virtues are required to exercise properly a freedom newlyacquired. Thus it is the lowest class of labor that reaps the smallestadvantage from free conditions, and that suffers most from their misuse.

The main evil in the wage system is certainly not that the liberty ofthe worker is too great, but that it is too small. The sale of laborinvolves the obeying of orders during certain hours specified in thecontract. Here again the evil is greatest in the lowest grades of work,while the great majority of wage-earners are left a large measure ofchoice in the time and manner of their work. Where labor is severe andwithout joy to the worker, it appears to be little better than a form ofslavery. Contrast the condition of the section hand, cursed and beatenby a brutal foreman, with that of the wage-earner in the locomotive-cab,self-respecting, self-directing, and trusted with the safety of propertyand lives. The wage system is manifold, it is adaptable. If it holds aportion of the laborers with a harsh hand, it gives to all a widemeasure of opportunity, and to most a great degree of independence intheir lives. A hasty resort to indiscriminating analogy, as in callingwage-work "slavery," does not further truth or social justice.

§ III. PROGRESS OF THE MASSES UNDER THE WAGE SYSTEM

1.The nineteenth century was a period of great progress for the massesin America, England, and throughout Europe. There are differences ofopinion as to the extent of this progress, the way in which it is to bemeasured, and the degree to which it is an occasion for congratulation.There is no longer any dispute as to the actual fact that it has takenplace. Many lines of evidence converge to confirm this one conclusion.The average money wages in the United States may be represented in 1840by 87.7, in 1860 by 100, and in 1891 by 161.2. This was the high markfor a time and a decline followed. Again wages rose from 1897 on, and in1899 had reached 163.2. They have continued to rise since and in 1903attained the highest point in the history of our country and thereforein the history of the world. Another temporary decline undoubtedly willoccur when industrial conditions become less prosperous.

Real wages, also, the power to purchase goods with labor, are greaterthan ever before so far as this can be measured in the price of leadingcommodities. The offsetting loss of the free health-giving pleasures ofcountry life cannot easily be expressed. In England likewise the rise inmoney wages has been great. In 1860 it is represented by 100, in 1870 by113, in 1880 by 125, in 1891 by 140, in the intervals some declineoccurring. For a century in all civilized lands wages have moved in anever-rising series of waves. The purchasing power of wages in Englandincreased ninety per cent, in the thirty years between 1860 and 1891.Throughout Europe the same general change is seen, going always hand inhand with new industrial methods and the displacing of the oldagricultural system by the wage system. As the hours of labor have atthe same time been shortened, the workers have gained doubly.

2.This progress is mainly due to the opening up of rich[Pg 233] naturalresources and to the development of industrial processes. Recognized insome measure by every one, this progress is attributed by differentobservers to different causes: in America, by many to the protectivetariff; in England, by many to the freer trade introduced about 1840;throughout the continent of Europe, to the spread of constitutionalgovernment and free institutions; by trade-unions everywhere, to theorganization of labor. There is, doubtless, under certain conditions,some portion of truth in each of these claims. But, either separately oraltogether, they fall short of a broad, reasonable, and sufficientexplanation. The two-fold proposition just presented, the justificationfor which has been given in preceding chapters, points to a general andadequate cause.

Seventy-five years ago it was thought that, with the increase ofmachinery, of factories, of the concentrated control of wealth, andespecially with the wage system, there must go a steady depression inthe welfare of the workingman. This idea was connected with the iron lawof wages. It was believed by some that, whatever the causes of advancingsocial income might be, the wage system would rob the wage-earners ofall share in progress. In view of the facts, if it cannot now beasserted positively that the wage system is the cause of all the gain,it can be asserted negatively that it is not inconsistent with greatprogress on the part of the laboring classes. It might be possible to gofurther and to maintain that the organization of industry, under thewage system and competitive conditions, by its encouragement ofenterprise, energy, and economy, has been an indispensable condition inthe industrial progress which has in turn made possible the rising wagesof labor.

3.The increased proportion of workers in the higher occupations meansa further rise in the average condition of the masses. A smallerproportion of workers is now engaged in the low-paid industries thanfifty years ago, and a correspondingly larger proportion is in thebetter, or highly[Pg 234] paid, industries. Decade by decade the proportionshifts toward the upper part of the scale. Both in America and inEngland (doubtless also in other countries) more men are now engaged inthe higher professions and skilled occupations, a smaller proportion inthe lower occupations. This would raise the average of wages even if thewages of particular occupations had not risen.

4.The diffused advantages of progress mean relatively more to themasses than to the rich. In the olden days the poor man was bound tothe spot where he lived, the rich man had his carriage; to-day poor andrich ride side by side in the trolley car. The introduction of thesecheap methods of enjoyment means relatively more to the poor. Bettermedical care, better sanitation, more abundant food, clothing, comfort,free schools, and libraries have all a part in this movement. Theenormous possibilities in these lines are just beginning to be realized.The achievements of the last twenty years read like a story fromfairy-land. It tells the leveling up of the conditions enjoyed by thecommon man.

5.Any sound method of improving social conditions must grow out ofexperience, not break with it. Even if things were on the downwardinstead of the upward road there would be no excuse for wildspeculation. The only rational way is to find what is good in what is,and build upon it. There can be no excuse for suggesting a method fromimagination. Projects of social change must be tried by successfulexperiment, and gradually fitted to present needs. It is in this waythat the higher forms of life have developed; it is in this way thatsocial and political institutions have come into being. Things that worksuccessfully first in a small way are worthy of trial on a larger scale.The wage system is a favorite object of attack for radical socialreformers. It has many unlovely features and there are many individualcases of hardship. It may well be asked, What method shall be pursued toreform it? Its retention, however, is not inconsistent with very greatchanges in the[Pg 235] present political and economic arrangements. Theimpersonal economic forces are working for improvement; but further,there is a growth of sentiment, an increase in sympathy, a feeling amongmen that the "cash nexus" is not the only bond that should unitedifferent classes, and this sympathy is becoming an economic force,softening and improving many of the most unlovely features of the modernwage system.

CHAPTER 26

MACHINERY AND LABOR

§ I. EXTENT OF THE USE OF MACHINERY

1.A machine is a mechanical device by which power is applied in anautomatically repeated manner, to change the place or form of things.It is not easy, perhaps not important, to distinguish the machine fromthe tool in every case. Tools are portions of matter, such as bone,wood, iron, which man guides and directs in applying his energy tothings. A machine may be used by the foot, but the hand is the greattool-using member. In many cases there is a clearly marked distinctionbetween tool and machine. A simple, single piece that can be taken intothe hand, as a spade, a hammer, a knife, is a tool; a combination ofwheels, levers, pulleys, etc., is a machine. The simplest machine is buta slight adaptation of the tool, by which power may be applied in anautomatically repeated manner. The drag develops into the cart, a simplemachine. The spinning-stick, a tool used in ancient times, developedinto the Saxon spinning-wheel of the sixteenth century, the form usedwhen America was colonized. The use of power derived from nature, asthat of wind and water and steam, while not the essential mark ofmachines, is the most characteristic feature of their moderndevelopment. Hand-machines, such as the hand-press and the type-writer,have had important industrial results, but it is the use of powerleading to the concentration of industry and the ownership of machineryby the employers that has the greatest significance in the moderneconomic problem.

2.Machinery of many sorts has long been used, but the "age ofmachinery" begins with the eighteenth century. Inventions, newmachines, and new processes, though not frequent, were not unknown inthe Middle Ages; but no one class of machines took possession of a wholefield of industry and gave rise to a great economic problem by thedisplacing of labor. The great industrial changes in the Middle Agesgenerally grew out of political changes, or of changes of routes oftrade whereby large industries were disturbed, or of changes in the useof land through new methods and the bringing into use of land in otherplaces. The industrial changes in England at the end of the eighteenthcentury on the contrary were due mainly to great mechanical inventions.The development of the textile machines for cotton and wool spinning andweaving mark the beginning of the movement. Here for the first time wereinventions in such numbers, of such a nature, and under such conditions,that they were rapidly and widely applied, affecting the lives of agreat number of workers. The steam-engine at the same time opened up thelong line of mechanical inventions by which wood and iron are shaped andwrought, and the iron industry underwent notable developments. Sincethat time, have taken place in all Western countries that rapidexpansion in the use of machines and those notable changes in industrialorganization which distinguish our era from all others.

3.Machinery is applicable in very different degrees to the differentprocesses and industries. Machinery can save much labor in somedirections, little or none in others. It is especially adapted to theapplication of power. In the United States, in 1870, in manufacturesalone, two and one third million horse-power were used; in 1900, elevenand one third million, the increase being five-fold. It is said that inthe world, in 1870, three and one half million horse-power was furnishedby stationary engines, ten millions by locomotives. Probably to-day thetotal is four-fold as great.

Machinery is applicable with especial advantage to industries thatchange the form of materials easily transported and widely used. Theremust be a large output to justify the use of machinery. In 1840 a man'swork in spinning cotton was three hundred and twenty times as effectiveas in 1769, in 1855 it was seven hundred times; and though the rate ofimprovement is diminishing, to-day the productivity of such labor isstill greater. Similar examples are found in the manufacture of shoes,and in all varieties of wood- and iron-work. Machinery is mostapplicable where there is a compact plant; not so easily where the powerhas to be distributed over a wide area, unless a special track can beprovided.

Machinery, therefore, has affected manufactures much more immediatelyand greatly than it has agriculture. It has not as yet, for example,been found practicable to apply steam to ploughing to any great extent.As the profitable use of most farm machinery requires a level surfaceand a large area given to a single crop, it cannot be used as well eastof the Alleghany Mountains as in the Mississippi Valley, and it is stilluneconomical in large portions of the civilized world. Despite thisdifficulty the methods of the farmer of to-day contrast strongly withthose of one hundred or fifty years ago. Planters and seeders, reapers,harvesters, corn-shellers, hay-loaders, automatic unloading-forks,elevators, water-power-, steam-, and gasoline-engines allow greateconomies. The labor needed to produce food for one hundred people is afraction of what it was one hundred years ago. In many other industriesmachines are usable only in a slight measure, indirectly, or not at all.They are of the least assistance in the personal services, and in thework of the thinker, the teacher, the speaker, and the artist.

§ II. EFFECT OF MACHINERY ON THE WELFARE AND WAGES OF THE MASSES

1.The immediate effect of improved machinery, if suddenly introduced,is almost always to throw some men out of employment. Any sudden changein industry injures men who have become adapted to the work that isaffected. A well-mastered trade, a wage-earning though intangiblepossession, may be made suddenly valueless. Men cannot quickly changetheir methods of working or their place of work. This is as true ofchange brought about by new trade routes or by scientific discoveries(where machinery does not enter in) as in the case of labor-savingmachines. If machines displace labor rapidly, men who cannot adjustthemselves to the new conditions suffer, and there are always some whocannot adjust themselves, always some who suffer. It is rarely possiblefor a man past middle life to shift over into a new trade where hisefficiency will be as great and his pay as high as in the old. Newmethods of puddling iron sent many old men into the poorhouses ofPennsylvania only a few years ago. Even where the total employmentincreases, the individual sometimes suffers. The increased demandresulting from the cheapening of a product may call for more workersthan were employed before the new machinery came in, and yet some of theformer workmen may be thrown out of employment. The introduction of thelinotype is said to have displaced a large number of hand type-setters,but to have increased greatly the amount of printing. As the machinesare expensive and cannot be worked properly by men not highly expert,men past thirty-five years of age have not been allowed to learn theiruse.

The least efficient men in any trade always suffer most. The changecrushes hardest the man at the margin of employment. The more skilledworkman can hasten his pace and still earn a living wage in competitionwith a machine,[Pg 240] while the less skilled can but drop out entirely,innocent victims of an economic change, sacrifices to the cause ofindustrial progress. Happily such pathetic incidents are relatively notnumerous. Most machinery is introduced in commercial centers, andgradually spreads to other factories in such a way that most men canadapt themselves to the change. The effect of machinery must not bejudged by the extreme cases. It was found that there were morehand-looms in use in England in 1850 than fifty years before, though inthe meantime power-looms had displaced the hand-looms in all the greatfactories.

2.After time for adjustment, the total sum of employment is as greatas before, but the labor is differently distributed. The "lump oflabor" idea, as it is called, is widely held, especially amongworkingmen. The notion is that there is exactly so much laborpredetermined to be done; therefore, if machines are introduced, thereis that much less for men to do. The logical conclusion easily drawn isthat every machine reduces wages. Few, however, would go on to thefurther conclusion that in the aggregate the existing machinery, like anenormous vampire, is sucking the life-blood of theworking-people,—though traces of such a notion frequently appear.

If extreme examples are taken, it may be made to appear either that anincrease or that a decrease of employment results from machinery.Industries grade off from those that are capable of developing a greaterand greater demand, to those at the other extreme that are capable of avery slight increase, as a result of a lowering of the price. Thereseems to be practically no limit to the consumption of textiles,provided their price falls; the demand for dress alone is indefinitelyexpansible. Queen Elizabeth, who had a different dress for every day inthe year, has many potential imitators. There is a constant increaserelatively, as well as absolutely, in the number employed intransportation, as each census shows; there are more railroad menrelatively[Pg 241] than there were stage-drivers and teamsters before the dayof railroads. The number of people now engaged in printing books andpapers is larger by far than in the days when all the books of the worldwere written by the old monks in their cloisters. The proportion ofworkers in agriculture, on the other hand, is less than it formerly was.In part this is a change in appearance only, for the farmer once made alarge part of his tools which are now made by workers employed inmanufactures, yet who in a very real way are aiding in agriculture. Inpart the change is, however, the effect of the use of machinery andother improvements in agricultural processes. The amount of raw-foodproducts required for each hundred persons is quite inelastic. As itbecomes possible to expend more for food, the change is made in quality,variety, flavor, rather than in quantity. The greater part of the savingin the cost of food is, however, expended in other products, and thelabor saved in agriculture finds employment in supplying these risingwants. In other cases also, new industries are made possible as machinesliberate energy from the production of the more necessary goods. At eachcensus it is necessary to change the schedule of occupations, becausemen have adopted callings unknown before.

3.In some cases the introduction of new machines injures particularworkmen. The only reason for the use of machinery is to improve thequality or to lower the price of products. If the workers can do nothingbut blindly pursue the same tasks, it is to be expected that the wagesof hand-labor will fall in a particular trade into which machinery issuddenly introduced. When, as sometimes happens, employers introducemachines for the immediate purpose of breaking a strike, the workmen areconvinced that machinery is the enemy of labor.

Because the extensive introduction of machinery in England was at firstaccompanied by the unhappy result of a lengthening of the hours of laborin factories, this result[Pg 242] was deemed to be necessary in all othercases. It was in fact quite abnormal, and has not been seen elsewhere.The owners of factories wished to keep their machines employed as manyhours as possible; the laboring classes of England, being at the sametime demoralized and depressed by industrial and social influences thathad no logical connection with machinery, had no power to resist thismovement. In all other countries of Europe and in America, where theintroduction of machinery has been more gradual and normal, it has beenfollowed immediately by a shortening of working hours, as eventually itwas in England also.

4.Indeed, the economic effect of improved appliances is logically andinevitably to raise wages. It has been shown above, in the discussionof wages, that if the efficiency of machines increases faster than doesthe number of workers who use them, the marginal application of laborstops at the higher uses or services of agents and is not forced to thelower. The more perfect the economic environment, the higher the incomeseven of those who own no part of the machinery. A part of this benefitmay appear in the form of higher money wages received, a part in theform of the lower price of things bought. Real wages are the essentialthing, and as a consumer the laborer shares with every other member ofsociety in the benefits of improved machinery. The benefits resultingfrom greater abundance are diffused, and as goods are brought from thehigh, or scarcity, end of the scale of value down toward the level offree goods, everybody gains by the abundance and cheapness.

The general, or average, gain is not to be judged by comparing theconditions of the lowest grade of society with those of fifty years ago,for while that grade may have been bettered only a little, it has beenpossible for large numbers to rise to higher grades because of the useof machinery. The physical tasks are to-day much lighter than everbefore, and a larger proportion of society is engaged in industries thatrequire skill and thought rather than physical labor. That[Pg 243] portion ofthe work is being more and more shifted upon machines. It is important,though, to distinguish between classes of workers in judging of thebenefits and evils of machines. A machine is "an iron man," it has beensaid, and comes into competition with other men to lower their wages byoutworking and underbidding them. But this iron man can do onlyautomatic tasks; it is not capable of exercising judgment. Everyintelligent laborer who can adjust, adapt, fit himself for moreintelligent action will rise above the machine and profit by itspresence. But the crude physical labor which can compete only on theplane of automatic machines, must find its field of employment more andmore hedged in. If the wages of unskilled labor are not depressed, it isbecause of the enterprise of others who rise to more skilled employmentsand thus reduce the competitors of the lowest rank.

5.The early effects of the factory system on the health, intelligence,and morals of the workers often have been bad; but not necessarily theabiding effects. Some kinds of machines can be more profitably usedwhen they are grouped in great factories, and, where this is common, itis spoken of as the factory system. In the ideal modern factory(realized in few cases) each smaller machine is a part of a largerorganization of machinery, so perfect that the material goes in at oneend of the building and out at the other without the loss of a singlemotion. Factories compel great numbers of laborers to live near eachother and to work together. The sudden crowding together of people intonew social relations is usually bad for morals. Men are moral under theeyes of their neighbors, acquaintances, and families; habits becomeadjusted to right standards, and the temptations in new conditions arealways great. Until of late, engineering science has not been able todeal with the problems that arise where population is densely crowded,and the early factories with their surroundings were most unsanitary.Under the degrading conditions that resulted in some places,[Pg 244] especiallyin England, the effect of machinery on the intelligence of the workerswas bad. Whether this is its natural result is debatable, but thefactory worker in general does not appear to be less intelligent thanthe agricultural worker. The alertness of the city dweller is duedoubtless to social contact more than to the immediate work he does.This work may or may not be less thought-awakening than work with simpletools. There is a general improvement along all the lines ofintelligence, morals, and health. The conditions in the cities asregards health and morals are approaching those of agriculturalcommunities. While many factory districts are forlorn, there may be seenaround many factories more happy conditions, better buildings, bettersanitation, increased leisure for workers, workmen's clubs, educationalagencies, and many other evidences of civic and social progress.

6.The great social consequences flowing from the concentration ofindustry and wealth are the most serious problems in the relation ofmachinery to labor. The ownership of tools was widely diffused inmedieval times. It is not yet evident how many can own a share in greatfactories, but the control drifts into few hands. It is not yet clearwhat social effects great corporations will have on our democraticinstitutions. Many problems of large industry remain to be solved in thenear future. The question in the old form, as to the effect of machineryon labor, is no longer open. It has been clearly answered by experienceand explained by theory: the economic effect of machinery is to lift theproductiveness and efficiency of the average man. The benefits areunequally distributed, but nearly all share in them to some degree. Thequestion which the future will have to answer is, What will be thesocial and political effects of the great fortunes that have been madepossible by the enormous development of machinery?

CHAPTER 27

TRADE-UNIONS

§ I. THE OBJECTS OF TRADE-UNIONS

1.A trade-union is an association of wage-workers for purposes ofmutual information, mutual help, and for the raising of wages. The termtrade-union is used in a general sense both of combinations of workersin the same trade, and of men in different trades, though usually thelatter are calledlabor-unions. The "Knights of Labor" is a goodexample of the labor-union, the "American Federation of Labor" of acombination of trade-unions. The Knights of Labor is composed of localbranches to which workers of every class except lawyers andsaloon-keepers are admitted. The Federation of Labor, however, iscomposed of chapters, or lodges, that are homogeneous, all the men ofeach lodge being in the same trade.

The definition given is broad enough to include the various degrees ofhelp given and the various methods adopted by trade-unions to accomplishtheir objects. Trade-unions are mutual-benefit associations: insuranceagainst accident, sickness, death, or lack of employment, forms animportant part, and in some cases almost the whole of their work. Allunions in a measure serve their members as employment bureaus, while insome unions this is a most important feature. Through trade-papers,correspondence, and personal meetings, information is exchangedregarding trade conditions, and great mutual service is thus rendered.But a great deal of the help given is in the more impersonal economic[Pg 246]ways: help to get from the employers better wages, to secure shorterhours, to improve in various ways the conditions of employment.

2.The organization of workers has resulted from the separation of theeconomic and personal interests of employers and workmen. The controlof industry has become more concentrated during the age of machinery,and this has reduced the feeling of economic unity among the differentranks of industry. There is now to the average workman no possibility ofbecoming a master, an employer. The largeness of industry forbids,moreover, the meeting and personal acquaintance of employer and workmanwhich were before possible. Misunderstandings grow when men cannot talkover their differences. The social chasm has widened between the workmenand the responsible director of industry. As a result of these changes,the attitude of the employer very often has become that of the buyer oflabor as a mere ware. He has with the mass of his employees no personalrelations whatever. Under these conditions, when the employer feels thepresence of competition, he is more likely to force the lowest wage thatis possible. It is not unusual for the immediate direction of factoriesto be intrusted to paid managers, who are responsible to thestockholders and whose work is judged only by the dividends they succeedin earning. Many examples might be found where the managers or theresident owners have wished to pursue a more liberal policy than theabsentee shareholders would permit.

3.The need of organization of labor has grown with the growth offactories and with the loss of personal touch among the workers. Thisis another aspect of the point just mentioned. The smaller the number ofemployers, the easier is it by an understanding to suppress competitionon their side. If there is only one factory of a kind in a town or city,the employer is able to drive a harder bargain with the worker.Especially in times of industrial depression is a[Pg 247] change of employmentdifficult for the laborer; it involves much risk, and loss of time andmoney in moving. In the long run competition must be felt even in suchcases. The unfair employer will find his workmen drifting away, hisforce reduced in number and quality, and his evil reputation goingabroad among workmen. But there is a great deal of friction in thisadjustment and the loss falls largely upon the workman. In a largeindustry, especially, the workers have no personal acquaintance witheach other, nothing to give them a sense of unity and power. In theold-fashioned shop, with its close association and its interchange ofviews, could grow up a strong public opinion; but in the wilderness of amodern factory the worker may be unknown in name and character to theman who touches elbows with him. Moreover, in America differences innationality and in speech among immigrant workers is often an effectivefactor in preventing the assertion of their interests. There is ananalogy (though it is only an analogy) between these conditions and thepolitical conditions that have led pure democracies to give way torepresentative governments. So long as a community is small and men knoweach other personally, there may be popular government, but when thenumber becomes larger the only way in which public opinion can beconcentrated and made effective is by delegating the functions ofgovernment to representatives.

4.The main objects of labor-unions to-day are to improve conditions intheir working places, to maintain or increase wages, and to shortenworking hours. Better conditions of safety and sanitation in their workwere not the first thought of the unions. The workers, as a result ofhabit and ignorance, were strangely unconcerned about this matter.Reforms in this direction at the outset had to come largely fromsympathetic observers. But since better ideals have been developed,organized laborers strive to improve the sanitary, moral, and otherconditions in the places of work. Their main object, however, was for along time to raise[Pg 248] wages, or to resist any decrease. Shorter hours havebeen a prime object of recent years, and almost coördinate with that ofhigher wages. The eight-hour movement has declined somewhat of late, buta few years ago it seemed possible that the eight-hour day would becomethe rule. This aim has never been lost sight of, however, and now andthen another step is taken toward it. Labor leaders have repeatedlyasserted in recent years, when the two demands have been made together,that shorter hours were more desirable than increased wages.

§ II. THE METHODS OF TRADE-UNIONS

1.The union's first aim is to get control of all the labor force inthe market, and to minimize competition among workers. Every laborfederation aims to extend its control to every branch of its trade. Asense of wrong is one of the strongest forces to bring the workers intothe organization. The appeal to a common interest is effective in timesof great grievance, as it was effective in the dangerous times of theAmerican Revolution, though failing during the Confederation. Theunwilling are first persuaded, then coerced by threats, by pettypersecutions, by the most cruel of all peaceful weapons, socialostracism, and finally by personal violence. The "public opinion" andclass feeling fostered among workers by their organization are analogousto the sense of patriotism and loyalty in the country at large, and attimes displace it, as is seen in the opposition to the militia and tothe maintenance of public order at times of strikes. The individual whodeclines to enter the union is denounced as a traitor and made to feelthe scorn of his associates. When all these measures fail, pressure isbrought to bear upon the employer to get him to force the unwillingworkers into the union.

2.Its next aim is to use collective in the place of individualbargaining, to force as much as the competitive wage, and more ifpossible.[Pg 249] The term collective bargaining has been much used to describebargaining between a group of labor leaders, the delegatedrepresentatives of the workingmen, and a group of employers ordirectors. It is sometimes claimed that all the trade-union seeks is toput the workman on an equality with the employer in bargaining, enablinghim to get all he would if competition were free on both sides. It issaid that organized labor simply prevents the employer from followingthe maxim of Napoleon to "divide and conquer," from meeting hisemployees one by one and forcing his own terms upon them. But the mosteffective argument in organizing the trade-union is that it forces ahigher wage, more than the market would warrant. It is sometimes assumedby labor leaders that competitive wages would be very low, almoststarvation wages, and anything above that level is credited to the workof the union; while in other cases where the wages are already large,the purpose frankly avowed is to limit the labor supply in theparticular trade and to force a monopoly wage by any means possible.One's opinion of trade-unions is likely to differ according as they workin one or the other of these ways. The impartial onlooker sympathizeswith the efforts of the trade-unions in so far as they serve merely toput the workers on an equality with the employers in bargaining. Thepublic wants to see "fair play," and up to a certain point the union ismerely a device to get fair play. But if the union is a device to defeatcompetition, to force artificially high wages, it will be judgeddifferently. The public readily sees that if the unions force more thana fair and open market affords, it is rarely at the expense of theemployer; that in the long run it is at the expense of the purchasingpublic itself, including the unprivileged workmen shut out from themonopoly of labor.

3.In order to accomplish their ends, the trade-unions seek to controltheir employers' business in various ways. They demand, first, that nonon-union men shall be employed[Pg 250] even at union wages; they demand thatthe employer shall help them to force his employees into the unions. Inthis very usual demand for the "closed shop" or "union shop" the publiccan see very little justice. On this point, nearly always, unionsforfeit in a strike the sympathy of the public; yet the unions assertthat it is almost absolutely necessary to gain this point in order tocarry out their objects. If a union and a non-union man work side byside there are many ways in which the employer may make the union mansuffer. If business slackens, it is likely to be the union man that isdischarged; if any preference is given, it is to the non-union man.Certainly all will agree that if the unions are to get the strength toenforceall their demands it is essential that they make good thisclaim which leaves the employer almost helpless. Yet it certainly is notessential to the accomplishing of valuable services for the members ofthe union. The educational and mutual-benefit features are attainedwithout this means; and much experience shows that, if their cause isstrong, the organized men can carry with them a large proportion of theworkers and the sympathy of the public in a contest for higher wages. Itnever has seemed to any considerable portion of the public any moredesirable that organized labor through its officers should be able todictate to employees, than that employers should crush the workmen. Itis by just this assumption that union advocates beg the question of the"union shop."

Further, the unions direct and control the employment of labor, oftenlimit the number of apprentices in a trade, and assume to determine whoshall enjoy the privilege of learning it. They limit the output, fix themaximum amount, and forbid the use of labor-saving machinery. Wheneverthe unions are charged with these acts, labor leaders either deny thefacts or avoid giving a direct answer, but there is no doubt that thecharge is true in many ways and in many cases. The requirement that eachspecial kind of work shall be controlled by a special trade, anddisputes between[Pg 251] rival trades, for which their jealousies areresponsible, give rise to great annoyance, expense, and loss toemployers and to the entire public.

4.The strike is a threat and a mode of attack to enforce the demandsof the union. To most newly organized laborers the union appeals mainlyas an instrument for striking, for threatening the employer or formaking him suffer. When a new union is formed, it is nearly alwaysdedicated by a strike, which is the simultaneous stopping of work by anumber of workers. A strike is intended to force the employer to grantthe wages and conditions demanded. Its effectiveness lies in the injurywhich it occasions or threatens in the stopping of machinery, the ruinof material, the loss of custom, and the failure to complete contractsundertaken. Its success being dependent on the inability of the employerto fill the places of the strikers, their energies are bent onpersuading or coercing other workers from taking employment. There aremany ways of coercing workers without personal violence. Public opiniondoes much, and probably the severest of all coercive measures is thesocial ostracism of the worker. What may be called the endless-chainboycott is an excommunication, without measure or limit, of thenon-union worker and of every one in any way befriending him or theemployer. So far as in their power lies, the enraged strikers dissolvethe very bonds of society, brother casts off brother, and mother disownsson. The unhappy conditions in the coal regions in 1902 rivaled thetragedies of civil war. A reasonable use of the boycott, refusal tomaintain social relations with the person who offends one, is doubtlessa part of personal liberty; but the boycott, as experience shows, hasmoral limits, and it should have strict legal limits. Its use beyond themoderate limit of the first degree of personal relations is antisocialto the degree of criminality, whether it be used as the weapon oforganized workers or of organized wealth.

When peaceable means fail, often there is a recourse to[Pg 252] violence bothagainst the employer and his property and against the non-union men. Theevils of violence in strikes often are tardily recognized by the public,whose sympathy up to a certain point is with the striker as "the underdog." It is slow to realize that strike violence is mob-law. Whenevermen of one group assume the right to coerce forcibly and to wreak theirhatred against one of their fellow-workers, it is a blow at politicalliberty. No free society can safely go the first step in permitting onegroup of men to usurp control over others in this way.

5.The great losses caused by strikes are the penalty of an unsolvedindustrial problem. The losses to workers in wages, to employers and toinvestors in income and property, and to the public in interruption ofbusiness, aggregate an enormous sum. It is, however, impossible toestimate it at all exactly, as the losses are in many cases indirect andintangible. The strikers are concerned not with the balance of totallosses and total gains to society as a whole, but with the net gain thatin the long run accrues to them. It is true that there are indirectgains not easily calculable, as the advance of wages made to avoid astrike while the lesson of the consequences is still fresh. Opinionamong workingmen is not a unit as to the value of strikes. A few yearsago it seemed safe to say that strikes were declining as compared withthe period of the early eighties. It is probably true, as is often said,that as laborers become educated they put less faith in strikes. Theepidemic of labor troubles, marking the years from 1899 to 1903, gave noevidence of a decrease in the use of strikes, yet many of these were dueto the recent organization in various trades. The coal strike of 1902,though doubtless due to real grievances, was opposed by the officers ofthe union, an unusually capable set of men, but the more violent anddiscordant elements overruled the more pacific counsels. The public isperhaps as favorable as it has ever been to the cause of labor, but itappears to have less patience with strikes than[Pg 253] it had fifteen yearsago, and strikes usually fail if not backed by public opinion. Thepublic has not as yet thought out consistent conclusions on the questionof the rights of the union. It is just now much impressed with the valueof arbitration. As experience destroys the unsound sentiments, anddivides the wise from the unwise measures, a peaceable solution ofindustrial differences must and will be found.

§ III. COMBINATION AND WAGES

1.Wages in particular industries often are maintained above thecompetitive rate. The older economic writers were somewhatunsympathetic with trade-unions, and were even inclined to deny thatorganization could be helpful in any way in raising wages. This view, itmust now be recognized, was mistaken, and overlooked the hindrances tocompetition and the effective economic forces that organization canbring into play. The sympathies of most men favor the wage-earner sostrongly that they hesitate to express an opinion in any way unfavorableto his efforts to raise wages. But the view of the economic theorist asto the services of the union cannot be as roseate as is that of theunion labor leader. The general proposition, however, is applicable,that wherever it is possible to limit supply, prices may be raised. Ifmen fitted to do a certain work are not permitted to do it, labor in thespecial industry becomes more scarce and consequently more highlyvalued. This involves the result that some men are forced to remainwhere they get lower wages than they could earn if free to act. Thetemporary need of the employer may enable the union to force from him adivision of his profits. If the trade-union watches its opportunity andtakes occasion to strike when a failure to fill orders would cause himgreat loss, it may compel him to pay for a time more than the normalvalue of the labor. It may well be doubted whether such action on thepart of[Pg 254] labor is generous, fair, honest, or in the long run wise; butthat it may be immediately effective cannot be denied. By the principleof complementary goods an essential kind of labor can be given anartificially high value, if its supply can be controlled. If only thelabor that is ready and willing to come in to take the place of thestrikers can for a time be kept out, wages may be fixed practicallyaccording to monopoly principles, later to be discussed in connectionwith capitalistic organization.

2.Trade-unions can, in various but limited ways, set in motioneconomic forces to increase the productiveness of labor. It isdifficult to take a moderate view of trade-unions; it is easier to go toone extreme or the other. In a book by Trant, reprinted from the Englishedition and circulated by the American Federation of Labor asrepresenting its theory and claims, all the advances in wages that havebeen made are said to be due to the trade-unions. This claim is believedby many besides the members of trade-unions. The thought is sometimesexpressed even by social students that but for the trade-unions wages inAmerica would be the same as in 1850. Many well-known facts should causesuch an opinion to be accepted with hesitation, to say the least. Onlyabout one tenth of the workers in England are unionists and of thetwenty-two million workers in the United States, far less than ten percent. are organized. Can it be maintained that one tenth of the laborsupply fixes the value of all? In many lines where labor is notorganized, as in teaching, clerical positions, professional and domesticservice, wages have risen even more than in organized trade. Theevidence advanced to support the extreme claim is that wages are higherin some organized trades than in other unorganized trades requiring thesame grade of laborers. Trant says that "where there are no unions wagesshould be lower. This is exactly the case"; and he quotes: "Wherever wefind union principles ignored, a low rate of wages prevails and thereverse where organization is perfect." But he later[Pg 255] explains in partthis difference: "The union men are the best workmen and often employerspay a man more than union wages. This is not surprising as no man can bea union carpenter unless he be in good health, have worked a certainnumber of years at his trade, be a good workman, of steady habits andgood moral character."

If this be true, it is in accordance with strict competitive principlesthat, as the elite of the trade, they should get higher wages than thoseoutside. Moreover the unions exist mainly in the more populated placeswhere cost of living, wages, and all prices range higher than in thetowns. A much higher standard of work prevails in the cities, both amongunion and non-union men, and the old men and the inefficient drift awayto the smaller towns and the places where wages are lower. Many of thedifferences are explicable without taking any account of the union. Sofar as unions tend toward intelligence, education, sobriety, efficiency,fuller and fairer competition, they are economic factors in all branchesof industry, and it cannot be doubted that they do work in some measurein all these ways. So far also as they strengthen the bargaining powerof the laborers, or as they can enforce a monopoly of labor in aparticular trade and locality, they can secure the full competitive oreven a monopoly price.

3.Wages viewed in general industry, and in the long run, aredetermined mainly by impersonal economic forces. That implies theconverse, that they are not determined mainly by the trade-unions. Thisstatement, in fact, is admitted in calmer moments by the extremepartisans of the unions. Even the book before quoted says somewhatvaguely that "it is an error to think that the trade-union seeks todetermine the rate of wages. It cannot do that. It can do no more thanaffect them." Again it says: "Capital is increasing faster thanpopulation.... It seems therefore merely in obedience to natural lawsthat wages should rise." Men can easily see personal and immediateresults.[Pg 256] They cannot follow out the impersonal and ultimate workings ofeconomic forces. The leaders make exaggerated claims; laborers believethem and pay their dues more readily; the public believes them and isthe more inclined to pardon the excesses of so important an institution.That wages in a number of special trades are raised in a considerabledegree cannot be questioned. The open or secret use of violence andother antisocial forces make much of this boasted service to some of theworkers, an injury to others, and an occasion of reproach from thecitizen who condemns the spirit of lawlessness thus encouraged. Thechief factors tending to raise the general standard of wages are theproductiveness of industry, peace, order, and security to wealth,honesty in man and master, in lawmaker and in judge, the efficiency andintelligence of the workers, and an earnest effort on their part to getthe share that competition would accord them. Chiefly, though notexclusively, because of their bearing on this last factor, trade-unionshave a useful, even though subordinate, part in the regulating of wagesover the whole field of employment.

DIVISION B—ENTERPRISE AND PROFITS

CHAPTER 28

PRODUCTION AND THE COMBINATION OF THE FACTORS

§ I. THE NATURE OF PRODUCTION

1.The aim of industrial effort is the increase of the quantity andquality of scarce goods; this is economic production. The thought hasbecome familiar to the student that the supply of economic resources ofwhatever sort is limited, while the wants are practically unlimited. Asupply of consumption goods meets a perennial stream of wants, theresult being that value is attributed to things. The aim of productionis to add to scarce things, to make the supply of goods as large aspossible. There is occasion here to recall the thought of the twoaspects of production noticed in Chapter 24. Man's part in production ispassive when goods come into existence without his effort. One canimagine the indolent savage of the tropics, lying under the banana-tree,letting the fruit drop into his mouth. One can conceive of a tribeliving upon manna, where every day the people awoke to discover acertain amount of food provided to each person's hand. Though no effortcould increase that amount, still, if the food differed in flavor andthe better qualities were rare, value would come into existence andexchange[Pg 258] would arise. Now there is something very analogous to that indaily experience. There are some goods which effort can do little to,increase. Usually, however, there is a possibility of change andadaptation to make them better suited to needs, and there is requiredthe use of intelligence to choose among the goods and to employ them inthe best way. Further, man can intervene and direct the course ofindustry; he does not merely gather what is provided. It is this activeintervention and effort that is here to be considered.

2.To have value, a thing must be of the right stuff, in the rightform, at the right time, and at the right place to gratify wants. Adistinction is sometimes made between elemental, form, time, and placevalue. It is a mistake to say that the value of anything is due to anyone of these features, for to have value all must be united in a singlething. But the distinction is useful in emphasizing the missingcharacteristics, which if supplied, cause value to emerge. Ice may beconsidered to have form value when produced artificially by a machine,time value when stored from winter to summer, and place value whenbrought from the north to the south. But not less essential is thepsychological condition of a hungry and thirsty population ready toconsume the ice. Any act or agent is said to be productive which worksin any one of these respects: puts things in better form, or in a morefitting place, or provides them at a more fitting time to serve humanwants.

3.Economic production (in contrast with technical or merely formalproduction) is such a change in goods as is attended by an increase invalue. It is often well to contrast form, appearance, imitation, withthe thing itself, the reality. Men sometimes go through the forms ofstudy when their eyes and thoughts are wandering; through the form ofgetting a college education when they are simply having a good time.Likewise in production there is the form and the reality. The young ladyjust out of boarding-school rarely produces a masterpiece with the tubesand brushes[Pg 259] that Raphael might have used. The justification for amateurwork is to be found in the doing and not in the market value of theresult. Blue rosebuds, painted with loving if unskilled touch on redvelvet slippers, may bloom into a romance and happiness; but to theeconomist this appears to be a consumption of good pigment foramusement, not a creation of value. The difference between the form andvalue of productive effort becomes, in the study of businessorganization, a most essential question. The significance of leadershipand control of industry is found in this fact that economic goods may beunited to produce results having either a less or a greater value thanthe materials that are used.

4.Individual acquisition may be contrasted with social production incases where the individual increases his wealth at the expense ofothers, without adding to value. Most economic efforts increase theincome of the individual and the income of society at the same time. Thefruits of the field and the uses of machines are net additions tocurrent income; they are not merely subtracted from the income of oneand added to that of another. The increase of products by labor maydepress somewhat the exchange value of competing labor, but the generalwelfare is furthered by the greater abundance. With very slightqualification it is true that in these cases the good of each is thegood of all. But in some forms of human effort, social and individualinterests clash. When two men bet, one gains and the other loses. Thegambler's gain is a loss not only directly to his beaten opponent butindirectly to society. Certain forms of speculation approach dangerouslynear to the appropriation of the goods of others, and others becomeoutright stealing, or cheating so nearly like stealing that it would betreated as a crime if discovered. But many a man prowls along theborder-line of crime all his life and succeeds in making large gainswithout falling into the clutches of the law. Cheating that can bedetected, and outright stealing, are prohibited by the law not becausethe burglar is an[Pg 260] idler; he loses sleep; he has his trials too. Thepursuit of burglary requires courage, effort, and ingenuity, but societydoes not reward these as virtues nor recognize as production thetransfer of wealth from the bank-vault to the pocket of the burglar. Itis the aim of social institutions to harmonize individual and socialinterests in the pursuit of wealth, to force men into lines of actionwhere individual acquisition adds to the sum of social utilities. Butthere are many marginal cases where human justice discriminates only ina bungling way, and many controverted questions arise at themeeting-point of ethics, economics, and law.

5.In this sense, productive industries may be distinguished fromunproductive ones. The old distinction between productive andunproductive labor rested on the idea that production must be embodiedin material and lasting form. We have rejected this for the thought thatthe tests of production are to be found in feeling, not in outwardthings. The distinction, therefore, between productive and unproductivelabor must now be of a very different kind. Viewed from the socialstandpoint, the efforts of men may be seen to be directed along more orless productive lines. Enterprise and effort shade off from the more tothe less productive, from the extreme where the value is a net additionto wealth, through other cases where one's gain is partly at the cost ofothers, to fraud and crime where there is merely a transfer ofownership.

§ II. COMBINATION OF THE FACTORS

1.The various parts, materials, and agents that unite to form productsare called the factors of production. In a general sense every separatething that enters into industry is a factor; as, in agriculture, forexample, the seed, plows, fields, fences, barns, cattle, labor. Butusually in economic discussion, these numerous factors are grouped inlarge classes. The main factors are two, variously named as man[Pg 261] andnature, or labor and material agents, or humanity and wealth. Rejecting,as we have, the old view as to the nature of consumption goods and as tothe nature and possibility of the distinction between "land" andartificial capital, we class under wealth all material economic agentswhatsoever. The discussion of labor and wages has broadly laid down theprinciples that apply to the value of human effort, but the factor ofdirecting energy presents in modern society so many important featuresthat it calls for special and fuller consideration.

2.The economic progress of society has been marked by decreasingdependence on the bounties and chances of nature and by increasingcontrol of natural forces by man. Various stages of progress in humanhistory have been recognized. First is the stage ofappropriation—thestage of hunting, or of fishing, or of gathering fruits. Man in thisstage is still an animal in his economic methods, not guiding andcontrolling nature, but merely gathering what nature chances to bringforth. The limitations to man's powers in this stage are marked. Thereis excess of supply and waste at one season, scarcity and greatsuffering at another. With such crude utilization of the bounties ofnature, a vast area will support but a small population. When sheep andcattle have been domesticated, and where there is a large area forgrazing, industry rises to thepastoral stage. While still dependenton nature's bounties for the feeding of his cattle, man is hourlyintervening to increase, regulate, and improve the supply of food andmaterials. Famines are more rare, economic welfare is greater, a greaterpopulation is nourished on the same area. Theagricultural stagebegins whenever man plants seeds, trims, tends, and increases by hiscare the supply of vegetable food. This is a still greater interventionin the course of nature. Man anticipates the future, directs forces, andgroups materials to his purpose of getting a regular food-supply. He isthus himself forced into settled life, begins hand-production, and[Pg 262]makes the first steps in commerce. Then gradually comes theindustrialstage, in which control over nature grows, supplies increase, machineryand motive forces are utilized, and humanity is in the full tide ofindustrial development. These are not sharply marked changes, butthroughout all there is a growth of security, of certainty, and ofproductivity. With man's increasing power and foresight, chance islessened, for directing energy takes its place.

3.For a high efficiency of production, as a whole, conditions mustfavor the best organization and direction of industry. Industry isdependent primarily upon natural resources. Climate, rainfall, irondeposits, fuel, supply of wood or coal, predetermine in large measurethe limits within, and the direction in which, the industry of anycommunity can move. The progress of production depends also on anincreasing efficiency of labor as embodied in individual men, and uponsocial and political conditions making possible an increase of capital.But—a condition as important as any of these—production is dependentalso on a wise combination of the factors. Social, political, andeconomic conditions must be such as to call forth the factor ofdirection and control of industry, to make possible industrial progress.This is one of the greatest sources of America's superiority to-day. Ithas been strikingly said that it is now no longer "young America and oldEurope," but "old America and young Europe." America is older inindustrial experience; Europe, with undeveloped resources, awaits thetouch of American methods and machinery. There are dynamic forces inAmerican society not present in equal degree in any other. It istherefore not alone the great resources of coal and iron,—equalresources may be found in unexplored parts of the world,—it is thedynamic social forces, invention, enterprise, and organization, whichhave brought America to the forefront in industry. Her natural resourceshave thus yielded an incentive and a premium to enterprise as a sort ofby-product. Absence of caste, political liberty, the[Pg 263] democracyfollowing the spread of the frontier, have not made it possible forevery one to succeed, but they have made it possible, as nowhere else inthe world, for real ability to scale the barriers of birth, poverty, andhardship. A conservative population never can equal a progressivepopulation in industrial efficiency. It has been remarked that Americahas little to fear from Oriental competition so long as the avenues ofeducation and enterprise are open to her young men, insuring her thehighest capacity in the organization and direction of industry.

4.A high efficiency of industry is dependent on many social causesmaking possible a great specialization. It was said in anotherconnection that division of labor is dependent upon the size of themarket. With a large population massed at one spot, so that the demandfor even the less important products is large, there may be a highspecialization of industry. An increase of transportation, such asrailways and telegraphs, is equivalent for many economic purposes togrowth of population on one spot. In colonial days it took ten days togo from Boston to Philadelphia, and two weeks to go to Washington. SanFrancisco is now for many economic purposes but one fourth as far fromBoston as Washington was at that time. California and the eastern statesare distant only thirty minutes by telegraph and three days and afraction by railroad, and are thus in many respects in the same market.The great development during the past century in the means ofcommunication and of carriage has made possible, as never before, themassing of population to secure the advantages of division of labor inmost lines, without meeting the hitherto insurmountable difficulty inthe securing of food for such large numbers in a limited space. Thepopulation draws its food from the whole vast area; whereas it is massedat the points more favorable for other products and can make use of themost highly specialized machinery. These several conditions thus havefavored the growth of large industry under a single control anddirection,[Pg 264] on a scale never before approached. These changes havebrought in their train social problems connected with the concentrationof economic power. It remains to be seen whether the unquestionedeconomies of this new organization can be retained and improved while itis divested of its evils.

5.With the growing division of labor, grows the need of the highestability for the directing of industry. Ability may be judged by variousstandards. From one point of view, the scientific mind, grouping factsin the cold light of reason to arrive at truth, is the highest type. Butsupreme, each in his own sphere, are also the artist expressing, throughpainting, poetry, dramatic action, and music, the subtleties andcomplexities of feeling, the moral philosopher, the prophet, thepreacher, in the best sense of the term the teacher, all aiding to guidethe spiritual forces of humanity along lines that make for socialwelfare. Not least is the business enterpriser, whose function is todirect the economic forces for production. It is vain to assign a meanplace to the organizing intelligence and its social work. Its importancegrows apace with the growing magnitude and complexity of industry.Misjudgment now will destroy more wealth, and wise judgment can producelarger results, than ever before. The captain of industry also may workas an artist or as a gambler; he may, by the methods he pursues, upliftthe moral plane of his society or he may help to corrupt and degrade it.No citizen is in control of more potent influence for good or ill thanthe successful business organizer. On the attitude of society towardhim, and on the standards to which he is held, depend in large measurethe use that will be made of his exceptional powers.

CHAPTER 29

BUSINESS ORGANIZATION AND THE ENTERPRISER'S FUNCTION

§ I. THE DIRECTION OF INDUSTRY

1.In the simplest kinds of individual production the value of theresults depends largely on intelligent choice. Even for the solitaryworker the choice of the right time to do work is most important. Thefirst thing Robinson Crusoe did was to turn to the ship to save as muchas possible of the cargo before it was dashed in pieces by the waves. Ifhe had begun first to till the soil to provide a future supply of foodit would have shown one kind of foresight, but it would have shown verypoor judgment. Every moment of delay in recovering the cargo of thewrecked vessel cost him many useful materials. The humblest farmer has agreat range of choice and a need of good judgment in fixing the time tosow, to reap, to do each simple task. There is the same need to-day forthe small shopkeepers, for the blacksmiths, for the small producers ofall kinds to make wise choice of time in the use of their own labor.There is also a wide range of choice in the distributing and combiningof labor, agents, and materials. A limited supply of agents can be usedto secure a variety of goods, more or less desirable. There are manychances for mistake, but in the long run it is judgment, not chance,that determines the success of one man as compared with another. Thereis a choice in ways and methods by which a thing can be done. There aremany wrong ways, there is but one[Pg 266] best way, at any stage of industrialprogress. While most work is done in customary ways and littleindependent judgment is required, yet in every business from time totime new problems arise and call for an exercise of choice as tomethods. Moral qualities are continually called for, such as control ofimpulse, and the giving up of the comfort of the moment. The wisdom ofour fathers is embodied in a multitude of proverbs that suggest the wisecourse. Men must "make hay while the sun shines," not lie in the shade.But virtue fails less often from lack of knowledge than from lack ofwill. As men differ in judgment, character, and will-power, theirproducts differ, even in the simplest circumstances. The ability tochoose and to do wisely is an element in personal skill.

2.When men work in an associated group, the direction of effortbecomes relatively more important. The first and simplest advantage ofassociation is working in unison. Men unite their muscular efforts for asingle task, and accomplish what is impossible to them working singly.But when many work in unison, the right selection of time and way is ofgreater importance; a mistake will waste more materials and agents. Ifassociation is to yield its advantages, there must be division of labor;hence harmony of effort, hence agreement or direction. While the gain ofwell-directed association is large, the waste of ill-directed effort isgreater, when specialization has taken place, than with isolatedworkers. Most communal societies have failed because of the lack of agood head. The few exceptional successes have been due to the presenceof a man of superior ability, such as George Rapp of the HarmonistCommunity, who, had he lived in this day, could have become easily thehead of a great business corporation.

3.Where various industrial groups are associated, direction becomesstill more important. In the single group it is an internal harmonyalone that is needed. The work of a dozen men must be so arranged thateach is in his fitting[Pg 267] place. But as this group comes into contact withothers, the relationship becomes two-fold, and there must be bothinternal and external harmony. The more complex the economicorganization of society, the more the chance of mistake and the moreinjurious are the mistakes to a wide range of interests. Large amountsof capital and labor can be rapidly lost through lack of wise directionof associated groups.

4.The increased efficiency of industry has been accompanied by thespecialization of control. The crude, early methods of enforcingharmony in industry were slavery and political subordination. Underdivision of labor, with free workmen, industry is ruled by impersonaleconomic forces that bring the less capable under the direction of themore capable. This work is rudely done, no doubt, but the penalties ofbad direction of labor and capital are so great that blundering cannotbe permitted. The man who shovels dirt must do it at the right time andplace if, in this complex society, it counts for something and gives theeffort value. If he cannot choose well for himself, he comes underdirection. The average man cannot decide nearly as well here as he couldon a desert island where and when to put in his spade. There it would beto raise food for the current year; here it may be to dig a canal or atunnel whose uses will not become actual for many years. The moredistant the end sought, the more difficult is the choice. To everyworker, according to his personal skill, is left some degree of choicein the method of his work, but in a large part of industry the range ofchoice is very narrow. The man with the shovel and the man with the hoecome under direction.

§ II. QUALITIES OF A BUSINESS ORGANIZER

1.The organizer and director of industry must first have technicalknowledge of methods, processes, and materials. The qualities requiredin the direction of industry are implied[Pg 268] in the foregoing section, butthey may be more specifically enumerated. Knowledge of technicalprocesses is relatively more important in the direction of industry inthe earlier stage. In the single independent producer it is the qualitymost desirable. He must know the quality of the materials with which heworks and the best modes of combining them. But, as industrialorganization becomes more complex, only a broad knowledge and ability tojudge of the results of different processes and to compare plans arenecessary in the organizer. He can hire the technical knowledge ofdetails required in the larger management of business. Draftsmen,engineers, pattern-makers, men with far more education and capacity incertain lines than the business manager, work under his direction.

2.The organizer requires ability to judge men and tact in relationswith them. In the small group, ability to get on well in personalcontact with workmen is of great importance. Especially rare is thegenial manner that wins the confidence and even the affection of themen. A sense of humor and the ability to turn a joke are said to haveobviated many a strike and thus to have prevented losses both to theemployer and to the men. In large affairs much of this managing tact canbe hired in good foremen; but the organizer must still have a knowledgeof men, ability to judge of human nature, to select his subordinates,and to animate them with his own purposes and plans. Mr. Carnegie hassaid that an appropriate epitaph for himself would be, "He was a man whoknew how to surround himself with men abler than he was himself." Thatseems too modest; but in a sense it is not, because he claims forhimself, and justly, the highest of all industrial qualities. A greatadministrator in political or industrial affairs can dispense witheverything else rather than with this, the supreme quality of the greatorganizer.

3.The organizer must have unusual foresight and the ability to form alarge commercial policy. This proposition[Pg 269] is to be interpretedrelatively to the task before the organizer, and to the size of thebusiness. Modern industry anticipates demand far more than did primitiveindustry. Large amounts of materials and energy are embarked indirections from which they cannot be recalled. With the progress ofelectrical engineering it soon may become possible to recall at anymoment a cargo embarked for a distant port. But no wireless telegraphyis able to recall the great masses of capital that are embarked ondistant and definite journeys in modern business. The organizeranticipates future demand, and prepares for it. The process has beenfiguratively expressed somewhat as follows: the enterpriser throws intothe crucible great quantities of material; they melt, and an industrialresult is secured, but whether the deposit is greater in value than thematerial is a question that cannot be answered for years. The need ofanticipating demand is greater to-day than ever before, and thisrequires large investments months and even years in advance. The lossesare proportionally large if there is miscalculation of demand. A largecommercial policy is one that takes into account the more distantfactors, and anticipates the new conditions. The rare ability to do thisis rightly called statemanship in economic affairs.

4.The organizer need not himself have great wealth, but he must haveability to command financial resources. Business to-day is done in manycases with borrowed capital. Even a subscription to stock is frequentlyas much in the nature of a loan, made in reliance on the reputation ofthe organizer, as an investment for profits. There are many temporaryneeds that require sudden loans. The confidence of investors, whetherbanks, trust companies, individual shareholders or investors in bonds,must be secured by the organizer. Good judgment of the money marketoften is as vital as judgment of the market for the particular product.In some of the largest corporate enterprises this quality becomes themost essential.

5.Organizing ability of the highest order is rarely found. This isalmost a superfluous statement after the foregoing. According to thetheory of chances, such a combination and balancing of qualities islikely to occur in very few cases. Even where it exists, it may not bediscovered or developed. The man may not find his opportunity, nor thetask the man. There are many misfits in the world. On the occasion ofthe visit of Prince Henry of Prussia to America, in 1902, he wasentertained at luncheon in New York with one hundred of the leaders ininvention, finance, and industry, wherein have been the mostcharacteristic achievements of America. In jocular reference to theFrench Academy, whose members are the forty most noted literary men ofFrance, the newspapers called this the meeting of America's one hundredimmortals. There were J. P. Morgan, the great financier; Vanderbilt,Hill, and Harriman, the railroad kings; Carnegie, the iron magnate;Irving Scott, "the man who built the Oregon"—nearly all the companydeserving a place at the table mainly by reason of excellence asbusiness organizers. Such a gathering has a dramatic interest aspresenting the greatest leaders of industry, but about other tablesmight be gathered thousands of other less notable figures worthy to beaccounted captains of industry in their several fields. One may wellask, How did they come into the important places they occupy?

§ III. THE SELECTION OF ABILITY

1.The men actually in control of industry have been selected inmanifold ways. Skill develops a small industry into a large one. Asmall factory owner gradually adds machine to machine, building tobuilding, till he finds himself at the head of a great industry. Or anemployee develops ability and becomes an employer. Who does not know ofsome one who, as a small boy, went into a store to do chores, worked upto a clerkship and, enlisting the confidence[Pg 271] of men of wealth, wasenabled to establish a business of his own and become an employer?Others have won promotion from the ranks to the head of a large industryin which they secured at last a controlling interest. Employees thathave proved their ability may be selected by the directors of a stockcompany. Men that have worked their way up from the ranks may bequeaththeir business positions to their sons and grandsons, as in the case ofthe Vanderbilts and the Goulds. And finally, but rarely, there may beselection by fellow-workmen in the case of coöperative business.

2.There is a constant selective process: dropping out the weak andadvancing the efficient organizer. There is, to be sure, an element ofchance in this selection. The process in general is a rude one.Accidents and unforeseen changes, industrial crises, failure of healthat a critical moment, fraud and crime, may defeat men of ability andthey may never regain their foothold. Lack of experience may lead todisaster a naturally able but youthful heir, too suddenly burdened withthe responsibilities of a fortune. On the other hand, men of limitedability may inherit fortunes and preserve them by caution, withoutenterprise. It is not always true, even in America, that "It is butthree generations from shirt-sleeves to shirt-sleeves," although manyfortunes slip away from the sons of rich fathers. In general, success inretaining the control of a business is an evidence of considerableability. By loss of fortune unwisely risked, through unforeseen changesin methods, and after manifold blunders, the less capable drop out.Thus, by the ceaseless working of competition, the higher places aretaken by those most capable of filling them, and the efficiency both ofthe employers and of the workmen is increased.

3.In the various kinds of business organization the merits of men andof methods are tested. The independent producer working entirely alone,directing his own industry, is analogous to the animal organism of asingle cell. More complex is the family partnership found often in earlystages[Pg 272] of industry but more rarely now, where the father directs thework of his children and all share in common. The simplest form of thewage system is the single employer with a few assistants. When theemployer is in danger of losing valuable assistants, he sometimes givesthem a share in the business. In the ordinary partnership, two or moremen divide the ownership and duties, agreeing as to the division ofcontrol. Coöperation among workmen, though rare, gives an unusualopportunity for the discovery of special talent. The dominant form oforganization to-day is that of the stock company, or corporation, theownership of which is divided among the holders of shares of stock, orof certificates of membership.

This variety of organization affords opportunity for a two-fold test:that of the ability of men and of the merits, in varying circumstances,of the different forms of organization. Methods of organization areconstantly tested by their results. Men having money to invest areasking whether they would be better off to go into business bythemselves, or to join with a partner, or to buy stock in some largecorporation. Each of these forms of organization has its peculiaradvantages. A stock company can better enlist large amounts of capital,while the individual employer is generally more free from dictation andcan adapt his business more quickly to changing conditions. At the sametime this variety of organization offers better opportunities formanaging ability to show its metal. On the watch towers of industry aremany observers sweeping the horizon for the appearance of men ofbusiness talent. Some characters develop better under direction; othersprove that nowhere does native ability count for more, and merebook-schooling for less, than in business administration. There is someground for the belief that a college education does not increaseexecutive capacity in business. Such ability often seems to be a freakof nature and a product of practical experience, rather than the resultof college training.

CHAPTER 30

COST OF PRODUCTION

§ 1. COST OF PRODUCTION FROM THE ENTERPRISER'S POINT OF VIEW

1.The task of the enterpriser is to get together the essential factorsto secure valuable products. The enterpriser must first decide whatproduct he will endeavor to secure, and the kind, the place, the time,the quantity, and the quality. He must then select in the rightproportion the materials, labor, plant, and machinery necessary for thatproduct. He must purchase these factors in the market at the lowestprice he can, unite them and sell the product to recover the expenses inthe selling price. A thousand items enter into the cost and perhaps asingle product emerges. What the business man thus pays out, expressedin money form, are the costs that are here to be considered.

2.The term cost of production is used in several senses, the chief ofwhich are money cost, psychic cost, and alternative cost. The ambiguityof this term is a source of much confusion.Psychic cost is the pain,fatigue, irksomeness of labor. This is not definitely measured except atrare points. When the pain of work more than offsets the value of theproduct, the worker who is free to determine the length of his ownworking-day, stops. At that point the psychic cost and the utility ofthe marginal unit are almost equal in intensity—the one as a positive,the other as a negative quantity. But the value of the product as awhole cannot be related to the psychic cost or sacrifice, and thereforeit cannot[Pg 274] serve as a measure of cost in every-day business.Alternative cost is any good or gratification that must be given upwhen any other good is chosen. One may stay at home and read a book orgo on a picnic; the pleasure of reading the book will cost the pleasureof the picnic. A good dress may cost a happy vacation that must be givenup for it. In this sense, each thing is a cost of every other thing thatmight be chosen in the place of it. Alternative cost is thereforemanifold and indefinite. The thought is significant at the moment of achoice, but it is not constantly measurable for practical purposes. Themoney cost is the practical cost generally implied in the term cost ofproduction. It expresses not the pain of the laborer in doing the work,not the sacrifice of the owner of the capital in saving the money, butmerely the sum of money paid out by the producer. There is frequentconfusion of these ideas in economic discussion, few even of the leadingeconomists of the nineteenth century having quite escaped it.

3.The enterpriser, looking upon the cost of most of the factors asfixed, seeks to combine them as economically as possible. Whether theenterpriser is running a factory or a farm, is engaged in a retail or awholesale store, is conducting a school, or a railroad, he has to solvemuch the same problem. By close attention, good judgment, skilfulbargaining, he may be able to buy slightly cheaper than his competitors,and thus have an advantage over them at the outset. When he does this,it is usually by searching out a better market in which to buy, buyingat a better time, and judging better than his competitors the quality ofgoods. If, in a given market at a given time, goods are sold to one morecheaply than to others, it is an act of generosity. Even the best buyerspay nearly the prevailing market price for agents. The most successfulenterprisers are not found to be those paying lower wages or lowerground-rent than their competitors. It must not be forgotten that themain forces fixing the prices of agents are impersonal, and can be only[Pg 275]slightly modified in most cases by a particular buyer. He lookstherefore upon the cost of the elements as an ultimate fact which he canchange little, if at all, and he shows his judgment chiefly in theselection of quality. Cost determines and limits the extent of hisbusiness and determines the price at which he sells.

4.The right proportioning and skilful substitution of the factors is adelicate technical task for the enterpriser. Good buying and goodselling must precede and follow the central part of the enterpriser'stask, that is, the combining of the various factors. Each factor isapplied, subject to diminishing returns, up to a point where itsaddition will not secure the value attributed to it in its cost. Theenterpriser is constantly studying the question whether the applicationof another unit of any one factor at the price will add to the value ofthe product as much or more than the cost. This calculation is made forevery one of the minor factors entering into the business, and for thebusiness as a whole. The proper proportion varies at different prices,or costs. If wages rise, "it pays" to get machinery; if wages fall, itpays to let the machinery deteriorate and to do more by hand-labor.Likewise there is constant substitution of the various materials. Theright proportions change constantly with inventions. A model factory isso proportioned that the buildings hold the right number of machines,with the right amount of space for the workmen, and the right amount ofpower. If there is more of a single factor than the ideal proportion, itis an unnecessary cost. Even the model factory begins to be out of datealmost as soon as the walls are dry, and the latest method is to buildas nearly as possible on the unit system, so that new parts may be addedwithout the loss of harmony and proportion.

5.The enterpriser's costs determine the lowest price at which he cancontinue to sell, but if successful he may have a wide margin ofprofits. New factories are constantly arising with new and betteradjustments. In industries of[Pg 276] competing products, also, the processesare changing. Hence there is always a pressure of competition on someenterprisers who constantly complain that they must sell below the costof production. The organizers of a trust always declare, some no doubttruly, that they have been selling below the cost of production.Business men say that competition is destructive, and it certainly doesdestroy the less favorably situated enterprises. Each enterpriser'sprice is the highest he can get in the market for his product; it mayfar exceed his costs; it may even fall below them, but only temporarily,for if sales continue to encroach on capital, the sheriff soon closesthe doors. Successful competitors are constantly pressing upon themarginal enterpriser, fixing a price that leaves themselves a profit,but is below his cost. Even the most successful enterpriser comes intocontact with cost, and seems to be compelled by it. He reaches out fortrade, and sells some (not all) goods at a price which leaves him noprofit. He enlarges his factory and ships goods farther, paying thefreight, which means a lower price at the factory. The expandingbusiness, therefore, comes at length to the point where it cannot gofarther at the prevailing prices. Hence the business man's view of thecosts is that they determine value. It is true in the sense that thesupply of a particular product in any market is at last limited by costof marginal producers or of marginal portions of supply. But it is nottrue of all the units of product that costs determine, or equal, marketprice. There is a margin above costs to the successful enterpriser on alarge portion of his output. The margin may be narrow or wide, accordingto the business. The margin is "profit," or the gain of the enterpriser.

§ II. COST OF PRODUCTION FROM THE ECONOMIST'S STANDPOINT

1.The economist should view money cost as an intermediate and not asan ultimate explanation of value. The[Pg 277] value of all things must betraced back to gratification, to the relation of goods with psychicincome. This being true, the value of the factors which the enterpriseruses must be derived from the value of the products, and not thereverse. This does not mean that the business man is deceived into thebelief that he has in cost of production a final explanation of value.He simply is not interested in that question. He knows that there aremany influences determining the cost of the factors he buys, but theyare distant; he cannot influence them, and in the single stage of hisproduction they seem to fix the price. In some purchases, and on thestock exchange, a marvelous recognition and analysis of the most distantinfluences is necessary; but in general a superficial view of value istaken in business; it does not pay to do other. The logical treatment,however, must go deeper into the question and trace the cost of agentsback to the ultimate cause of value, that is, to want-gratifying power.To say that the price of a product is determined by the money cost, orprice, of the factors is simply to postpone the answer to the questionof value; one has still to ask, What determines the money cost, orprice, of those factors themselves?

2.The demand for any factor entering into products is reflected, in anincreased price, to its cost in all competing products. Figurativelyspeaking, products compete with each other for the factors that enterinto them. According to location, quality of the soil, and improvements,a certain area of land has various rival uses. These uses bid for theland, or put in an economic claim for it. Products of a higher valueoutbid and exclude those of a lower. If fine wine can be raised on apiece of land, potatoes ordinarily will not be planted in it. But ifthere is such a supply of that quality of land that it continues to beused side by side for both products, it will have the same value andyield the same rental in both uses. The least utility yielded by anyportion of the supply fixes the value of all the units.[Pg 278] Machines areusually made for some product determined in advance, but often they areonly partially specialized and within limits they can be adapted.Sewing-machine factories were readily turned to the making of bicyclesat the time of greatest demand, and bicycle factories later were usedfor the making of automobiles. Thus, in general, machinery is used forthe product to which it contributes the most value. Any enterpriserseeking it for any other use finds its "cost" affected by its variousalternative uses. The same is true of all the materials and of all thegrades of labor entering into products. The enterpriser'scost istherefore the reflection of the want-gratifying power of the productiveagent in all its other uses as well as in the particular product hedesires. To the enterpriser, cost seems the cause of the value of aproduct. To the economist it should be clear that the utility found inthe various products is the basis of value in the factors,i. e., ofthe costs.

3.The genealogy of value may thus be traced through the variousintermediate products to consumption goods. A single product having asingle source of supply shows most clearly the reflection of valuedirectly from the product. The discovery of a mineral spring or of agood quality of building-stone on worthless land, will cause a value toattach at once to the source of supply. When a great singer like AdelinaPatti commands several thousand dollars for each appearance in concert,the source is the magical throat of the singer, and the salary reflectsthe utility of the music in the minds of delighted hearers.

When the one source of supply yields several different kinds of productsthere is just one new condition which confuses the thought and suggeststhe error that value begins in the source (with costs therefore) and notin the product. Looking at the products severally, no one of themexplains the value of the source, and, on the contrary, each one is seento have a value independent of the particular use to which it is put. Tomake the illustration most simple: a savage finds[Pg 279] in a wreck on thecoast a number of bars of iron. His fellows wish them for variouspurposes: to make arrow heads, spears, knives, hatchets, hoes,ornaments, nails, needles, etc. Value is in this case derived in part,through the source, from the alternate uses. Taken jointly andconsidered as one sum, the value of the various products accounts ascompletely and exclusively for the value of the source as if they weremerged into one product. The source (S) is distributed to each of theproducts in accordance with their marginal utility, and therefore thevalue of the various products from any source of supply constantly tendsto equality. Any unit of product sought for any purpose must be paid foraccording to a marginal utility determined in all the applications. Thegenesis of the value is in the utility of the product; the value of thesource is derived.

In actual life the problem is far more complex, and yet, through itssettlement runs just the same principle. There is constant bidding formaterials, and through their price the claims of rival products areadjusted. A point is reached where it does not pay to use any more of anagent in a certain industry; the production of another unit results[Pg 280] ina loss. There is a most complex relation among many different industriesusing the same factors, the value of a unit of product (ata) beingreflected up to the source, and through successive links to the mostdistant product (z). The effect of this is to reduce the sale (ofz)and correspondingly the use made of the agent in question. A higherprice of leather, due to the increased use of shoes, raises the value ofhides and cattle (this increasing the extent of cattle raising) andraises thus the cost of carriage-trimmings, pocket-books, foot-balls,leather belts, and every other leather product. As the price rises,substitutes for leather, and imitations of it, are used for such of theproducts as cannot bear the increased cost of leather.

4.The enterpriser does not fix the value of products or of agents, butis the medium through which consumers express their estimates. Theenterpriser who anticipates aright and satisfies the public taste is thegood medium. He readily transmits and accurately focuses the rays ofpublic judgment. One that misjudges is a poor medium. The enterpriser ishimself the servant of costs. Laborers sometimes[Pg 281] assume that theemployer can dictate wages, prices, and markets, can rule things with alordly hand. With rare exceptions the ultimate control in these mattersby business men is very slight. In the main the enterpriser masters thesituation only by bowing to it, just as the scientist and the engineergain mastery over nature because they know when to bend and how to obey.The consumer, by deciding to buy this or that product, sets in motionwaves of value. The consumers of products are the true purchasers oflabor, materials, and uses of agents. The enterpriser must conformclosely to cost, to the price prevailing for the moment, or hiscompetitors in this day of narrow margins will seize the opportunity.The enterpriser is merely the distributor or equalizer of cost among allthe different products for which different agents can be used. If heacts efficiently, profits arise.

CHAPTER 31

THE LAW OF PROFITS

§ I. MEANING OF TERMS

1.The term profit is popularly used as any gain or advantage securedby any means in business. The terms used in economics, being taken frompopular language, vary in meaning according to the context. It isnecessary to clear thinking to reject some words entirely and when usingothers to define them more strictly. The broad usage of the term profitsjust noted includes every kind of return to industry: such as intereston capital, and wages or services of the man owning the industry.Precise thinking requires its use in a much narrower sense.

2.A common meaning of profits in retail business is the gross gain ona given sale. Buying an article for one dollar and selling it for twodollars, is said by the merchant to be selling at one hundred per cent.profit, jocularly called, "The Dutchman's one per cent." The cost priceis considered to be that paid to the manufacturer or wholesaler. Indifferent lines of goods there is added regularly to this cost twenty,thirty, or fifty per cent., as the case may be, as the merchant's profiton the sale. This is of course a gross profit, and not net, or trueprofit. It leaves out of account rent, interest on capital, clerk hire,freight, and many other minor items that enter into the cost of runninga store. It often happens that the Dutchman's way of reckoning is nearerthe truth, and that the gross profit of one hundred per cent. proves atthe end of the year to be only a net[Pg 283] profit of one per cent. Thisevidently is a loose meaning, impossible in the discussion oftheoretical questions. This meaning is sometimes developed, makingprofits the sum of all the gross profits on separate sales within ayear, or the difference between the wholesale and retail prices of goodssold within the year.

Another meaning given to the term is gross profit (as above) comparedwith the capital invested. The "profit" in this case varies partly withthe rate of the turnover. To illustrate: if the amount invested in aprinting-office is $100,000, and the annual business done is $300,000,the capital is said to be turned over three times; if the gross profitson sales averaged twenty per cent., they would be sixty per cent. on theinvestment; but, if the capital had been turned over four times, thegross profit would have been eighty per cent. on the investment.

3.Another meaning of profits is the annual net gain of the business,as compared with the average investment of capital. This is a long steptoward greater definiteness. If at the end of a year it were found thatafter paying all outside expenses there were $10,000 to set aside, thiswould be accounted a profit of ten per cent. on $100,000 invested. Butconfusion still reigns because of wide variation in the methods ofestimating costs before fixing net profits. In one case the enterpriserrents lands and buildings, in another he owns them; in one case he hasborrowed money and counts interest as a cost, in another he is free fromdebt; in one case he counts as a part of cost an estimated fair salaryfor himself and his partners, in another (usually in a small business)no such allowance is made Such a variation in business usage is mostperplexing. In all these cases one must have the exact conditions inmind before it is possible to make any comparisons and draw anyconclusions as to the relative profits of different industries.

4.In the narrower and exacter sense profits are the net gain of theenterpriser after counting the rent of material agents and contractwages of employees at the prevailing rates.[Pg 284]Into the practical problemof cost and profit many factors enter, and the theoretical problem is todetermine just how much ought to be attributed to each. In a largebusiness usually the practical bookkeeping problem is not unlike that ofeconomic analysis. A stock company counts as cost, as a part of fixedcharges, interest on capital borrowed either from banks or bondholders.Its managers are paid salaries, counted as a part of cost. The netbalance, after deducting these and all other expenses, is countedprofits and paid in dividends to stockholders. The economic student isnot attempting to get a theory of profits that is in contrast withpractice. Rather, he is trying to analyze profits generally, just asthey are analyzed in the few cases where the books are properly kept. Ineconomic theory, therefore, profits are the part of the gain of anybusiness that is logically attributable to fortunate investment and goodmanagement; profits are the income attributable to the enterpriser'sservices.

5.Typical economic profits are thus a species of wages but are markedby peculiar features. In some of the older treatises on politicaleconomy, profits are treated merely as a combination of "wages ofmanagement," and of interest on capital invested. A man hired at a fixedsum to manage a business is receiving simply contract wages. Economicprofits are notcontract wages, not being paid by agreement, but beingyielded impersonally by the industry. Profits are, however,economicwages or the earnings of services. As business has developed, it hasbeen seen that the enterpriser's work has its peculiar character anddeserves special attention. The old English word "enterpriser," used ofthe "adventurer" who embarked in foreign trade, may fittingly apply tothe organizer and director of business to-day. Foreign trade then, moreoften than now, was most uncertain, and there were many chances that theship would be lost, or the venture prove a losing one. In the simplest[Pg 285]business to-day there is this element of enterprise, or undertaking,combined with ordinary capital and labor. As industry develops, thisspecial service stands out more clearly. In the corner-grocer and in themanager of the little news-stand, the elements of enterprise and laborare not apart. In the large wholesale house, the enterpriser is seen tobe not merely an abstractly thinkable function, but a separate andconcrete person. The typical enterpriser is the man who gives his timeand energies to the launching and guiding of business.

§ II. THE TYPICAL ENTERPRISER'S SERVICES REVIEWED

1.The enterpriser guarantees to the capitalist-lender a fixed return.Agents will yield the highest economic rent of which they are capableonly in the hands of those who can use them with exceptional skill.Owners of capital who for any reason, such as youth, inexperience, illhealth, incapacity, or conflicting duties, are not able to make agentsyield the average rent, seek out, or are sought out by, those who ingeneral can make the agents yield more than the average. The interestcontract between them is one of mutual advantage, in that theenterpriser pays a definite sum to the investor unable himself to applyhis productive agents. Immense sums of capital are now put into thehands of small enterprisers, such as Western farmers improving theirlands, builders of city homes and business blocks, and smallmanufacturers. But stocks and bonds of corporations give a wide varietyof investments which shade off from the safer or capitalistic type, tothe more uncertain, or enterpriser's type. First-mortgage bonds, being afirst claim on the income and property, have the highest security andyield generally the lowest interest. Even national bonds are notabsolutely safe, and for that reason as well as because of theirfluctuation in price, even their purchase has something of the nature ofan enterprise. Stocks are the enterpriser's type of investment,[Pg 286] thedividends being more uncertain, but giving the chance of a higher returnthan the average. It is because some stand ready to assume the risk ofmaking goods yield average returns or more, that others can sit andenjoy a fixed income with little effort and in comparative security.

2.The enterpriser gives up the certain income to be got by lending hisown capital, and, becoming a borrower, offers his capital as insuranceto the lender. Every business has an element of uncertainty in it, andsome one must meet the risk. A man with marked ability as an organizerof industry is rarely found long without capital of his own. But even apenniless man who can gain the confidence of investors is able to getbacking and to secure the necessary funds to engage in business. Thelenders in such a case, however, run a greater risk than when theenterpriser is a man of some means, and they therefore ask a higher rateof interest than if they were loaning to a wealthy man or to a wealthycompany. They are in part the enterprisers. When, as usually, theenterpriser invests some of his own capital, it is a guarantee of hisgood faith, a sort of insurance reserve to protect the lender from loss.The first loss falls on the enterpriser, and the chance of loss to thelender is in large part, though not entirely, eliminated. It ischaracteristic of modern loans that the borrower may be rich, notpoor,—often richer than the lender. The mortgage on real estate and thecreditor's claim on a merchant's property usually give security of fargreater value than the loan.

3.The enterpriser gives to other workers a definite amount forservices applied to distant ends. In discussing the wage system it waspointed out that most labor at the present time is put upon futuregoods. It is not known what they will be worth a month or a year laterwhen they mature as consumption goods; their present worth can merely beestimated. If they prove to be worth little, the profits may be nothingor less than nothing. The enterpriser, however, buys the services forready money, embodies[Pg 287] them in goods, and assumes the risk; the goodsmay sell for more or less than the wages. It is sometimes said with acertain irony that if the enterpriser assumes the risk he is verycareful to pay so little for labor that he does not lose. In this naiveview the enterpriser is so independent of the market that he can paymuch or little as he pleases. In fact in many cases he gains little, andin many he loses and loses largely.

4.The enterpriser risks his own services and accepts an indefinitechance instead of a definite amount for them. Assuming the risk for theright conduct of industry, he backs himself, expresses his faith inhimself as a manager who can make labor earn more than the prevailingwages and make capital yield more than the prevailing rate of interest.If it were otherwise, he would loan what capital he has instead ofborrowing more; instead of employing others, he would himself seekemployment in some other industry. Men are constantly shifting from theclass of hired workers to that of enterprisers. It is a rude and oftentragic process of adjustment and selection that enables men havingability as enterprisers to continue in that work, and forces others intothe class of employees.

5.The enterpriser is the economic buffer; economic forces aretransmitted through him. In a more primitive industry each man iswage-earner, capitalist, and enterpriser combined in one. As industrydevelops, some of the factors of cost become distinguishable, andrelatively stable and calculable. A low rate of interest, ranging fromthree to four per cent., can be secured with practical certainty byputting one's money into good corporation securities, into thesavings-bank, or into national bonds. Contract wages in each class oflabor also are fixed by competition at a point where they are a mediumor average of gains and losses. The enterpriser is the most movableelement. As the specialized risk-taker, he is the spring or buffer,which takes up and distributes the strain of industry. He feels[Pg 288] firstthe influence of changing conditions. If the prices of his productsfall, the first loss comes upon him, and he avoids further loss as besthe can by paying less for materials and labor. At such times thewage-earners look upon him as their evil genius, and usually blame himfor lowering their wages, not the public for refusing to buy the productat the former high prices. Again, if prices rise, he gains from theincreased value of the stock in his hand that has been produced at lowcost. If the employer often appears to be a hard man, his disposition isthe result of "natural selection." He is placed between the powerful,selfish forces of competition, and his economic survival is conditionedon vigilance, strength, and self-assertion. Weak generosity cannotendure.

6.Profits therefore fluctuate more from industry to industry and fromman to man than do other incomes. As a somewhat exceptional case, smallemployers in industries such as baking and tailoring, may for longperiods get less for their work than their employees get in wages. Thepride in being an employer and occasional chances of greater gainsperhaps explain the fact. The fluctuations of the market may sweep awayfrom the enterpriser not only all his "profits," but all his accumulatedwealth. As a consequence, profits may be at other times very high, formen will not take the risk of great losses unless there is a chance oflarge gains. While the income of the salaried man is occasionallyadvanced, and then for long periods remains unchanged, the profits ofenterprise come in waves. In seasons of prosperity the income of theemployer swells with a dramatic swiftness while rents and wages movetardily upward. But for years again the employer earns a return hardlyexceeding a low interest on the capital invested in the enterprise, orruns the business for a time at a loss. Profits of this kind should notbe spoken of as a percentage. Greater or less, they are the net resultattributable to the enterpriser's skill, and bear no fixed or calculablerelation to any capital investment.

§ III. STATEMENT OF THE LAW OF PROFITS

1.Some apparent profits are due to antisocial or criminal acts.Cheating, lying, breaking of contracts, bribery of public officials, andmany similar acts may greatly increase individual incomes. These are notprofits, as the term is here understood, but they are hard todistinguish from profits in practical life. One man gains a temporarysuccess by acts that are later punished as crimes; another, guilty oflike deeds, escapes conviction for lack of evidence or ontechnicalities, and enjoys ill-gotten wealth. More fortunes, however,are due to actions on the border-line of ethics, which society is notyet honest enough to condemn or wise enough to prevent. No code of lawscan be framed that will make possible the punishment of all antisocialacts. Any law that would catch all the guilty would injure many of theinnocent. Economic analysis may exclude from the concept of profits thegains made by such means, but only omniscience could distinguish them inevery actual case from "swag and boodle."

2.Some profits are the result of pure chance or luck. What is luck? Aresult that is not calculable, coming to pass in conditions where arational choice is not possible, is called luck, for lack of anothername. Now pure luck often brings temporary profit to the individual, butchance does not in the least account for the average and abidingprofits. There is bad luck as well as good luck. According to the law ofchance, in the tossing of a coin for "heads and tails," one side is aslikely to come up as the other, and in the long run the number of headsand tails will be equal. Where cases are numerous, losses and gainsdistribute themselves about a general average, and may be eliminated byinsurance, as that against fire, flood, lightning, against sickness ofthe employer, which would cripple the business, or against his death,which would check it. But many factors evade all[Pg 290] attempts to reducethem to rule, and chance remains a considerable factor in the success ofmany individuals. It still sometimes appears better to be born luckythan rich.

3.Some profits are temporary gains from happy but not entirelyaccidental choice of the best course. Many cases of profit said to bedue to chance are found on closer knowledge to be due to superiorjudgment. A slight advantage in choice will give now and then apparentlychance gains. The adventurer who, on the discovery of gold, goes at onceto California or to Alaska, may stumble upon a gold-mine. It is luck;but if he stays at home it is more likely, according to the theory ofchances, that he will stumble over an ash-heap. In places wheregold-mines are comparatively plentiful, one takes chances between a loadof lead and a bag of money. Throughout life there is constantopportunity, but it must be sought. One who has the good judgment to beever at the right time at the place where he has the best chance ofstumbling upon a good thing, usually gets the advantage, and men call itluck. The more the causes of success in general are studied, the largeris found the element of choice, the smaller that of luck. Some writersmake these temporary gains the essence of profits. Considering thatprofits are always due to the introduction of new and better methods,and not to the continued use of better ones, they argue that as theknowledge of these becomes common property profits will disappear. Butthis in our view is a partial truth.

4.Continuing profits arise from the continued exercise of superiorjudgment. After all the chance elements are taken into account, thereremain differences in the abilities of men, and a continued andever-renewed need of organizing power. Profits, being recognized as dueto these differences in the abilities just as rent is due to differencesin the fertility and efficiency of goods, have therefore been calleddifferential gains. There would be no objection to the term were it notintended to emphasize a supposed difference between[Pg 291] profits and rentson the one hand and interest wages on the other.

Some writers have so magnified the thought that the enterpriser'sfunction is to assume risk, as to make it a denial of the view thatprofits are the earnings of ability. The risks of business are not thoseof the throwing of dice in which (if it is fair) skill plays no part,and gains in the long run offset losses. Business risks are rather thoseof the rope-walker in crossing Niagara; the task is easily undertaken bythe skilful Blondin, it is fatally dangerous to the man of unsteadynerve and limb. Profits are due not to risks, but to superior skill intaking risks. They are not subtracted from the gains of labor but areearned, in the same sense in which the wages of skilled labor areearned. So long as some men have better organizing ability than others,have better judgment, are better able to take the risks, there is reasonto believe that profits will continue.

Profits are the share, or income, of the enterpriser for his skill indirecting industry and in assuming the risks. Despite the complexinfluences, they are determined by his contribution to industryessentially as is the value of any skilled service.

CHAPTER 32

PROFIT-SHARING, PRODUCERS' AND CONSUMERS' COÖPERATION

§ I. PROFIT-SHARING

1.Profit-sharing is rewarding labor with a share of the profits inaddition to contract wages. The essential mark of profit-sharing isthat the additional payment depends on the net profits of the wholebusiness at the end of the year. It is not to be confused with a freegift, or with special privileges granted by the employer, such aslunch-rooms, bathrooms or houses at a low rent. Profit-sharing is acontract made in advance, not a free gift. Nor is it the same as a bonusor premium for a larger output, made contingent on the physical product,on the increased number of pieces turned out by the workmen,individually or in groups. Premium for output is given for somethingdirectly under the influence of the worker. The amount of profits isaffected by the amount of output, but also by a number of other thingsthat are quite outside the control of the workmen.

2.The purpose of the employer in adopting profit-sharing is tostimulate the industry of the workers, thus reducing waste and cost oflabor and supervision. The employer adopting the plan does not intendto lose by it; he believes that if he can get his workmen to take aninterest in the business his costs will be reduced. He offers to dividewith them the resulting savings. There is, in every factory, greater orless waste of materials, destruction of tools, and[Pg 293] loss of time, thatno rules or penalties can prevent. If the worker can be made to take astrong enough personal interest he will use care when the eye of theforeman is not upon him. The product also can be slightly increased inmany ways by the workmen's exertions or suggestions. In some cases thequality of the work cannot be insured by the closest inspection as wellas it can be by a small degree of personal interest. Eitherresponsibility for the fault cannot be fixed, or the defect is one notmeasurable by any easily applied standard. Strikes are averted, goodfeeling is promoted, and contentment is furthered if the interest of theworker can be made to approach, and actually to be in harmony with, thatof the employer. The economic result of the plan, if it can be made towork, must be to reduce the costs of these establishments below whatthey are. The crucial question is whether this alone insures that thecosts will be less than those of competitors, thus giving a source outof which an increased amount, really a wage, can be paid to the laborer.This additional wage is made conditional on the employer's success ingaining a net profit on the year's business.

3.The profit-sharing plan is now successfully working in over onehundred firms in America and Europe. The plan was first tried in Parisby Leclaire, a house-painter. In house-painting there is often a greatwaste of materials and time by men working singly or in small groups indifferent parts of the city. By this new method Leclaire enlisted theaid of the workmen, reduced the costs, and increased the profits. It isa remarkable fact that the plan has been continued successfully by thesame firm to the present time. The most important examples ofprofit-sharing in the United States are the Pillsbury Mills inMinneapolis, Procter and Gamble's soap-factories at Ivorydale, O., andthe Nelson Mfg. Co. at Leclaire, Ill. In some cases both manufacturerand workman value the system highly. N. P. Gilman, the author of "ProfitSharing," puts the ratio of[Pg 294] successes very high. Others declare thatthe failures are mostly lost sight of and are very many. The proportionof business done in this way is not large. One hundred firms is a verysmall fraction of one per cent. of the total number of firms in Germany,France, England, and America. A still more important fact is that thismethod of remuneration did not spread in the ten years preceding 1900.

4.The failure of profit-sharing to grow is due to objections on theside both of the employer and of the workman. On the side of theworkman there is the bookkeeping difficulty. He is suspicious, and helacks knowledge of the business. If at the end of the year the booksshow no profits, the workman loses confidence, considers the plan to bemere deception, and rejects it. Moreover, the plan puts a limitationupon the workman's freedom to compete for better wages by changing hisplace of work. It is almost indispensable to make length of service acondition to the sharing of profits. Workmen coming and going, workingonly a few months, cannot be allowed to share; the percentage given tothe others increases with length of employment. Whenever men are thuspractically subject to a fine (equal to the amount of shared profits) ifthey accept a better position, there is danger of a covert lowering ofwages. The plan tends to break up the trade-unions, which is one of thereasons that the employers like it, and is the reason that organizedlabor opposes it. The employer on his part objects to the interferencewith his management, the troublesome inspection of the books, and theconstant grumbling and complaint of the workmen. It makes known theamount of his profits; if they are large, the advertising of his successinvites competition; if they are small, publicity injures his credit anddepresses the value of his property. In view of all these difficultiesit is not surprising that while the plan often starts promisingly, itusually loses its efficiency after a short trial. Business methods areseverely subject to the principle of the survival of the fittest.[Pg 295]Through competition and the survival of the firms that adoptimprovements, better methods must eventually supplant poorer ones. If amethod fails to spread when it has been tried for fifty years and allare free to adopt it, there must be some defects inherent in it. Thatmust be our conclusion as to profit-sharing.

5.It is usually better to make wages depend on the worker's efficiencyrather than on the profits of the whole business. The strongest motiveto efficiency is present when reward is connected immediately anddirectly with effort, not with some result only slightly under theworker's control. In profit-sharing the added share is only partiallydue to increased effort of the worker. Labor is but one of the groups ofcosts. Profits are the net result of many influences. Chief among theseis the wisdom of the enterpriser in planning and conducting thebusiness. The "profits" may be nothing, though the worker may beexerting himself to the utmost. The plan is, therefore, reactionary, notin accord with the general progress of the wage system, which is tendingconstantly to centralize responsibility, to put the risk into the handsof competent managers, and to secure to the worker a definite amount inadvance, as high as conditions make possible. The system of premiums, orbonus payments, for output, gives in most cases better results and israpidly spreading. It is sounder in conception and works better inpractice. This premium depends on the increase by the laborer of theoutput of his particular machine or process as compared with a standardbased on the experience of some definite period.

§ II. PRODUCERS' COÖPERATION

1.Producers' coöperation is the union of workers in a self-employinggroup to do away with any other enterpriser than themselves, and tosecure for themselves the profits. Its object is not to do away withany return on the capital[Pg 296] investment. Capital may be borrowed eitherfrom outsiders or from the individual coöperators, and is paid astipulated interest apart from the profits. The source of the gain is tobe found in the saving of what the worker looks upon as the needlessdrain of profits into the pockets of the employer. The hope is that theenterpriser's function (if it is admitted that he has any usefulfunction) will be performed by the workers collectively or through theirrepresentatives. They undertake to furnish brain as well as muscle,management as well as hand-work. The hope is even to increase theprofits through increasing the stimulus to the workers and by saving infriction, disputes, and strikes.

2.Practically the plan has been made to work in a comparatively fewsimple industries. The most notable examples of successful coöperationin America have been the cooper-shops in Minneapolis. There were asimple problem of costs, few and uniform materials, patterns, andqualities of product, few machines and much hand-labor, simplewell-known processes, a sure local market. Mr. Lloyd, in a recent book,describes many successful societies in England, but they are all of asimple sort of industry, as agriculture and dairy-farming. Within thewhole field of industry, this method of organization makes little if anyprogress. Most experiments have failed and the successful ones oftenbecome ordinary stock companies with the most able men in control.Therefore, whether losing or making money, they nearly all cease toexist as coöperative enterprises. This result has disappointed theprophecies of many wise men of seventy-five years ago. In the time ofJohn Stuart Mill, great expectations were entertained of the future ofproductive coöperation, which was thought to be a solution of the wholesocial problem.

3.The main difficulty in productive coöperation is to secure managingability of a high order. There is no touchstone for business talent, noway of selecting it with any certainty in advance of trial. Thisselection is made hard[Pg 297] in coöperative shops by the jealousies andrivalries, and by the politics among the workmen. A man thus selected byhis fellows finds it almost impossible to enforce discipline. Incoöperation there is occasionally developed good business ability thatmight have remained dormant under the wage system; some workmen showingunusual capacity cease to be handicraftsmen. But the unwillingness onthe part of the workers to pay high salaries results in the loss of ablemanagers. Having demonstrated their ability, the leaders go to competingindustries where their function is not in such bad repute, and wherehigher salaries can be earned; or they go into business independently,being able easily to get control of the necessary capital.

4.Most coöperative schemes have suffered from a lack of good theory,an inability of the workers to see the importance of the enterpriser'sservice. Most men make a very imperfect analysis of the productiveprocess. They see that a large part of the product does not go to theworkmen; they see the gross amount going to the enterpriser, and theyignore the fact that this contains the cost of materials, interest oncapital, and incidental expenses. They ignore further that theenterpriser's function is a productive and essential one. The theory ofexploitation, or robbery, as explaining the employer's profits, is verycommonly held in a more or less vague way by workmen. With a body ofintelligent and thoroughly honest workmen, keenly alive to the truth,the dangers, and the risks of the enterprise, coöperation would bepossible in many industries where now it is not. The producers'coöperative schemes usually stumble into an unsuspected pitfall. When aheedless and over-confident army ventures into an enemy's countrywithout a knowledge of its geography, without a map, and without leadersthat have been tested on the field of battle, the result can easily beforeseen.

§ III. CONSUMERS' COÖPERATION

1.Consumers' coöperation is the union of a number of buyers to savefor themselves the profits of the merchants or agents. There are manyclasses of consumers' coöperation, but the chief ones are: (1) to sellgoods (retail stores); (2) to provide insurance (coöperative insurancecompanies); (3) to provide credit or capital (coöperative banks). Theseare also productive enterprises, for the merchant's work adds value tothe goods, the insurance company and its agent do a real service, theprofits of the small bank are, ordinarily, earned fairly under existingconditions. The terms producers' and consumers' coöperation merely setin contrast the part of the productive process that is undertaken.Producers' coöperation is concerned with the earlier steps, usuallystopping when the product is disposed of to wholesale or retailmerchants. Consumers' coöperation (often called distributivecoöperation) is concerned with the later steps, the placing of aconsumption good (rarely also productive agents) into the hands of thefinal user. It imparts the same value to goods that the retail merchantdoes. The one thing this class of coöperators is sure of when they beginis a number of consumers to make use of the service or products theypurpose to supply; hence the name.

2.The waste of competitive mercantile business is the source fromwhich it is expected that the savings of the coöperative enterprise willcome. It is a great expense to the retail dealer to secure a body ofcustomers. Rent of store-room, clerk hire, interest on invested capitalare fixed charges, which can be met only on condition of a regular andfrequent turnover of the stock. To attract customers the dealer musthave a well-located store, must advertise, keep open long hours, and payidle clerks. Frequently he must give credit, raising the price enough tocover[Pg 299] the expense of bookkeeping, collection, bad accounts, and loss ofinterest. The public's likings, whims, lack of judgment, and lack ofbusiness analysis make these charges necessary. There are manycommunities where it would be impossible to carry on a cash businesseven at considerably lower prices. Customers are exacting and requirethe costly delivery of small packages; two horses and a driver musttravel two miles to deliver a spool of thread or a half-dozen oranges.Frequent changes of fashion and the shifting of customers from one storeto another keep the merchant always insecure in his trade. A number ofbuyers mutually agreeing to pay cash, to buy at certain times, to placeall their orders with one store, to go to a cheaper location, down analley or into a basement, can save much of this cost on one condition:that the management approaches in its efficiency that of ordinarycompetitive business. In spite of all these advantages, if there isinefficient management the final cost will be no less than that ofordinary business.

3.Despite the possibilities of saving, most coöperative stores failthrough a lack of good management. Note first the greater successes.Since 1842, from which time it dates, the coöperative-store movement hasprogressed steadily in England, where the scores of retail societies arefederated and own large wholesale stores. The long experience hasdeveloped good methods and a conservatism almost inconceivable to anAmerican mind. They are practically great stock companies in which onecan buy a share at a small cost and become a purchaser at usual prices,receiving a dividend later according to the amount of his purchases.Coöperative stores in American universities are generally successful,apparently because they don't coöperate. Some get into politics and gothe way of the wicked. The survivors gravitate into the hands of acommittee of the faculty, which tries to employ an efficient manager,and administers the business as a public[Pg 300] trust without private profit.The wastefulness of multiplying orders for text-books to be used by aclass whose number is definitely known in advance, and the comparativelyuniform character of the supplies, make economy peculiarly easy in thiscase. A large part of the services of the coöperative store, however,are indirect; it reduces and regulates the charges in the stores nearby.

Nearly all the Granger stores, started thirty years ago in greatnumbers, and most of the coöperative stores among American workmen, havefailed. The failure is easily explained by the ignorance of danger, bylack of harmony, by credit sales, and by inefficient management. Thewastes of competitive business are partly a tax imposed upon men (takencollectively) by their lack of business method; the community is notintelligent enough, honest enough, or self-sacrificing enough to dobusiness in the most economical way. Partly they are the price paid forvariety and change, and for the cherished American right "tokick"—something difficult for the members of a coöperative store to dowithout hurting themselves.

4.The experience with these plans verifies the analysis of theenterpriser's function: pure profits are the earnings of a productiveservice. Comparing these three plans, they are seen to be alike inseeking to make workers share some of the profits, to change thedestination to which profits would go. The first would create profits bythe effort of the workers, and give them a part of the saving. Thesecond would have collective workers perform the enterpriser's work inthe factory and get his reward. The third would have collective buyersdo the work of the merchant and save his profits and other costs. Thelast is the easiest to do. Profit-sharing is next in difficulty, andproducers' coöperation is the hardest of all to put into practice. Insome cases, under some conditions, the enterpriser's services may bemore economically performed than at present, for the waste is great. Buttaking men as they are and things as they are, in most[Pg 301] places theenterpriser's service is necessary and must be paid for. Hiscontribution to the success of the industry depends on his nature andability, and it can be distinguished theoretically and practically fromthe contribution made by the workmen. Nothing but changes in humannature, in education, and in morality can diminish the necessity for hisservice.

CHAPTER 33

MONOPOLY PROFITS

§ I. NATURE OF MONOPOLY

1.The term monopoly is used loosely and in many senses. In populardiscussion monopoly means almost any wealthy corporation or the powerthe corporation possesses, a power which is usually thought of asoppressive. Even economists have held the vaguest ideas regardingmonopoly. The recent rise of trusts and monopolies has given a large newbody of facts bearing upon the subject, but all the resulting discussionby the public and by economists has not brought agreement upon adefinition entirely satisfactory. When usage has not settled upon anyone meaning, the selection of a definition is in a measure arbitrary,though it may be guided by logic and considerations of expediency. Letus state the various meanings and indicate the one adopted in thisdiscussion.

2.Monopoly should not be used as synonymous with scarcity. Scarcityis the essential condition of all value. The simplest things—bricks,sand, the commonest unskilled labor—would have no value were there nota degree of scarcity relative to the wants that may be gratified."Monopoly," whatever else it means, always conveys the idea of someexceptional kind of scarcity, scarcity due in part to some source orcause not ordinarily present. It is a bad practice in definition toapply two words to one idea, leaving the other idea unnamed, as is donewhen monopoly is made synonymous with scarcity. Both words are needed.Such a[Pg 303] usage unfortunately is common in economic literature. Manyeconomic writers, for example, have called landownership monopoly,saying that land being the work of nature cannot be increased by men,and therefore must always be scarce. Even if it were true that in theeconomic sense land could be produced by man, there still would beconfusion here between a general class of goods and a special thing. Thefact that a particular field cannot be duplicated does not make amonopoly of land as a whole, any more than the existence of desert landin Arizona makes land valueless or a free good. Nor is a land-owner amonopolist any more than is the owner of a valuable machine. The ownerof forty acres of land worth four hundred dollars, or the owner of avillage lot worth a hundred dollars, can hardly be called a monopolist.It leads to absurdity to use the word monopoly with reference tolandownership indiscriminately. Neither mere scarcity nor the limitationof natural stores should be called monopoly when ownership is scatteredand combination between owners does not exist.

3.The ability of superior material agents and of skilled workers tosecure higher returns than do poor ones does not constitute monopoly.The free competition assumed in abstract discussions of value, does notmean equal capacity or efficiency, but the legal freedom and personalwillingness to move a productive agent into the highest industrial placeit is capable of holding. The rocky field does not compete with thefertile one in the sense that it can yield the same uses. The field fitonly for potatoes does not compete with those rare and favoredlocalities that can raise the best wines. The gardener earning twodollars a day does not compete with the skilled physician with an incomeof twenty thousand dollars a year, for he has not the economic capacityto do so; but he isfree to compete (as is the owner of the rockyfield) unless law, caste, class legislation, social prejudice, or someother objective factor forbids. Anything, however, that prevents thelabor or capital of[Pg 304] buyers or sellers from application for which theyare fitted, defeats free competition. To use the term monopoly of anyand every limitation of economic ability is to extend it to every caseof value. To use it of the high wages of skilled workmen, where no unionto suppress competition exists among them, is to make it a colorlesssynonym of scarcity. It should be confined to a narrower and moreexclusive use. Some special kinds of limitation should be connected withthe idea of monopoly.

4.The limitation connected with monopoly is not that of economiccapacity but that of ownership and control. The derivation of the wordfrom the Greek points to the general thought:monos, alone,poléo,to sell, a single seller, the sole source of supply in a given market.The term was first used in England of special grants or patents ofmonopoly from the crown to make or deal in specified articles, such assoap, candles, etc. The political power of the state created anddefended the monopoly. This policy is pursued in a limited degree to-dayfor the encouragement of invention, in the granting of patents andcopyrights. In the current definition, "The exclusive right, power, orprivilege of dealing in some article or trading in some market," theterm "dealing in" is well chosen, for it is broad enough to cover casesof buying as well as selling, and includes power derived from politicalas well as from other sources. But the term "exclusive" is too absolute,allows of no gradations, and makes the definition applicable only in therarest cases.

5.Monopoly is such a degree of control over the supply of goods in agiven market that a net gain will result to the seller if a portion iswithheld. Every producer has control over some agents and some portionof the supply of products; but ordinarily the portion controlled by anyone is so small that withholding it entirely from sale would not causethe market price to rise in any appreciable degree. The producer in sucha case regulates his action as if the market price were fixed beyond hiscontrol, and he uses his productive[Pg 305] agents fully up to the point wherecosts equal price on the marginal unit of product. A skilled workergetting five dollars a day loses that sum every day he is idle. Alandowner whose land can command a competitive rent of ten dollars anacre must take that sum or less, or nothing; he cannot get more. How cana net gain ever result from a smaller sale? As a reduction of supplyresults in a higher price, it is possible, as is seen in the paradox ofvalue, for a situation to arise in the case of some goods, where asmaller number of units yield a larger sum in the market than a largernumber of units. But the seller's interest lies not in the increase oftotal sales, but in that of net gains. Net gains, being the product ofthe number of units sold multiplied by the gain on each unit, increaseat a much faster rate than do total sales. The existence of monopolypower in any degree depends therefore on several factors: the effect ofcontraction of supply in raising prices, the effect on costs, the numberof units remaining in the ownership of the one contracting supply, andthe possibility of preventing others from increasing supply later toprofit by the higher prices.

§ II. KINDS OF MONOPOLY

1.Monopoly gets its power from political, economic, and commercialsources. A political monopoly derives its power of control from aspecial grant from the government, forbidding others to engage in thatbusiness. The typical political monopoly is that conferred by a crownpatent bestowing the exclusive right to carry on a certain business. Asecond kind is that conferred by a patent for invention, or thecopyright on books, the object of which is to stimulate invention,research, and writing by giving the full control and protection of thegovernment to the inventor and writer or their assignees. In this casethe privilege is socially earned by the monopolist; it is not gotten fornothing. Moreover, the patent is limited in time, expires and becomes asocial possession.[Pg 306] A third kind is a government monopoly for purposesof revenue. In France, the government controls the tobacco trade, andthe high price charged for tobacco makes the monopoly yield a largeincome. A fourth kind are public franchises for public service, asstreet-railways, lights, gas, waterworks, etc. These are granted toprivate capitalists to induce them to invest capital in something whichhas public utility.

Economic monopoly arises when the ownership of scarce natural agents, asmines, land, water-power, comes under the control of one man or onegroup of men who agree on a price. Economic monopoly is a result ofprivate property that is undesigned by the government or by society. Itis exceptional, considering the whole range of private property, but itis important. The oil-wells embracing the main sources of the world'ssupply have come under one control. One corporation may control so manyof the richest iron-mines of the country as to be able to fix a pricedifferent from that which would result under competition. Coal-mines,especially those of some peculiar and limited kind, such as anthracite,appear to become easily an object of monopolization. Economic monopolymerges into political monopolies, such as patents and franchises.Private property is a political institution designed to further socialwelfare, and only rarely is any particular property a monopoly. Privatecontrol of great natural resources doubtless would have been prohibitedhad it been foreseen.

Commercial monopoly, variously called contractual, organized, orcapitalistic monopoly, arises where men unite their wealth to control amarket, to overpower or intimidate opposition, and to keep out or limitcompetition by the mere magnitude of their wealth. These various kindsso merge into each other that they cannot always be distinguished inpractice. A patent may help a capitalistic monopoly in getting controlof a market; great wealth may enable a company to get control of rarenatural resources.

2.Monopolies may, for special purposes, be classified also as sellingand buying, producing and trading, lasting and temporary, general andlocal. The terms selling and buying monopoly explain themselves, thoughthe latter conflicts with the etymology. Under conditions of barter theselling and the buying monopoly would be the same thing in two aspects.A selling monopoly is by far the more common, but a buying monopoly maybe connected with it. A large oil-refining corporation that sells mostof the product may by various methods succeed in driving out thecompetitors who would buy the crude oil. It thus becomes practically theonly outlet for the oil product, and the owners of the land thus mustshare their ownership with the buying monopoly by accepting, withincertain limits, the price it fixes. The Hudson Bay Company, dealing infurs, had practically this sort of power in North America. Manyinstances can be found, yet, relatively to the selling monopolies, thoseof the buying kind are rare. A producing monopoly is one controlling themanufacture or the source of supply of an article; a trading monopoly isone controlling the avenues of commerce between the source and theconsumers. Monopolies are lasting or temporary, according to theduration of control. By far the larger number are of the temporary sort,because high prices strongly stimulate efforts to develop other sourcesof supply. Yet the average profits of a monopoly may be large throughouta succession of periods of high and low prices. Monopolies are generalor local, according to the extent of territory where their power isfelt. At its maximum where transportation and other costs mosteffectually shut out competition, monopoly power shades off to zero onthe border-line of competitive territory.

3.Degrees of power to affect price result from varying extent ofcontrol; monopoly is a relative term. The term monopoly by itsderivation has reference to a single seller; but there are otherthoughts in the concept. Monopoly has reference also to the amount ofthe supply controlled. The[Pg 308] frequent use of the adjectives partial,limited, and virtual are implied but usually superfluous recognitions ofthe relative character of monopoly. Ownership of a particular knife,pencil, book, makes one the unique seller of it, but confers no monopolypower, as the power of substitution is practically absolute; the welfareof no one depends in any appreciable measure on that particular pencil.Ownership of an important fraction of an entire species of goods givesmore power to affect value. One owning a large part of the desirablebuilding sites or houses in town may gain by occasionally letting onestand vacant in order to drive better bargains with tenants. Atrade-union may control most of the labor-supply of one kind in a town.But the test of monopoly is that a gain results from a higher price andfewer sales. It begins at the point where there is a motive to limit thesupply in accordance with the paradox of value. The control of an entirespecies of goods gives price-fixing power, limited only by substitutionof goods. Even though one person controlled all the coal and wood in anymarket, their prices still would be limited. If there were but onepossible source of meat-supply, most people could live without meat. Themonopoly of great species of goods can thus be seen gradually to mergefrom one grade into another. It is a matter of quality as well asquantity. There is more or less of it in the different industries, and,as noted in the preceding paragraph, it varies over time and territory.

§ III. THE FIXING OF A MONOPOLY PRICE

1.A competitive producer gets the highest price that will permit himto dispose of his product. The enterpriser seeks to get the highestprice for his product that the market will afford. His ability tocontinue making a profit at a lower price does not induce him to reducethe price unless the reduction is to his interest. The ordinarycompeting manufacturer is limited in his price by two things: first,[Pg 309]his customers may cease to buy such articles entirely and may substituteother goods if the price is too high; secondly, they may buy of othersellers. Between his wish to keep the price up, and the customer's wishto buy as cheaply as he can, the price is fixed at a point where thereis no inducement for others to come in and reduce his sales, or for himto seek a better market. There may be under these conditions a potentialbut very limited monopoly power. The sole druggist in a small town mightoccasionally get extortionate prices from particular customers in timesof dire need, but he would thus drive away much of his custom, and wouldtempt a fairer and less grasping competitor to come in. Thus, when menand capital are free to come and go, there results an average or normalreturn for ability and agents of a certain grade. Prices come toequilibrium where each is selling his total product.

2.Where a monopoly exists to a greater or less degree, there is lessreason to fear loss of custom to competitors. The degree of controldetermines the fear of competitors. If the control is slight, a verysmall rise of price will bring in competitors. The monopoly profits inthis case either must be very small or they will be very brief. Thoseoutside, controlling a large supply, will be tempted by large profits tomarket it at once and to increase it as fast as possible. Even where alarge part of the supply is under one control, the fear of substitutionputs a limit on the price demanded. If the control were extended to allwealth, the monopolist would be the absolute despot of the lives of hisfellows. But as things are, the monopolist aims, just as the competitordoes, to get the price that gives the maximum gain. The monopolist,however, is in a more or less favored position, as he can raise hisprice considerably before losing the most of his customers. Much dependson whether the costs increase or decrease as output grows. Where a largeincrease in output greatly decreases the cost, lower price may leave alarger margin between the cost and the selling price. A[Pg 310] generalmonopoly price is therefore not an unlimited price. It is higher thanthe competitive price if the same cost of production is maintained. Itmay conceivably be lower than the former competitive price if theeconomies of combination greatly reduce the cost and justify a largeincrease of the output.

3.A monopoly often seeks to avoid a general market price, and itadjusts its charge in each small market separately. This is a mostimportant aspect of the monopoly problem and a most importantmodification of the principle just stated. A market price is theexpression of the least urgent demand that aids in carrying off a givensupply. It is a maxim that there can be but one price at a time in agiven market. The baker ordinarily sells the loaf at the same price toevery one buying a given quantity. If he had a monopoly of thebread-supply, however, he might deal with each customer separately,ascertain, by personal inquiry into the lives of the citizens and by theaid of a force of detectives, just how much each could or would payrather than do without bread. The policy of varying prices is thusfollowed by monopolies, though usually in a less inquisitorial way, toenable them to get the highest possible returns. Under the name of"charging what the traffic will bear," it is practiced by the railroadsas local and personal discrimination. The endurance of some communitiesand of some individuals being greater than that of others, the burden isadjusted to the back, being made not as light but as heavy as each canbe forced to bear.

Large monopolies dealing in commodities use an adaptation of this methodto kill off small competitors who, within a certain district, sell atless than the monopoly price. Prices are suddenly reduced in thatcommunity below cost until, the small competitor being ruined, themonopoly rate is reëstablished perhaps higher than before. Fear ofsuffering a like fate prevents others from attempting competition evenwhen prices offer a great attraction and give a high monopoly profit.

The profits of monopoly can be explained by the ordinary laws of value,yet evidently they form a peculiar economic and social problem. Theyappear to be due not to the services of the enterpriser in increasingproduction, but to his success in limiting it. There is, therefore, anantisocial element in them not found in the profits of ordinaryindustry. This deserves further and closer study.

CHAPTER 34

GROWTH OF TRUSTS AND COMBINATIONS IN THE UNITED STATES

§ I. GROWTH OF LARGE INDUSTRY IN THE UNITED STATES

1.In the discussion of the so-called trust problem three things mustbe distinguished: large individual capital, large production, andmonopoly power. Capital, in the sense of valuable agents, is found inthe smallest as well as the largest industry, and every owner, from thesmall shop-keeper to the wealthiest bondholder, is a capitalist. Inpopular discussion, however, the word frequently implies great wealth ina single hand, though this wealth may be invested in a large number ofsmall industries. Large production is the concentration of capital intolarge units of industry. The capital may be the same as before, theownership may or may not be widely diffused, but the control andmanagement are unified. Large factories may or may not have monopolypower; as factories grow in size, competition among them often becomesmore, not less, complete and severe. On the contrary, monopoly, asbefore defined, may exist where the industry is small, as the waterworksin a small town, or a small factory for making patented articles. Inperiods of depression a business with a capital of ten thousand dollarsmay go on and prosper, while one with millions may be forced intobankruptcy. These three ideas—great individual wealth, large industry,and monopoly power—are often hopelessly confused in the discussion ofpresent-day questions.

2.Three industrial stages may be broadly distinguished: that of tools,that of machines and small factories, and that of large production. Menare prone to forget that all the world is not doing just as they are.Over two thirds of the people on the globe are still in the firstindustrial stage. One billion people use only tools, and have no bettersource and means of power than domestic animals. This is true in themost of Asia and Africa, in the greater part of South America, and inmany portions of North America. About two hundred million people live inthe stage of simple machines and small factories. These are found ineastern and southern Europe, small portions of South America, some partseven of the United States. In this stage there is not enoughmanufacturing power in the community to supply much more than its ownneeds. About two hundred million people in the United States and westernEurope have reached the third and highest industrial plane, where thehighest mechanical devices are employed and industry becomes highlyspecialized. These differences are broadly stated; there are contrastswithin every nation. Three hundred miles from here, in the Alleghanies,people still can be found spinning and weaving and wearing homespun asin colonial days. In a trip of twenty miles in Tyrol or Switzerland onecan observe every one of these industrial stages. The most strikingdevelopment, if not the typical form, in America to-day is large orconcentrated industry.

3.In the last half century the unit of organization in leadingindustries has tended to grow larger. Seventy-five years ago atool-using household industry, on farms and in homes where the greaterpart of the things used were produced in the family, was still thetypical organization in the United States. The early factories growingout of the household industry were small. A family specialized inproducing cloth and exchanged with its neighbors; so with shoes,candles, soap, canned goods, cured meats, etc. Since that time twocounter forces have been at work to affect the ratio[Pg 314] of manufacturingestablishments to population. The number of establishments has beenincreased by specialization of farming which has called for manyindustries to produce the things once made on farms, and by increasingwealth and invention, which has made possible many small industriessupplying things before almost unknown. The number of establishments hasbeen diminished as the staple products that can be transported have cometo be made in larger factories. The resultant of these movements duringthe thirty years ending in 1900 is somewhat surprising: the ratio offactories (with an output worth five hundred dollars) to population hassomewhat increased. In 1870 there were two hundred and fifty-twothousand establishments; in 1890, three hundred and fifty-five thousand,and in 1900, five hundred and twelve thousand, a ratio to population ofone to one hundred and sixty-two, one hundred and seventy-seven, and onehundred and forty-four respectively. The last date was one of greatindustrial prosperity, and doubtless many ephemeral enterprises had beencalled into existence, thus giving a somewhat abnormal result. Moreover,there has been a large increase in the number of things made infactories which were formerly made in the homes, and which then did notappear at all in the census of manufactures.

In cotton-weaving, however, the unit of industry is growing, factoriesin 1870 numbering nine hundred and fifty-six; in 1890, nine hundred andfive; in 1900, one thousand and fifty-five, the later increase being dueto the fact that many new factories in the South have been started inthe last decade. The population meantime doubled. This movement has beengoing on for seventy years, there being about the same number of millsin 1900 as in 1830, though population had multiplied six-fold. Iron- andsteel-mills numbered one thousand three hundred in 1880, one thousand in1890, and nine hundred and sixty-five in 1900. In industries havinglocal markets and sources of supply for materials, the change has beenless rapid. There were twenty-four thousand grist-mills in 1880,eighteen thousand in 1890, and twenty-five[Pg 315] thousand in 1900, a changeof ratio from two thousand one hundred to three thousand population pergrist-mill. There were twenty-six thousand sawmills in 1880, twenty-twothousand in 1890, and thirty-three thousand in 1900, a change from aboutone thousand nine hundred and twenty to two thousand two hundred andseventy persons per sawmill.

But while the number of establishments in these staple industries wasdecreasing, the number of employees per establishment in most cases wasincreasing. The average in all industries, in 1870, was eight; in 1890,twelve; in 1900, ten and four tenths. In cotton-mills, in 1870, theaverage was one hundred and eighty-four; in 1890, two hundred andforty-four; in 1900, two hundred and eighty-seven. The grist-mills, in1880, had two and four tenths persons per establishment; in 1890, threeand four tenths. The sawmills, in 1880, averaged six employees each; in1890, fourteen; iron- and steel-mills in 1880, one hundred andtwenty-one each; in 1890, one hundred and ninety-six.

4.The amount of capital per establishment is tending to increase inthe leading lines of industry. The amount of capital is not so easy todetermine as the number of employees, and it is recognized that thecensus figures on this subject are only approximately correct. We aretold that in cotton-mills, in 1830, the average capital invested wasfifty thousand dollars; in 1890, nearly four hundred thousand dollars;in 1900, four hundred and forty thousand dollars. It is easy to observethe large increase in investment of capital in flouring-mills since thenew processes came into use. The average capital of all industries doesnot grow as in the staple ones, for many smaller industries have comeinto existence. In 1880, the average capital was eleven thousanddollars; in 1900, it was eighteen thousand dollars.

The years between 1890 and 1900 saw the rapid formation of trusts andcombinations, and of larger industries. Consolidation took place on agreat scale in railroads and in manufactures. Much of this has been ofsuch a kind that it does not appear at all in the figures showing thenumber of establishments[Pg 316] and of employees. Many discrepancies appear inthe data regarding this movement given by different authorities, asthere is no generally accepted rule by which to determine the selectionof the companies to be included in the lists, and as the conditions arechanging from day to day. A competent financial authority [1] gives thefollowing figures regarding the "industrial" trusts (manufacturing andcommercial) and gas trusts, organized in the United States between 1860and 1899, not including combinations in such businesses as banking,shipping, railroad transportation, etc. The figures refer to thereorganization and consolidation of industries into larger units, someof which have much and others little or no monopoly power.

The number organized and the capital represented by this movement in thelast of these decades are eight times as great as in the thirty yearspreceding. In the last ten years can be traced the influence of generalindustrial conditions.

The first three years enjoyed great prosperity and the number ofcombinations were six, thirteen, thirteen. In 1893, the number was less,but the total nominal capital (preferred and common stocks and bonds)was still the greatest it had ever been in any year. Then came theperiod of depression, 1894-97, when both the numbers and the capitalwere comparatively small. Then followed the period of the greatestformation of trust companies the world has ever seen, which extendedfrom 1898 to 1901, and ended in 1902.

In a list recently revised by another authority [2] it appears that thedata for all "industrial trusts" (nearly, but not quite, comparable withthe foregoing figures), are in round numbers as follows:

These figures would indicate that the industrial trusts more thandoubled within four years, most of the growth being within three years.The same authority, in a more comprehensive list, classifies in sixgroups all so-called "trusts" of the United States, at the date ofJanuary 1, 1904, as follows (the figures just given above are the totalsof the first three groups):

§ II. ADVANTAGES OF LARGE PRODUCTION

1.A great technical advantage of large production is the better andfuller use of machinery. A large factory with a large output can keep aspecial machine adjusted for each pattern and process, whereas in asmall factory much time and energy are wasted in adjusting one machinefor various processes. The machinery in a large factory is thus morefully utilized. Compare the machinery used in a large ax-factory withthat used in twenty-five small ax-factories having the same totaloutput: the one hundred and fifty workmen in twenty-five small factorieswould use twenty-five shears, one hundred trip-hammers, fiftygrindstone-pits, fifty polishing-frames, a total of two hundred andtwenty-five machines; the same one hundred and fifty men in one largefactory would require three shears, a saving of twenty-two; twentytrip-hammers, a saving of eighty; thirty-seven grindstone-pits, a savingof thirteen; thirty polishing-frames, a saving of twenty; a total ofninety machines, a saving of one hundred and thirty-five machines. Thedifference in cost due to machinery is not so great as these figuresindicate, as the unused machines last longer; but in the small factorythere is more depreciation from rust and decay, and a largerproportionate investment of capital for which interest must be earned.The average amount of stock and materials required in a large factory isnot so great in proportion to the output.

2.In a large factory the division of labor may be more complete andeffective. The technical economies of the division of labor can berealized in large measure only when a number of men work together.Partly because of the advantages in the use of machinery, but partlyfrom other causes, labor in a large group is proportionately moreeffective than in a small group, especially in producing form-value. Inmaking plows, nine men working separately will[Pg 319] average sixty-six plowseach per year, while one hundred and eighty men working together willaverage one hundred and ten each per year, the output per man beingincreased sixty-six and two thirds per cent. In a rifle-factory with adaily output of fifty, eight men are needed for the same product thatcan be supplied by three men in a factory with an output of one thousanddaily.

3.In the larger industry the costs of management, supervision, andmarketing are relatively less. Division of labor decreases thedifficulty of supervision in larger factories, where the processes aredivided, systematized, and made a matter of routine. The necessaryinspection of the results is more rapid and easy. The advertising ofcertain kinds of goods involves a large and inevitable outlay, which isrelatively less for a larger business, as the greater the output thesmaller the burden on each unit of the product. Combination effects agreat saving in the number of commercial travelers, a result partly dueto the decrease in competition, but partly also to better organization.Each of twenty different factories must send its drummers into everypart of the country to seek business. In combination they can divide theterritory, visit every merchant and get larger orders at smaller cost.Supplies can be purchased more cheaply in large amounts, and shipmentsin car-load and train-load lots make possible special (sometimesillegal) concessions from railroads and from carriers on waterways.

4.There are some disadvantages in a large industry which put a limitto the growth of a single local establishment. There is practically alimit to the advantages of size in a factory. When each man is workingon the smallest possible subdivision of the product, doubling the numberof employees will not increase his skill. When the finest machinery canbe kept constantly in use, economy in its use has reached the maximum.As large factories tend to create cities around them, land rises invalue and higher wages[Pg 320] must be paid the workmen. Small factories areconstantly seeking out lower rents, taxes, wages, salaries, cheaperlocal sources of materials, cheap though limited sources of power, andthus they compete successfully in many markets. The point is reached inthe growth of establishments where oversight cannot be as perfect andcomplete; the eye of the master cannot be over all. The market that canbe reached by one factory is limited by distance, as the cost oftransportation finally offsets all the other advantages of largeindustry.

It is evident that most of these reasons apply to a single local factorywith far greater force than to a federation of locally scattered plants.It was once believed that the growing disadvantages of large industrywould set an early limit to consolidation. While there is a truth inthis thought not to be overlooked, the effects must now be recognized tobe more distant than was supposed. The limits to the advantages ofcombination have been removed by the application of the federative planwhich makes possible under one management the maximum of advantages withthe minimum of the disadvantages in large industry. That was thediscovery of the early promoters of the trust movement.

§ III. CAUSES OF INDUSTRIAL COMBINATIONS

1.Trusts are large combinations of capital with some degree ofmonopoly power. The original, legal meaning of the term trust does notinclude the idea of monopoly. The old legal idea of a trust is theconfidence imposed in a trustee. The method that was adopted by theearly combinations was the trust method, that is, they made use of thislegal device: the stock of the separate companies was put into the handsof a board of trustees to whom was thus given the right to control. Asit has been found possible to accomplish the same end without the use ofthis legal method, the popular meaning of the word trust, as applied to[Pg 321]a monopoly, no longer agrees with the legal meaning. The word trust ispopularly used of any large industry, though usually there is connectedwith it the idea of some evil power to raise prices to the consumers. Alarge number of the corporations called trusts have, however, littlemonopoly power, and some have none at all. They are simply largeestablishments.

2.A strong reason for combination of competing plants is found in thelegitimate economies of large production. The economies that arepossible within a single factory may be still greater in a number ofcombined or federated industries. The cost of management, amount ofstock carried, advertising, cost of selling the product, may all besmaller per unit of product. A large aggregation can control creditbetter and escape loss from bad debts. By regulating and equalizing theoutput in the different localities, it can run more nearly full time.Being acquainted with the entire situation, it can reduce the friction.A strong combination has advantages in shipment. It can have aclearing-house for orders and ship from the nearest source of supply.The least efficient factories can be first closed when demand falls off.Factories can be specialized to produce that for which each is bestfitted. The magnitude of the industry and its presence in differentlocalities strengthens its influence with the railroads. Its politicalas well as its economic power is increased.

A recent phase of corporate growth is the "integration of industry,"that is, the grouping under one control of a whole series of industries.One company may carry the iron ore through all the processes from themine to the finished product. A railroad line across the continent ownsits own steamers for shipping goods to Asia or Europe. Large wholesalehouses own or control the output of entire factories. The possibilitiesin this direction have only begun to be realized.

3.The men uniting to form a trust always declare that[Pg 322] its formationis the necessary result of excessive competition. The statement isoften true in the sense that a hard fight and lower prices have precededthe formation of the trust. But as this excessive competition usually isfor the very purpose of forcing the combination, this explanation is abegging of the question. It is fallacious also in that it ignores themarginal principle in the problem of profits. Profits are neverhomogeneous from factory to factory, and to those that are on the margincompetition may appear excessive. It is generally the largest andstrongest factories, in the more favored situations, that, in order toget rid of troublesome competitors, force the smaller, weaker,industries to come into the trust. When, therefore, it is said thatcompetition is destructive, it may be a partial truth, but more likelyit is a pleasantry reflecting the happy humor of the prosperouspromoters of the combination.

4.Another strong motive for the combination is the profit to promotersand organizers. There are indirect as well as direct gains to themanagers of a large business. There is the gain from the production andsale of goods to consumers, and there is the gain from the financialmanagement, from the rise and fall in the value of stock. The promotersof a combination often expect to make from sales to the investing publicfar more than from sales to the consumer of the product. A season ofprosperity and confidence, when trusts and their enormous profits areconstantly discussed, has an effect on the public mind like that of thediscovery of a new El Dorado, a California, or a Klondike. Then is thetime for the wily promoter to offer shares without limit to investors.

These considerations show that the trust is not simple in its cause, norin its nature. In a sense the most artificial of industrialarrangements, in another sense it is a natural evolution of industry.More and more it is being recognized that though it has in it somethingof evil, it has as well something of good, and certainly much of theinevitable.

CHAPTER 35

EFFECT OF TRUSTS ON PRICES

§ I. HOW TRUSTS MIGHT AFFECT PRICES

1.The economist's task, strictly confined, is to explain the relationof trusts to prices, not to solve the problem of their politicalcontrol. The question of trusts is such a large one that its discussionhere must be confined to those aspects having close relation to thecentral subject of economic study,—the laws of value. These laws wereby the older economists thought to be true only within the limits offree competition. Seeing that in various ways this freedom is interferedwith not only by caste, custom, organized labor, but by patents,political privileges, and the power of large aggregations of capital (inshort by all things that check the flow of ability and of agents fromone industry to another), the question occurs: Are the abstract laws ofrents, profits, and wages of any significance or of any help indiscussing the great practical questions of to-day? Are not pricesdetermined by the personal whim of industrial despots who can biddefiance to the laws of price? The control of trusts by legislativeaction is largely a political problem, but it must be guided by acorrect economic analysis. Proposed legislative measures often assume orimply that in no way, directly or indirectly, is competition found inthe problem. It should be the aim of economic study to make clear thetrue bearing and force of monopoly power in practical problems of value.

2.The fundamental principles of market value cannot be[Pg 324] changed by atrust; a selling monopoly can affect price only as it affects supply ordemand. The strongest "trust" yet seen has not been omnipotent. Manycareless expressions on the subject are heard even from ordinarilycareful writers and speakers: "The trust can fix its own prices," "hasunlimited control," "can determine what it will pay and for what it willsell." This implies that trusts are benevolent, seeing that the pricesthey charge are usually not far in excess of competitive prices in thepast. Such a view overlooks the forces that limit the price a monopolycan charge. The law according to which the value of products on themarket is determined, is as valid where there is a trust as anywhereelse. The marginal utility of goods to the consumer determines the priceof any given supply. If the supply remains the same, no trust can makethe price go higher. What it gets in exchange are the services or thewealth of the rest of the public. At what rate can it exchange itsproducts for the products of others (including other trusts)? Themonopoly usually directs its efforts to affecting the supply, leavingthe price to adjust itself. (This is the case of the selling monopoly;the statement must be adjusted where it is a buying monopoly.) It canaffect the supply either by lessening its own output or by intimidatingand forcing out its competitors. It is true that this logical order isnot always the order of events. The trust does not first limit thesupply, and then wait for prices to adjust themselves; it first raisesits prices, but unless it is prepared to limit the supply in accordancewith the new resulting conditions of demand, such action would be vain.The control of the sources of supply is the logical explanation of thehigher price, even though the limitation of supply is effected later bysuccessive acts found necessary to maintain the higher price.

Monopoly price is therefore a rational thing, not a mystery entirely outof harmony with the simple law of value laid down for consumption goods.The trust works as the magician[Pg 325] does, not as was thought of old, indefiance of natural laws, but in harmony with them and by their aid. Theview the public took of the trusts was at first medieval. That shouldnot be the view to-day.

3.The economies of large production after a successful combination maybe divided in varying proportions among monopolists, workmen, andconsumers. If the great economies of large production are effected by anew combination which makes no attempt to fix a higher price and limitproduction, where will the fruits of these economies go? They will gofirst to the owners of the trust, because, unless inspired by motives ofphilanthropy, they have no need to lower prices. Though they are inpossession of special facilities, they will try to secure as high aprice as before. A wider margin permits greater profits on each unitwithout limiting the output or the sales. They may retain this so longas they do not yield to the temptation to increase the output inproportion to their new facilities.

These economies, may, however, at times inure to the benefit of theworkmen in higher wages if they succeed by any means whatever insqueezing the employers at this time of exceptional gains. Thesuggestion has even come from employers that in order to allay labortroubles there should be a union of capital and labor to squeeze theconsumer, by doing away with all competition in fixing prices. Thisproposition to divide the plunder of monopoly has been viewedapprovingly by some leaders of organized labor, but it does not lookespecially alluring to the general public, to which is assigned thehumble part of paying the bill.

Part of the advantages will go to the consumer whenever there is amotive on the part of the large establishment to increase supply inorder to get a larger profit or to forestall new competition. As theimprovements become matters of public knowledge, most of the neweconomic methods can and will be adopted by new enterprisers, and otherlarge aggregations of capital will be induced to come in to reap[Pg 326] thebenefits. The effect, of course, is an increase in supply and a loweringof prices. The fiat of the trust to prices to remain fixed while supplyincreases is as vain as a mortal's commands to the waves to be still.The undesigned result of the economies of large production, therefore,where control is not great, is to lower the prices and to diffuse thebenefits among the public.

4.If the trust succeeds in raising its prices it gains at the expenseof the community. If a producer has some monopoly power, recognizes anduses it, his gain does not correspond with an increase in production. Itis taken from those who buy these products, it is deducted from thepsychic incomes of other members of society. This raising of pricesactually reduces technical production, for the output is limited inorder to secure the higher price. The probably less urgent wants of thereceivers of monopoly incomes are gratified in place of the probablymore urgent wants of the average purchaser. The result is a decreasedsocial income, with an increase of the inequality of distribution. Thereis an analogy here with the effects of trade-unions. If the trade-unionsucceeds in forcing prices higher than the competitive prices, it gainsat the expense of the other portion of the community. But while itsgains appear to be more largely at the expense of the richer elements ofsociety, the gains of the trust are more likely at the expense of thepoorer elements. If the success of organized labor means to some extenta leveling up of income, the success of the trust means a still furtherinequality. Hence a difference in public sympathy in the two cases.

5.The responsibility for either the rise or the decline of trustprices cannot always be determined. Prices are changing constantlyunder competitive conditions. In this active, moving world, changes ofdemand, the exhaustion of sources of supply, new processes, expirationof patents, opening up of new lines of transportation, affect prices ina multitude of ways entirely independent of organization.Trust-controlled[Pg 327] industries are open to all these influences. Economicforces cannot be isolated as can elements in a chemical laboratory, and,therefore, trusts claim the credit for all the reductions of price thathave occurred. By such a calculation the trusts usually make a showingof progress, as, until 1896, for twenty years the tendency of prices inmost lines was downward. Always getting the highest price they can underthe market conditions, they yet pose as benefactors. They would claimthat the economies possible only under trust organization cause even amonopoly price to be less than a competitive price would be. Critics ofthe trusts, on the other hand, charge them with causing all the increasethat occurs, and with checking the decline in prices. The criticscompare the percentages of decline in price during the decades beforeand after the combination was formed, and as it is impossible for ageometric rate of decrease in price, as a result of improvements, to belong maintained, this showing is very unfavorable to the trusts. Amethod has been found, however, of testing, in the case of a few leadingindustries, the effects they have had on the price of their portion ofthe productive process.

§ II. HOW TRUSTS HAVE AFFECTED PRICES

1.Examination of the course of prices in the case of some notabletrusts shows that, wherever effective, they raise prices above thecompetitive rate possible to smaller production. The most instructivestudy in the subject is that undertaken by J. W. Jenks a number of yearsago, and later developed by him when working with the IndustrialCommission from 1898 to 1900. Its results are embodied in a series ofcharts. It appears that the price of refined petroleum, in 1871, wastwenty-five and seven tenths cents per gallon; in 1880, eight and sixtenths cents; in 1887, seven and eight tenths cents; in 1900, seven andeight tenths cents. A writer in the "North American Review" claims thatthis[Pg 328] decline was due to the economies accomplished by the Standard OilTrust. It will be noticed, however, that prices fell most rapidly (fromtwenty-five and seven tenths cents to eight and six tenths cents)between 1871 to 1880, a period of intense competition, when the industrywas new, and when the independent companies, fighting for theirexistence, introduced many improvements and began the construction ofthe pipe-lines that were later secured by the Standard Oil Co. Despitethis rapid decline, the smaller companies still could have maintained aprofitable business had it not been for the ruinous discrimination ofthe railroads against them. Because of this, the Standard Oil Co., in1880, obtained almost complete control. The price twenty years laterthan that date was less than a cent cheaper. In the meantime the pricefor a time continued to fall. Competition was never quite stilled. Thesmall competitor, wherever he saw a chance, has nibbled off a bit of thetempting profits. The rise from 1898 to 1900 was in accord with thatoccurring in other lines. A much lower cost of production is nowpossible to the great monopoly with its larger sales and more economicalmethods. The by-products, unknown at the beginning of the period, nowyield large sums, yet the price remains much the same as a quarter of acentury ago. The trust has succeeded in retaining a large part of theincreasing margin of price over cost.

The influence of the sugar trust may be studied by what is known as themethod of differentials. The differential in sugar is the differencebetween the cost of the raw sugar and the refined granulated sugar. Rawsugar is the main material and the principal fluctuating item of costbeyond the control of the trust. Changes in the differential reflect thechanges in profits except as modified by a cheapening of the process.The period from 1880 to 1887 was one of great competition. In 1880, thedifferential was one and ninety-two hundredths cents on each pound ofrefined sugar, but it fell steadily till, in 1887, it had reachedsixty-four hundredths[Pg 329] cents. In the fall of that year the trust wasformed; and the next year the differential had risen to one andtwenty-five hundredths cents, in 1889 to one and thirty-two hundredthscents. Tempted by the enormous profits, the rival refineries of ClausSpreckel were started, and with competition the differential fell, in1890, to seventy hundredths cents. The rival factories were then boughtup and under the new combination the differential went sailing up to oneand three hundredths in 1892, and to one and fifteen hundredths in 1893.Rival factories again arose and competition grew stronger, reducing thedifferential to ninety-four hundredths in 1894. It was in that year thatthe firm of Arbuckle Brothers and Claus Doscher each opened a greatrefinery, and in the next year the differential fell to fifty hundredthscents. In 1900, some agreement, the terms of which were unknown to thepublic, was entered into by the rivals and the differential had risen,in March, 1901, to ninety-five hundredths cents. In every case thedifferential fell when competition was effective and went up whenmonopoly power was regained.

The differential of steel-wire nails is the difference between the costof the steel billets and the price of the wire. Between 1890 and 1895there was a steady decline in the differential. In 1895 was formed thenail pool, an agreement to share the profits, a form of combination. Arapid advance took place, both in the price and in the differential. Inthe fall of 1896 the pool was broken and then occurred a fall in pricesand in the differential during 1896-97. In January, 1899, the nail trustwas formed, controlling sixty-five to ninety-five per cent. of theoutput of wire nails, and a rapid advance occurred in the price and alsoin the differential.

The tin-plate industry practically had its origin in the United States,in 1892, under the McKinley tariff. As competition increased, prices andthe differential fluctuated and declined. At the end of 1898 thetin-plate company was[Pg 330] formed and prices at once started upward with arapid increase in the differential. Cause may, in a measure, be mistakenhere for effect. In these cases the part of the rise in price due to therise of materials is not brought about by the trust. The differentialrepresents its part of the productive process and its source of profits.The power to make the differential high is due in part to the generalconditions of business in the last three years considered. The profitsof all industries in those years increased. While prices may have risenpartly because the trust was formed, it may have been possible to formthe trust because prices were rising. The general conclusion is thattrust prices are always raised when, and to the extent that, control issecured. They are lowered below normal prices when competition becomestroublesome. Fluctuation of prices probably has been more rapid and morespasmodic under trusts than it has been under ordinary competitiveconditions.

2.A large degree of monopoly control may lower the incomes ofproducers of materials, the value of competitive plants, and prices inspecial local markets. A strong selling monopoly tends to become also abuying monopoly. A great industry using great quantities of materialsmay either own the sources or purchase from small producers. The steeltrust owns mines, and ships and railroads to bring the ore to thefurnaces; but the tobacco trust buys from the farmers. If the packing,refining, and marketing of a product is monopolized, the sellers of theraw or partly finished product are subject to one-sided competition. Thesmall producers of tobacco, of crude oil, and of anthracite coal claimthat the effect of the trusts is to give them lower prices for theirproducts. Some have been severely punished by the monopolies forrefusing to take the first offer made. Monopoly is thus likewise able topurchase competing plants at ridiculously small sums, by first makingthem valueless through fierce price-cutting, or by threats of it. "Rich"is often a relative term, and it is said that many a small millionaire[Pg 331]producer has anxiously waited to see whether the great trust would nextturn its attention to him.

3.Competition of less capable producers works in most cases to preventthe great or continued rise of trust prices. Early trusts overestimatedtheir power. The persistence of competition in industries where thetrusts have had great advantages in position and resources has beenastonishing. The wall-paper trust, though for many years it kept pricesabove competitive rates, was repeatedly undermined by competition. Thewhisky trust, while it frequently raised prices, was as often forced bythe growth of small distilleries to lower them below competitive rates.Competition in the oil industry has persisted under the greatestdifficulties. The smaller companies have hauled the product by wagonwhen the trust was moving it by pipe-lines. The continuance of highprices by a trust depends on a high degree of control of supply. Arecognition of the limits of their power has led trusts in some cases toa policy of moderate prices, affording a good profit, but notencouraging competition.

The limits of the power of the trust to control prices are strikinglyshown by the fact that it cannot even insure low prices if the marketconditions do not justify them. The steel trust, in 1902-3, declaredthat it would not advance the price of steel rails above twenty-eightdollars, and this was hailed as a beneficent effect of trust control,which, by equalizing production, could prevent excessive fluctuations ofprice. But the trust's declaration was a bit of inexpensive humor on thepart of the managers; the trust had nothing to sell at the price quoted,as its entire product had been sold out months in advance. While,therefore, the trust continued calmly to quote steel rails attwenty-eight dollars, competition raised the market price tothirty-three dollars a ton; twenty-eight dollars or more was paid forsecond-hand rails, and a proportionate price for other iron products.Such exceptional conditions, raising prices to abnormal levels, are[Pg 332]followed by a decline disastrous not only to the small producer, but tothe trusts as well.

4.The control of the trusts must be sought in the direction ofmaintaining potential competition through fair and free conditions ofindustry. Many of the remedies suggested are reactionary and would giveup the benefits of large production. Measures must be sought in harmonywith the economic principles of price. Since many of the trusts havegrown wealthy by special shipping privileges from the great quasi-publiccorporations, the railroads, and by special favors from public orcorporation officers, who have been false to their duties, the solutionmust be a political and moral one; it must be sought in the developmentof honest citizenship and of a more efficient social regulation ofquasi-public industries. The conditions of competition may be madefairer by requiring publicity of accounts, and by making it impossiblefor great corporations to strangle their local competitors by specialand temporary prices. The state here has the same duty to perform thatit has to protect the weak man from personal violence at the hands ofthe strong. This will not prevent competition, but it will determine theways in which the rivalries of men can be manifested. Any measures forcontrolling the great combinations must start from a right understandingof the law of value, neither underestimating nor overestimating theireconomic power. Public sentiment toward the trust question has changedsomewhat in recent years, because the nature of trusts and the extent oftheir power are better understood. There is now less fear of them, andmore confidence that they can be tamed and made to serve the welfare ofsociety.

CHAPTER 36

GAMBLING, SPECULATION, AND PROMOTERS' PROFITS

§ I. GAMBLING VS. INSURANCE

1.Many forms of chance are inseparable from the individualenterprise. There are what may be called natural chances chances,arising from the uncertainties of the seasons, from rainfall, heat,hail, storm, flood, lightning, land-slides. Such chances must be takenboth by the small enterpriser and by the large. In an earlier conditionof society natural chance almost dominated industry, and it stillremains and must always remain an important factor to deal with. Thereare political chances, as war and riot; as legislation on money,tariffs, credit, and business relations. These are caused, it is true,by the action of men, but it is a collective action out of the control,to a greater or less degree, of the individual—absolutely out of thecontrol of most individuals. Men of greater political influence can tosome extent control these chances, possibly in their own favor. Thereare chances of carelessness causing fire, explosions, wrecks onmisplaced switches, and involving penalties and losses that must be met.There is the chance of physical or mental collapse, as the suddeninsanity or the sudden death, unforeseen and unpreventable, of oneperforming responsible duties. Sickness often wrecks the plans and thefortune of a whole family. There are economic changes, such as those inmethods of production, in machinery, in methods of transportation; suchas the growth of fashions or the growth of population changing demand insome directions and for some materials.

Some of these chances are more connected with money-lending, others withmanufacturing; some with agriculture, others with commerce; but all arepresent in some degree in every industry. In the broadest view they arenot chances, for on the basis of experience it can be foretold that theywill occur to some one; but no individual can tell when and how theywill occur to him. A general average of chances in different lines ofbusiness causes some to be called safe, others extra-hazardous. Thechance is averaged and added to the profit or gain of that industry, foran extra-hazardous industry must in general afford a higher average ofprofit in order to induce men to engage in it. It is folly to take arisk without ascertaining its degree, so far as general experienceenables one to choose. But inasmuch and in as far as the gains andlosses fall unequally upon different individuals, income depends onchance.

2.The essence of gambling is the attempt to gain by taking chancesthat are not the unavoidable incidents of productive enterprise. Thechances just enumerated are not sought, but avoided as far as possible;yet they must be borne by some one, and the burden must be distributedthroughout society. There are unquestionably many kinds of chance-takingwhich differ from these in economic, and therefore in moral quality; butit has taxed the ingenuity of philosophers to lay down an abstractdefinition of gambling that would permit ready and certain distinctionin practice between gambling and legitimate chance-taking. Typicalgambling is the transfer of wealth on the outcome of events absolutelyunpredictable, so far as the two gamblers are concerned. Examples arethe shaking of unloaded dice or the honest dealing of a pack of cards.There can be no doubt of the entire lack of a productive economic basisin the betting on prices carried on in so-called bucket-shops byignorant persons having no connection with the market of real things,and seeking to get something for nothing as a result of mere chance.

Cheating is not a necessary mark of gambling, although the cruder kindsof dishonesty, such as the loading of dice or the collusion ofhorse-owners or of horse-jockeys to deceive the betting public, are socommon that they seem often to be its essential feature. Gamblersrecognize fair as opposed to unfair methods. Fair gambling is a kind ofminor morality within the immoral field of gambling, like the honorfound among thieves. Gambling bears somewhat the same relation tolegitimate chance-taking that play does to labor. The chance-taking ingambling has no useful purpose or result outside itself. The gamblersconstitute themselves a little fictitious economic circle, and theytransfer gains and losses on the turn of events that have no practicalobjective result within their circle except to determine the directionof the transfer.

3.Legitimate forms of chance, or risk-taking, shade off intoillegitimate forms, or gambling. Ranging between the extremes oflegitimate risk-taking and of gambling are a number of cases of a mixednature. The bets made on college games, races, and contests differ fromordinary bets only in the added feature of so-called college loyalty (atravesty on the real sentiment). These college gambling contracts aresupposed (according to a mode of reasoning found also among primitivepeoples) to exercise a subtle and irresistible influence upon theresult. A crew that enters the race with the odds against it is unnervedand undone, thinks the patriotic collegian.

In nearly all wagers, judgment in some degree influences the choice ofsides. One man bets on a horse whose pedigree and performances he knowsthoroughly; another judges by the horse's appearance as it comes uponthe track. The professional book-makers have the latest possible andmost exact information on which to base their bids.

In the bets made on one's own prowess, as on speed in running or rowing,or in playing cards (wherein also the element of pure chance is mingled)the chance-taking is[Pg 336] still far over on the uneconomic side of theborder-line. The running is for the sake of the wager, not for a usefulpurpose. A premium won by a runner for speed in delivering a message ofeconomic importance is in striking contrast to the winnings in a wager.

Finally, the very border-line of difficulty is reached in the purchaseand sale of goods in the market with a view of profiting by chancechanges in price. Land speculation, the purchasing and holding oflumber, grain, cattle, and other tangible and useful things, must bejudged liberally. The quality of gambling depends somewhat on the motiveas well as on the ability of the actor. The enterpriser dealing withreal wealth, and fitted to take the risks, both because of his resourcesand of his exceptional knowledge, needs the motive of gain, and in asense can be said to earn socially what he gets. The motive of theuninformed must be a blind trust in luck, and a hope to gain from a risein prices which they are quite unable to foresee or rationally toexplain.

4.In its relation to value, a bet, or wager, is the exchange of thechance of loss for the chance of gain, involving a social loss. Evenwhen fairest, the average results of such an exchange must beunfavorable to society. One person loses a part of his income thatgratifies relatively urgent wants; another gains something thatgratifies only less urgent wants than were represented by the sum herisked. The area that is subtracted from the loser's psychic income islarger than the area added to the winner's psychic income. The resultwould be different on the impossible condition that it were always thepoorer man that gained and the richer one that lost. Betting, then, doesnot produce wealth; it merely transfers ownership in a way that reducesthe total want-gratifying power of wealth.

The effects that gambling and betting have upon character are still moreimportant and dangerous than their effects upon income. Motives ofeconomic activity are reduced; energy is diverted from productiveenterprise; society is[Pg 337] demoralized through dishonesty of menintoxicated by gambling; speculation and embezzlement occur; and thereis a reduction both of production and of enjoyment in society. Thesethings can be reasoned out with mathematical certainty by means of thelaw of marginal utility.

5.Insurance is, in outer form, a bet; but its essential purpose is theuseful one of equalizing and eliminating chance. In its early forminsurance was a bet made by a ship-owner to protect his cargo from loss.The chance of loss in shipping was even greater in the Middle Ages thannow, and it became customary for the ship-owner to bet with a wealthyman that the ship would not return. If it did come back, the owner couldafford to pay the bet; if it did not, he won his bet and thus recovereda part of his loss. It was what is called to-day "a hedge," that is, onebet made to neutralize, or offset, another. This gave to the smallermerchant the advantage of distributing his losses over a number ofvoyages, as was done by the owner of many vessels. Antonio, the wealthymerchant, is made thus to express his security:

Gradually there came about a specialization of risk-taking by the menmost able to bear it. They could tell by experience about what was thedegree of uncertainty, and could lay their wagers accordingly. Whenseveral insurers were in the same business, competition forced them toinsure the vessel and cargo of the ordinary trader for something nearthe percentage of risk involved. The insurance thus tended to become amutual protection to the ship-owners; what had to be paid in premiums tocover risk came to be counted as part of the cost of carrying on thatbusiness.

Modern insurance is mutual in nearly every case: the total[Pg 338] premiumsequal the total losses plus operating expenses, the interest on thereserve of premiums counting as part of the premium. Each one getsprotection for the loss of his property in return for the payment of asum that will cover the losses on others' property. Such an exchange isa profitable one. The premium comes from marginal income; the loss ofhouse or property would fall upon the parts of income having highermarginal utility. The less urgent wants of the present are sacrificed inorder to protect the income that gratifies the more urgent wants of thefuture. In insurance each party gives a smaller utility for a greater;each has a margin of advantage; while the greater certainty in businessstimulates effort and rewards it. This is quite the opposite of theworking of betting and gambling.

6.To be economically sound, insurance must have to do with realproductive agents, and with somewhat regular, ascertainable eventsbeyond the control of the insured. The difficulties that arise in caseof fire-insurance are due largely to the failure to meet theserequirements. When the insured sets fire to his own buildings, fireinsurance ceases to be a legitimate thing. Constant efforts are made byinsurance companies to guard against these "moral risks," the leastcalculable of any. Merchants whose stocks have been mysteriously burnedtwo or three times find difficulty in getting insured. In life-insuranceit was the custom formerly to refuse to pay death-losses in case ofsuicide; but now that condition is attached only for the first two orthree years. It being reasonable to suppose that no man would plansuicide years in advance, death by one's own hand some years aftertaking life-insurance is regarded as coming under the ordinary rule ofchance.

§ II. THE SPECULATOR AS A RISK-TAKER

1.Every enterpriser is to some extent specializing as a risk-taker.This familiar idea may be taken as a starting[Pg 339] point in discussingspeculation. In its broadest sense speculation means to look intothings, to examine attentively, study deeply, contemplate, meditate. Ina business sense the speculator is one who studies carefully theconditions and the chances of a change of prices; hence arises thethought that speculation is connected with chance. The enterpriser canestimate these chances better than most men. He stands on a hilltopsweeping the horizon, and can see farther than the workingman can. Herelieves the other agents of part of the risk, and he insures bothlaborer and capitalist against future fluctuations of prices. Some ofthe profits of successful enterprise in countries where no system ofregular insurance has grown up, and in certain lines here where noinsurance is possible, are speculative gains of this sort. Offsettingthem, however, in large measure, are the speculative losses, by which inmany cases the investment has been swept away altogether. The cautiousbusiness man tries to reduce chance as much as possible by insurance,and to confine his thought and worry to the parts of the productiveprocess where his ability counts in the result. The wise have found outthat it is better to shift the risk to some specialist who can take itbetter than they. For a man who has his thought and effort concentratedon running a flour-mill, it is foolish to take the risks of fire, ofloss in shipment, of a rise in the price of grain needed to filloutstanding orders—it is as foolish as it would be for him to make hisown machinery. Insurance being the economical way to cover risk, thereckless will, in the long run, be eliminated from the ranks ofenterprisers.

2.In some lines the risk of marketing and carrying large stocksbecomes highly specialized, so that ordinary enterprisers shift it to asmall group of risk-takers. In buying and selling large quantities ofproduce there is required the closest and most exclusive attention of asmall group of men. The marketing of some staple products requires themost minute acquaintance with world conditions. To foretell[Pg 340] the priceof wheat one must know the rainfall in India, the condition of the cropin Argentina, must be in touch as nearly as possible with every unit ofsupply that will come into the market. Such knowledge is sought by thegreat produce speculators in the central markets. If all means ofcommunication—telegraph, cables, mails—are open to all, competitionamong these speculators becomes intense, and the result is the extremestefficiency. Their survival depends on the development of acute insightinto market conditions. It is the testimony of expert witnesses and ofwriters in the report of the Industrial Commission that the margin atwhich farm produce is sold has fallen greatly in the last few years.These products are marketed along the lines of the least resistance,that is, of the greatest economy. The function of the commercialspecialists is to foresee the markets, and to ship to the best place, atthe right time, in the right quantities. If a product shipped toLiverpool will, by the time it arrives there, be worth more in Hamburg,there is a loss. Such difficult decisions can be made best by a smallgroup of men selected by competition. When handling actual products theyperform a real economic service.

3.Even some mere speculators on the produce markets may and do attimes perform a productive service as risk-takers. Many of thespeculators in staples, wheat, corn, wool, rarely handle the materialthings, the real products. They make it their business to study theworld conditions, to foresee prices, and in a sense to bet upon them.Regular merchants buy and sell fictitious products of these men. When amiller buys ten thousand bushels of wheat that will remain in the millthree months before they are marketed as actual flour, he at the sametime sells that number of bushels to a speculator for future delivery;or selling flour for future delivery the miller buys a future in wheat.In either case he cancels the chance of loss or gain, giving up thechance of profit in the rise of wheat in exchange for[Pg 341] protection fromthe loss of the product on his hands. To him this is legitimateinsurance, for he is striving not to create an artificial risk, but likethe medieval ship-owners, to neutralize one that is inseparable from theordinary conditions of his business.

One may ask, How, if the miller in the long run benefits, can thespeculator gain? He does not intend to perform this service for nothing.Yet as the sales in the whole market equal the purchases, some say thatthere can be no profits to the speculator. There are unsuccessfulspeculators and at any rate their losses go to the successful as a sortof gambling profit. Speculators do not dine entirely on "lambs"; theyare anthropophagous. But, further, the sales to legitimate purchasersshould net a gain to the abler speculator. In proportion as hisestimates are correct, there will remain a regular slight margin ofprofit to him. If he agrees to sell wheat at eighty-five cents to bedelivered in three months, he expects it to be a little less at thattime. In the long run the ablest speculator probably buys at a littleless and sells at a little more than the price really proves to be. Thismeans that the merchants in the long run pay something for protectionagainst changes in prices, just as they pay something for insurance. Andyet this is the cheapest way to eliminate risk, and a man engaged on alarge scale in milling is, it is said, at a disadvantage if he neglectsthis method of marginal buying.

4.The buying of margins by the "lambs" is simple betting, and muchmanipulation of the market is dishonest. What has just been describedis the more legitimate phase of marginal buying, not its darker aspect.One who, having no special opportunities to know the market, buys orsells wheat, or other commodities or securities, on margin, is called alamb. He is simply betting. He has no unusual skill; he cannot foreseethe result. The commission paid to brokers "loads the dice" slightly;the opportunities of the larger dealer of anticipating information loadthe dice heavily[Pg 342] against the lambs. Secret combinations and all kindsof false rumors cause fluctuations large enough to use up the margins ofthe small speculator. At times a number of powerful dealers unite tocause an artificially high or low price, a situation called "a corner."But this is little other than gambling between betters. The generalpublic gains and loses little if any by these operations, except in theevil effects they entail socially.

§ III. PROMOTER'S AND TRUSTEE'S PROFITS

1.The promoter of trusts performs in some ways a substantial economicservice. A promoter is one who undertakes to convert a number ofunrelated factories, or establishments, into a trust, or combination. Hegets options on different factories, that is, the right to buy them atan agreed price within certain time limits. He gets some banking houseto underwrite the combination, that is, to agree to dispose of a numberof shares to the investing public. A certain number of shares go to theowners, a certain number to the banking house for its services inunderwriting, and a substantial number, it may be ten or twenty percent, of the enormous capitalization, to the promoter himself. This ispayment for his ability to water the stock successfully, to capitalizeit for more than its former value. Evidently the owners think he earnsthe money or they would not pay him. So far as there are economicadvantages in large production, and inasmuch as there is always frictionin the forming of new industrial arrangements, there is a real socialservice performed by the promoter. The gains of the promoter are in partthe legitimate price of progress.

2.A large part of the profits of promoter and of owners is unfairlytaken from the investor. The larger modern business is less and lessattached to particular neighborhoods. A much smaller proportion ofinvestments is made in industries which the investor himself can controlor even see in[Pg 343] operation. Business, therefore, in these days is donelargely on faith in other men. Especially the investor takes greatchances. The prospectus announcing a reorganization is frequentlymisleading. It frequently misrepresents the sources of income and theprobable dividends, conceals essential facts, and makes misleadingstatements. The capitalization often is absurdly high, compared with thevalue of the different establishments. In one case eight million dollarsof stock were issued to represent factories whose combined value hadbeen five hundred thousand dollars. So far as the capitalization isbased on the increased profits due to the monopoly power, the profits ofreorganization are taken out of the pockets of the public. But in facteven monopoly earnings cannot support such valuations, and from theoutset if fair dividends are paid, they are falsely paid out of capital,not out of earnings. With the approach of bad times there must be asuspension of dividends, a fall in the value of securities, and a lossfalling upon the investors. Such practices are a serious evil, for thestability of industry depends on the opening up of opportunities forsafe investment to the average man.

3.Corporation officers and trustees, speculating in the stocks oftheir own companies, are reaping illegitimate gains. It is recognizedby public sentiment and in law that for public officials to letcontracts to themselves is bad morals and bad public policy. It is theduty of legislators not to make laws for companies in which they areinterested. One of the greatest scandals in American public life, "theCredit Mobilier affair," was caused by the acceptance by members ofCongress, virtually as a gift, of shares in a company that was seekingfavoring legislation. Such action must be looked upon as a sort ofindustrial treason, comparable to the old form of political treason.Corporation officers are in a position of public trust toward theinvestors quite comparable to that of government officers toward thecitizens. The power of directors and of other officers to manipulate[Pg 344]earnings and dividends, and thus to affect the market value of thestock, leaves the investing public helpless. The practice by officialsin great corporations of speculating in their own stocks, whose pricesthey can manipulate, is so common as scarcely to attract comment. Largefortunes result from this betrayal of the trust imposed by theshareholders. This is not legitimate speculation; it is like loading thedice, pulling the horse, drugging the pugilist—things despised andcondemned even in gambling and sporting circles.

It appears, therefore, that in the complex conditions of modern businessthere is a legitimate concentration of risk in the more capable hands,but also a growth of opportunities for illegitimate speculation and forlarge dishonest gains that were not possible before. These two types ofspeculation should be distinguished, as far as possible, in thought andin practice; but this it not easy in concrete instances, which varyalmost indistinguishably from the clear case of honest earnings to theother extreme of illegitimate gains.

CHAPTER 37

CRISES AND INDUSTRIAL DEPRESSIONS

§ I. DEFINITION AND DESCRIPTION OF CRISES

1.In a broad sense, a crisis is a decisive moment or turning point;hence, in industry, a collapse of prosperity. In the course of a feverthe crisis is the point where there is a turn for the better or for theworse. The figure of speech as applied to industrial conditions wouldseem to fail, in that what precedes is apparently exuberant health, notdisease. Business conditions do not move along uniformly. There arewaves of prosperity. Profits are apparently great, then may be suddenlyswept away. The profits of the prosperous time are partly illusory, orexist only on paper. The situation has all the unhealthiness of thefever-patient. Men trade in promises and when the crisis comes, theyhave only promises for profits. The discussion of business managementand profits is not complete without a consideration of this rhythmicmovement of confidence and prices.

A crisis in the business affairs of an individual, in the sense of acollapse of prosperity, may occur from many mischances. A local crisismay be felt in some one neighborhood as a result of flood, of fire, orof other accidents. Such a case was that which occurred in 1864, inManchester, England, when the cotton factories were compelled to closebecause the supply of cotton was cut off by the blockade of the ports ofthe South in the Civil War. Such a local crisis sometimes results from achange of transportation,[Pg 346] throwing a town out of the line of trade.These have been mentioned in discussing chance and risk; but thephenomenon known generally as an industrial crisis is of wider extentand of a more peculiar nature.

2.In a more special sense a financial crisis is the confusion and lossthat mark the end of a period of rising prices; an industrial depressionis the period of hard times that follows. The word crisis suggests abrief period, a moment, something that is severe, sudden, and soon over.The term financial panic is frequently used as a synonym for financialcrisis. A crisis in the narrower sense has to do with prices—is alwaysconnected with money in some way. While, therefore, crises may bedivided into industrial, speculative, and financial, according to theirimmediate occasion, all of them are financial in the sense that theyhave to do with a change in the general price level. A crisis is a joltto prices which shatters the credit of some banks, brokers, merchants,and manufacturers. Crises are thus peculiar to the money economy and toa developed industry. Not every business misfortune is to be called anindustrial crisis, but only those where prices and credit are generallydepressed. A long period of hard times is sometimes called a crisis, butit is better to distinguish it by the term industrial depression.

3.The period leading up to a crisis is one of general prosperity.Industry in successive decades does not pass through an unvarying seriesof changes, but history repeats itself with sufficient regularity tojustify the view that a certain series of changes is typical in modernindustry. When prices are at the lowest point many factories are closed,and much labor is unemployed. Conditions are worse in some industriesthan in others. General economy and great caution prevail; few newenterprises are undertaken. To those having available money this is agood time to buy, and property begins to change hands. Then hoardedmoney begins to come out of its hiding-places. Money flows in from othercountries, particularly if business conditions[Pg 347] are better abroad thanhere, for low prices make a country a good place in which to buy. At thesame time that the money in circulation thus increases, there is ageneral return of confidence that increases credit. Not only are theremore dollars, but each does more work. Then old enterprises are resumedand new ones are undertaken. The purchase of materials in largerquantities causes a rise in prices and an increase in costs. The surpluslabor on the margin of efficiency gets employment, and wages begin toincrease. The only classes not sharing in this improvement are thereceivers of fixed incomes. As prices rise, the purchasing power oftheir incomes gradually falls.

4.The crisis is a moment of widespread loss, which is followed by along period of small profits to most enterprises, and of enforcedeconomy. As prices cease to go up rapidly, the question arises in manyminds whether the movement can continue, and if not, when it will cease.Men wish to hold on for the last profits, and are willing to risksomething to gain them. When foreign prices do not rise in as greatproportion as domestic prices, foreign imports are stimulated and thequantity of exports falls. This disturbs the equilibrium of money andrequires at length large and continued exportation of specie. Thischecks prices, and, reducing the specie reserves of the banks, compelsthem to be more cautious. The fall in the value of many stocks andsecurities held by the banks forces many brokers and speculators toconvert their resources into ready money. This is the moment of danger;weak enterprises find their foundations crumbling, and there are manyfailures. The falling prices, the shattered credit, and the financiallosses force many factories to close; many workmen are thrown out ofemployment, and business must again enter upon a period of retrenchment,for it has completed the cycle of changing prices.

§ II. CRISES IN THE NINETEENTH CENTURY

1.The periods of industrial hardship in the Middle Ages were connectedwith adverse conditions of production, not with the collapse of prices.Periods of exceptional hardship in medieval times were mostly due topolitical oppression, famine, wars, pestilence, and scourges of nature.There being very little of the money economy, there was no developmentof credit and of credit prices. The money economy began, as has beennoted, in the cities. As the use of money spread, as larger commercialenterprises were undertaken, as borrowing and the payment of interestbecame common, there began to appear in city trading circles, on a smallscale, the phenomena of the modern crisis.

2.In Europe general industrial crises date from 1763 and have occurredat more or less regular intervals since. It frequently is said that thecycle, or period, of crises is ten years, but it takes an elasticimagination to find support for this in history. The crises of theeighteenth century occurred in 1763, 1783, 1793, these dates marking theclose of wars of some magnitude. The crises were not widespread orgeneral, but were more marked in England, which was most developedindustrially and in its money economy. Likewise in the nineteenthcentury, the crises were of unequal force in the various countries,usually being severer in England. The English crises may be roughlydated 1803, 1825, 1838, 1847, 1857, 1864, 1875, 1890. These wereattributed to various causes; that of 1825 to over-trading abroad; thatof 1847 to railroad-building; that of 1864 to the interruption of thecotton trade and of commerce, as a result of the Civil War in America.While in many parts of England the crisis of 1864 was unusually severe,in other countries it was of little moment. Germany, after several yearsof great speculative prosperity, had a most severe crisis in 1875; whileFrance (a somewhat significant fact),[Pg 349] although prostrated by the war of1870-71, losing a large amount of wealth, and paying a thousand millionsof dollars to Germany as a war indemnity, escaped a commercial crisisalmost entirely at that time.

3.In the United States there have been five marked crises: the firstin 1817, the last in 1893. These crises were of date 1817-20, 1837-39,1857, 1873, 1893. Major crises thus occurred about twenty years apart,and minor crises in several instances alternated with them, notably in1866, 1884, and we might add, 1903. These crises were the culmination ofdifferent kinds of speculation, usually spoken of as their causes. Thecrisis of 1817 was due to over-trading and to the immense importationfollowing the war of 1812 and the resumption of commerce with Europe in1816. In 1837-39 came in quick succession two crises, not quite distinctfrom each other, the second similar to the relapse of a fever patient.The immediate occasions were over-speculation in lands, a great issue ofbank money, national expansion, and over-confidence, possibly in somedegree the heedless financial measures of Andrew Jackson. The crisis of1857 followed a period of great prosperity marked by the discovery ofgold in California in 1848, by great expansion of commerce, by thebuilding of railroads, and by a great increase in foreign trade. Thecrisis of 1873, probably the severest in our history, is attributable togreat speculation, especially to railroad-building on an unexampledscale following the war. The blow, when it fell, was intensified by thecontraction of currency leading to the return to a specie basis andlower prices. The crisis of 1884, a comparatively slight one, occasioned(rather than caused) by the discussion of the money question, wasfollowed by some years of noticeable depression. The years 1889 to 1892witnessed a prosperity that culminated in a crisis in September, 1893,(likewise generally explained as due to the unsettled state of ourmonetary system) followed by a period of depression lasting until 1897.

The period from 1897 to 1903 has been marked by great prosperity and byrising prices. The over-hasty prophecies of collapse in the last twoyears have thus far been falsified,[3] but there is now a generalfeeling of distrust in investing circles. Already there has been areduction of dividends in leading industries, and here and there a fallin the value of stocks. High prices have greatly checked building. Thegreat credit advances made on "industrials," the stocks of manufacturingcorporations, are one of the main sources of danger. Caution, however,has been learned by experience; the banking interests are more closelycoördinated and give better mutual support than in the past, and aconsiderable decline in stocks has already occurred without as yetaffecting general prices of commodities. Various novel features in thesituation make prophecy difficult, but a period of liquidation and lowerprices appears to be at hand.

4.Irregular in time, and unlike in their immediate occasions, crisesshow some general features. The chief of these are told in the briefstory of the course of prices. Crises are less severe in countries withless developed money and credit systems. They are harder in the UnitedStates and England than in Germany, harder in Germany than in France,harder in western Europe than in eastern Europe, harder in Christendomthan in heathendom. They are less severe in rural districts, whereprosperity depends more on crop conditions, and business has in it lessof financial speculation. Their effects are least felt in the stapleindustries, for when hard times come, people economize on the lessessential things. The glove-factory, the silk-factory, thegolf-club-factory are more likely to close than the flouring-mill. Theyare felt less by classes with fixed incomes than[Pg 351] by those with variableones. They affect wages and salaries less than profits. The rate ofwages is affected only in a moderate degree, but laborers suffer in theloss of employment. The money-lender who has eliminated chance as far aspossible and has taken a low rate of interest loses little; therisk-taker who draws his income from dividends on stock probably losesmuch.

§ III. VARIOUS EXPLANATIONS OF CRISES

1.Over-production and under-consumption theories are those most widelyheld. In the first annual report of the United States Commissioner ofLabor (1886) is given a long list of theories, more or less wild, thathave been advanced in explanation of crises. It is simply a catalogue,not a logical grouping. Most of the views can be classed asunder-consumption or over-production theories, which are but two aspectsof the same idea. One view is that too many things are produced, anotherthat too few are consumed. The over-production theorist, seeing thatwarehouses are filled with goods that cannot be disposed of for whatthey cost, that factories are shut down and men are out of employmentfor lack of demand, declares that productive power has grown too great.The under-consumption theorist, seeing the same facts, says that thetrouble is lack of purchasing power. He admits that there are people whowould like to buy these things, but he asserts that such people lackmoney because production grows faster than wages, wages being fixed, ashe believes, by the minimum of subsistence—a theory akin to the ironlaw of wages. In both over-production and under-consumption theories theinequality of demand and supply is looked upon as a general one. Thereis supposed to be not merely an unequal and mistaken distribution ofproduction, but a general excess of productive power.

The wide vogue held by these views would justify a fuller discussion anddisproof of them here, did space permit. It[Pg 352] must suffice to indicatemerely that they have the same taint of illogicalness as the "fallacy ofwaste," the "fallacy of saving" and, still closer likeness, the "fallacyof luxury." They overlook the fact that an income, either of money or ofother goods, coming even to the wealthiest, will be used in some way. Itmay be used either for immediate consumption or for further indirect usein durable form. Through miscalculation there may be, at a given moment,too many consumption goods of a particular kind, but the durableapplications can find no limit until the inconceivable day when thematerial world is no longer capable of improvement. At the time of acrisis, there is unquestionably a bad apportionment of productiveagents, and a still worse adjustment of their valuations, but these inno wise negative the basic economic fact of the scarcity of wealth.

2.Another group of theories explains the crises as being due to money,either too much or too little. The unregulated issue of bank-notes hasbeen assigned as the cause of crises, especially under the circumstancesaccompanying such crises as those of 1837 and 1857 in America, whenbank-note issues chanced to be the agency most marked in the undue andunsound expansion of credit. The issue of government paper money,leading to inflation and speculation, is assigned as a cause leading upto such a crisis as that of 1873, following our Civil War. The reverseview is taken by the advocates of a cheap and plentiful money. They saythat these crises were caused, not by the expansion, but by thereduction of bank-notes; for example, not by the inflation of pricesthrough the issue of greenbacks in 1862 to 1865, but by the contractionof the currency from 1866 to 1873.

There is only a fragment of truth in these various views. It is alwayslack of money at the moment of the crisis that causes any particularfailure, and in that sense it is always lack of money that causes acrisis. But the question is, whether in any reasonable sense it can besaid that it was[Pg 353] lack of a circulating medium before the crisis thatbrought it on. There is no support for this view, except in the rarecase when the money standard is undergoing a rapid change, as in theUnited States from 1866 to 1873, and the statement then needs muchmodification and explanation. The money theories of crises are nearer tothe truth than are the over-production type, for the crisis is alwaysconnected with money and prices. But it cannot be said that the absoluteamount of money in circulation in the period preceding crises givesoccasion to them. In a few instances a rapid change in the amount hashad an important effect, but this fact does not explain crises ingeneral.

Lack of confidence is said to be a cause of crises. This is a truism,but the lack of confidence is not without reason and cause.Over-confidence in the period of expanding prices is succeeded byextreme depression when many false hopes are shattered.

3.Crises must be explained essentially as the forcible and suddenmovement of readjustment in the mistaken capitalization of productiveagents. Capitalization runs through all industry. The value ofeverything that lasts for more than a moment is built in part upon rentsthat are not actual, but expectative, whose amount, therefore, is amatter of guesswork, or "speculation." Many unknown factors enter intothe estimate of future rents. The universal tendency to rhythm in motion(material or psychic) manifests itself in an overestimate orunderestimate of rent and of every other factor in value. This isemphasized by a psychological factor called the "hypnotism of thecrowd," Most men follow a leader in investment as in other things. Thespirit of speculation grows till it becomes almost a frenzy, and peoplerush toward this or that investment, throwing capitalization in someindustries far out of equilibrium with that in others.

The use of credit enhances the rhythm of price. A large part of businessis done practically on margins. If the value[Pg 354] of a thing fully paid forfalls in the hands of the owner, he alone loses; but if the value of athing only partly paid for falls so much that the owner is forced todefault in his payment, the loss may be transmitted along the line ofcredit to every one in the series of transactions. A credit system,highly developed, is a house of cards at a time of financial stress.There is an element of credit in all modern business. Enterprisers enterinto strenuous rivalry to secure the profits of a rise, ever hoping toget out whole before the crisis comes.

The fundamental cause of crises thus is seen to be psychological; it isthe rhythmic miscalculation of rents and of capital value, occurring tosome degree throughout industry, but particularly in certain lines. Butthis subjective cause in men is given full opportunity for action onlywhen certain favoring objective conditions are present. Most noteworthyof these besides the credit system is a dynamic condition of industry.The past century has opened up new fields for investment on anunexampled scale. Investment has advanced both intensively andextensively in a series of great waves. New machinery and processes havegiven undreamed of opportunities for enterprise in the older countries,and the physical frontier of investment has moved outward with the marchof millions of immigrants to people the fertile wilderness. Such factorsdisturb the equilibrium of prices both in time and space, give apowerful impulse toward higher values in the older lands, and stimulatethe hopes of all investors. When the balance between the capitalizationsof various industries and between the rents of the various periodsproves to be false, the inevitable readjustment causes suffering andloss to many, but particularly in the inflated industries. But, becauseof the mutual relations of men in business, few even of those who havekept freest from speculation can quite escape the evils.

4.Crises must be discussed in connection with other subjects thanprofits. In the text-books the subject of the[Pg 355] crisis is variouslyclassified. It may well be discussed with money, credit, and banking. Ithas its bearings on wages, justice in distribution, the theory ofinterest, and the consumption of wealth. But the reasons for taking itup in connection with the subject of profits are strongest. In no otherconnection is the presence of the element of speculation and of chanceprofit and loss in business so forcibly seen.

The income of every class of society is to some extent affected by thesemore or less periodic fluctuations. They are in part the price paid forprogress under the constantly shifting conditions of our dynamicindustry. In part they are the proof of industrial maladjustment. Theforce of the shocks will no doubt be much reduced by better banking andbusiness methods, and by a sound currency system. More important still,the development of moderation, conservatism, and a less speculativespirit among the leaders of business will do much toward softening theasperity of these scourges of industry.

PART III

THE SOCIAL ASPECTS OF VALUE

DIVISION A—RELATION OF PRIVATE INCOME TO SOCIAL WELFARE

CHAPTER 38

PRIVATE PROPERTY AND INHERITANCE

§ I. IMPERSONAL AND PERSONAL SHARES OF INCOME

1.Under the title "the social aspects of value" are to be consideredthe influences exerted upon incomes by various social acts, ideals, andinstitutions. The incomes from the wages of free labor and those fromthe rent of wealth, as studied in the abstract theory of value, arealike in their impersonal aspect, their relation to utility. But whilewage flows from a personal source—is an income appearing to reward thepersonal effort of the laborer, the income of the wealth-owner is due tothe uses of goods. In the abstract theory of value we do not seek to getbehind this impersonal phase of rent. The income arising from goods goesto the de facto owner of the goods. We do not ask how the goods firstcame into his possession, whether through labor or as a gift, whetherstolen or inherited. Indeed, the economic theory of competitive rent maybe said not to recognize the personal fact of ownership; it is concernedwith the impersonal fact of usufruct. The theory of economic rent, oftime-value and capital, and of wages, as measured by efficiency, isimpersonal, is a study of functional distribution. In the problem ofmonopoly[Pg 360] the personal factor is more prominent, but the economic studyof rent cannot well stop there.

An answer, at least in broad outline, must now be given to the questionwhy some men are permitted to hold wealth as their "own," that is, as"property," while other men are propertyless. Why do the owners exactpayment for the use of goods, and why are they allowed by their fellowsto do so? Back of these facts is a great system of social institutionsthat helps to determine what men will do. Market value is a social fact;price is determined by the bidding of men under the existing social andpolitical conditions. These broader social aspects of value remain forconsideration. The influence of lawmaking, of collective action, and ofsocial institutions on value must be noted. Incidentally, this has beendone in speaking of patents, political monopolies, and relatedquestions; but mainly the subject has been viewed from the individualstandpoint; now it must be looked at more fully from the social side.

2.The study of personal distribution should include a furtherexplanation of the various elements that unite to form the individual'sincome. "Distribution" in economics is the reasoned explanation of theway in which the total product of a society is divided among itsmembers. It is a logical question and not an ethical one. The economistfirst asks, What is the effect of utility on value? and, next, What isthe relation of these goods to the personal incomes of the members ofsociety? It is not his peculiar part to say whether this is the bestdistribution in an ethical sense, yet in pursuing the question ofdistribution one comes to the border of certain moral questions.

The impersonal and the personal views of distribution are not, however,contradictory; they are different aspects of the same question. Itcannot be said that the analysis of economic rent is a purely abstractpiece of work. In fact, the impersonal view of distribution is essentialto an understanding of the personal view of it. The one gives general[Pg 361]principles, the other the special cases. In the practical economicissues of the day, the most urgent need is a better popularunderstanding of the abstracter theory of value. It is a guiding threadthrough otherwise bewildering mazes.

The actual incomes of individuals are made up of different elements. Thewage-earner and the salaried man are rarely quite without materialwealth. The enterpriser gets some income also in the form of contractinterest, or as rent from machinery. Actual personal incomes aretherefore a sum of various functional or impersonal incomes. Theearnings of every agent may be thought of as always going either to someindividual or to some group. By social convention the receiver ofincomes that are not personal gifts is supposed to have produced them.This involves the great assumption that the owner of a piece of land hasproduced or contributed in some way to society an amount equal to therent. This may be true in many cases, but in many cases this view cannotbe accepted without close scrutiny.

3.Property and wealth are respectively the personal and theimpersonal, the legal and the economic, aspects of productive agents.Law holds an important place in the discussion of actual economicquestions. This fact was not overlooked by John Stuart Mill, and it hasbeen far more clearly recognized in the last few years, especially bythe German economists. Political law in the broadest sense, as embodiedin the state, is, in the first place, a set of rules to guide theconduct and regulate the relations of men in society—a legal code; itis, in the next place, a governmental machine to determine disputesbetween men—a judicial system; and it is, finally, physical power tobring contestants into court and to secure and protect their rights—apolice force. Whether acting through legislature, courts, or police, inall its dealings with wealth the law is predominantly personal. Thequestion the law asks and answers regarding wealth is notWhat, butWho? Who is the owner, who should control, receive, enjoy the income?Economic wealth[Pg 362] consists of scarce things, of valuable agents, andbecause they are scarce, men quarrel over them. Because of theimpersonal economic fact that a field and a machine produce scarcegoods, arises the legal question as to which man is entitled to enjoythem.

In the case of material things, property value and capital value must beexactly equal. Property rights cover the ownership of a material thing.Material property consists of things viewed with reference to ownership;capital consists of the same things viewed with reference to theireconomic services. There are other property rights besides those inmaterial things, various immaterial rights controlling the action of theindividual and thus giving a sort of ownership of the individual'sactions. Such are patents which forbid other men making a particularkind of machine; copyrights which forbid other men printing certainwritings; legal contracts that limit the action of men in various ways,and thus appear to abridge their liberty.

§ II. THE ORIGIN OF PRIVATE PROPERTY

1.Property is ownership, the legal control over the sources ofeconomic income. The Latin word property means ownership, and hencethat which pertains to the individual, that which is a man's own. Thecontrol of property is greater or less. The law makes between propertyrights and equity rights certain subtle distinctions which have theirreason in the history, if not in the logic, of the law, but which arenot essential to economic discussion. What we are interested in are theequitable claims of men to wealth rather than the technical propertyrights. With that thought let us consider the value of the control ofwealth. If a farm worth ten thousand dollars is mortgaged for fivethousand dollars, its economic worth is ten thousand dollars after asbefore the mortgage, but the equitable claim is divided into two sharesof five thousand dollars each. The value of the property[Pg 363] right cannot,in a reasonable view, be greater than the value of the economic wealthit covers. There is much confusion in the law of taxation on this point.The law treats the farm as property and the debt upon it, whethersecured by a mortgage or not, as another body of property. Needless tosay, this leads to absurd conclusions in reasoning, and to grossinjustice.

There are different forms of ownership: first, private, as that ofindividuals, families, partnerships, or corporations; second, public orstate, as the ownership of the state house, the highway, the Adirondackforest-reserve or the Erie Canal. These are equally effective as againstthe claims of outsiders, but the rights of those inside the circle ofownership differ. For example, the rights of one shareholder againstanother, or the rights of one member of a family as against another, arenot the same as the rights against outsiders. Private property is thecharacteristic feature of our present industrial society, but it existsside by side with state property and with many intermediate gradesbetween private and common property. Private property, while attacked onsome sides, is usually accepted without question; but in this age ofinquiry its origin should be examined, its limits and the reasons forthem should be noted, and its purpose, faults, and effects should be setclearly before the judgment.

2.The older theories of the origin of private property are those ofoccupation, conquest, labor, natural rights, and law. The theory ofoccupation is that property is based upon the priority of claim of onewho finds wealth without an owner and appropriates it. This, to be sure,is a statement of what happens in the settlement of new countries, butit is not an explanation of the property rights that are arising everymoment, nor does it give a logical reason for the continuance of ancientproperty rights.

The same can be said of the conquest theory, the theory that property isbased on force. It applies to the invasion of[Pg 364] the Roman provinces bythe barbarian tribes who divided the country and enslaved thepopulation. But it rarely applies to present-day happenings and at itsbest it cannot, to modern minds, "justify" present property rights.

The labor theory, meeting some queries where others fail, is thatownership is based on production, on the right of a man to that to whichhis brain and his muscle have imparted value. It is evident that thistest leaves without explanation or justification a great number ofthings that do exist and have existed as property.

The natural-rights theory is that property is necessary for therealization of the dignity of human nature. This, if true, would be notso much an explanation as a condemnation of private property as it hasexisted in most cases, as millions of men are in every land all butlacking in property, and inequality of possession is everywhere marked.This theory expresses, however, one of the worthy ideals of moderndemocracy. Although, in common with the various other "natural rights"theories, it must to-day be deemed too absolute and too individualistic,it contains a far-reaching truth, of which due account must be taken inour social philosophy.

The legal theory is that property exists because the law says it shall.This expresses a truth, but is no more than a truism. The law determinesthe limits of property, but what determines the limits of the law? Whatpractical or social justification is there for passing and continuingsuch law? The legal theory does not explain anything finally. Each ofthese theories has its defects, but each points to some fact importantand significant, at certain times and places, in the explanation of thiswidespread institution.

3.The institution of private property has evolved under diverseconditions; the question of its origin is not the same as that of itspresent justification. In early societies individual property rightswere not very clearly marked. Every tribe asserted against other tribes,and tried to uphold, by[Pg 365] war, its claims upon its customaryhunting-grounds; but the claims of the individual hunter and fisherwithin the tribe did not often come into conflict. Private property atthe outset was in personal possessions, ornaments, weapons, utensils,which were very meager in that primitive society where it was the custom"to go calling with a club instead of a card-case." Only later cameindividual property in land. A few years ago it was generally believedthat the organization of the old German tribes was politically an almostperfect democracy, and economically a communism wherein all had equalclaims on the land. To-day this opinion is very seriously questioned. Itseems probable that the so-called communism was really an oligarchy ofthe favored, and that the masses lived in subjection, cut off from allbut a meager share in the public property.

However that may have been, strong forces within historic times have putan end to the common ownership and tillage of land as it existed amongthe serfs of Europe. The common tillage of land was shown by experienceto be wasteful. Not only did competition tend to bring the economicagents into more efficient hands, but the movement was furthered by manyacts of injustice and violence on the part of those in power. Inquiriesinto the origin and development of this social institution areinteresting and helpful in forming an estimate of its presentsignificance, but the problems of the past are not those of to-day.Whether or not the ancient beginning of property in Europe was inviolence and evil has but a remote bearing on the question as to thepresent working of it. Social conditions and needs have not changed morethan have the forms and limits of property itself. Each generation hasits own problems to solve, and each must test existing institutions bytheir present results, ignoring for the most part the evils of the past.

4.Private property may now be justified mainly on the grounds ofsocial expediency. This is a broad explanation under which can bebrought the many varying conditions;[Pg 366] but it has the fault of a broadexplanation, that it needs be further explained. Conceding that privateproperty works hardship to the individual in many cases, it must bejustified on the ground that, on the whole, it furthers the progress ofsociety. Private property is looked upon by some as merely reflecting orexpressing the economic inequalities of men; the man poor in ability isthe man poor in property. It is looked upon by others as exaggerating,indeed at times reversing, the economic abilities of men. In general, itmust be judged by this test: Does it further the welfare of societybetter than would any alternative plan for the control of economicwealth? The question is not whether it is faultless, for no humaninstitution is so. Nor must it be assumed that property is a fixed anduniform mode of control; there are many kinds of property. Differentparts of wealth may be treated in different ways: there may be privateproperty in wagons, and public property in roads; private property inhouses, and public property in forests; private property in automobiles,and, in some countries, public property in railway-carriages. But anyrule of property, like any other workable human law, must be applicableto all individuals that meet the conditions. Hence any human institutionmust be judged by its average working, not by exceptional cases.

The very acceptance of the theory of social expediency implies the needof a readjustment of the institution of private property; for privateproperty, as it is found to-day, is complicated by many historicalaccidents. Survivals of ancient injustice and relics of feudalinstitutions that rest on no vital reason remain in our new country aswell as in the older ones. The limits of property in many respects aredetermined, not according to the logic of expediency, but by the socialinertia which often governs succeeding generations.

§ III. LIMITATIONS OF THE RIGHT OF PRIVATE PROPERTY

1.Unmodified private control of property is unknown: the public makesmany reservations in its own interest. Few realize the manifold ways inwhich property rights are limited. There is, first, a whole set oflimitations to prevent nuisances. An owner in many situations is notfree to build a slaughter-house or to start a glue-factory on his land.Property is governed by general public utility, and anything thatthreatens to become a nuisance or a danger is excluded. When, under theright of eminent domain, the state or the railroad takes the oldhomestead from its owner who would live and die there, the payment ofmoney damages to him does not make this the less a limitation of hisproperty rights. Rights of way on property exist either through contractor by prescription permitting its public use. Most important of alllimitations is the right of taxation, by which society takes more orless of private incomes for purposes of which the individual owners mayin no way approve.

2.The law enforces a multitude of private claims against privateowners. A variety of rights called easements or servitudes may attachto private property, modifying its exclusive use. Leases for any periodare a virtual limitation of the control and division of the ownership.Both the holder of the lease and the owner of the property have certainrights before the law. The lender of money secured by mortgage has alegally recognized and enforceable interest in the mortgaged wealth.Property is left in trust for the benefit of persons or of institutionsor of the public, and is administered by trustees who are strictly boundto the execution of the terms of their instructions. Contracts of manysorts are entered into by owners, limiting their control in manifoldways, and the law enforces these contracts. These all form a complex ofequitable claims, which together equal in value one undivided propertyright, which in turn equals[Pg 368] the value of the wealth. These claimsmutually limit each other (whether they be called equitable claims, orliens, or property rights), and wealth is not multiplied by multiplyingthe claims, as the lawmakers unfortunately sometimes assume to be thecase.

3.The right of bequest, or of gift at death, is limited in variousways in different countries. The term bequest implies a will, usually awritten will in which the person, foreseeing death, has expressed hiswishes as to the disposition of his property. It is said sometimes thatbequest is a "logical" result of private property, but the law does nottreat it as such. In countries where hereditary aristocracies exist,primogeniture is in some cases required by law, in others so stronglyfavored by public opinion that it is practically always followed. Customlimits bequests in England to members of the family, and wills givingoutside the family are rare, and are almost always broken in the courts.John Stuart Mill contrasts this with the frequent practice by rich menin America of giving for public purposes. In France the right of bequestoutside the family is legally limited; only the share of one child canbe willed away by the father, and the rest must be equally divided amongthe children. Settlements andfidei commissa are limited in manycountries, because of the recognized social evils resulting from thetying up of estates for generations. Throughout the history of England,Parliament has given attention to the question of mortmain, whichchiefly concerned the drifting of great estates into the hands of thechurch or of corporations, as a result of bequests by the pious. Onlyrecently in England, and to a less extent in this country, has beenseriously discussed the policy of permitting unlimited endowments tocharitable institutions, and new legislation has diverted from theiroriginal purposes some of the old endowments. These varied and oftenstrict limitations of the right of private property are all determinedby some thought, wise or foolish, of social expediency.

4.The law of inheritance varies greatly with time and place.Inheritance, in contrast with bequest, usually means succession to theproperty of one who has died intestate, that is, has made no will. Theold idea of family unity survives in great measure in modern laws ofinheritance. The nearest living relatives, no matter how distant theymay be, inherit property when there is no will. When a miser dies insolitude and neglect, the world must be searched over to find a remotecousin to take the hoarded wealth. Inheritance is limited largely atpresent by the power of taxation. The view is growing that the claims ofthe society in which wealth has been acquired are stronger than those ofrelatives distant alike in space, in blood, and in affectionateinterest. This view is reflected in many recent inheritance-tax lawswhich take from the shares of distant relatives a goodly portion forpublic purposes.

The question is raised in many minds, If private property is not anabsolute right, what shall be its limits? What changes should be made init? The essential thought in the various attacks on the institution ofprivate property is that, because it occasions inequality in incomes, itis not socially expedient. The conviction is growing that, in somegeneral way, incomes should correspond to, and reflect, social service.It is well to consider more closely what the terms social expediency andsocial service imply.

CHAPTER 39

INCOME AND SOCIAL SERVICE

§ I. INCOME FROM PROPERTY

1.Property rights must meet the test of social expediency. If privateproperty is defended on the ground of social expediency, it must showgood social results. It is not a sacred thing; it is open toexamination, and must be judged by its fruits. Of all the forms ofincome, that from property has been most strongly attacked. The thoughtis that enjoyment of wealth should not be found apart from labor, andthat it should bear some proportion to services performed. The enjoymentof an ample income by one who does no more than to draw checks or tosign coupons seems to many minds to be unjust; and it is oftenquestioned whether there is any social service performed by thereceivers of the rent from land. Property seems in many cases to bedistributed without rule or reason. It does not correspond with beauty,strength, wit, wisdom, temperance, gentleness, or charity. Since thebeginning of the Christian era, reformers have assailed and preachedagainst the prevailing inequality of wealth. The idea that incomes, ifnot equal, should correspond to social service has always been presentin some vague way in the minds of men.

2.The right to transmit property by inheritance or by gift may bejudged with reference to its effect on the giver, on the receiver, andon society at large. It is well to take these three points of view. Theright to dispose of property either during life or at death hasundoubtedly in many[Pg 371] ways a good effect on the character of men. Itstimulates the father to provide for his children, the husband toprovide for his wife. There is a joy in giving, a joy in the power tobestow one's wealth on those one loves. The right to give stimulatesindustry, frugality, ingenuity, and yields productive results. Much ofthe existing wealth probably never would have been created if men didnot have this right of gift. But there is a limit to the working of thismotive, and other motives often are much more effective. Many men aftergaining a competence continue to work for love of wealth and power intheir own lifetime, as the miser continues to toil for love of gold.When men without families die wealthy, when men that have not theslightest interest in their nearest relatives labor and amass wealthtill their dying day, it is evident that the right to bequeath propertyhas little to do with their efforts. Love of accumulation and love ofpower in these cases supply the motive. A more limited liberty todispose of property at death might still suffice, therefore, to call outthe greater part of the efforts now made to accumulate property.

That the effects on the receiver of the property are good is somewhatmore doubtful. It is true that children raised in great comfort orluxury would be more than ordinarily unhappy if plunged into poverty oreven into humble circumstances on the death of their parents. There ismuch social justification for permitting families to maintain anaccustomed standard of comfort. Few would deny that a moderate provisionby parents to provide education and opportunity for their children iscommendable and desirable. But the evil effects of waiting for deadmen's shoes are proverbial. Many a boy's greatest curse has been hisfather's fortune. Men of native ability wait idly for fortune to come,and opportunities for self-help slip by unheeded. The world oftenexclaims over the failure of the sons of noted men to achieve greatthings, for, despite confusing evidence, men still have faith inheredity. A too easy fortune saps[Pg 372] ambition and relaxes energy; and thusrich men's sons, if not most carefully and wisely trained, are madepitiable paupers in spirit, while the self-made fathers think their boyshave chances they themselves did not enjoy. The greater social loss isnot the dissipated fortunes, but the ruined characters.

The effects of inheritance on the community are good in so far as itsecures efficient management of wealth. If the son or relative has beenin business with the deceased, there is a reason that he should inheritthe property, and his succession to it makes the least disturbance toexisting business conditions. But every profligate son is an argumentagainst inheritance; every incompetent heir is an argument in the handsof the enemies of the existing order of society. It is to society'sinterest that no able-bodied member shall stand idle. Every child shouldhave presented to him the motive to devote his powers to the socialwelfare in economic or other directions. Moreover, many feel that thegreat fortunes now accumulating through successive generations in thehands of a few families are endangering our free society, even if thesefortunes should continue to be well administered. There is a widespreadfeeling that the heredity of great wealth is, like the heredity ofpolitical power, out of harmony with the democratic spirit—though thismay easily become a misleading comparison. Still, democracy wishes tosee men as individuals put to the test, not profiting forever by thedeeds of their forebears. This feeling is shared by those who cannot becharged with radical prejudices. A few years ago the Illinois BarAssociation passed a somewhat startling resolution favoring moderatelimits to inherited fortunes. Every year sees bills of this purportintroduced in the legislatures and in Congress. Andrew Carnegie says itwould be a good thing if every boy had to start in poverty and make hisown way. Cecil Rhodes recorded in his will his contempt for the idle,expectant heir.

3.Social expediency will limit the right of intestate[Pg 373] inheritance topersons in essential economic and social relations. Public opinion isnot yet crystallized in favor of this formal proposition, but tendsstrongly toward it. The foregoing considerations show that the right ofgift in the lifetime of the giver should be the freest. The right ofbequest, that is, of gift by will, should be liberal. The man who hasacquired wealth may well be trusted to decide who bear to him a closesocial or personal relation, and to say whose lives have in a measurefurnished the motives of his activity. But the right of intestateinheritance by distant relatives is one that stands on weak socialfoundations to-day. It appears to be an unreasonable survival from morepatriarchal conditions. The true test is whether the wish to provide forthese heirs has furnished the motive for the producing and preserving ofthe wealth. The claims of those nearest in blood and closest in personalrelations are strongest. Family affection and friendship form thestrongest of social ties, and it is socially expedient to cultivatethem. Motives for abstinence and industry must be strengthened. But thesame test shows that the zealous regard of the American law for therights of grandnephews in Australia, or even of brothers long absent indistant quarters of this country, is irrational, and is unjust to thecommunity where the fortune lies.

4.Many fortunes built on favoring legislation are defended as due tosocial service. In the Middle Ages kings often granted great estates tonobles as rewards for past merit and as a payment for expected publicactions. The great landlords were the magistrates, military leaders, andsupporters of social order, and thus, in the judgment both of the kingand of the commonalty, the nobles earned their incomes by their socialservice. While this practice has disappeared under constitutionalgovernment, large grants are still made to royal families. ManyEnglishmen who are democratic at heart uphold such grants as the priceof social stability. Regard for royalty is so deep-rooted in the mindsof the people of any long-established monarchy that there is always[Pg 374]danger in change. England must pay many millions annually as the priceof loyal and conservative sentiment. So long as this is true, a familyof royal figureheads and idlers performs a social service.

Protective tariffs sought by wealthy manufacturers are granted, notostensibly to help them, but to help the country. The argument is thatthe benefits are diffused. Aid to enterprises in private hands, such asship subsidies or as the grants to the Pacific railroads, are defendedon the ground that, as a whole, society benefits by thus increasing theincome of one class. The promise of social service is most urged bythose who get the immediate benefit. Their eyes are keenest. Themanufacturer sees clearly the benefits that will come to his factoryfrom a protective tariff, but before he can get it he must convince manyothers that they too will gain. The majority of the American electorateis not voting a special favor at the polls, but is recognizing what itbelieves to be in its own interest. Most students of social questionsdoubt the wisdom of most of these grants to the wealthy on grounds ofsocial service. The burden of proof is on their advocates, but fewto-day are so rash as to say that such a claim of social service isnever sound.

5.Property in natural agents is the most strongly attacked. In thecase of great natural deposits, such as those of coal or iron, thesocial service that is performed by the mine-owner is hard to see. Greatincomes are drawn in the form of royalty or rent by those who never lifta pick or direct a stroke of work. Agricultural land in the hands ofabsentee landlords yields an income not very clearly due to socialservice, and this phase of property has been especially assailed duringthe past century. The modern form of this discussion is concerning "theunearned increment," the rise in the value of lands as a result ofsocial growth. It is proposed to appropriate by "the single tax" theentire rental value of the land for the use of the public.

The defense of property in land is first positive: taking[Pg 375] not theextreme but the usual case, private property secures the discovery anddevelopment of natural resources and their thorough use and goodmanagement (not necessarily by personal labor with the hands). If thisis true, it is well for the individual and for the community to havethis wealth in private hands. But in other cases there is merely anegative argument for property in land: no other better method ofemploying it has been devised and found practicable The experience withstate ownership of mines, forests, and estates has not definitelyanswered in every case the question whether the social results of stateownership are more favorable than those of private ownership. In somecases they clearly are not, in others they may be; and as the balance ofopinion inclines in the direction of public ownership, other reformswill doubtless be undertaken.

6.The present inequality of wealth, not private property as such, isoften attacked. It is estimated that in the United Kingdom two percent. of the families own seventy-five per cent. of all the wealth,while ninety-three per cent. own less than eight per cent. In the UnitedStates it is estimated that one per cent. of all the families own morethan the remaining ninety-nine per cent.; and at the other part of thescale eighty-seven per cent. of all the families own less than twelveper cent. of all the wealth. The trend has been toward concentration offortunes and a larger proportion of the growing income from property isin a few hands. Many feel that the law of property is defective whenthis is possible, although at the same time the average income of thewage-earner is increasing. Yet, it is not the institution as a wholethat is attacked, but its details. The custom of equal division ofproperty among children in the United States has not been as effectivein keeping fortunes small as was expected. The wealthy American familieshave averaged small, and in some of the most prominent the rule of equaldivision has not been followed. Opportunities for the investment ofsmall savings at low interest are not lacking, but[Pg 376] the great fortunesovertower the little ones, securing the great profits and greatpolitical and economic power. The farms and the villages are refuges forthe small industry and for the small fortunes, and this fact has a greatinfluence on our national character. The whole social atmosphere in thecities, with their extremes of wealth, differs from that in the country,and this contrast promises to become greater as the years go on.

7.The ideal of property rights is that they shall furnish the highestmotives for efficient social service. Private property furnishes such amotive in a broad way, but its most ardent defenders will recognize thatit does so imperfectly. It is an institution that has been tried andthat does the work, while other methods suggested to do away with it arefound to be dreams. The ideal of socialism is the abolition of privateproperty, the centralizing under the control of the state of all wealth,except the simple personal belongings, clothing and other consumptiongoods. But history and human nature unite to testify that extremesocialism is an unworkable plan, excepting under special conditions, asin barbarous times and under a political despotism. The modern ideal forthe control of wealth is the best attainable harmony of liberty andefficiency. If private property as it is, falls short of that ideal, atany rate it works either on a small or on a large scale, and socialismdoes not work at all. Property rights as they exist are not a product ofpure reason. They are the result of social evolution, of historicalaccidents, of class legislation, and of selfish interest in many cases.Changing social conditions and ideas are bringing many changes in law,and further change must be expected to come.

§ II. INCOME FROM PERSONAL SERVICES

1.Incomes from legitimate enterprise and speculation correspondroughly to social service. It has been recognized[Pg 377] above that there aremany grades of chance, of speculation, and of enterprise. The extremecases are bald crimes and are punished as such. Over some men that neverdirectly break the law there always hangs a suspicion of guilt. It isthe purpose of the law to make dishonesty unprofitable, but howimperfectly it does so! There are many cases of chance gains where thelucky man without social service legally enjoys his fortune. The lawmust be framed in broad terms, and cannot provide for every case. It maybroadly forbid lotteries whose evils clearly exceed their benefits. Butwhat would be the effect of taking away reward for the discovery of agold-mine, even though sometimes it is awkward stumbling, not industry,that reveals the veins of metal? Society has studied that question inthe past; even now changes are being made in the laws; and in their turnthe citizens and legislators of the next generation must decide thequestion. It is always under consideration.

Are the rewards of the successful enterpriser greater than he deserves?How shall it be judged what he deserves? The answer is in the form of aquestion, Could society have the service without the reward? Society maybe thought of as hiring the services of the efficient business man atthe lowest price. Does it wish the services of Cornelius Vanderbilt inorganizing a great system of railroads, of Andrew Carnegie, of PierpontMorgan? What can it get them for? It must appeal not only to their loveof money but to their love of power. Large services and large resultscan be bought only with large rewards. The shrewd enterpriser is not tobe paid with abstract social gratitude. He is not to be tricked, as is aChinese god, with tissue-paper gold.

But in many ways fortunes appear to grow without social services, andsometimes with social harm. Russell Sage, the noted capitalist (whoshould know something of Wall Street), in speaking of the greatest ofAmerican corporations, said: "They dominate wherever they choose to go.They can make and unmake any property, no matter how vast. They[Pg 378] canalmost compel any man to sell out anything, at any price." Henry Clews,the well-known New York banker, said of a certain group of financiers:"Their resources are so vast that they need only to concentrate on anygiven property in order to do with it what they please.... There is anutter absence of chance that is terrible to contemplate. Thiscombination controls Wall Street almost absolutely. With such power andfacilities it is easily conceivable that these men must make enormoussums on either side of the market."

2.The high pay of rare ability and skilled labor reflects in general ahigh social service. The large income of some men reflects service to anarrow class, not to society as a whole. Lawyers as a class aid inmaintaining right, but a corporation lawyer may get enormous fees fordefeating just public claims; a skilful criminal lawyer may grow richaiding the guilty to escape justice. Other service ministers to thewhims, follies, and vices of the men who pay the bill. Such a service is"social" in a mean sense, corresponding to the low standards of desirein that social group. But what of the high rewards of skilled serviceministering to worthy ends? Such favorites of fortune as Jenny Lind andPatti have received five thousand dollars for a single concert. Is thisbecause they are the lucky possessors of a rare gift, or because theyperform a social service deserving such reward? Certainly many of theirauditors get what they want and believe they are getting the worth oftheir money.

In general the legal right of everyone to get the highest pay he can ina free and open market is essential to the calling forth of ability. Ina particular instance it is possible that the service would continue ifone half or more of the income were confiscated by the public; but sucha personal discrimination would introduce an arbitrary and demoralizinguncertainty into the problem. Who can tell how far the exceptional moneyrewards have inspired to the highest cultivation of great genius and[Pg 379] ofmany minor talents? In a broad but very true sense, therefore, itappears that high personal achievement, large economic reward, and largesocial service are connected.

3.The low income of unskilled labor seems to fall short of its socialservice. This does not refer to the feeble-minded or utterlyinefficient, but rather to honest, industrious, "day-laborers," and tothe low-paid manual workers in field, on railroad, and in factory. Theirservice is essential to the existence of society as it is, to all thehigher arts, to the sciences, and to the amenities of life; their tasksare the roughest, most painful, most dangerous; yet their pecuniaryrewards are the lowest. There is such a unity in society that each morefortunate man is dependent on the services of the humbler laborers whomake up a large part of society. According to the breadth of socialsympathy their claims seem more or less urgent.

There is a vaguely recognized and growing conviction that these hewersof wood and drawers of water should enjoy a larger income. But how arethey to get it? How is society to grant it to them? They get what theycan under the competitive conditions, they get what their service isworth in the market. Are the conditions of the competition fair? If not,what will be the effect of a change? If they get more, others will getless; and with what result? However great the wish for better things,the attempt to change conditions fundamentally in a forcible andartificial way is both dangerous and foolish. Improvement must comethrough the coöperation of many indirect agencies gradually changing thenature and direction of the deeper economic forces.

4.The services of each are being measured and paid for by each andall. In two ways society is putting its valuation on the economicservices of other members of society: first, by law, or formal socialconvention; secondly, by individual estimates. By formal law isdetermined what institutions shall be continued. If the class ofproperty owners is considered[Pg 380] worthy of this reward, the institution ofproperty will be continued; if not, it will be altered or destroyed.These decisions are made imperfectly, but as well as men of limitedintelligence and honesty can make them. If men were more capable in boththese ways they would enact better laws. Again, individuals are puttingtheir estimates on others in bidding for services to minister to wisdomand virtue or to ignorance and vice. If there is to be a much justerestimate of social service, there must be wiser men in society.

Does the world owe each man a living? No; on the contrary, each man owesthe world his services in exchange for his living. The pauperism ofspirit that consists in taking something for nothing is found in everyrank of society that enjoys the blessings of progress without giving itsbest services in return. The ideal of a better adjustment of reward andservice grows in the minds of men. Social evolution, shaped by thischanging ideal and by accumulating experience, will bring into closerrelation the social services and the economic rewards of men.

CHAPTER 40

WASTE AND LUXURY

§ I. WASTE OF WEALTH

1.The accidental destruction of wealth is a loss to the owner, rarelywith benefit, on the whole, to others. In the consumption of wealth theloss of its utility is accompanied by the gratifying of wants; in thedestruction of wealth utility is lost without the gratifying of wants.In a simple society, without exchange, the result of such a loss isevident. If food is destroyed, men suffer from hunger or gratifyappetite less perfectly; if clothing is destroyed, they are cold; ifhouses are destroyed, they have no shelter. Likewise, if theself-sufficing family on a farm loses wealth by fire or storm or blight,its economic environment is made less fitted to gratify wants. In theconditions of our society, where goods are exchanged, the result appearsto be different. The need to replace the lost goods makes a demand forspecial kinds of labor or goods. There may be, therefore, an immediatebenefit to some, which obscures the corresponding loss to others. If apart of the income of the loser must be diverted from other uses toreplace the wealth destroyed, those from whom he would have boughtsuffer an unexpected falling off of their sales, and he has himselfgained nothing. The net result is a loss of wealth and gratification tothe community as a whole.

There is a real exception where the accidental destruction removes somesocial difficulty. The great fire in London and the great fire inChicago resulted in wonderful improvement.[Pg 382] When an old city is builtalmost entirely of wood, each owner may think it to his interest to keepthe old buildings. A great fire sweeps them all down and compels therebuilding of the city on a new and higher standard. But the usualsocial result of accidental destruction is a loss. It is a use of wealthwithout a fulfilling of the purpose of production, the gratifying ofwants.

2.The intentional destruction of wealth by the owner, to make tradegood, benefits neither himself nor others. The case in mind is onewhere there is full choice between keeping or losing the good, not sucha case as the throwing overboard of a part of the cargo when the ship isin danger of sinking, in the hope thereby of saving the rest, or as theblowing up of buildings to prevent the spread of a fire. In such casesthe destruction is inevitable without man's action; he merely tries tominimize it. The case in mind is the deliberate destruction of wealththat might be kept for use. One labor leader, for example, boasted thatwhen he drank pop he always broke the bottle "to make trade good" byhelping the glass industry. The refuting of this fallacy is one of thetime-honored tasks in political economy. There is, it is true, anincrease in the demand for glass and glass-blowers' labor, but withoutan increase in gratification; but at the same time there is a decreasein the demand for other goods which would afford additionalgratification. The proverb, old in Shakespeare's time, runs, "Nothingcan come of nothing." What is spent for one purpose cannot be foranother; "you cannot eat your cake and have it too." A given income canbe spent in one of many ways, but not in all ways or even in two ways atonce. It is a question of thisor that. At the same moment that thedemand for pop-bottles is increased, the demand for other things isdecreased, possibly that for pop-corn or pop-guns or Populistpapers—who can tell? Such a form of benevolence is a mistaken,uneconomic attempt to provide labor for one man by taking it fromanother.

If the advocate of wealth-destruction would be consistent, he shouldbreak, not merely the pop-bottle, but the water-pitcher and the table aswell; he should make a bonfire at least once daily of his clothing, hishouse, and its furnishings; he should advise blowing up the steamboatand ripping up the railroad when they have carried a single load ofpassengers. Thus, when all men were naked and starving, and civilizationhad sunk to savagery, trade would have been made as "good" as, by thepolicy of destruction, he could ever hope to make it.

3.The intentional destruction of wealth owned by other persons isfalsely thought to benefit trade in general. The cases referred to arenot acts done with criminal motives, but those done with a view to thepublic interest. If one sets fire to the property of another, seekingrevenge or plunder, he is guilty of the crime of arson. But what shallbe said of volunteer firemen that let an old house burn down to providelabor for carpenters and "to make business good"? The duty of firemen isto put out fires, no matter what the building is; but they choosesometimes to be ministers to the social interest as they interpret it.The more spent for carpenters' work out of any income, the less can bespent for other objects. It is true, however, that if in a small townthe money to rebuild is borrowed from a distant loan or insurancecompany, there is an increase in employment in that town for one season;and that is as far as most men try to carry their economic analysis. Letthe student carry it further.

Servants sometimes excuse the breaking of dishes and furniture on theground that it makes work, and that the employer can afford it. Butincome is thus diverted from other expenditure, either for production orfor consumption. In the light of the theory of wages, it would appearthat carelessness reduces the servant's own efficiency, and in the longrun the loss comes, in part at least, off the wages of that particularservant. Bastiat's discussion of the broken window-pane[Pg 384] is often anddeservedly quoted. What is seen is a certain immediate benefit that theglass-maker and glazier get; what is not seen is that the power toexpend an equal amount for other things is thereby lost by the owner ofthe house.

4.The destruction of unnecessarily large value to secure a givengratification is not economically sound. The careless use of wealth tosecure an inadequate result is likewise justified as "making tradegood." The blunder that compels the rebuilding of a wall in a rich man'sgarden is an occasion for congratulation to those who see in it a happyprovision of work for the unemployed. It is easy to forget that theproper use of goods is the final step in production. According as goodsare well or poorly used, the production—that is, the real income orgratification they afford—is large or small. Differences in skill inthe use of wealth are great. A French cook, we are often told, can makea palatable soup from what goes from the average American kitchen intothe swill-pail. Waste in the use of goods is more likely to be found innew countries where wealth comes more easily and necessity does notenforce frugality.

The praise of waste implies the error noted in the precedingpropositions. Deliberately securing less than the maximum result fromwealth is merely a minor degree of the intentional destruction ofwealth. The mistaken view is essentially that of the opponents oflabor-saving machinery. It may be true, if the interests of a smallclass of workers or of tradesmen for the moment are looked at; it isfalse, if the interests of society as a whole be considered. Far more ofwisdom lies in the proverb, "A penny saved is two earned." The economicuse of wealth as surely adds to wealth (and, ultimately, to the incomeof society) as any other mode of production.

Some government expenditures, as for river and harbor improvements, aresometimes favored, not because their immediate purposes are good, butbecause they "make work"[Pg 385] and "distribute money" throughout the country.This money comes from taxation, and no matter what the system oftaxation, the burden falls on some one, reducing the incomes at thedisposal of the people to expend for objects of their own choice. If thework is not worth doing for itself, the collection of money in smallamounts from many taxpayers and its expenditure as a large sum in onelocality results in a net loss to society as a whole. Where the resultis worth something, but not enough by itself to justify the expenditure,the fallacy of the destruction of wealth is present in a smaller degree.Examples are seen in the extreme use of pensions and in some publicsubsidies.

5.The supposed benefits of destruction and waste are due to a narrowand incomplete view of the question. Let us restate the ideas that havebeen touched upon. In many cases it is possible that one person maybenefit by another's mishap or folly in the use of wealth. The complexinterrelations of men in society make this inevitable. But, toappreciate the final effects of such action upon society, one needs butto go back to the essential thought of wealth and its purposes. As theaverage efficiency and bounty of the world fall, so fall the income andwelfare of men. As it rises, the social and economic levels rise also.Every kind of economic wealth has potentially two kinds of uses: togratify wants—thus fulfilling its destiny—or to be converted intohigher and more efficient agents—consumption or production. That thepossibilities of the latter are boundless is overlooked in the fallacieshere criticized. An efficient world would be the result of "economy" andsaving; a wasted and used-up world, the result of the fallacy of thedestruction and waste of wealth.

§ II. LUXURY

1.Luxury, while variously defined, involves always the thought ofgreat consumption of wealth for unessential pleasures.[Pg 386]It is notpossible to define luxury absolutely; it is a relative term. Thoseopposed to it condemn it in their definition of it, as, for example: "anexcessive consumption of wealth," or "devoting a relatively large amountof wealth to the satisfaction of a relatively superfluous want." Thosewho take a more moderate and favorable view say: "It is the enjoyment offorms of wealth not obtainable by the mass of men." The difficulty inthe definition as well as in the problem of luxury is that it involves amixture of economic and of ethical questions.

2.Luxury is erroneously justified by some as giving employment tolabor. Typical instances are extravagant dress and elaborate ballswhere fine and costly flowers, decorations, music, coaches, require theexpenditure of a large amount of money. It is said of the EmpressEugenie, wife of Napoleon III, that, in order to help the glove industryof France, she wore no pair of gloves more than once; in order to helpother French industries, she purchased many silks and laces. It is avery comfortable doctrine to some people that the oftener they changetheir dress, the greater benefactors to society they are. A few yearsago the "Bradley-Martin ball" was given in New York city. It waspossibly little more elaborate and expensive than many another ball, butit chanced to be a dull time for news and the papers all over the landgave columns to its discussion. In the many interviews with ministersand business men, the thought appeared over and over that the ball hadat least the merit of giving employment to labor.

The fallacy of this is essentially the same as that in the argument forwaste and destruction. From the fact that these particular tailors,musicians, and florists would have less employment if this ball were notgiven, it is falsely concluded that, but for this ball, this particularincome, or capital, would not be used at all. The average of employmentin those special industries which minister to luxury is the result ofand is determined by the average level of[Pg 387] demand. There are morecaterers and florists in Ithaca than in Hayt's Corners. A more thanordinarily gay season gives unusual profits to these enterprises, and itis true that an abrupt and extreme falling off in demand would causethem large losses, and leave many workers lacking employment for thatone season. But, if this limited demand became usual, capital and laborwould shift to the other industries to which expenditure had shifted.Other modes of expenditure than twenty-five thousand-dollar balls arepossible, as, for example, twenty-five thousand-dollar public libraries.Mr. Carnegie takes his dissipation in that form. That gives employmentalso; not less does investment in new houses, in new railroads, and innew factories. More employment of a particular kind of labor is causedin one case than in another, but not more employment of labor as a wholeand on the average.

3.If all extreme luxury ceased, men of means would improve durableagents more or would give more or would take more leisure whileproducing less. The question of luxury is most difficult when put thus:What would happen if everybody began suddenly to live on the simplestfood and to confine himself to the bare necessities of life? A suddenchange of this sort is almost unthinkable, but if it took place, all thefactories and agents used for non-essentials would lose their value atonce. A great industrial crisis would follow, as industry would have toadjust itself abruptly to an unprecedented standard of desires. Whatwould happen if that standard continued would vary as human naturevaries. There might follow increase of population, or a heightening ofthe efficiency of such agents as were of use, or, more probable than allelse, a progressive lightening of labor, a use of the surplus of energyin study, rest, and recreation. It is, of course, illogical to supposethat with limited desires for the objective goods of the world therewould continue undiminished efforts to produce goods and to save forfuture superfluities. In actual life[Pg 388] changes of standard occurgradually. Economizing in material things by simpler living makespossible not only the increased efficiency of productive agents but theincreased enjoyment of immaterial goods.

4.The defenders of luxury claim that it is the great incentive toprogress. It is undoubtedly true that a dead level of conditions isunfavorable to the progress of society. There must be in society somemotive for emulation and ambition after the bare necessities of life areprovided. There is therefore much strength in the defense of luxury.Necessities, strictly understood, are things absolutely essential tolife and health. No hard line can be drawn between necessities andcomforts, between comforts and luxuries. The level rises; it is a triteand true saying that the luxuries of one age become the necessities ofthe next. The rise of the bath-tub in the nineteenth century is anepitome of the progress of civilization in that period. The free bathsin our cities surpass the hopes of the wealthy of a century ago. Eventhe meaner motives of envy may have their social function. The lowersocial grades, emulous of the higher standard held before them, laborwith greater energy. The successful and capable, not content withnecessities, continue to give their efforts to production. Thedestruction of the motive of luxury before the development of asubstitute in a higher social conscience, would be paralyzing toindustry. Luxury in a moderate measure may be defended by the samearguments as those for private property. True as this view may be inmany cases, in others it seems directly opposed to the facts. Let uslook at the economico-moral questions involved from the side of theindividual who is indulging in luxury, and from that of the society inwhich he lives.

5.As a question of consumption luxury involves for the individual bothan economic and a moral problem. The economic question is, Does luxuryenhance the man's real income? Does a greater expenditure on himselfgive him a[Pg 389] larger sum of gratification in life than a moderateexpenditure would give? Ostentation has its penalties. Undue strivingafter effect defeats its own purpose. This is the cold fact ofexperience, not a speculative proposition. To get back to thefundamental principle: gratification results from a harmonious relationbetween man's nature and the world. Life loaded with too much luggagestaggers under the burden. The tired faculties of the Sybarite cease atlength to respond to natural pleasures. When the senses are robbed oftheir fineness, youth grows blasé, mature manhood is ennuied, life isempty. The praise of "the simple life" has lately been heard in aquarter whence such counsel does not usually come. In gay Paris, a wisepastor has made one of the most beautiful and rational pleas for plainand sincere living that society has heard since the time of the stoicphilosophers. The word is needed. With the growth of incomes grows thestrain to reach the self-imposed standards of frivolity. Insanity andsuicide are on the increase. The stress of modern life makes men yearnfor the simpler joys. Happiness dwells not outside of men; they mustseek it within.

An economic failure, luxury is likewise in most cases a moral failure.Morality has to do with others; the social aspect of luxury is itseffect on other people. The mere spending of a large income in selfishindulgence absorbs all the energies and interests of some men and women.Not only happiness in the narrow sense, but self-realization, is to suchlives impossible. Those absorbed in display can give no due measure ofthought to social obligations. A society made up of self-absorbed andself-centered individuals is a selfish society, foredoomed to decay.

6.The larger moral problem involved in luxury is connected withdistribution or the justice of the income, rather than with consumptionor the spending of the income. The individual effects of luxury broadenthus into the larger social effects. Most of the enemies of luxurycondemn all[Pg 390] expenditure of wealth above a very moderate sum, declaringthat it is "unjust" for one man to have much while others are inpoverty. This communistic doctrine pervades the teaching of many moralteachers, pagan and Christian. In many ways a public opinion can bedeveloped to disapprove and condemn ostentation. Frivolous displaybecomes bad taste. Flaunting riches meet the public frown. The spendingof income for dress and display has never been successfully forbidden bylaw. The Middle Ages are full of futile sumptuary laws which sprang fromthe envy of the nobles for the wealthy merchants. The growth of goodtaste may do what formal law found impossible.

The use of wealth in these days is taking more social directions. Itturns from dress toward education, art, music, and travel; then ceasesto be applied merely to self and family, and benefits the community.Nowhere and never before has this movement gone so far as in America.Andrew Carnegie, with his gifts of millions annually to publiclibraries; Peter Cooper, founder of the People's Institute; EzraCornell, the patron and prophet of the modern type of highereducation—are citizens of a kind better known in this country than inany other.

The immorality of luxury rests in most minds on the conviction that itis unjust that any one should have so large an income to use. Thequestion of luxury leads back to the question of distribution: Has theman honestly gained his wealth? If so, he may spend it with goodjudgment or poor, with good taste or bad, but, so long as he does notinjure others in the spending of it, there is much vagueness andconfusion in the talk of "justice" or "injustice." Each must in largemeasure be his own judge of the wisdom of expenditure. Luxury is notalways a question of wealth. Every person of moderate income hasrelatively superfluous and expensive tastes. One spends more for musicthan many a millionaire does; another more for books. How many collegestudents' budgets could pass the censorship of Hetty[Pg 391] Green, reputed tobe the richest woman in America? If expenditures were regulated by thepublic, few persons would be within the law. But whatever the goods thatare bought, if income is unjustly acquired, if its distribution is byrules that do not give the best possible approach to social service,there may well be talk of injustice. There is need of better standardsof taste and judgment in expenditure, but not of sumptuary laws. Ifthere is any legal change, it should be rather in the law of property.

CHAPTER 41

REACTION OF CONSUMPTION ON PRODUCTION

§ I. REACTION UPON MATERIAL PRODUCTIVE AGENTS

1.Economic consumption is the enjoyment of the utilities which wealthis capable of affording. All wealth looks toward consumption. To takeaway the prospect of the enjoyment of goods is to take away all theirvalue. Consumption involves generally the using up of a thing. Food isconsumed quickly, clothing more slowly, and houses wear out after manyyears. The using up is, in some cases, due to the forces of nature, andis not hastened by enjoyment. A house goes to ruin more rapidly ifuninhabited than with a careful tenant; clothing is destroyed morequickly by moths than by wear. The use of many goods that give estheticpleasures, as art, painting, sculpture, and the enjoyment of finescenery or of beautiful building sites, does not destroy the things thatafford the pleasure. The idea that all value originates in labor has ledto false views on this question. The essential mark of consumption isthe using of the income as it arises, not necessarily the using up ofthe material agents that afford it, though this frequently occurs aswell.

2.The kind of consumption affects the value of material agents. Eachbuyer helps to determine the use of productive agents. The control ofpurchasing power means the potential control of industry to that degree.It was necessary in discussing the enterpriser to recognize that thebuyer eventually dictates the direction of industry; the[Pg 393] enterpriserseeks to produce that for which there is most demand. A change of tasteaffects the value of natural agents. An increase in the demand for meataffects the value of wheat and potatoes, and also the land used forproducing them. A change in the national diet may be equivalent to thediscovery or to the destruction of half a continent. If one chooses todrink wine instead of buying statuary, he increases the value ofvineyards and decreases that of marble quarries: If one drinks beer, hebids for barley; if he eats candy, he may be offering a bounty forbeets. Therefore, choosing vines or violets, pictures or pretzels, eachwith his nickel helps to determine what shall be produced.

The distribution of wealth thus affects the value of agents. The wealthyspend relatively more for luxuries, the poor for food and otheressentials. Where wealth and incomes are very nearly equallydistributed, the demand of different families will be for much the samekinds of goods. If there were no rich men, the demand for vineyardsproducing fine wines would be less. The very best qualities of goodstake on the highest prices when there is a small, but very wealthy,class of purchasers.

Inventions often shift demand, and value follows. The invention of thebicycle with pneumatic tires, coincident with the adoption of electrictraction for street cars, reduced the price of horses between 1890 and1895. This doubtless was a factor in agricultural land values at thattime. This change was sudden, extreme, and temporary, and there hassince been a gradual adjustment and a return to the former values.

3.The production of the next period may be radically affected by theuse now made of agents. Some consumption takes the form of using up andreducing the stock of wealth. The demand for lumber causes thedisappearance of the forests, whereas the demand for oranges stimulatesthe planting of orange trees. The reckless exploitation of natural[Pg 394]resources leaves society poorer. Great herds of buffalo were slaughteredto get the hides, which were of comparatively slight value. Rich landhas been exhausted to get a few harvests.

War is a use of wealth for ends believed at the time to be necessary andbelieved to forward social welfare better in the long run than woulddishonorable submission; but it causes misery and leaves industryprostrate. The forms taken by saving are affected by the choice ofexpenditure. In war the savings of individuals are given to thegovernment and used for destructive purposes. The lender parts with hiswealth and society uses it up. While the lender has a claim on theindustry and on the remaining property of the community, society as awhole is the poorer. If the savings had taken the form of publicbuildings, libraries, railroads, and factories, the wealth and income ofsociety as a whole would have been enhanced.

4.The kind of consumption affects the wages of the various classes oflabor. That an increase in the supply of a given grade of labor reducesits wages and encourages its use, and vice versa, is a truth that becamefamiliar in the study of wages. An influence also is exerted from theside of goods upon the price of labor. A shift of demand from one kindof goods to another depresses the wage of the one kind of labor andraises that of the other. A low grade of labor that performs only simpletasks, and those but badly, is injured if demand shifts to betterproducts. Back of the sweat-shop shirt is the problem of the inefficientworker. Progress takes place by the effort of labor to increase itsefficiency and to move into higher paid callings, and at the same timeby the desire of the purchaser to buy as good a quality as he can.

Every buyer then determines in some degree the direction of industry.The market is a democracy where every penny gives a right of vote. It isthe thought of the society called "The Consumers' League" that throughpurchases, pressure[Pg 395] may be brought to bear upon the employer to providebetter conditions of work. The members of The Consumers' League refuseto buy goods not made under sanitary conditions. Undoubtedly there ishere a great economic force which an enlightened public opinion, evenwithout a formal association, can make in large measure effective. Everyindividual may organize a consumer's league, leaguing himself with thepowers of righteousness. Will he read a yellow journal or a pink or awhite one? A nickel or two will buy either. He has a dollar; will he goto the theater or buy ten dishes of ice-cream? He decides to buy a book,and more type and paper are made, and more printers are employed; hesubscribes to foreign missions and Christian workers penetrate fartherinto Africa. Every purchase has far-reaching consequences. You may spendyour monthly allowance as an agent of iniquity or of truth. You cannotescape a choice even by burying the money, for that is either a demandfor gold or a gift to the issuer of paper currency.

§ II. REACTION UPON THE EFFICIENCY OF THE WORKERS

1.All consumption works some temporary change in the consumer, makinghim a more or less efficient producer. Most consumption goods are usedto gratify a wish of the moment. Many actions are governed by impulserather than by reason; but in general this impulse is in harmony withthe interests of efficiency. In primitive society instinct and appetitemust generally have been safe guides. Food not merely appeased hungerand gratified the palate, but it gave strength. Sensations of cold,hunger, and thirst were developed by nature to stimulate men to do thethings that helped them to survive. In primitive societies there are fewchances to seek pleasures that are not favorable to efficiency. In thestruggle for existence the more efficient tribes survive, and those thatdevelop many abnormal tastes must perish.[Pg 396] But the conditions of modernlife are more complex, and temptations beset men on every side. Tastesare pampered and appetite is gratified at the expense of later welfare.

2.The physical efficiency of the worker is conditioned on wiseconsumption. Chemists and physiologists are telling now in accurateterms how the nutritive values of foods differ. Food values are notmeasured by the pleasure afforded the palate. The wide variety andgreater choice now possible, even to the modest purse, make the chanceof error much greater than in simpler conditions. This subject, alreadytouched upon in the sections on the efficiency of labor, deservesfurther notice. From youth to age, the foolish choice of goods yieldsits harvest of ultimate misery. When babies are fed on crackers dippedin coffee, or, as among the Italian immigrants, on stale bread dipped insour wine, there is a poor foundation laid for a vigorous manhood. Richand poor cook too much for taste and too little for nutrition ordigestion. Much cooking is still done in ways fit only for ourgrandfathers who had cast-iron stomachs and worked in the open air.Culinary methods have not been adapted as yet to a sedentary life.

Drinking tempts some men not only by taste, but by the appeal tosociability; to other coarser natures the joys of Bacchus offer the onehope of exhilaration. The pleasure from alcoholic liquor may at themoment outweigh the cost in money, but a diseased appetite forbids anyreckoning of the vast psychic cost that follows. The coin paid for thedrink is the beginning of the expense; misery, disgrace, degeneracy, andbestialty too often are the unreckoned items.

Clothing is primarily for ornament, secondly for physical comfort. Thatwas the historical order, and it is the logical order in most mindsto-day. How badly the two needs are harmonized! No wonder that thesavage suffers in adopting civilized dress. Travelers describe theAfrican potentate, attired in a high hat and a bracelet, striving tooutshine[Pg 397] his rival resplendent in full-dress coat and a palm-leaf fan.Civilization is making headway there; but the student of primitivepeoples finds one of the important causes of their decay to be their badjudgment in adopting civilized dress, unsuited to their customs andclimate. A mistake is made likewise by workers in physical tasks inimitating the dress of the wealthy and professional classes. The dressof the higher classes often is chosen because of its unsuitableness foran active worker. It serves thus to mark its wearer as one engaged indelicate tasks or as a person of leisure. Possibly, therefore, becauseof their strong social ambitions, the manual workers in America morethan elsewhere adopt a costume that is not sensible or sanitary.

3.The intelligence of the worker is affected by the form of hisenjoyments. This does not refer to the use made of spare time forregular study in night schools, correspondence schools, vacation work,but to the use of time when seeking recreation. The choice of recreationreacts upon the nature of the man. Will he read a book or playbilliards? In proper proportions both may be good, in excess both areevil. Liking realism, does he read Howells or the blood-curdling serialentitled "Piping the Mystery"? Does he devote his spare hours to the"Scientific American" or to the "Police Gazette"? At the moment theremay be as much pleasure in one as in the other (and one might add, inHibernian phrase, "Yes, and more too."). Does he enjoy music, thetheater, or the cheaper attractions of Coney Island and the Bowery? Ishis recreation permeated with a certain intellectual ambition? There maybe just as much momentary joy in one choice as in another, and life isshaped by the direction of one's enjoyments. Much depends on the naturalbent; some natures incline to the healthy as the plant grows toward thesun. With most characters much depends on the influences of neighborhoodlife; thus the boy's clubs and college settlements of the cities, theschools and playgrounds of the villages, are tending to surround[Pg 398] childlife with healthier conditions, that will mould it into better socialhabits.

4.The form of the worker's expenditures affects his industrialvirtues. This is not a moral lecture; it is a look at the economic sideof the subject. There are some moral qualities, however, that areclosely connected with efficiency, while others are not. Someindividuals are corrupt in private personal relations, but "square" inbusiness dealings. But usually there is some connection between the two,and under modern conditions this is becoming closer. Fitness for dailytasks is affected by the daily thoughts of the worker. Sordid and foulthoughts, like an internal malady, sap the economic efficiency of theworker; clean, bright thoughts act as a tonic. Drink, gambling, fastliving, unfit men for positions of trust, while many pastimes leave themoral nature cleaner and stronger. Few can live a doublelife—honorable, conscientious, and exact in one part of the day, andcorrupt in another. Dr. Jekylls and Mr. Hydes are not often found inreal life. The habitual train of thought in leisure hours possesses andcontrols the man throughout his work. It is said that "A man is what hiswork makes him," but it is equally true that a man's work tends tobecome what he is. A man fit for a higher kind of work rises to it inthe usual order of things; but no matter how humble the task, itpartakes of the worth and wholesomeness of its doer.

§ III. EFFECTS ON THE ABIDING WELFARE OF THE CONSUMER

1.Man and his welfare are the end and aim of the economic process.The starting point of industry is wants; the goal is welfare. Momentarygratification is only a way-station, not the journey's end. Too often,in economic reasoning, things are looked at from the employer's point ofview. The older writers, such as Ricardo and Mill, were inclined to takewhat John B. Clark has called the "feed[Pg 399] and work" view,—the view thatthe workman is merely an agent of production, a means to an end; thathis food, the same as coal for an engine, is to be thought of rather asemployer's cost than as consumer's gratification. But, in the broaderview, the welfare of men as men is the subject most worthy of economicstudy. The workman's food is to gratify his hunger, primarily; notmerely to make him a better working machine. This reverses the order ofthe older reasoning. The use made of the income is itself a kind ofproduction—its last stage. Is the process, on the whole, worth while?This can only be judged by finding whether, on the whole, the welfare ofman has been furthered.

2.An income yields the maximum gratification when it is apportionedamong goods so that their marginal utilities, as nearly as possible, areequal. Even a small income is income capable of many applications. Thechoice lies among many thousands of articles. Utility varies not onlyaccording to the kinds of good, but according to the varying quantitiesof each. Every moment, therefore, the conditions of a choice arechanging. The best use of income forbids the purchase of an additionalunit of any good unless it affords the highest gratification obtainable,at the moment, at an equal price. Various circumstances prevent theexact application of this rule. Expenditure is a matter of habit, inlarge measure, rather than a matter of judgment. The knowledge neededfor a rational choice very often is lacking. Appetites change, makingunwise the old purchases, yet men go on buying the same things in thesame proportions simply because a readjustment that would give greatergratification requires thought. Finally, the best economic adjustmentmust conform to the abiding physical and moral welfare of the user, notto a temporary impulse; and such a choice is far more difficult thanthat of the temporary good.

3.Progress takes place where new wealth gratifies marginal wants asintense as those of the preceding period. If the utility of every kindof goods decreased uniformly as[Pg 400] wealth increased, desire would steadilydecline in intensity. But old wants vary and new wants develop withprosperity. Desire grows by what it feeds on. Ambition passes on toother and higher peaks. The direction of the individual man's life thusis determined by the expenditure of his increasing income. Wealth makespossible a new adjustment of life, a new character, both in theindividual and in the society.

The thought that needs emphasis in this connection is that, whileproduction and consumption are separable in thought and distinguishablein practice, they are not opposed in their ultimate purpose. The highestfruits of production are in the lessons of sacrifice and discipline, andin its opportunities for experience and self-expression. The best resultof the consumption of wealth is not the gratification of appetite, butthe strengthening of the spiritual forces within men. The world is torise to a higher social stage not by banishing labor and by multiplyingsensual enjoyments of the commoner sort. Wealth, even in an economicview, is not the end of life, but merely the means to its realization.

4.Enjoyment is increased by a proper variety and harmony of goods. Asthe old kinds of goods increase in amount and fall in value, there mustbe a substitution of new goods. An element added to the dress or to thediet heightens greatly the total gratification. The result is a unit.Think of a dinner without butter, or a cranberry-pie without sugar, or adress-suit without a linen collar. Certain combinations are essential tothe requirements of developed taste and present a problem ofcomplementary goods. Combinations of complementary goods enhance theenjoyment; inharmonious combinations decrease it. That certain things"go together" is a fact that rests often in the nature of things.Complementary colors please the eye; well-seasoned dishes please thepalate.

Again, the harmony of goods is affected by the special nature of theoccupation. A farmer with his out-of-door[Pg 401] life can use tobacco with farless danger than the sedentary worker. A piano player cannot be abase-ball player: the one requires soft and supple hands, the other hardand callous ones. The young man must give up the piano or the game, orplay both badly. The harmony may rest on a still more complex socialadjustment. The loss to the man whose life is in the main on a higherplane is greater if he descends occasionally to a lower. A ditch-digger,looking at the question short-sightedly, may deem "a good drunk" a verydesirable form of enjoyment. But a brain-worker, whose joy as well asefficiency depends on the clearness of his intellectual processes, mustsee that in his case the perils and the costs are much greater.

Wise consumption depends not alone on physical pleasures, but on thespiritual unity of the uses made of goods. Happiness and character areakin in the qualities of simplicity and unity. Happiness, so far as itdepends on wealth, is a harmony of gratifications. Character is aharmony of actions, a group of complementary deeds. There can be noharmony, without a central, simple, guiding principle. The wise andmoral use of goods and the economic use of them are therefore for theindividual essentially the same. Life is a unity. The results of thechoice of goods are reflected in the health, intelligence, happiness,morality, and progress of society. It is vain for the economist toignore the ultimate relations between economic choice and morality; itis folly for the moralist to ignore the economic bases of right andwrong in human conduct.

CHAPTER 42

DISTRIBUTION OF THE SOCIAL INCOME

§ I. THE NATURE OF PERSONAL DISTRIBUTION

1.Personal distribution, in economics, is the reasoned explanation ofthe ways in which income is divided among the members of the community.Before noting more exactly the ways in which distribution can and doestake place, it may be well to review briefly some definitions that havebeen given in other connections. Distribution is bound up in practicewith production, but it can be thought of as a more or less distinctproblem. Functional distribution is the attribution of value to agentsor classes of producers, to land, machinery, and labor consideredimpersonally as groups of productive agents. Personal distribution isthe actual apportioning of income to living persons. This theme now tobe dealt with is the more important practically, for the abstractdiscussion of rent and interest is of use only as it helps to anunderstanding of this vital human problem. It is well to recall also thedistinction between wealth income, money income, and psychic income. Thefirst is the objective aspect, the last is the subjective aspect, ofincome; the second, money income, may be an expression, in money form,of either of the others, but commonly of the former. The moneyexpression of psychic income can be only approximately attained.

2.The individual's income is determined by a number of forces, onlypart of which are primarily economic. Many persons derive incomedirectly neither from property nor[Pg 403] from labor. They neither toil norclip coupons, but they flourish in the favor of others—parent, husband,wife, friends, patrons. So long as the good-will continues these personsmay be as well off as if they drew a salary or owned a bank. If a personin control of goods shares them with another, it is a matter thateconomists must recognize, but cannot well reduce to rules of value. Itis not the task of economists to explain why the impulses of generosityarise, but only how they affect distribution. The economic problem ofdistribution really ends where owner or worker secures his income.Giving a part of it to some one else is essentially a form ofconsumption, and only secondarily a mode of distribution; it is the waychosen to spend the wealth income.

The psychic income of individuals, therefore, is often made up of manyelements. Some parts are due to services performed by the personhimself. When one combs his own hair he is adding to his income.Benjamin Franklin said it was better to teach a boy to shave himselfthan to give him a thousand dollars. Other goods are the uses and fruitsof legally controlled wealth: chance finds, as gifts of value or lostand abandoned goods; goods assigned to one by authority; wealthinherited; illegal gains by robbery; goods secured on credit; giftseither of things or of services. The uses of this university are a giftforming a part, first, of the student's income, and, finally, of thesocial income. Such gifts can be traced back to large-hearted,public-spirited men like Ezra Cornell, but they must be looked upon ascoming from some one. This list, incomplete as it is, suggests that thereal income of most individuals has manifold sources. Let us undertaketo examine and analyze the various methods in actual use in thedistribution of income to the persons making up society.

§ II. METHODS OF PERSONAL DISTRIBUTION

1.Distribution is sometimes compulsory, by force or fraud. This crudeand primitive mode of distribution, the negation of personal liberty,never has been quite eliminated. In every country an unhappily largenumber of men from time to time break over into crime, from violence andhighway robbery down to sneak-thieving, pocket-picking, and bunco games.Not more than ten per cent. of this criminal element is at any one timein prison. This method of personal distribution, not hinted at in mosttheories of distribution, determines a large part of the income of tensof thousands of men in this country and concerns the distribution ofmillions of dollars. These enemies of society appropriate whatever theycan, and the law stops them if it is able.

Slavery is distribution by legalized force, but the force is notlegalized by the consent of the victims. The evolution of the harsherslavery may be traced through various forms of milder serfdom. There isfound an element of this in the freest existing societies; men unwillingare forced to do things. A patent example is the convict on achain-gang, a slave to society as a penalty for his violation of itscommands. But some radical reformers to-day claim that present societyis wholly based on legalized force, and that the workingman isessentially a slave. Their ideal cannot be realized without dissolvingsocial bonds and destroying civilization; yet the presence, even in oursociety, of this forced, unwilling submission on the part of some of itsmembers cannot be ignored.

A similar example of forcible taking is seen in case of war. Savagetribes plunder and take captive their weaker neighbors. Conqueringmodern nations usually exact tribute from defeated enemies. Germany gota billion dollars from France, Japan a quarter of a billion from China.The[Pg 405] terms of peace at the close of our great Civil War were the mostliberal ever granted by conqueror to vanquished; and yet the federalpensions granted to Northern soldiers are a form of tribute, being paidby taxes falling alike upon the North and the South. In all these casesthe distribution by force is unwillingly suffered. In none of them is itreducible to economic rules or capable of a strict economic explanation.

2.Distribution may be charitable, that is, determined byconsiderations of benevolence and affection. Charitable is here used inits original sense, as synonymous with love or affection. First to bementioned is the love of parents, the root and type of all the forms ofcharity. The lack of economic equivalence in the relation of parent andchild is complete in early years. The helpless infant gives nothingeconomic to the parent, the parent gives all to the child. Gradually,however, the balance is regained; as the years go on, not only does thechild repay in affection but in many cases he repays in material ways.In the factory districts and on the farm the child in early years beginsto reëstablish the balance, becomes a worker, and contributes as much asthe cost of his support, and finally more. A student of modern Englishtown life has traced the curve of poverty traversed by the average childof the poor, as the family moves, now below, again above, the level ofminimum income required for physical efficiency. In the middle orpropertied classes the children do not for many years take the burdenfrom the parents, and it is doubtful whether in most cases the economicbalance is ever reëstablished. It is not to the parents, but to thesucceeding generation, that the debt is vicariously paid.

Friendship widens the range of generosity and multiplies the mass ofgifts. Broad sentiments of humanity lead to gifts outside the range ofpersonal affection and personal interest, to the beggar on the street,to institutions devoted to charity. In New York state about twentymillion dollars[Pg 406] a year is given to charity, and in the country at largemany times as much. In the year 1901 over one hundred million dollarswas given to education in the United States by private donors; and thathigh mark will no doubt soon be passed. Gifts in cases of greatdisasters, as the Irish and Indian famines, the Chicago fire, theGalveston flood, the eruption of Mount Pelée, bespeak a wideninggenerosity. Religion impels to the building of churches, to the supportof priests, missions, and manifold religious undertakings. Charity inthis connection is the expression of a sentiment that varies from thebroadest and most general humanitarian sentiment to the most intense andardent personal affection.

3.Distribution may be by an authority willingly acknowledged. The twopreceding forms of distribution, force and love, shade off into thisform. In them the ones from whom goods are taken or to whom they aregiven have no power to change the conditions; here is to be consideredthe case where the person bows willingly to the superior power and takeswhat that power accords him. There are few despotisms in which thegovernment is not based on the wishes and average capacities of thegoverned. If the citizens as a body really desired and were deserving ofbetter government, in most cases they could get it. Much is heard, forexample, of despotism in Russia, and of the abject condition of thepeople; but travelers testify that while many in the educated studentclasses are filled with the greatest discontent, and the intelligentsubject peoples, such as the Finns, detest their rulers, such sentimentsare far from general throughout the empire. The power of the Czar couldnot exist for a single moment if the mass of the people did not look tohim as the great father whom they venerate and love. If this is true,the despotism in Russia, though abhorrent to our ideals of freedom, isfitted to the aspirations of the mass of the people. So far asgovernment determines income, the authority distributing income there,as elsewhere, is one willingly acknowledged.

In patriarchal tribes, in communal societies, in monastic and otherreligious orders distribution is by an accepted authority. Each personworks at what he is commanded to do, and some one in authority (thepatriarch, head of the community, the father of the monastic order)portions out the work and the reward. In the family this rule largelyprevails, and even after the children have come to years of discretionthey not infrequently accept, from habit or affection, the will of theparents, and give up their entire wages to receive back a portion. Themethod of charitable distribution while the child is young graduallychanges to authoritative distribution after the child becomes a worker.The untrained and indocile youth, however, is made the subject ofcompulsory distribution.

The collection and distribution of taxes is by public authority. Noattempt is made to give back an exact equivalent to the tax-payer. Themoney is taken and spent by authority for the public good. This methodis exemplified in the work of certain commissions appointed by law tofix rates or settle disputes, as boards of conciliation and arbitrationand railway commissions. The courts sometimes find themselves obliged toenter this field, although they do so most unwillingly. They try toconfine their efforts to interpreting the contracts men have voluntarilyentered into, and they avoid, so far as possible, the making ofcontracts or the fixing of rates.

In many cases, little thought of as economic distribution, theauthoritative method is followed. Literary and oratorical contests arepassed upon by a set of judges whose opinion of merit determines theaward. It is a poor method, often resulting in injustice (as everydefeated candidate will admit); but it is the only way practicable fordeciding such contests. Yet there are literary and oratorical contestsdecided very differently. If a man advertises himself as an orator andcharges fifty cents admission to his lecture, everyone who goes to hearthe man votes that he is an orator;[Pg 408] everyone having money but stayingaway votes that he is not of such value. The one is judgment by theauthoritative, the other by the competitive, method. The essence of themethod of distributing by authority is that one individual (or group ofindividuals) judges of the deserts or duties of others, decides whatothers must get or must pay, not what he himself is willing to pay.Authoritative distribution is necessary in many cases, but it is fraughtwith dangers. It is the essence of socialism that it would make thisplan universal.

4.Distribution of psychic income may be in part by the collective useof social wealth. By collective use in the full sense is meant thecontinuing enjoyment at the same time by all caring to partake andwithout limit as to amount.

Now it is evident that, because of difficulties that arise, not allthings are capable of this kind of enjoyment. Free water for private usefrom public waterworks is wasted; free meals and clothing toschool-children are open to still greater abuses. Men cannot thuscollectively enjoy rare wines or good confectionery; they cannot partakewithout limit of a limited supply. But libraries and schools maypractically be managed in this way. They require both certainqualifications and certain sacrifices on the part of the user.Collective enjoyment is most completely possible where the use of apermanent form of wealth, such as a park, can be made free to thepublic. All individuals may enjoy equal privileges, though general rulesmay limit the kind of use; for example: no one may be permitted to pullflowers or to walk on the grass, but all who make use of the park enjoyequal privileges. Henry van Dyke in one of his essays puts into themouth of his boy the question, "Father, who owns the mountains?" and theanswer is, He who can enjoy them. Every man without covetousness, as hestands on this hilltop, owns the mountains, the lake, and this beautifulvalley.

In some ways the amount of public enjoyment is decreasing,[Pg 409] as by thegrowing density of population, by the loss of open spaces and commonsfor playgrounds, by the destruction or fencing in of natural scenery;but in other ways it is growing and must grow rapidly. The spirit ofcivic improvement spreads. The streets are better paved than formerly;there are more public buildings, art galleries, and noble monuments.Every cross-road in the land will some day have its fountain and itsstatue. The coöperation of the whole community gives to collective usemany of the advantages of large production, and the maximum ofenjoyment.

5.Distribution may be by status or set rules and customs.Distribution by status fixes the shares of men independently of theireffort and without their control. It is guided neither by their personalmerit nor by the economic value of their services, but by the merits andacts of men not living. This method has prevailed and still prevails toa great extent, though in our society this is hardly realized. Feudalsociety was built on status. Men were born to certain privileges andpositions; they inherited property which could neither be bought norsold; they followed trades which could rarely be entered by any outsideof favored families. Caste in India and in other Oriental countriesregulates by status a large part of the life. In western countriesto-day inheritance of property is the main legal form of status and itshades off into other forms of distribution. While in some casesinheritance may be looked upon as a gift to the heir, in other cases,elsewhere noted, it is partly earned by the heir who has helped toproduce it. By public opinion and by prejudices, status is stillmaintained even where the law has formally abolished it, as is seen inmodern race problems.

6.Distribution is usually competitive in accordance with the value ofthe product. This is the dominant form of distribution in modernsociety. It is the essentially economic form, as contrasted with thelegal and personal forms just described, because it is impersonal andreducible to a rule of value. Distribution under competition is madenot[Pg 410] with reference to abstract ethical principles or to personalaffection, but to the value of the product so far as it is honestlycontrolled. Monopoly, it may be noted, never has ceased to rest underthe ban of Anglo-Saxon law, hence to exemplify compulsory, as opposed tocompetitive, distribution. A striking feature of the competitive methodis its decentralization. Each helps to value the economic services ofeach. If one pays more for the services of the singer than for those ofthe cook, it is not because he would rather listen to the singing thanto eat, but because by apportioning his income he can get the singingand the eating too. In the existing circumstances, the singer's servicesseem to him worth paying for, and he backs his opinion with his money.So each is measuring the services of all others, and all are valuingeach. It is the democracy of valuation, while the method of authority isan oligarchy or monarchy.

7.The best distribution in practice must be sought in union andharmony of these various methods. Various social reforms propose simplythe extreme application of one kind to the exclusion of the others.There are two opposing views of competition: one, that it is the idealto be sought; the other, that it is inherently bad, and therefore shouldbe abolished. Extreme individualists, believing that everything would besettled for the best by free competition, wish to make it universal.They ignore the many cases where it does not, should not, and cannotexist.

Socialists, ill content with the share secured by the less skilledlaborer, say that the competitive plan is unsound at the core. They saythat distribution should be not in proportion to value, but inproportion either to needs or to deserts (they are not agreed which),judged by a vague ethical standard. But this involves the principle ofauthority in its extremest form. It intrusts to some men the function ofpassing upon the economic merits or desires of all others. Yet thatalone is not a conclusive argument against all use of authoritativedistribution. In many practical cases the[Pg 411] intrusting of power andauthority to men to judge of the value of others cannot be avoided.Whatever is indispensable, whatever is the best possible, is, humanlyspeaking, just. Assessors, judges, jurors, must be employed. Interstatecommerce commissioners determine whether rates are reasonable, boards ofarbitration settle disputes, the strike commission adjudicatesdifficulties in the coal regions. Doubtless these methods will beincreasingly used.

There is no other kind of distribution than those enumerated. Thestrongest contrast is between the competitive and the authoritativeprinciples; the others are minor and modifying. None of them alone issufficient; each has its merits and each has its defects; they mustsupplement each other. Actually they are employed in modern society sideby side; each seems essential and best in some special application. Butit does not follow that exactly the proper use is now made of each. Notwo generations have followed the same rule, and the proportions inwhich use has been made of them has constantly shifted. It must berecognized that the principle of diminishing utility applies to eachmethod of distribution as it does to the productive processes. Each maybe best under certain conditions and circumstances, but, extended inapplication, each reveals its weaknesses. In any productive process thebest method depends upon the proper proportion and combination ofelements. Progress toward the best possible distribution is to be soughtin the wise adjustment of the various methods to human nature and tohuman needs.

CHAPTER 43

SURVEY OF THE THEORY OF VALUE

§ I. REVIEW OF THE PLAN FOLLOWED

1.The beginning and end of economic study is man. Before leaving themore theoretical and abstracter part of the theory of value, it may bewell, at the cost of some repetition, to restate and review therelations of the various parts of the argument. Intent on details of thetheory of value the student is in danger of losing its broaderperspective.

The proposition with which this section opens was accepted as ouraxiomatic starting-point. It was not so in the older political economy;men too often were looked upon rather as a means to an end, namely, thecreation of wealth. This proposition refers to all classes, not to asmall group of men. The aim of economic study is democratic, being thewelfare of all men. Economics does not purpose, however, to explainman's action with reference to all things. It asks and attempts toanswer the question: "Why does man attach value to certain things andactions; why does he measure them in certain ratios as expressed interms of each other; and why do these ratios change with changingconditions?" This purpose has determined the order of our study.Beginning with an analysis of the nature of wants, and of the mentalprocess of valuing consumption goods, the circle of inquiry widened tothe problem of valuing things whose relation to wants is more remote andindirect (though not less important).

The problem of future uses, the major part of the theory[Pg 413] of value,leads back to the question of the use man makes of things—a fieldclaimed by the moralist, but one that cannot be neglected by theeconomist. Economics is not the whole science of social relations. It isa restricted part of the field. But it comes into relation with greatpractical questions that touch all sides of life. Thus economicsbroadens and unites with the general stream of sociology. In the pursuitof our study one comes back to the starting-point and cause ofvalue—human wants and the use made of wealth to gratify them. Thecircle is completed. We have surveyed, rapidly and imperfectly it istrue, the whole range of economic inquiry.

2. The central point in economic study is the simplest problem ofexchange value. The first look at the economic world reveals so manythings that have relation to wants, and relations so complex, that themind is confused. The object of science is to simplify; it seeks unityin the midst of chaos. Relations exist between wants and things thatcertainly never can gratify them directly. Where is the simplest aspectof the problem to be found? Evidently in the exchange of consumptiongoods, for these are in closest touch with wants. Out of the complex ofdirect and indirect goods, those few which are at the moment gratifyingwants must be somewhat abstractly, but logically, set apart and studied.In the simplest problem, the exchange of the most typical consumptiongoods, is the key to the larger problem of value. If one could follow itstep by step into its complexer relations, he might hope to understandeverything in economics.

3.The problems of rent and of time-value are successive steps in theexplanation of the exchange value of indirect agents. The term rent hasbeen so variously defined that no caution to the student as to its usecan be deemed superfluous. Until recently economists sought to confinethe term to the income from natural resources (or land). Rent, in theirconception, was the income from one group of goods, physicallydistinguishable from another group of goods, called[Pg 414] capital, which weresupposed to yield interest. That is, rent and interest was each supposedto bear much the same relation to a particular set of durable agents;the difference between them was primarily in the agent that yielded them(though there were other complicating thoughts) rather than in theaspect of value they represented.

Rent as defined in this volume has the much broader meaning of theusufruct of any material agent as contrasted with the use-bearer.Usufruct is a conception most intimately related to that of consumptiongoods, but is logically one step further removed from want. Time-value,as here considered, is a broader conception than that of contractinterest, for it has to do with the all-pervading element of time in itsinfluence on value. Some rents are logically, and in practical businessas well, not measured over periods of time, but at the moment of theiraccrual. The measurement of time differences is mainly required insetting a valuation upon a more or less permanent use-bearer. Thisprocess, which is capitalization, has only recently been recognized tobe the discounting of all the future uses to their present worth. Whilein its essence this is merely a problem in exchange value, it is thehighest, subtlest, and most difficult of such problems. Itsunderstanding presupposes rent, just as rent presupposes the analysis ofwants and marginal utility. It is the outer zone of the value problem,carrying the thought of value years away (all but an eternity away) frompresent enjoyment.

While both rent and time value are widened so that each applies in somemanner to all durable agents, it is a grave error to conclude hastilythat the intention is to make synonymous the old terms rent andinterest. Rent and time-discount remain essentially different stages inthe value problem. Actual concrete neteconomic incomes as they ariseare always rents. Interest never accrues in a concrete form exceptunder the interest contract for a money loan (a contract income, not aneconomic income), and this evidently is a species of contract rent.Time-value is a phase of value connected[Pg 415] logically with investment, orthe calculation of future earning power; rents are both actual andexpectative, or future, but as realized incomes they always expresspresent earning power. Together, rent and capitalization embrace thewhole problem of valuing durable material agents.

4.Wages and profits are of the same genus, the value of human servicesof different grades. The attempt has been made in the foregoingtreatment to show the unity between the problems of wages and profits,and to point out the difference between the conditions that surroundthem. Through the common characteristic, social utility, the employer'sservice can be compared with the most ordinary or the most artisticlabor. Profits and wages, therefore, are simply different aspects of thesame question. A common power, or principle, is found in all objects ofvalue, a power to gratify human wants. In the variety of human servicesand in material goods must be sought this unity.

The different kinds of services range from direct to most indirectgoods. The commonest labor may serve welfare at the moment or may beembodied in a form to be used years later. In that light, wages seems amore complex problem than either rent or capitalization. But the momentthe service embodies itself in a material good with future uses thegeneral theory of capitalization applies to it.

§ II. RELATION OF VALUE THEORIES TO SOCIAL REFORMS

1.The earlier theories of political economy implied a dismal view ofthe future of the masses. The theory of value one holds is sure toaffect his view of economic progress and of social reform. The theoriesfrom the middle of the eighteenth to the middle of the nineteenthcenturies, however varied they were in other respects, nearly all gave agloomy view of the condition of the laboring-men. The physiocraticschool in France, the so-called "orthodox" economists in England (thatis, the writers from about 1800 to 1850 that were in[Pg 416] sympathy with thelandholding or commercial classes), and the socialistic orlaboring-class theorists, all inclined to this view. It was while thisview prevailed that Carlyle characterized political economy by the termstill sometimes heard—"the dismal science." The thinkers of that timestarted their study of value at wages, and assumed that population wouldalways increase so fast as to force labor to a bare subsistence. Theother shares (or the other classes of society) were supposed then toabsorb all the surplus income. Economics to-day is not especiallylugubrious, and its more cheerful note is due as well to its changedtheory of value as to the evidence of advancing welfare among themasses.

2.The socialistic theory of value, akin to the other, holds thatcapitalists absorb all the benefits of progress. The socialists (of theradical school) claim that their theory is merely the logical conclusionto be drawn from the old "orthodox" theory, stated in its extremestform. Usually, however, the orthodox theorists softened and modifiedgreatly the statement of their harsher views. The socialists have notbeen willing to recognize any ameliorating conditions. They say:economic theory shows that under a competitive condition of society thelaboring-man must be forever ground down in helpless misery; thereforethe only hope of the laboring masses is to do away with competitivesociety and to substitute for it central, governmental control of allindustry. They did not and do not attempt to distinguish carefully thepart of production, due to brains and effort, from the part due toownership of capital. The socialist theory is a plan for politicalagitation rather than a scientific theory of value. It was originated orelaborated by men such as Karl Marx, Frederick Engels, and FerdinandLasalle, as labor leaders and political agitators, who found a readyweapon in the bungling economic analysis of the time. The claim of ascientific basis for socialism has continued to be proudly made by theirfollowers, but it has a tottering support in their defective theory ofvalue.

3.The single-tax theory of value is that ground-rent automaticallyabsorbs all benefits of progress. This is the most notable example of aplan of social reform growing out of an abstract theory of value. Whilethe socialists first had their plan of social reform (or revolution), inwhose support Marx's fanciful theory of value was invented, Henry Georgeappears first to have got hold of a theory of value that suggested hisplan of social reform. Studying the political economy of Ricardo andMill, he accepted their ideas regarding the hopeless outlook of thelaboring classes, and their conception of the theory of ground-rent withits false implication that landowners get all the surplus in society.George thus came to believe that, with private ownership in land,competition steadily robbed all but landlords, even the non-landholdingcapitalist, of any share in the benefits of progress. This theory ofvalue is thought to explain all the poverty in the world. It calls, inthe single-taxer's opinion, for a radical measure of reform, namely, thetaking of all rent of land for public purposes as a common instead of anindividual income. If the theory of value on which it is based weresound, the doctrine would have irresistible reasons in its favor; if itis false, most of the argument falls to the ground, though there maystill be substantial reasons of a different nature for the exceptionaltreatment of ground-rents for purposes of taxation.

4.Recent theories of value assign to labor a more hopeful position. Amost optimistic theory of wages is "the residual claimant theory,"presented by Francis A. Walker. His view was that the various shares ofproduction, such as land-rent, the income from machinery, etc., and theenterpriser's profits, were fixed by forces independent of wages, andany increase in the product must therefore fall to the laborer as theresidual claimant. This conclusion has the one merit of explainingsomehow the rise in wages in the past century, but the fallacy of itsmethod is too evident to call for exposure. Not to enter into thedetails of the method, it is[Pg 418] enough to note that it involves thecircular reasoning that land-rent is a surplus over cost of production,and is fixed regardless of wages, whereas the cost of production itselfis made up of money wages.

Another American economist, John B. Clark, is led by his theory ofprofits to a most hopeful conclusion as to the future of wages. Profitshe considers to be essentially the reward for improvements in productiveprocesses, which gradually accrue to the general benefit. As profitsthus disappear, the average wage-earner is correspondingly uplifted, aconclusion quite as hopeful as that of Walker. In discussing profitsabove, dissent from the narrow conception of their source has beenexpressed.

Some facts lend support to every one of these theories of socialprogress, but other facts refuse to be harmonized. The temptation to geta simple, dogmatic explanation of value should be resisted. When theinterrelation of the factors is recognized there is little likelihood ofconcluding that some one of them will absorb all the benefits ofprogress. One is not driven to the extreme either of optimism or ofpessimism. While the theory of value is not in itself a theory ofsociety, it greatly influences social conclusions. Clear economicanalysis is a condition to sound thinking on practical questions.

§ III. INTERRELATION OF ECONOMIC AGENTS

1.The industrial process is a unity and the different agents bear anorganic relation to each other. The problem of value is not one ofphysical division; it is one of logical analysis, and this is notpossible in isolation or without the competition of men. Production asnow carried on is a social process; the determination of market price isa social process. The different agents are complementary goods, eachnecessary to the best use of the various other agents. The value of seedis not to be found apart from the use of the ground; or the value of theleather apart from the shoemaker or the[Pg 419] thread he uses. When thesethings are brought together in society their value is found by thecomparison and measurement of marginal utilities. Economic forces, likeother classes of forces, act and react upon each other. Two bodiesattract each other in space; two chemicals uniting are both transformedinto a substance differing from either. The economic result of materialsand men coöperating is something differing from either factor, yetdependent on both.

2.The divisions of the older political economy are aspects of thegeneral problem of value. The divisions conventional in the text-bookson political economy, namely, "production, exchange, distribution, andconsumption," have not been observed in the plan of this work. It hasnot seemed possible to accept the view that each of these phases of thevital economic process could be discussed completely apart from theothers.Consumption must be studied at the beginning, as the basis ofexchange value, and again at the end, when the circle of thought hasreturned to the use man makes of wealth; and it pervades the wholesubject of value, for back of every price is the potential utility ofthe good.Exchange is coextensive with the whole process of associatedindustry; for wherever there is a price, there is exchange. Subjectivevalue outside a market forms a small, though not negligible, part of theproblem for the student of to-day.Production is implied in everyexchange, as exchange is in all social production. They are, indeed, butdifferent phases of the larger phenomenon, the economic process. Nor isdistribution, considered in its impersonal or economic form, any otherthan the logical valuing of the shares of the factors in economicproduction. Impersonal distribution is coextensive with economicproduction. Whatever a good, logically considered, contributes to valuein production, that is its share of the product. Personal distribution,it is true, brings in other great influences which have been partlyconsidered, but which will be treated more fully in the division tofollow, on the influence of the state in the distribution of income.

3.The law of diminishing returns is the broadest principle of value.The one character common to all goods is that their importance varieswith their quantity in any given connection. This is true of directgoods whose power to gratify wants falls as the supply grows; it is trueof indirect goods, whose technical importance diminishes as the quantityincreases, and which when taken at any given cost can be applied, aftera point, only with diminishing advantage. The gradual extension of themarginal principle from land used in agriculture to every conceivableeconomic agent is the most important development of the last century ofeconomic theory.

It being true that things are measured by the utility of the unit usedlast, logically considered, the least change in the combination altersthe value of all the factors. Practical economic problems, therefore,are dynamic, not static. The view that the shares of the differentfactors are fixed by quite separate laws has not been accepted here. Thelaw of rent is the same as the law of wages in its essential point andprinciple. It is a general law of value applied to a particular kind ofwant-gratifier. The law of substitution likewise is a general law, forwithin limits some substitution of factors is always possible along themargin. That being true, every movement of price creates its ownresistance; substitutes will be found for materials, demand willdecline, and a new equilibrium of price will be attained.

4.The factors and agents of production mutually furnish the field ofemployment for each other. Each factor is dependent for its technicalefficiency on the presence of the other factors. If labor is plentifuland machines are scarce, machines bear a high rent. In accordance withthe law of diminishing returns, the last unit of labor in that casecontributes little to the product, and labor gets low wages, while moreis attributed to the machine. Each machine thus may be considered tooffer a field for the employment of labor. If population increases andland remains fixed, the need for[Pg 421] food raises the rental value of land.But if population increases slowly, and capital and science progress,the field for the employment of labor is enlarged; and if new lands areopened up or new resources are discovered beneath the surface of theland, the field for labor is still more enlarged and a greater share isattributed to labor. This changing character of the problem must berecognized; no share is foreordained in size.

The pursuit of the analysis of value along the lines of marginal utilitythus leads to conclusions far less mechanical, and, to the superficialstudent, less simple than were the doctrines prevailing in the oldereconomics. But the conclusions are, let us hope, more exact and moreapplicable to the real world, enabling the student to arrive at justerviews of the present interests and of the future welfare of society.

DIVISION B—RELATION OF THE STATE TO INDUSTRY

CHAPTER 44

FREE COMPETITION AND STATE ACTION

§ I. COMPETITION AND CUSTOM

1.Economic freedom exists when men's goods or their own services maybe exchanged as they choose, without hindrance. Competition is butanother expression for economic freedom. Where men arefree toexchange their goods and to get the best price they can, and actually doso, they are said to compete. The action of men in the mass followspretty regular lines, corresponding to certain abiding motives. If oneman dictated all industry, a very fragmentary science of economics wouldbe possible; but the mass of men act according to some rule and are freeso to act. When men are free to bring their goods to a market and getthe best price possible, a single market price results.

When cost of production was believed to be the regulator of value, itwas said that the law of value laid down was true "within the limit offree competition." Market price varied ceaselessly from cost ofproduction, and whenever it did "the law of value" as then formulatedwas admittedly invalid or inapplicable. The law of monopoly price wassupposed to be in marked contrast to the law of competitive prices. Thelaw of prices, as followed in our study, stated in[Pg 423] terms of marginalutility, is equally valid in competitive and in monopolistic conditionsif there is merely one-sided, or buyers', competition. Two-sidedcompetition is not the sole, though it is the usual condition, which theeconomist takes account of in reasoning on the problem of price.Anything that keeps men from exchanging what they have for the bestprice, interferes with competition. Some of these hindrances have beennoted, others are now to be.

2.Economic freedom does not mean equality of power or of efficiency.It was said in discussing monopoly that it was not to be understood tobe merely either scarcity or superiority. To speak of the class oflaborers of ability above that of the average day laborer as having amonopoly is certainly a confusion of monopoly with the scarcity ofefficiency. The term competition is not easy to define in practice; forit is not easy to see just what part of a man's inability to exchange isdue to his own lack of efficiency, and what to things outside of himselfwhich prevent him from exchanging his labor. But the thought is clearthat free competition—economic freedom—is limited whenever men arehindered by any power outside themselves from using their economic poweras they prefer. The limitations of competition, thus understood, areessentially social limitations, imposed by other men eitherunconsciously by custom, convention, tradition, or consciously by forceor by laws. When, among Polynesian tribes, the custom of tabooprevailed, by which certain things were reserved to the rulers and wereforbidden to the common man, there was a limitation on his economicfreedom. Contrast such limits with those set by the penury of nature.The savage may like best to hunt, but if there is no game, he must fish;he may like best to make arrowheads, but in need of food he must digroots. Economic action is limited by lack of knowledge and skill; theresources of nature lie unused under the feet of savages who aresuffering from their lack. These are limitations not of economic freedombut of economic efficiency.

3.In early society custom limits economic freedom in many ways. Thesavage is not a man without law; he is bound in many ways to prescribedlines of conduct. Primitive custom usually takes on a religioussanction, and every member of the tribe is compelled to do as hisfathers have done and as his neighbors are doing. He is not free tochoose. Custom in some ways is favorable to the welfare of society, forit limits the power of masters and rulers, preserves the rights ofindividuals to common property, and is in the interest of the weak aswell as of the strong. In an age of force if it were not for custom, hewho had might on his side could take all. So in early society eveneconomic relations were complex and yet almost fixed—changing onlyslowly from generation to generation. Every such social custom thatlimits the choice of men limits economic freedom.

4.Custom ruled a large share of the industrial life of the MiddleAges. Political and economic interests were not clearly divided in theMiddle Ages. Land was the all-important kind of wealth. Military andother public services were performed by the vassal, who thus at the sametime paid his taxes and the rent of the land. The landlord was at oncethe ruler, the receiver of rents, and the collector of taxes. The rent,however, was not a competitive price, but consisted of the dues andservices the forefathers had been accustomed to pay. This limitedslavery, like all other slavery, was wasteful, as it did not give to theindividual the strongest motive to increase the quantity and to improvethe quality of his service. Trade became limited in almost everydirection. Crafts and gilds arrogated to themselves the right ofemployment in their industries. No matter what talent the son of apeasant might show, he usually found it impossible and always found itdifficult to follow the occupation of his choice. Privilege pervaded allthe life of that time. In such conditions economic friction is great.Men are kept in trades below their ability, while others gain command ofmonopolistic and unearned returns.

Yet through all the Middle Ages ran the forces of competition. Theinefficiency of customary services was a constant invitation tocompetitors. Men were striving to break over the barriers of custom andprejudice. The strife for freedom was the vital economic force even ofthe Middle Ages. The industrial history of that time is largely thestory of the struggle of the forces of competition against the bounds ofcustom.

§ II. ECONOMIC HARMONY THROUGH COMPETITION

1.The industrial events following the discovery of Americastrengthened the forces making for economic freedom. Discoveries in theWestern hemisphere opened up a wide field for the adventure andenterprise of Europe. Commerce is the strongest enemy of custom, and newopportunities gave a rude shock to the conservatism both of the manorand of the village. With the rapid growth of industry and manufactures,old methods broke down. In an open market custom declines; it flourishesbest in sheltered places. Further, the movement of thought in theReformation and the spirit of the time, expressing the principle ofpersonal liberty, allowing the individual to follow his own opinions andtake the consequences, were favorable to competition. Despite thesefacts the restraints of the national governments on trade continuedgreat, in some respects increasing during the seventeenth and eighteenthcenturies, in France, Holland, and England. The regulation beforeattempted by towns and villages was employed on a larger scale bynational governments with their commercial systems. The colonies inAmerica were used for the economic ends of the "mother countries" andfor the selfish interests of the home merchants in Europe. The AmericanRevolution was one of the bitter fruits of the English policy of traderestriction.

2.Adam Smith's work advocating greater economic freedom had a profoundinfluence upon public thought. "The[Pg 426] Wealth of Nations," the firstgreat work on political economy, was published in the year 1776. Thatwas the "psychological moment," as public thought was so prepared for itthat it had its maximum possible influence. The year of the AmericanDeclaration of Independence gave the most striking object lesson on theevils of a selfish colonial policy that interfered on a grand scale witheconomic freedom. The old customs had become ill fitted to life, illadapted to the rapid industrial changes that were going on. What wasneeded in many directions, both in politics and in industry, wasnegative action by the government, the repeal of the old laws, theoverthrow of old abuses. The French Revolution, following a few yearslater, emphasized this thought in the political field. The philosophersof the time believed in a "natural law" in industry and politics. Thereformers of the time wished to throw off the trammels of the past andto give men opportunity to exert themselves "naturally." In America theold abuses never had taken deep root, as the conditions of a newcontinent were not favorable to monopoly and privilege. Although themovement for the repeal of medieval laws has continued in Europe from1776 till the present time, yet to-day custom is stronger in Europe thanin America. Serfdom was not abolished until the nineteenth century inAustria and southeastern Europe, and not until a few years ago inRussia. Many economic and cultural forces furthered this movement, butthe most powerful intellectual force in its favor was the work of AdamSmith. So strong an impression did Smith's book make, that in the mindsof men "free trade" became almost identical in thought with politicaleconomy, whereas that was but the temporary economic problem of theeighteenth century.

3.The doctrine of the "economic harmonies" is the extremest form ofbelief in the virtues of competition. Every truth in politicalphilosophy finds some exaggerated expression. The main task of thestudent is to determine what shade of gray things are, rather thanwhether they are white[Pg 427] or black. The belief in the benefits ofcompetition and the virtues of economic freedom found expression in thedoctrine of "the economic harmonies." This is the faith that if men areleft entirely free to do as their interest dictates, the highest andbest efficiency for all will follow; it is the belief that the economicinterests of all men are in harmony. The most striking evidence insupport of this thought is the stimulating effect of self-interestfreely working in the field of competition. Each strives to do what willbring him the largest return, and the price others pay measures theirestimate of the service. Each seeking his own interest is led to makehimself more useful to others. Thus are men stimulated to sacrifice, toinvention, to preparation; thus is zeal animated and are effortssustained.

Through self-interest the working force is distributed over the field ofindustry wherever it is most needed. The remarkable adjustment ofindustry to the needs of each neighborhood is brought about byindividual motives, not by centralized authority. It is not mere chancethat produces this harmony. Wherever consumers settle, stores arestarted and factories are built. Wherever work is to be done, men comein about the right number to do it. Skill is adjusted to needs by thedelicate measurement of the market rate of wages. Competition gives adefinite rule of price—certainly the only definite impersonal rule;some say the only just rule. The competitive price must be appealed toeven in arbitration. It is the standard to which things tend constantlyto adjust themselves in an open market.

4.Experience shows that the economic interests of men are only partly,not wholly, in harmony. That there is a great measure of truth in thestatements just made, all must admit; but their application is limited.They are partial truths, never to be ignored, but quite false if taken,without modification, as practical rules of conduct. There are threespecies of competition in every market: that between sellers, thatbetween buyers, and that between sellers on the one hand[Pg 428] and buyers onthe other. It is to the interest of the buyers that the sellers shall benumerous, eager, and freely competing. It is to the interest of theseller that supply shall be small, that sellers shall be united, andthat buyers shall compete sharply. If at any point free competition ishindered, even the disciple of economic harmony must expect a discordantresult. But in reality competition is rarely quite complete on bothsides, and when it is not, the weak suffer. Men do not start with fairand equal opportunities. All that they may be entitled to undercompetition may be so little that social sympathy seeks to better theresult; hence poor relief, public and private. Society as a whole has aninterest in the outcome of the individual's economic struggle. It cannotsee men starving or driven into crime. But the argument need not beconfined to such crude and extreme cases, for wherever economicinterests are not in harmony and it is possible to further the socialwelfare, will not society be justified in acting?

§ III. SOCIAL LIMITING OF COMPETITION

1.Undoubted evils result from some forms of competition under theconditions actually existing. Complete freedom must remain a somewhatabstract ideal, and actual conditions must be recognized. Entire freedomof choice means freedom to make mistakes, a privilege whose enjoymentsociety cannot always permit. The child should be raised to goodcitizenship, and entire freedom of choice makes that impossible orimprobable. The freedom of choice of the insane, the feeble-minded, andthe criminal, cannot be recognized. Even where competition is the idealof sound adult humanity, it is not to be too suddenly or extremelyapplied. The inequality of faculties, the prevailing dishonesty, themass of inherited abuses, cannot be either ignored or at once ended. Theimmigrant from Europe, plunged into the trying conditions of city life,suffers in health and in morals, and often becomes[Pg 429] a burden uponsociety. One of many competitors may drive competition to an evilextreme. The "problem of the twentieth man" is presented when nineteenmen desire to limit competition in ways not socially harmful, as byclosing shops on Sunday or in the evening, and the one man refuses. Theappeal to economic harmony often is the cry of "peace, peace, wherethere is no peace." The highest social result may be attained now bylimiting, again by directing, in other cases possibly by fostering,competition.

2.The main rivals of competition are custom, religion, morality,combination, and state action. The first three of these were thestrongest forces in the past and they are still operating; butcombination and state action are more characteristic of the present. Theinfluence of custom, of morality, and of religion on value, has beentouched upon at several points in our study; that of combination hasbeen recently and more fully discussed. But state action, one of themost important of all the limitations, has been reserved for theconcluding portion of our work.

3.It is a function of the state to determine in part the ways in whichmen shall exert their powers. This is not the sole function of thestate, nor is its influence toward this end exclusive. The state putslimits to the physical rivalry of men. In the distant past no doubtphysical rivalry between men was an agent of progress. The strong droveout the weak; physical contest developed more vigorous limbs, keenersenses, and higher sagacity. To-day it is one of the principal functionsof the state to suppress the physical contest between men. The citizenis surrounded with a network of rules and regulations of which he ishardly conscious. Most men easily avoid coming into contact with thepolice and feel no irksomeness in the control of the civil courts. Thestate regulates economic interests in many other ways; it controls thebuilding of streets; it inspects the material and construction ofhouses; it forbids acts injurious to the public welfare; it regulatesthe issue of money; it determines the[Pg 430] manner in which credit may beextended, the forms of taxation, and the direction which trade maylegally take. The state has a part in shaping great industries of apublic or semi-public nature, such as waterworks, railroads, and thepostal system.

The state is as wise as the men who constitute it. Men make mistakes,therefore men collectively will make them. The state regulates andlimits—now wisely, now foolishly; but its aim is to preserve thebenefits of competition without its evils, to lift the competition to ahigher plane, and, by determining the direction in which men shall putforth their efforts, to give a higher and truer economic freedom.

CHAPTER 45

USE, COINAGE, AND VALUE OF MONEY

§ I. THE PRECIOUS METALS AS MONEY

1.Money we have defined as a material means of payment and medium ofexchange, generally accepted and passing from hand to hand. The originand function of money were set forth in the study of capital. Thesubject must now be approached from a different side and with thetwo-fold purpose of seeing whether there is anything peculiar in therelation of money to the general problem of value, and what is theinfluence of the action of the state on the value of money. Thedefinition of money implies several ideas. First, the words "generallyaccepted means of payment" imply that money, as something bearing thestamp of social approval, has a peculiar social character, is not anordinary good. Second, the definition implies that money itself must bea thing having value, otherwise it could not serve as a medium ofexchange. Exchange means the taking and giving of things of value. Moneyis, therefore, not merely an order for goods, as a card or paperrequesting payment; it is itself a thing of value, though this value maybe due solely to its possessing the money function. This point is one ofthe most difficult in the subject. Third, the definition implies thatmoney is a material thing. The telegram when transferring an order forthe payment of money, the spoken word, the promise to pay, etc., are notmoney. Fourth, it implies that money passes from hand to hand, is athing that can be handled, and is or can be bodily transported.

The application of the definition is not always easy, for money shadesoff into other things that serve the same purpose and are related innature. Even special students differ as to the border-line of theconcept, but as to the general nature of money there is essentialagreement. In many problems it appears to be at the same time like andunlike other things of value, and just wherein lies the difference oftenis difficult to determine. The use of money is of such socialimportance, and it touches so many practical interests, that it raisesmany questions of a political and ethical nature. There are perhaps morepopular errors on this than on any other one subject in economics. Yetthe general principles of money are as fully understood and as firmlyestablished as any parts of economics.

2.The precious metals, gold and silver, are the standard, or primary,moneys in the world to-day. Primary, typical, standard money is theunit in which the value of the money of a country is expressed, nomatter what its form is; the standard is a certain weight and finenessof a particular metal. Coins of this standard are called full, or real,money by some writers who deny the title of money to everything else. Ithas been shown before that there has been an evolution in the use ofmoney. The more efficient forms, gold and silver, have competed withcopper, iron, tin, cattle, salt, tobacco. In this contest silver hadproved itself a few centuries ago to be the fittest medium of exchange,but in the last century gold has, among the leading nations, beendisplacing silver rapidly. In a higher degree than any other material,gold has the qualities of a good standard money in rich and industriallydeveloped communities. The gold-using countries to-day are those of thewestern world. England for perhaps two centuries practically has hadgold as its standard money; the United States since 1834 (except for theperiod of paper money from 1862 to 1879); France since about the year1855, at which time she shifted from silver under the working of thebimetallic law; and Germany, then[Pg 433] more backward industrially, since1873. Australia and Japan have reached that result only within the lastfew years, and Italy, Russia, India, Mexico—even China and otherOriental countries—are striving to attain it.

In all these countries other kinds of money are used side by side withgold and silver. The actual money consists of a wide and confusingvariety: silver, nickel, copper, paper in various forms and issued byvarious authorities. But among all the kinds, either gold or silver isfound standing preëminent and in a peculiar position. The difficultiesof the money problem must be attacked at the point of standard moneywhere it is nearest to ordinary value problems and is less complicatedthan when the various money substitutes are included. Most of thefallacies regarding money have arisen not about standard money, butabout paper and light-weight silver.

3.Coinage is the act of shaping and marking a piece of metal to beused as money so as to indicate its weight and fineness. The preciousmetals can and do circulate as money without coinage. Any other markequally plain and equally recognizable serves for many purposes just aswell as the government stamp on the standard metal. The use of metals inantiquity was without coinage, by weight and test of fineness. Inbackward countries to-day most payments are made by weight.International payments are made by means of gold ingots that bear themark of some well-known banking-house, and for that purpose gold bullionis money without the coiner's stamp. But for most uses governmentcoinage has marked advantages. It is far more convenient for the averagecitizen to handle coins uniform in size and design than the diversecoins that would be put out by private enterprisers.

An established rate of fineness insuring uniform quality is a greatconvenience. In the United States all gold and silver coins are ninetenths fine; in Great Britain, eleven twelfths. The established weightof the gold dollar in the[Pg 434] United States is twenty-three and twenty-twohundredths grains of fine gold or twenty-five and eight tenths grains ofstandard gold. The limit of tolerance is the variation either above orbelow the standard weight or fineness that a coin is allowed to havewhen it leaves the mint. The par of exchange between standard coins ofdifferent countries is the expression of the ratio of fine gold in them.Thus the par of exchange between the American dollar and the Englishsovereign (the "pound") is four and eighty-six and two third hundredths,that is, four and eighty-six and two third hundredths dollars containthe same amount of gold as an English gold sovereign. The embosseddesign, milled or lettered edges, and other similar devices are merelyto make the coins easily recognizable and difficult to counterfeit.

4.Seigniorage is the right the ruler or state has to charge forcoinage, or it is the charge made for coinage. Coinage as a function ofgreat importance politically as well as economically was early exercisedby governments or rulers. The prince, king, or emperor stamped his owndevice or portrait upon the coin; hence the term seigniorage fromseignior (meaning lord or ruler). The right to issue money came to beone of the most essential prerogatives of sovereignty. Coinage is rarelywithout charge, and often has been a source of revenue to the ruler. Inthe Middle Ages this right was frequently exercised by princes for theirselfish advantage to the injury and unsettling of trade.

When no charge is made for coinage, the coinage is said to begratuitous. Coinage is said to be free if the subject or citizen cantake bullion to the mint whenever he pleases, paying the usualseigniorage. Coinage is limited if the government or ruler determineswhen coinage is to take place. Thus, coinage may be both free andgratuitous, when citizens are allowed to bring bullion whenever theyplease and have it converted into coins without charge or deduction. Butcoinage is free without being gratuitous when any citizen[Pg 435] may bringmetal to the mint, whenever he chooses, to be coined subject to theseigniorage charge.

5.Where coinage is free and gratuitous the coin is worth the same asthe bullion that is in it. This evidently and necessarily must be nearthe truth if the citizens exercise their right. They will not long keepmetal uncoined in their possession when it is worth more in the form ofmoney, nor will they long keep money from the melting-pot when it isworth more as bullion. Yet there may be a slight disparity between thebullion and the money values before the metal is converted into coin orthe coin melted down into metal. A motive for action must exist beforeeither change will be made; but a thing cannot have considerablydifferent values in two different uses at the same moment.

There is here no special problem of value. The value of gold as bullionand money is fixed by marginal demand. The several uses of gold areconstantly competing for it: its uses for rings, pens, ornaments,championship cups, photography, dentistry, delicate instruments, and asa circulating medium. If the metal becomes worth more in one use, itsamount there is increased and correspondingly diminished in the others.The supply likewise is influenced by changes in price. Gold-mining isone among various industries to which men may apply their labor andcapital. Some mines are superior, others average, others marginal whichit barely pays to work. There is, therefore, a rise and fall of themargin of production with change in price and change in cost ofproduction. If at a given moment, when it barely pays to work a mine,gold becomes worth less, that mine will go out of use. As gold rises,some mines that did not pay before, come into use. A similar variationhas been noted in the case of marginal land, marginal factories,marginal forges, and marginal agents of every kind.

The question was once asked in Parliament, "What is a pound?" and a goodquestion to ask in beginning the study of money is, "What is a dollar?"The answer, so far as it[Pg 436] refers to the standard money, is: a dollar isa convenient name applied to twenty-three and twenty-two hundredthsgrains of fine gold or twenty-five and eight tenths grains of standardfineness. The exchange value of gold varies in different places andconditions, but the name remains the same. A dollar exchanges for morewheat in Dakota than in New York or for more iron in Pittsburg than inOregon, yet it is sometimes asserted that the value is always the samebecause the name is always the same. The fallacy of this may be seen inthe equivalent expression that twenty-three and twenty-two hundredthsgrains of gold have the same value always and under all circumstances.

The problem of the bullion value of money metal, under gratuitouscoinage, presents no special difficulties. The ordinary theory of valueapplies to it. The difficulties of the money question begin at the pointwhere the money value is seen to diverge from, and depend on, somethingelse than the value of the bullion. Yet in the principles just discussedare found a firm foundation for any further study of the question.

§ II. THE QUANTITY THEORY OF MONEY

1.The fundamental use that money serves is to apportion incomes ofgoods so as to make them yield the maximum gratification. Money firstincreases utility by increasing the ease with which exchange takesplace. Like any tool or agent, it is valued for what it does or helps todo. But further, it enhances the sum of enjoyments by the division ofgoods into proper quantities, making them available at the best time. Itfollows from the principle of diminishing utility that the particulartime at which goods are available for wants has an essential bearing ontheir value. A hundred loaves of bread in the hands of a singleindividual would mold long before they could be consumed. Money enablesmen in society to acquire these hundred loaves in a series so that they[Pg 437]can be used when most needed. Money is the most successful device manhas ever discovered for distributing the supplies of a journey along itscourse, and the goods of daily need over a period of time. The use ofmoney as a storehouse of value is merely an extreme case of keepingthings for the future when they will have a greater gratifying power.

The fact that money is essentially a valuable good kept on hand as thebest possible provision against emergencies points to the essentialnature of the money demand. Money is sought, in order to form a cashreserve, up to a point where the loss from keeping it balances theprobable gain. The money use is subject to the law of diminishingutility; beyond a certain point its added convenience is purchased attoo great cost. Every man may be thought of as having an average, orusual, money demand, which is that proportion of his income that giveshim more utility retained in money form than if at once expended. A manwith an income and expenditure of fifty dollars a month paid monthly hasuse ordinarily for no more than fifty dollars as his cash reserve. Whileunder ordinary circumstances this is his maximum demand, variouscircumstances may diminish it. If his expenses are distributed in twoequal parts (the one on pay-day, the other thirty days later) hisaverage money demand is twenty-five dollars, not fifty dollars. If mostof his purchasing is done at the beginning of the month, his averagemoney demand may be perhaps ten dollars. Many a workman purchases oncredit, spends his fifty dollars within an hour after he receives it,and goes without money for the rest of the month. The average demand ofa community for money required as a reserve is affected by the methodsof doing business. With a given method of use a reduction in the supplyof money results in loss of time and waste of effort; an increase in thesupply results in a lowering of its value relative to other things. Ineither case the equilibrium of the marginal utilities of income must berestored. The[Pg 438] thought of an average, rational, money demand relative tomoney income is the fundamental requisite for clear thinking on thequestion of money, but to grasp this thought there is needed a certainpower of scientific imagination lacking in some minds.

2.The quantity theory of money is that, other things being equal, thevalue of money falls as its quantity increases, and vice versa. This isan abstract statement of a concrete and difficult problem. The phrase"other things being equal" betokens the statement of a tendency wherethere are several unknown factors. In recent discussion the quantitytheory of money has been questioned by some critics; yet it is held bymost economists to be merely the general law of value as applied tomoney. There are three sets of facts to be brought into relationshipwith each other in the quantity theory: (1) amount of business orexchanges to be effected; (2) the methods by which this is done; (3) theamount of money available to do it. According to the quantity theory wemust expect that when conditions (1) and (2) remain fixed, the value ofmoney will vary inversely as its quantity. This conclusion follows fromthe conception of the money demand as the value of circulating mediumthat bears an average proportion to the value of goods exchanged.

Let us consider various conditions. When a number of men, by reason ofincreasing gold supplies, get larger stocks of money than they have had,the former proportion between their money incomes and their money isaltered. In reducing their stock of money by buying goods they bid upthe prices of goods until the total value of goods exchanged again bearsthe same ratio as before to the total value of money. Taking an extremecase: if twice as many dollars get into circulation in a community,either some few men must have several times as many dollars as before,while others have the same; or every man will have his due proportion,just twice as much as before. The latter, "other[Pg 439] things being equal,"must be the logical result after equilibrium has been restored. Is anyother result thinkable? Now if prices of goods remained the same asbefore, there would be twice as great a value of money available toeffect exchanges. There is no reason why each should tie up twice aslarge a proportion of his income in a supply of the medium of exchange.If, however, there is a concerted movement to spend the surplus money,there results a general bidding down of the exchange value of money, ageneral bidding up of prices of goods. At what point will this movementstop? The rational conclusion must be that "other things being equal"equilibrium will be reëstablished only when the ratio between the valueof money and the price of goods becomes the same as before. The moneybeing doubled, prices must be double, and likewise for any other changein quantity.

3.The quantity theory is misunderstood, and is criticized on theground that the facts oppose it. If but one kind of metal were used asmoney, and this were coined of uniform weight and fineness, the problemwould be comparatively simple. But in fact gold and silver, full-weightand light-weight coins, circulate side by side. More mysterious still,the money in circulation is partly coin and partly paper. How can thequantity theory hold in these conditions? Several objections to thequantity theory are presented. It is said, first, that prices do notvary exactly with the per capita circulation of different countries at agiven moment. The per capita circulation in Mexico may be five dollarsand in the United States twenty-five dollars, while prices are much lessthan five times as great here as in Mexico. Secondly, it is said thatprices do not vary directly with changes in the amount of money in agiven country. There is now perhaps five times as much money per capitain the United States as fifty years ago and yet prices are not fivetimes as high. Thirdly, it is said that credit methods change, andtherefore that money does not fix prices. Fourthly, it is said that evenif true of primary money the theory fails to apply to actual[Pg 440] conditionswith many forms of money in circulation side by side. Fifthly, it issaid that there are too many unknown quantities to permit the rule to beused.

4.A reasonable interpretation of the quantity theory makes it astatement of the effect of a change in a single factor. The objectionsto the quantity theory assume that it is a statement of what occursunder all conditions, instead of what it is, an index to the working ofone condition at a time. The foregoing objections need but to be furtheranalyzed to show that in each of them it is not merely the quantity ofmoney, but a number of other factors that differ in each of thepropositions. We may note briefly in turn the defects in the argumentsof the preceding paragraph.

First, the quantity theory does not remotely imply that prices indifferent countries differ at a given moment according to the per capitamoney. In the case of the United States and Mexico not only the amountof exchange per capita but the method of exchange, and the rapidity ofthe circulation of money differ quite as much, doubtless, as does theper capita circulation. The quantity theory would lead any fairlycareful student to a conclusion the exact opposite of that which itscritics have twisted from it.

Second, the quantity theory does not imply that during a period of yearswhen a country is changing in a multitude of ways, as in population,methods of industry, modes of exchange and transportation, and in wealthand income, the prices will vary directly either as the absolute or percapita amount of money does. In the light of the quantity theory theinquirer must be led to just the opposite of the ridiculous conclusionimputed to it.

Third, the theory does not overlook the effect of an increased use ofcredit, for it fully implies that any such a change, by economizing theuse of money, would enable the same amount of money to support a higherscale of prices.

Fourth, the theory does not overlook the variety of forms, and is nottrue merely of primary money. However great[Pg 441] this variety, the moneydemand of individuals and of communities still represents a prettydefinite ratio of the value of exchanges effected. If the primary moneyalone were doubled in quantity, while the various forms of substitutemoney (smaller coins, bank-notes, government notes, etc.) remainedunchanged, the quantity of money as a whole would not be doubled, andaccording to the theory, prices would not be expected to double. Indeed,in such a case, the method of exchange would be very greatly altered,and the case is fully covered by the statement of the theory.

Fifth, despite the number of changing factors affecting the methods ofexchange, the method of business, etc., the quantity theory is a ruleusable at any moment. These various factors change slowly, and thequantity theory answers the question, What change occurs in prices as aresult of an increase or decrease of the money in a given community at agiven moment? Like the law of gravitation, the law of projectiles, andthe statement of the chemical reaction to be expected when adding somesubstance to a given compound, the theory must be interpreted withpractical limitations. When the quantity theory is thus stated andunderstood, its negation is unthinkable, as is evidenced by theinvoluntary use made of it constantly by every one of its few critics inexplaining the simplest monetary phenomena.

5.The quantity theory makes intelligible the great and rapid changesin price that have followed sudden changes in the money supply.Inductive demonstration of broadly stated economic principles isdifficult, but in no other economic problem is laboratory experiment sonearly possible as in that of money. Many inflations and contractions ofthe circulating medium have occurred, now in a single country, again inthe entire world, and the local or general results have served toexemplify richly the working of the quantity principle. With the scantyyield of silver- and gold-mines in the Middle Ages, prices were low.After the discovery of America, especially in the sixteenth century,quantities of[Pg 442] silver flowed into Europe. The great rise of prices thatoccurred was explained by the keenest thinkers of that day along theessential lines of the quantity theory, though there were many monetaryfallacies current at the time. The experience in England during theNapoleonic wars, when the money of England was inflated and prices roseabove those of the Continent, led to the modern formulation of thetheory by Ricardo and others. The discovery of gold in California andAustralia, in 1848-50, increased the gold supply marvelously, and goldprices rose throughout the world. Between 1870 and 1890 the productionof gold fell off greatly while its use as money increased and pricesfell. A great increase of gold production has occurred in the periodsince 1890. In part the rising prices from 1897 to 1902 are explicableas the periodic upswing of confidence and credit, but in part doubtlessthey are due to the stimulus of increasing gold supplies. These are buta few of many instances in monetary history which, taken together, makean argument of probability in favor of the quantity theory so strong asto constitute practically its inductive proof.

CHAPTER 46

TOKEN COINAGE AND GOVERNMENT PAPER MONEY

§ I. LIGHT-WEIGHT COINS

1.When the number of coins issued is limited properly, a seignioragecharge does not reduce their money value; they are worth more as moneythan as bullion. The coinage thus far considered has been that offull-weight coins without seigniorage. The question now is, What is theeffect of a seigniorage charge on the value of the coin as compared withthe bullion that is in it? This is one of the most difficult phases ofmonetary theory. Two values must be thought of: one the value of thecoin as money, the other the value of the bullion in it. When coinage isfree and gratuitous, these two values are the same. How can they ever bedifferent? The answer to the question is found in the theory of monopolyvalue. If the supply of coin is limited by the sole agency of issue, thevalue can be kept above the cost of production (i.e., in this case thebullion value), the seigniorage being the profit of the government. Thelimit within which the coinage must be kept is the number of coins thatwould circulate freely if they were made full weight without aseigniorage charge. This is the "saturation point" of the money demandof the country; it is a certain number of pieces of full-weight metal.If more than that amount gets into circulation it becomes worth less asmoney than as bullion, and it is melted or exported.

If this full supply of money at a given moment is 100,000[Pg 444] pieces ordollars, a seigniorage charge of ten per cent. could be made if thenumber of pieces were not increased above 100,000. The government alonehaving the right of coinage, the need of money would give thecirculating medium a monopoly value. The value of the money would riseuntil the coin would buy one ninth more bullion than was in it, but ifthere were any further rise the citizens would begin to take coins tothe mint. After the ten per cent. charge was taken out they wouldreceive a coin which, though containing one tenth less bullion, would beworth very nearly the same as the metal taken to the mint. Noconsiderable depreciation could take place unless the volume of businessfell off so that less money was needed than at the old standard. In thatcase there would be no outlet for the excess of coins until they fell totheir bullion value,i.e., till they lost the entire value of theseigniorage, the monopoly element in them. Melting or exporting thembefore that point was reached would cause the loss of whatever elementof seigniorage value they contained.

Assuming that the volume of business, or sum of exchanges, remainsunchanged, let us consider what will result if the government begins toissue "on its own account." The number of coins might be increased untilat the bullion price the total money value were equal to the original100,000 full-weight coins, at which point exportation would take place.There being nine tenths as much precious metal as before, it wouldrequire ten ninths as many pieces, or 111,111 pieces, to have as great avalue as the 100,000 had before. At this point there is no furtherprofit to the government in issuing coins of that weight. To make afurther profit it must again reduce the amount of pure metal in thecoin.

This is essentially what occurred often throughout the Middle Ages. Aruler debased the quality or reduced the weight of money, but for a timethe new coin, having the same money use, circulated as freely as the oldcoin. If,[Pg 445] as so often happened, the ruler yielded to the temptation toissue more in order to get the profit, the older, heavier coins at oncebegan to go abroad or into the melting-pot. Then occurred a fall invalue, mystifying alike to the prince and the people. The reason is nowperfectly plain: the number of pieces issued had not been kept withinthe proper limits, and the coins went down to their bullion value.

2.Subsidiary coins of lighter weight than the standard, if properlylimited, will remain in circulation at par. Money to serve all of itspurposes must be of different denominations. The amount required of eachdenomination is determined by the volume of exchanges for which each ismost convenient. Each kind of money, as the penny, nickel, dime, has itsown peculiar demand and its saturation point. For the smallerdenominations the standard metal is not suitable. A gold dollar cannotwell be cut into twenty or a hundred pieces. Thus copper, nickel, silverremain in restricted use. When these are issued at their bullion value,difficulties arise; not only are they too heavy, but as they vary inbullion value, some of them become worth more as bullion than as coin,and suddenly disappear from circulation.

This happened often throughout the Middle Ages and until the nineteenthcentury. Gold and silver generally were coined at a ratio of weightcorresponding exactly to their market ratio at a given moment, and everytime the market conditions varied, one kind of the money went out ofcirculation, and the country was left either without the larger goldcoins, or without subsidiary coin, or "small change." At length the planwas hit upon of issuing a limited number of subsidiary coins of lessthan full bullion value, that is, as "token coins." By this plan thereis given to the minor coins a value greater than that of the bullion inthem. The small profit made by the government on every penny, nickel, ordime issued, is a seigniorage charge. These minor coins, in somewhatconfusing variety,[Pg 446] circulate side by side with full-weight money, theirvalue depending on the monopoly principle. The result of a large issueof any one denomination would be a lowering of its value. In practicetheir issue is determined by the needs of business and by the requestsof citizens for small coins in exchange for standard money. One needing"change" gets it at the bank; when the bank finds its supply fallingshort it gets more from the government mints. As business increased in1898, the demand for nickels, dimes, and quarters became unprecedented,and the mints worked night and day to supply them.

3.Gresham's law of the circulation of coins of different bullion valueis: bad money drives out good money. This so-called "law" was stated inthese circumstances: England had two kinds of metal money, silver andgold, which were coined at a fixed ratio in weight; and as the marketvalue of the bullion changed, the new full-weight coins of the metalrising in value went out of circulation. The coining of the cheapermetal caused the melting or exporting of the one becoming dearer, andfor those purposes the coins containing the most bullion were picked.Likewise full-weight coins disappear whenever money of less bullionvalue (either because containing more alloy, or because made of acheaper metal or of paper) is poured into the circulation in largequantities.

Gresham's law needs some explanation, for it is frequentlymisunderstood. "Bad" money means money that has not the bullion valueequal to its money value, money that is either debased in quality orlight in weight. But not every piece of bad money will drive out everypiece of good money. If that were so, a single bad penny would drive outof circulation all the gold. The law applies only under certainconditions. The "good" will leave the country only if the total amountof money in circulation is in excess of what would be needed if all wereof full weight or best quality. Paradoxically speaking, if there is nottoo much of the bad[Pg 447] money, it is just as good as the good money. Thegood money may not leave the country. It may be hoarded, or be pickedout by banks and savings-institutions to retain as their reserve, or itmay be melted for use in the arts. Gresham's "law" is thus a practicalprecept: keep the amount of token or light-weight coin limited to thefield of its peculiar use, or it will cause the other forms, the fullerweight money, to leave for a better market. That better market may bethe melting-pot or it may be a foreign country.

§ II. PAPER MONEY EXPERIMENTS

1.Government paper money may be defined as money for which aseigniorage of one hundred per cent. is charged. The order in the studyof the money question is from seigniorage to paper money, because papermoney embodies the principle of seigniorage in its extremest form. Theissue of paper money grew out of the practice of debasing metal. Thegain of seigniorage from paper money is greater and is just as easilysecured. Government paper money is sometimes called "political money,"in contrast with money whose value rests on the value of its material.In this sense, however, all coins containing an element of seigniorage,or monopoly value, are to that degree "political" money. The typicalpaper money is irredeemable, that is, it cannot be turned into bullionmoney on demand. It was simply put into circulation with thelegal-tender quality. The "legal-tender" quality is the declaration ofthe government that the paper money must be accepted by citizens as alegal discharge for debts due them. The object of this is to compelpeople to use it as money whether they will or not. The purpose of thegovernment in thus employing its power over the circulating medium isusually to profit, that is, to secure the value of the seigniorage forpublic purposes. Paper money differs from bank-notes in that it does notdepend for its redemption on the credit of the issuer. It[Pg 448] differs frombonds in that its value is not based on the interest it yields, butsolely on its money uses. The issue of paper money may save thegovernment the payment of interest on an equal amount of bonds. Thepromise to receive paper money in payment for taxes or for public lands,may help to maintain the value of the notes by reducing their quantity,but nothing short of prompt exchange for standard coins makes them trulyredeemable.

2.The most notable examples of paper money in the eighteenth centurywere the American colonial currencies, the continental notes, and theFrench assignats. In all the American colonies before the Revolutionnotes or bills of credit were issued which were in most cases legaltender. Without exception they were issued in large amounts and withoutexception they depreciated. Parliament forbade the issues, but to noeffect. The continental notes were issued by the Continental Congress inthe first year of the war (1775), and for the next five years. Theobject at first was to anticipate taxes, and it was expected that thestates would redeem and destroy the notes, but this was not done. Thenotes passed at par for a time, but depreciated rapidly as their numberincreased. The country had less than $10,000,000 of coin before the war,and when, in 1780, over $200,000,000 of notes were in circulation theywere completely discredited; hence the phrase "not worth a continental."Specie quickly came back into use. A few years later the leaders of theFrench Revolution, failing to learn the lesson of the Americanexperience, issued, on the security of land, notes called assignats insuch enormous quantities that they became worth no more than the paperon which they were printed. In a figurative sense they may be said tohave fallen to their "bullion" value.

3.Notable examples of paper money in the nineteenth century were theEnglish bank-notes in the years 1797-1820, and the American greenbacks,1862-79. There have been many other examples. During theFranco-Prussian[Pg 449] War, France, through the medium of its great statebank, issued notes which only slightly depreciated. At the present timemany countries—Russia, Austria, Portugal, Italy, all the South Americanrepublics—have depreciated paper currencies. But the English bankrestriction of 1797-1820 is notable because it gave rise to thecontroversy which did most to develop the modern theory of the subject.The Bank of England was forbidden to redeem its notes in coin becausethe government wished to borrow all the coin the bank had. The resultwas the issue of a large amount of bank money not subject to theordinary rule of redemption on demand. It was virtually government papermoney. The notes depreciated and drove gold out of circulation, and notuntil 1820 was there a return to specie payments.

The United States under the constitution did not try paper money till1862 when paper notes (called greenbacks, because of the color of inkwith which the reverse side was printed) were issued as a war measure tothe amount of about $450,000,000. Other interest-bearing notes wereissued with legal-tender quality and circulated as money to some extent.Greenbacks depreciated in terms of gold, and gold rose in price until,in June, 1864, it sold at two hundred and eighty a hundred. Fourteenyears elapsed after the war before these notes rose to par, in terms ofgold.

4.Paper-money issues usually have had injurious effects on generalindustry. The purpose of the issue of paper money is generally torelieve the financial necessities of the government. It is a costlyexpedient, resorted to only in desperate extremities. A result usuallyunintended is the derangement of business and of the existingdistribution of incomes. The rapid and unpredictable changes in pricesgive opportunity for speculative profits, but most legitimate businessis injured. This incidental effect on debts and industry becomes themain motive of some citizens in advocating the issue. It is peculiarlyliable to be the subject of political intrigue and of popularmisunderstanding.

§ III. THEORIES OF POLITICAL MONEY

1.The commodity-money theorists declare that government is powerlessto influence value, or to impart value to paper by law. There are twoextreme views regarding the nature of paper money, and a third whichendeavors to find the truth between these two. First is that of thecommodity-money theorists, or the cost-of-production theorists, who willnot admit that there is any other basis for the value of money than thecost of the material that is in it. Money made of paper, on a printingpress, has a cost almost negligibly small, and, therefore, they say itcan have no value. The fact that it does circulate, and is treated as ifit had value, is explained by the commodity theorists as follows: Whilethe paper note is a mere promise to pay, with no value in itself, it isaccepted because of the hope of its redemption, just as is any privatenote. Depreciation in this view is due to loss of confidence; the risetoward par measures the hope of repayment. Such a view overlooks thefeature in which paper money differs from ordinary credit paper. Thevalue of one's promise to pay depends on his reputation and hisresources; the resources constitute the basis of value. Bonds have valuebecause they yield interest and are payable at a definite time instandard money. But paper money, lacking this basis for its value, hasanother basis in its money use, in its power to buy goods. The moneydemand in connection with the monopoly power of government over themoney supply, furnishes a satisfactory logical explanation of the valueof paper money.

2.The fiat-money advocates assert that government has unlimited powerto maintain the value of paper money by conferring upon it thelegal-tender quality. The meaning of fiat is "let there be," and thefiat-money advocates believe that the government has but to say, "let itbe money," to invest paper with value. The typical fiat advocates inthe[Pg 451] United States were the "Greenbackers," those voters who wished toretain the paper money issued in the Civil War, and to increase itsamount greatly. They saw in paper money an unlimited source of income tothe government. They proposed the payment of the national debt, thesupport of the government without taxes, and the loan of unlimited moneywithout interest to citizens. All might live in luxury if the extremefiat-money theorists could realize their dream. There are still somesurvivors of this faith in the power of the government fiat. Thedepreciation that has taken place in every case where government noteshave been issued, they declare to be due to a too mild enforcement ofthe law of legal tender. To them the fact that paper money may circulatefor a time at par appears a reason why it always should. They do notadmit that there is a saturation point in the use of money, and that itsuse is still further limited by the fear of larger issues. They do notsee that the ultimate basis of the value of paper money is economic,—isin its money use, not in the fiat of the government.

3.A sound theory of paper money makes it a special case of monopolyvalue. It has been seen that the power of almost every monopoly overprice is relative, not absolute. As the power of a great privatecorporation over the price of its product is limited, so is that of thegovernment over the value of political money. The money use is thesource of value to the paper notes. Business conditions remainingunchanged, the limit of possible issue without depreciation is thenumber of units in circulation before the paper money was issued, thesaturation point of full-weight and full-value coins. Becausegovernments generally have not stopped at that point, paper money hasdepreciated. Popular error and selfish interests force legislationbeyond the reasonable limit. In a few cases only have there been publicintegrity and courage enough to retrace the steps before great harmresulted. It is principally this lack of control that prevents papermoney from being a good circulating medium.

It is sometimes said that government cannot affect value in any way, butit can do so in many ways. Certainly one of the most remarkable is bythe use of its monopoly power over the medium of exchange, whereby itcan, under certain conditions, cause a piece of paper to have the valueof a piece of gold. Thereby at the same time it affects the interests ofnearly every member of society, raising or lowering the value of manykinds of property, and of many incomes.

CHAPTER 47

THE STANDARD OF DEFERRED PAYMENTS

§ I. FUNCTION OF THE STANDARD

1.The standard of deferred payments is the thing of value in which, bythe law or by contract, the amount of a debt is expressed. A credittransaction is a lengthened exchange; one party fulfils his part of thecontract, the other party promises to give an equivalent at a laterdate. The equivalent may be in any kind of goods; for example, in barterone may part with a horse on the promise of a cow to be received later;or a small horse on the promise of a large one; or a flock of sheep onthe promise of its return at the end of the year with a part of theincrease of the flock. A simple standard in which to express the debt isthe thing borrowed, as horse, sheep, wheat, house, etc. This involvesthe use of the renting contract. Again, the thing to which the value ofdebts is referred may be a thing quite different from the goodsborrowed, and with the growth of the money economy and the use of theinterest contract, money comes more and more to be used as the standard.The parties express the debt in terms of the standard unit establishedby law.

2.The importance of the standard of deferred payments increases withthe use of money and with the amount of outstanding debts. Until theuse of money develops, the use of credit is difficult and limited; itbecomes easy when the value of all things is expressed in terms of acommon circulating medium. If all business were done for cash therewould be no great interests affected when a change in the value of[Pg 454]money occurred. Every dollar would change in value in the hands of theholder, but there the effect would cease. But the volume of outstandingdebts expressed in terms of money now exceeds many fold the total valueof the circulating medium. The value of all these debts changes in thesame proportion as does that of the standard unit of money; when this ischeapened either by law or as a result of increasing supplies, acreditor to whom a thousand dollars are due loses the same as if he hada thousand metal dollars locked up in a strong chest.

Outstanding contract debts may be roughly divided into three classes:short-time loans, running less than a year; medium-time, running fromone to five years; long-time, running over five years. Fluctuations arerarely rapid and great enough to affect appreciably the debtors andcreditors in the case of short-time loans. The results are greater inthe case of long-time loans, such as national, state, and city debts,bonds of corporations, mortgages given by farmers on their land or byowners of city real estate. A multitude of interests are affected by achange in the value of money. When, as in the years 1873-96, money gainsin purchasing power (prices fall) receivers of fixed incomes aregainers. When, as in the years 1896-1903, the value of money falls, therevenues from educational and charitable endowments, the salaries ofpublic officials, and all fixed incomes, lose purchasing power. In acapitalistic age, therefore, almost every individual is affected in someway by a change in the value of money. In most cases the change escapesrecognition; people do not trace out the relation that an industrialchange bears to their own interests. In a few notable cases, however,the change has been revolutionary as in the period following thediscovery of America, when the feudal dues had come to be expressed interms of money instead of labor services. In modern times, the mass ofdebts being greater than ever before, such changes as those followingthe discovery of gold in California or the decrease in gold[Pg 455] productionbetween 1873 and 1890 have the gravest economic results.

3.The best standards of deferred payments available—the preciousmetals, gold and silver—are still imperfect. The good that is mostconvenient as a standard of deferred payments is the one used as money.Gold to-day is constantly expressing the value of all other things.Borrowers prefer to make loans in the form of the general medium ofexchange. From the usage of speaking of all things in terms of money,the false idea arises that the value of other things changes, but thatthe value of gold is always the same. Money is no such a fixed objectivestandard as a foot-rule or a pound weight. The value of gold rests onthe estimates made by men, and is constantly changing according toconditions. A fixed objective standard of value is not possible ofattainment. The value of the precious metals is stable as compared withmost things. The current new supply is comparatively regular. Forgenerations at a time there may be no radical changes in the output ofgold and silver. For centuries there was no change in the methods ofextraction. Recent inventions, however, have considerably altered theseconditions. The nature of the use of gold and silver, likewise, is suchas to make the demand for them, under ordinary conditions, most stable.The precious metals are but slowly worn out; only a portion of theannual output is used in the arts; there is, therefore, a largereservoir into which flows steadily a small stream; the existing stockis twenty or thirty times the annual output. Yet the value of thestandard metals is never quite stable, and sometimes several influencescombine, as in the last century, to affect their value greatly andsuddenly.

4.Various ideals for a standard of deferred payments have beensuggested—as return of equal enjoyment, of equal sacrifice, socialexpediency; and various standards—as labor, commodities, and thetabular standard. The ideal standard of deferred payments is one thatwill insure justice between borrower and lender. Different views havebeen taken as to what constitutes justice in this matter. The suggestionis attractive that the sum when returned should represent the sameamount of enjoyment as it did when it was borrowed. Such a standard isimpossible of realization in any general way, for men's circumstancesare constantly changing. To insure even to the average man the sameamount of enjoyment is only roughly possible. The same goods do notafford the same enjoyment when conditions have changed. Anothersuggestion is that the goods returned should represent the samesacrifice as those loaned. Here again the difficulty is in the lack ofan objective standard. Whose sacrifice? That of the lender, who may berich, or that of the borrower, who may be poor? Some have supposed theconditions of equal sacrifice were met by the labor standard, accordingto which the sum returned should purchase the same number of days oflabor as when borrowed. But what kind of labor is to be taken, that ofthe lender or that of the borrower, or that of some one else? Labor isof many different qualities, which can be exactly compared only throughtheir objective value in terms of some one good. The ideal of equalenjoyment has been supposed to be realized by the tabular standard,which consists of a number of leading commodities in fixed proportions.The money returned is to be enough to purchase the same goods at theexpiration as at the making of the loan, and thus may be a larger orsmaller sum than was borrowed. While this does not, as is sometimesclaimed, insure equality of enjoyment, it averages the fluctuations ofmany goods, and thus prevents great extremes. This standard has beenfavored by notable monetary authorities, but the difficulties of itspractical application are prohibitive.

It must be recognized that any possible concrete standard of deferredpayments will sometimes work hardship to individuals. The best averageresults for justice and social welfare will be secured by measuringdebts in goods that[Pg 457] change least often, least rapidly, and in the leastunpredictable manner. Gold thus far has proved itself worthy to serve asthe standard.

§ II. INTERNATIONAL BIMETALLISM

1.The fall of prices in 1873 and the following years meant a greatchange in the standard of deferred payments. The monetary changesfollowing the discovery of America were due to the inflow to Europe ofgreat quantities of silver taken by force from the native Americanrulers, and from the rich mines. Silver, at that time throughout Europethe main standard of deferred payments, was thus greatly lowered invalue. This change lightened all outstanding obligations, lowered themoney rents of the peasants, and the customary dues of labor whereverthey had come to be expressed in money form. By the third quarter of thenineteenth century gold had become in Europe and America the mainstandard, though silver still served as such in some countries. Theoutput of gold in 1849-57 caused the greatest money inflation that hasoccurred since the sixteenth century, favoring in a similar manner thedebtor classes. The substitution of gold for silver by some countries atthat time, by making a great additional market for gold, helped in somedegree to check the fall in its value.

The decline in the output of gold was a change of the oppositecharacter, causing a fall of prices and increasing the burden of debts.From 1873 to 1896 there was almost constant decline of the prosperity ofthe agricultural classes, due in part to this money influence, but inpart to influences which cannot be dwelt upon here, as they had nothingto do with the money question. There was complaint, agitation, anddemand for relief on the part of many interests in France, Germany,England, and the United States.

2.Bimetallism, the use of two metals as standard moneys, was theremedy proposed. Bimetallism is legally complete[Pg 458] when both metals areadmitted to the mints for free coinage at an established ratio ofweight; it is halting or limping when one of the metals is not freelycoined. Bimetallism may be legally authorized, but not actually working.As soon as the legal ratio varies appreciably from the market value,only one of the metals will in fact be brought to the mint. Nationalbimetallism is confined to a single country, as that in the UnitedStates before the Civil War, or in France before 1867. Internationalbimetallism is an agreement among several nations to use two metals onthe same terms, the only case in history being that of the Latin Union,which included France, Italy, Switzerland, and other countries. Thediscussion of international bimetallism in recent years has been on theproposal to make a much larger league of states than the Latin Union,embracing all the leading countries.

3.The main object of international bimetallism is to prevent thefluctuations of the standard of deferred payments. Commercial dealingsbetween gold-using and silver-using countries are of great magnitude,and the use of different standards leads to many difficulties.Fluctuations in the ratio of the two metals occasion much uncertaintyand loss to individual traders. The rise in the value of gold meant anincrease in the burden of the public debts of silver-using countrieswhich collect their revenues in silver, but which must pay their debts,principal and interest, in gold.

The theory of bimetallism is that the government can act on the value ofthe two metals through the principle of substitution. The metal tendingto become dearer will not be coined, the other will be coined in greaterquantities. The degree of influence that can thus be exerted on thevalue of the two metals depends on the size of the reservoir of themetal that is rising in price. When it all leaves circulation, the lawon the statute book permitting it to be coined becomes a mere soundingphrase. In such a case there is bimetallismde jure, but monometallismde facto. The greater the league[Pg 459] of states, the greater is thelikelihood that the scheme will work. The economic theory of bimetallismwas recognized by a majority of economists to be abstractly sound, butthe political difficulties in the way of international agreements aregreat, and have proved to be insurmountable.

§ III. THE FREE-SILVER MOVEMENT IN AMERICA

1.International bimetallism, despite many efforts, failed ofadoption. This brief proposition sums up the history of the movement,from 1878 to 1892, to form a league of states and an agreement forinternational bimetallism. International conferences were held, andtaken part in by the leading financiers of the world. France at firstfavored the policy, and the United States was always foremost inadvocating it, while England in the main was opposed. Some of theadvocates of bimetallism argued that the fall of prices was due notalone to economic forces, but also to a money conspiracy which hadinfluenced legislation to introduce and continue the gold standard.This, of course, was strenuously denied. It is true that the commercialclasses found gold the form of money most suitable to large business,and no doubt class interests entered into the question in some measure.The difficulties of the debtor class in America were peculiarly great,owing to the inflated paper currency, from 1862 to 1879, which had madeour conditions quite abnormal. In the period of speculation followingthe Civil War an enormous mass of debts had been accumulated. The hopesof thousands of tillers of the soil suffering from a fall in prices, andof the great debtor class, clamoring for relief, were centered upon thesuccess of this movement. Banking and other large business interests ingeneral opposed it.

2.The plan of the free-silver advocates was to legalize nationalbimetallism in the United States at a ratio between gold and silver verydifferent from the market ratio. Gold had become, long before 1860, thereal standard of our[Pg 460] money system, and after 1873 it was the only metaladmitted to free coinage. Silver, little by little, was losingpurchasing power in terms of gold, until from being worth, in 1873, onesixteenth as much, ounce for ounce, it became, in 1896, worth but onethirtieth as much as gold. It must be recognized that the power ofsilver to purchase general commodities fell much less than the change inits ratio to gold would indicate, gold having risen in terms of mostother goods as well as of silver. Nevertheless, the proposal to open themints to free silver at sixteen to one in the year 1896 meant a suddenand marked cheapening of money. The prime purpose was to lighten theburden of debts by making the standard of deferred payments cheaper. Itwas at first a debtors' movement, but to succeed it had to enlist thesupport of other large classes of voters. And thus, by force ofpolitical necessity, but doubtless in large part naïvely, it developedinto the more sweeping theory that wages, welfare, and prosperity calledfor a larger supply of money independently of the effect on debts.

In its extreme form the free-silver plan was a fiat scheme, for some ofits supporters believed that by the mere passage of the law the twometals could be made to bear to each other any ratio desired. But itsmost intelligent and high-minded advocates (who were moved to itssupport by a sincere sympathy and concern for the distressedagriculturalists) recognized fully that the force of the law was limitedby economic conditions. The extreme opponents of the plan, ignoring theevident fact that the adoption of a metal as a standard money is one ofthe most essential of the market conditions, denied that governmentaction could in any way affect the value. Most of the argumentspresented on either side in the political campaigns showed littleevidence of a sound theory of money. The victory of the gold standard in1896 and 1900, it would seem, was due more to the well-founded fear thata sudden change of the money standard would cause a panic, than to athorough understanding of the question.

3.The increase of the gold output has for the present checked the fallof prices. Before 1890, for a number of years, the average output ofgold was shrinking till it reached a scant hundred million per year. Atthe same time, nations which recently had gone over to the gold standardwere striving to secure large stocks for their banks and generalcirculation, and those great reservoirs, as a result, became betterfilled than they ever were before. After the opening of newgold-yielding territory in South Africa and in the Klondike, the annualoutput of gold became greater than it had ever been, being at theopening of the South African War in 1898 nearly three times that of tenyears earlier. The present methods of extracting gold resemble those offifty years ago as civilized industry resembles that of savages.Intricate machinery has taken the place of crude tools, chemicalprocesses have been introduced, and the principal product results fromthe regular and certain working of deep mines rather than from chancesurface discoveries. Great masses of debris can now be reworkedprofitably. In many parts of the world are enormous deposits oflow-grade ores, before useless, that can be worked economically bypresent methods. For a generation at least the world's supply of gold islikely to continue larger than ever before in history, and prices interms of gold probably will rise.

Though no change seems likely or possible at the present time, thefree-silver advocate has been justified by events against those goldadvocates who said that the amount of money has nothing to do withprices. Prices have gone up as gold has increased. The free-silveradvocates have gotten what they wanted through a change for whichneither party can claim the credit. Yet the present situation isunsatisfactory and undeveloped. A standard better than a single metal,more stable than a single commodity, is desirable if it can be found.The money question must arise again and in a new form before many years.The difficulty has not been finally settled; it is but postponed.

CHAPTER 48

BANKING AND CREDIT

§ I. FUNCTIONS OF A BANK

1.A bank is a business whose income is derived chiefly from lendingits promises to pay. Banks have passed through many changes in the pastthree centuries. Originating on the street corner for exchange of money,they have evolved into great institutions of many forms, and performingmany functions. The definition seems paradoxical, but it expresses whatin modern thought is the essential feature of a bank: the lending of itscredit. A reserve of money is needed by the man of business. But for thebanks each man would have to keep his reserve in his own till. Exceptthe small sum needed for current uses, a bank can keep this reserve moreeconomically than individuals can. It has the advantages of largeproduction similar to those of a large factory. The process of lendingcredit is called deposit and discount. It grew out of the deposit ofactual money for safe keeping and the loaning to borrowers by the methodof discounting their notes. The term now has a somewhat differentmeaning, for a merchant may obtain a deposit to-day without putting anymoney in the bank. He gets the bank to discount his notes or collateralsecurity, and to enter the sum to his credit as a deposit. He becomes adepositor by borrowing, not by lending to the bank. The sum is under theborrower's control; he can check it out when he wishes; but he usuallykeeps a certain balance to his credit. The bank's gain is larger thanordinary interest, because it[Pg 463] gets a discount on the large sums left inits possession. The bank increases its funds also by attracting depositsfrom those who do not care to borrow.

2.Functions not essential to banking are ordinary money-lending,money-changing, exchange to distant points, safe deposit, and issue ofbank-notes. Banks often lend in the ordinary way, allowing borrowers todraw the money out at once, but this is not the business they prefer.Many individuals and corporations, such as endowed charities, colleges,insurance companies, lend great sums of their own money without therebypartaking in any degree of the peculiar character of banking.Money-changing (the exchange of coins of different countries) is done bybanks, but likewise by many other agencies not sharing the essentialbanking character. Foreign and domestic exchange is the issue andcashing of "drafts" for money payments between distant places. Mostbanks are well fitted to perform this function, but some banks do notundertake it, and it is performed also by some business houses that arenot banks. Safe deposit is the keeping of things to be returned inidentical form, as silverware, notes, and papers. By banks in smalltowns this is sometimes done freely, sometimes for a slight charge; butin large cities safe-deposit vaults are generally quite unconnected withbanks. Even bank-note issue is not essential to banking; most banks inthe United States issue no notes, others issue very few. All thesefunctions may be united under one management, but the essential bankingfunction is deposit and discount.

3.The income of banks is derived from discounts, interest on their owncapital, charges for exchange and collection, rents on investments, andprofit from the loan of their bank-notes. The income of banks is drawnfrom different sources, according to the size of the community, and thenature of the banks. While in the villages and smaller cities theyperform a number of functions, in the larger cities they usuallyspecialize in a far greater degree. Like every other enterprise,[Pg 464] a bankmust start in business with some paid-up capital as a guarantee ofcredit. Further security is afforded by the limited liability ofshareholders for losses, in proportion to their capital stock. The sameamount of money could be loaned with less trouble and more cheaplywithout starting a bank, but used as a banking capital a part of it canbe loaned while still serving to attract money deposits. Charges tosmaller customers for exchange are a source of income to some banks, butin many cases this service is freely performed for regular customers andbecomes a considerable expense. Banks make few investments in realestate or other physical property; it is, in fact, their duty to keepout of ordinary enterprises, but they are forced sometimes to take forunpaid debts things that have been held as security. Profits onbank-notes have at times been the main, possibly the sole, motive forstarting banks; but that is not the case to-day when the right of issueis so strictly limited.

4.Banks are productive economic agents performing important industrialservices. False ideas have long been entertained about the magic powerof banks to produce wealth from nothing. To many, banks are a mysterymuch like paper money. Their opponents sometimes have pictured them asvampires fattening on the blood of industry. That they have shown abusesat times is undeniable, but, like other economic agents, they are to bejudged by their net efficiency. The bank is a tool performing servicessimilar to those of money. For some purposes money is an awkward andcostly agent in comparison with banks. For remitting payments from NewYork to San Francisco or Hong Kong, money is a medieval device. Moneycan more safely be entrusted to a bank than to a strong chest in one'sown house. The man who refused to make use of banks in this day wouldisolate himself economically, and would soon find himself out of any butthe smallest business. He could no more get along without the banks thanwithout the post, the telegraph, or the telephone.

The gathering of loanable funds by the banks, making them available atonce, reduces hoarding, makes money move more rapidly, and creates acentral market between borrowers and lenders for the sale of credit.While not creating more physical wealth directly, it adds to theefficiency of wealth; it oils the bearings of the industrial machine. Toabolish banks would be to destroy labor-saving machinery. Banks performincidentally a further service in developing better business methods inthe community. In supplying credit to active business, banks areconstantly passing judgment on the collateral security presented to themand on the solidity of the enterprises that are seeking support. Theyenforce promptness and exactitude in business dealings.

Because in their public nature banks are very analogous to money, theyhave always been looked upon as properly subject to more supervisionthan most private business, and government has always exercised aconsiderable measure of control over them, sometimes for good, sometimesfor evil.

§ II. TYPICAL BANK MONEY

1.Typical bank money consists of notes issued by banks on the creditof their general assets, without special regulation by law. As no twoleading countries have quite the same system of bank-notes, the subjectis a difficult one. It is well to begin, therefore, with a clearconception of typical bank money, unregulated by government. Such a formof note is one with which few now living in the United States have hadany experience, as the present national bank-notes differ in essentialways from the typical form. Typical bank-notes are notes issued by banksas a means of loaning their credit. The borrower, instead of receiving acredit balance at the bank subject to check, gets notes which he handson to other men. These notes are returned for redemption to the issuingbank as soon as any one wishes specie in their stead. The limit of theissue of such notes[Pg 466] is the need of the community for that form ofmoney, and if they are promptly redeemed in gold on demand, they nevercan exceed that amount. A holder of a note (in the absence of specialregulations) has the same claim on the bank that a depositor has. As itis to the interest of the bank to keep in circulation as many notes aspossible, there is a temptation to abuse the power of note-issue, towhich many banks yielded in the period of so-called "wild-cat banking"before the Civil War.

2.Bank-notes are viewed by some as a form of commercial credit.Typical bank-notes are not legal tender, and every one has the legalright to take or refuse them as he pleases. It is therefore said by somethat bank-note issue is of no special concern to the state, that it cansafely be left to individual self-interest. It is said that if one haslittle faith in a note, he may refuse to accept it. But in reality everyone is compelled to take the money that is current. The average citizencannot know the credit of distant banks, and thus has not the same powerof judging wisely in taking bank-notes that he has in making deposits inthe bank of his own neighborhood. Between bank-notes and ordinarypromissory notes, there are other differences of a nature prettygenerally recognized. Bank-notes pass without endorsement and thusdepend on the credit of the bank alone, not like checks, on the creditof the person from whom received. They yield no interest to the holder.They are intended to be used as money and are so used. Thus they comenear to paper money in their nature, and the banks are near toexercising the right of coinage.

3.By others, bank-notes are considered to be almost identical withgovernment paper money. Some opponents of bank-note issue declare thatit is a usurpation of the prerogatives of government, and that no powerbut the sovereign state should issue money. While many in America to-dayhold this view, the comparison probably is false and strained. Typicalbank-notes, unlike inconvertible paper money, depend[Pg 467] for their value onthe credit of the bank, not on their legal-tender quality and onpolitical power. They must be redeemed on penalty of insolvency;government notes need not be, and yet will circulate at par if properlylimited.

While these differences mark off government paper money pretty sharplyfrom typical bank-notes, it must be noted that in many cases actualbank-note issues have been far from this typical form. In the days of"wild-cat" banking, bank-notes were issued in excess and fell below par,yet the man in a Western community who dared to ask the bank to redeemthe notes in specie was not only frowned on by the bank, but condemnedby the public, which felt that business was endangered by such a demand.Redemption on demand would have required a reduction of the amount ofmoney in circulation and would have caused a fall in prices. Inflationof the bank currency went on with results almost identical with thosefollowing an excessive issue of government paper money. Not formal lawbut public opinion made such bank-notes essentially political money.

4.The public nature of bank money has led to many forms of publicregulation of their issues. Bank-notes thus stand midway in theireconomic nature between political money and private notes, sharingsomething of the character of each. An extreme analogy in eitherdirection is misleading. It is of great social importance that thecirculating medium should be reliable. The least possible amount of thecitizen's energy and thought should be required to decide whether themoney is good or bad. Nevertheless, those opposed to state interferencein industry declare that if the citizen is not left to look out forhimself, the growth of stupidity will be encouraged; and they say thatit is no more essential for the state to guarantee the quality ofbank-notes than the quality of woolen cloth or of sugar. Few, however,take so extreme a view, and it is generally held that it is a functionof the state to insure in a greater or less degree the quality of themoney in circulation. The[Pg 468] actual bank-notes of the leading countriesare thus of many varieties. The Canadian notes are the most nearlytypical bank-notes issued to-day; those of Germany come next, whilethose of the United States have little of the typical character.

§ III. BANKS OF THE UNITED STATES TO-DAY

1.The three forms of banks in the United States are private, state,and national. Any one with a little capital may become a privatebanker. There are "curbstone brokers" in almost every town, and some ofthe great financial houses are private banks. But the law will not allowthis to go very far. Some states will not allow a man to put up a signannouncing himself as a banker unless he complies with certain bankinglaws. In some states even private banks are subjected to the sameinspection as the state banks and are required to make the same reportsto the state officials. State banks are those organized under specialstate banking laws. They are usually subject to inspection by state-bankcommissioners, must make regular reports, and are required to complywith certain rules as to their reserves, rates, and investments. In anycase they do not issue bank-notes, because the national laws now tax thenotes of state banks so heavily that they are unprofitable. Nationalbanks, the largest and most important portion of our banking system,were authorized by law in 1863, during the Civil War. They are subjectto stricter regulation and inspection than are other banks, and thatregulation is perhaps an advantage to them, as it strengthens publicconfidence in their stability. Yet this regulation does not insure thedepositors against loss, as some national banks fail every year. Theymay be organized with twenty-five thousand dollars capital in towns ofless than three thousand population, with fifty thousand dollars intowns of less than six thousand, with one hundred thousand dollars incities of less than fifty thousand, and with two hundred thousanddollars in larger cities.

2.Our national bank-notes have no essential mark of typical bankmoney. The one marked peculiarity of the national banks of the UnitedStates as compared with those of other countries, is their mode ofnote-issue. They perform all the other functions of banks, essential andunessential, and perform them well, but the issue of bank-notes isoptional with them, and some of them do not issue any bank-notes. Thelegal condition to their issue is that bonds of the United States shallbe purchased in the open market and deposited with the treasurer of theUnited States. Until 1900, notes might be issued only to ninety percent. of the value of the bonds deposited; but now they may be issued upto the par value of the bonds. The notes, being secured by the value ofthe bonds, rest on the credit of the government, not on the credit ofthe bank. These notes are not promptly sent back for redemption to thebanks issuing them, as is done with typical bank-notes. They maycirculate thousands of miles away from the bank that issued them, andfor years after that bank has gone out of business. They are not an"elastic currency" increasing or diminishing with the needs of business.The changes in their amount depend upon the chance of the banks to makemore or less in this way than by any other use of their capital, andthis in turn depends largely on the price of bonds and on the rate ofinterest they bear. From 1864 to 1870, fortunes were made from thissource, but in recent years there has been little opportunity of gainfrom note-issues. Our present bank-note issues are not on a logicalbasis, and satisfy no one entirely. They are of importance neither tothe bank, to which they afford little or no profit, nor to the public,for which they do a service equally well done by silver certificates,greenbacks, or coins.

Along with the discussion of the currency has gone, since 1896, avigorous discussion of the banking system. The two problems are soclosely related that a change in the one suggests readjustment of theother. One extreme plan is to[Pg 470] abolish bank-notes entirely and toreplace them with additional issues of greenbacks; the other extremeplan is to authorize the issue of almost typical bank-notes. Amodification of the Canadian banking system, which has great merits, isheld up for imitation. Bills have been repeatedly before Congressauthorizing the maintenance of a general guarantee fund with which thenotes of failed banks could be redeemed, and at the same timeauthorizing branch banks such as those in Canada. Public sentiment hasnever strongly favored this plan, however, and there is more likelihoodof the passage of a bill providing for emergency notes in time offinancial stress, after the plan followed in Germany.

That the control of banking is an important duty of government is theconclusion of the practical world. The various banking systems of theleading countries embody different plans for the one purpose of theadequate control of banking in the public interest. Government controlof bank-notes is felt to be of the same nature as factory inspection,that is, to be a protective measure. When public interests are at stakeand private interests conflict with them, government acts to forbid onecitizen from doing harm, and to protect other citizens from injury.

CHAPTER 49

TAXATION IN ITS RELATION TO VALUE

§ I. PURPOSES OF TAXATION

1.Provision for the expense of organized government is the fundamentalpurpose of taxation. Taxation may be defined as the taking by thegovernment of private property for public uses. This implies a certaindegree of compulsion. When the national government accepts ten milliondollars in trust for the Carnegie Institution, it is not taxation,though wealth is given for public uses. The effects of taxation pervadeall industrial affairs, but they will be discussed here only in relationto the value of goods and to the distribution of incomes. By taxationthe government interferes with the individual's free choice and with theimpersonal economic forces. It expends income in different ways fromthose which would be chosen by the individual.

The primary purpose of taxation is public defense. War often has drivenmen into closer social relations. Public defense requires sacrifice onthe part of the family and of the individual. In family or patriarchalcommunities all share a common income and combine in the common defense,but self-preservation compels such small communities to form a larger,stronger state for the common defense. Personal service in the fieldgives place to money taxes permitting a more regular, continuing, andperfect organization of military forces.

Next comes the need of civil government to insure domestic tranquillity.As political unity grows, the citizens need less[Pg 472] often protectionagainst foreign foes, and they need more often, relatively, defenseagainst the aggressions of some of their own countrymen. Thepreservation of domestic order requires police, courts of justice, andother agencies. The ideal of the anarchist to do without government isnowhere realized. Everywhere there must be government to preserve peaceand to protect property. Unfortunately, this need grows with the growingdensity of population. Crime increases when men swarm in great cities.To maintain and operate the social machinery requires ever-increasingresources. The courts which settle disputes between men, and whichinterpret their contracts, are agencies of peace, displacing physicalcontests. Many other public expenses tend to enlarge, as those forlegislative bodies, public buildings, statistical inquiries, theprinting of public documents. Government on these accounts has become inmodern times an increasingly costly institution.

2.The promotion of the social and industrial welfare of society hascome to be an important purpose of taxation. Some functions ofgovernment, less essential than the primary ones just mentioned, seemnaturally to grow out of them. In a democratic society, populareducation is one of the necessary conditions of good government, as itappears that domestic order is not possible in a democratic statewithout intelligent citizens. Step by step the functions of governmentare widened. Some industrial functions are performed by the governmentin connection with the primary needs. Lighthouses are necessary to guidethe navy, but they also serve to guide the merchant marine and to aidindustry. The post was established as an agent of political and militarygovernment to connect the ruler with the outposts (a fact the name postindicates), but the postal service has grown in every country to be agreat industrial and social agency. The consular service, beginning inthe political need of keeping official representatives in foreign lands,has grown to be a great economic agency. Consuls are[Pg 473] commercialtravelers, advancing the trade-interests of their countries in allquarters of the globe. These social and industrial functions have beenincreasing of late. As the national and local governments engage more inindustry, they usually make larger demands in the shape of taxation.

It is along the border-line between the primary and the secondarypurposes of taxation that the contest goes on regarding the properfunctions of government. If they are to stop short of the extreme ofsocialism, where shall the line be drawn? The movement has been of latetoward greater government activity; more of the wants of men are thussupplied through the agency of the state. That year by year a greatersum is taken by taxation and spent for the citizen is a fact that may berecognized without debate here. The toll-road becomes a public road, thetoll-bridge becomes free, more is supplied by taxation for schools, foradvanced research, and for technical training. In our country greatwealth was given by the Morrill Act to scientific and technical schools.The state universities, against much opposition, have become in manystates of the Union the dominant educational force. Moreover, taxationoften is used as a means not merely of raising revenue, but ofdiscouraging one kind of industry and encouraging another. One industrywanes or dies under increasing burdens, another waxes strong byfostering exemptions and bounties. A large share of this "protectivelegislation" is done under the guise of taxation.

3.Shifting of the limits of state action and corresponding changes inthe weight of taxation are constantly affecting value and incomes.Society as a whole is made up of many groups of industry. Government isthe largest of these, collecting and expending more than any individualor corporation. Government is in one aspect a consumption good. Inreturn for its collective cost men collectively get the enjoyment ofsocial organization, markedly in contrast with the uncertain ties andhazards of primitive communities. But[Pg 474] government becomes also a mode ofsocial investment, an indirect agent, a productive enterprise. Wealthapplied through it secures a greater product than is possible byindividual action. Government can maintain lighthouses more economicallythan individuals could otherwise secure them.

But when the government undertakes these various tasks, the expensefalls unequally on individuals and affects differently their incomes.When free schools take the place of private schools, the law compelsevery one to contribute to education. To many individuals it is a matterof indifference whether they pay tuition or taxes, but the wealthybachelor sometimes grumbles when forced to help in educating theday-laborer's family of twelve. The average result may be right, butindividuals diverge from the average and thus have constantly a motiveto attempt to change the limits of governmental action. Happily thesubject is not always viewed with selfish eyes. The ethical andpatriotic thought is not, "How will this affect my interests?" but, "Howwill it affect the general interests?" But as the question of value isalways involved, men are usually found favoring or opposing a measure oftaxation according as it affects their own income. Thus taxation isinevitably an economic question.

§ II. FORMS OF TAXATION

1.Taxes usually are a portion taken from the income arising from laboror from wealth. In rare cases more than the net income of wealth may betaken, but the aim of taxation in general is to take only a portion ofthe income for public uses. As economic income has many sources, it maybe intercepted at many different points, and taxation may take variousforms. First, private income may be appropriated by a tax on income.This is the simplest in thought, but the administrative difficulties ofthe income-tax[Pg 475] are great in practice. It is not easy to determine themoney value of the various sources of enjoyment that come into a man'spossession in the course of a year, including, as the ideal requires,the immaterial gratifications along with the material. A second form isa tax on property in proportion to value. Since the value of materialwealth is the capitalization of the rentals at the prevailing rate ofinterest, the property tax, so far as it applies to material wealth,should take an approximately equal proportion of incomes. If it wereaccurately assessed, it would be in some respects better than a tax onactual rents, for it reaches the prospective, or speculative, rental. Athird form of tax is one on consumption, or expenditure. This is butanother mode of attacking income, for in the long run income is spent,not always by the individual who earned it, but by some one, and thus itis reached by a tax on expenditure. The principal consumption taxes inthe United States are the tariff duties and the internal revenues of thenational government. In time of war, internal revenues are extended inthe United States to a multitude of articles, but usually they arelimited (with minor exceptions) to liquor and tobacco. A fourth form oftax is one on selected agencies of industry; such are business taxes,licenses, taxes on investment in business, corporation taxes, etc. Theseburdens are diffused and rest eventually on some income, not alwaysexactly ascertainable. Actual tax systems combine these forms in greatvariety, subtracting many minute fractions from each citizen's income inways unsuspected by him.

2.The immediate effect of a change in the form of taxation is a changein the market value of goods. If the new tax reduces the net rent ofany productive agent, it reduces likewise its value, which is but thecapitalization of its net rental. If taxes are taken off of factoriesand put upon farm rents, factories rise and farm-land falls in value.The immediate change in value is much greater than the annual[Pg 476] tax, forif five dollars is to be taken permanently from the annual rental of thefarm, nearly one hundred dollars is taken at once from its sellingvalue.

Taxes are reckoned by enterprisers as a part of the cost of productionwhenever the conditions of competition and of substitution make itpossible to do so. In such a case the products rise in price and most ofthe tax falls upon the consumers. In the Civil War an increase in thetax on whisky increased its selling price, and distillers who ownedstocks on which a smaller tax had already been paid reaped profits ofmillions of dollars. When recently the tax on tea was increased inEngland, all dealers who had accumulated a stock before the law wentinto effect were gainers. Every change in taxation inevitably affects,either favorably or unfavorably, many interests. The chance toanticipate a change in tax laws or to get, from those in power,information of a proposed change, makes speculation possible andpolitical corruption profitable.

3.After every change in taxation, competition among bargainers goes onand a new equilibrium of prices results. The citizen who pays a taxinto the public treasury is not always the one whose income is reducedin the long run. In most cases the final and regular burden of the taxis distributed over a number of incomes. The passing on of the burden iscalled the shifting of the tax; the location of the final burden iscalled the incidence of the tax. The lawmaker cannot tell exactly wherethe weight will fall. The principles of value give some guidance in theinquiry, but the workings of the principle are difficult to follow.Certain it is that the new tax, both in its collection and in itsexpenditure, becomes a new influence in industry. Some occupations aremade more attractive, others less so. Some places are made more, othersless, desirable to live in. As property thus fluctuates in value, asinvestments become more or less remunerative, the market price ofcorporation stocks rises and falls. The rate of adjustment variesgreatly[Pg 477] under different conditions. The inflow and the outflow of laborand capital are more or less rapid in the various industries.

The fact that a change in taxation is a disturbing element in price isnot to be thought insignificant merely because "all comes out right inthe end." Every change in taxation is an element of uncertainty inbusiness and increases the fortunes of some men at the expense ofothers. Hence no considerable change should be made without good reasonsin its favor. The older taxes have the virtue of stability, but in manycases they have grown out of harmony with the industrial conditions.While, therefore, from time to time there is a real need of a reform inthe tax system, it should not be undertaken without recognizing the manyand complex interests involved.

§ III. PRINCIPLES AND PRACTICE

1.Taxation should be adjusted with reference to the general socialinterest. Many standards have been suggested to measure thedistribution of the burden of taxation, such as benefit, equality, andability. Each of these terms is capable of various interpretations whichhave changed from time to time. The benefit derived by any citizen frommost of the public services evidently cannot be measured with exactness.The standard of equality cannot be applied in any literal sense tostrong and weak, to rich and poor. It is possible, however, to interpretequality with reference not to objective goods, but to the psychicsacrifice occasioned by taxation. Ability thus is of many kinds and maybe differently understood. Some think ability to bear taxation is "inexact proportion to the money income"; others believe that it increasesat a greater rate than money income, and favor, therefore, progressivetaxation, that is, higher rates on the larger incomes.

The conflicting interests of the classes in each period are to somedegree softened by the social conscience, and taxes are adjustedaccording to a vaguely held ideal of the social welfare. Socialexpediency, more or less broadly interpreted, determines who shall betaxed and what will give the best social results. The exemptions fromtaxation in feudal times were great, and viewed from our standpoint wereinequitable, for it was the upper classes who escaped while the peasantsbore all the burdens. The landlords and nobility who were assumed to beperforming important social functions, often had outgrown theirusefulness. Exemptions are granted liberally in most states to-day forsome purposes and to some classes of citizens; to educational,religious, and charitable institutions; to the homes of priests andministers; to homesteads purchased with pension money, etc. Californiaalone of all the states in the Union continued until 1903 to taxchurches and private schools. The social interest requires that taxes beboth elastic and productive, so that the needs of the government shallbe amply provided for. The harmonizing of these needs in the laws oftaxation requires a high degree of wisdom, of foresight, and ofintegrity, in the legislator and in the citizen. No hard-and-fast rulefor the apportioning of taxes can be laid down. The decision must bemade in each generation by social opinion, guided by the socialconscience.

2.The administration of taxation should be economical, certain, anduniform. Whatever taxes are adopted, whether on property or income,whether at a proportional or a progressive rate, their justice andexpediency depend largely on their administration. Principle andpractice in this as in most affairs may go far apart. Some laws are moreeasily and economically executed than others. The time of collectionshould be as convenient as possible for the citizen, and the mode ofpayment should be the most simple. As to the time, method of payment,and amount, the utmost certainty is desirable. Taxation that isvariable, shifting, dependent on personal whim and favoritism, isdespotism. Above all,[Pg 479] the administration of the law should be uniformand impartial,—yet this is a principle most frequently departed from inpractice. The assessment of taxes has to be intrusted to men withfallible judgment, imperfect knowledge, and selfish interests. Theassessor is as near a despot as any agent of popular government to-day.Not infrequently it is to men incapable of earning two dollars a day inany private business that the power is given of passing judgment on thevalue of millions of dollars' worth of property. Under thecircumstances, evils are to be expected and they occur. The smallproperty-owner often is crushed under the unequal assessment while thelarge owner comes lightly off. Political friends are favored, politicalfoes are made to suffer. Woman nearly everywhere pays more than her fairshare of taxes, a fact that the advocates of woman suffrage do not failto urge as an argument for their cause, although women's disadvantage inthis matter is little greater than that of any man without specialpolitical influence.

3.The relation of taxation to private incomes makes it one of thelargest public questions of the day. The discussion of taxation hasaccompanied the growth of free government in England and America fromthe time of Magna Charta. The control of the public purse frequently wasthe occasion of conflict between the monarch and the people. Taxationwas a leading issue in the American Revolution. While, therefore, itcannot be said that the subject has been of no great importance in thepast, it is true that in our own national history since the adoption ofthe Constitution, taxation has not been much discussed, except in theone aspect of the tariff. Constitutional and political questions, statesrights, and the question of slavery, long absorbed the interest ofcitizens and legislators. But with the aroused interest of the public ineconomic problems, taxation is attracting, and is certain to attract inthe next few years, increasing attention in local, commonwealth, andnational politics.

CHAPTER 50

THE GENERAL THEORY OF INTERNATIONAL TRADE

§ I. INTERNATIONAL TRADE AS A CASE OF EXCHANGE

1.International trade is exchange between individual men, and has thesame object as other exchange of goods. The term international tradeshould not be misunderstood as meaning that nations rather thanindividuals engage in it. International trade differs from domestictrade only in the fact that the parties are citizens of differentsovereign states. Exchanges between men in the same village, betweenthose in neighboring villages, and between those in different countries,are prompted by essentially the same economic motive—the wish toincrease the want-gratifying power of goods. In every such case bothparties gain or think they are gaining. In international trade there isthe same chance for mistake as in domestic trade, but no more. In asingle transaction in either domestic or foreign trade one party may becheated, but the continuance of trade relations is dependent oncontinued benefits. The once generally accepted maxim that the gain ofone in trade is the loss of another, is rarely applied now except tointernational trade. The starting point for the consideration of thissubject is in this proposition: Foreign trade is carried on byindividuals, for individual gain, with the same motives and for the samebenefits as are found in other trade.

2.As commerce has grown, the territorial division of labor hascorrespondingly increased. Although economic[Pg 481] motives have hadinfluence in political affairs and have helped to determine politicalgroupings and the limits of modern nations, there is to-day no veryclose correspondence between political and economic boundary lines. Bothindustrial and political conditions have changed so rapidly that thelines often have tended to diverge rather than to agree. It is commonfor two portions of a nation to exchange far less than do two portionsof entirely different nations. The great territorial divisions ofindustry are determined first and mainly by differences of climate,soil, and natural resources. Thus trade arises easily between north andsouth, between warm and frigid climes, between new countries and old,between regions sparsely and regions densely populated. Foreign tradewith distant lands is as old as history. In medieval times the luxuriesof the temperate zone were mostly articles produced in the tropics.Political divisions usually have not been large enough to embrace widelyvaried soils and climates, the Roman Empire being an exception in markedcontrast with the comparatively small political units of the MiddleAges. Before modern methods of transportation, a large free federalstate like our republic was impossible. As in recent centuries the largepolitical units have been formed, the question has arisen, Shall thepolitical boundary be likewise the economic boundary marking the limitsof trade? The firm constitutional Union of the American states arose outof difficulties with regard to trade. The German Zollverein, theforerunner of the modern German Empire, had a similar origin. TheAustralian Federation consummated within the last few years has grownout of the need of adjusting tariffs and tariff boundaries. These largerpolitical units containing such varied resources can in larger measure,but never completely, become independent of the rest of the world ifthey will.

Territorial division of trade is determined secondly by differences inthe accumulation of wealth, in the development[Pg 482] of capital, ofinvention, and of organization, in the degree of intelligence of theworkers, and in the grade of civilization. It is mainly trade due tothis second group of causes, and carried on between old and newcountries of about the same latitude, that is the subject of discussionin economic treatises on international trade.

3.The doctrine of comparative costs is that relative, not absolute,advantages of production determine for a country the benefits ofinternational trade. The free-trade question in any country is whetherit is for its interests as a whole to permit trade between its citizensand the citizens of other countries. The question appears especiallydifficult where both countries have natural resources of about the samecharacter (as iron and coal in the case of England and America), andwhere, therefore, both can produce the things that are exchanged. IfAmerican labor can produce as much iron in a day as English labor,—ormore,—is it not foolish and wasteful, it is asked, not to produce thatwealth? Now, exactly the same case is presented in simple neighborhoodexchanges. The merchant may be able to keep his books better than doesthe bookkeeper whom he employs. The proprietor may be able to sweep outthe store better than the cheap boy does it. The carpenter may be ableto raise better vegetables than can the gardener from whom he purchases,and yet the merchant and the carpenter do not quit their better-payingwork and turn to clerking or to raising vegetables.

It often happens that both countries can technically produce both thearticles that are internationally exchanged. It may frequently happenthat one of the two countries has an advantage in amount of sacrificeand effort, as to both articles; but if the advantage is greater in onearticle than in the other, the foreigners, like the low-paid clerk, willbe willing to exchange at a ratio that will make it profitable tospecialize in the product wherein the greater superiority lies.Therefore not the advantage as to a single product, enjoyed by onecountry over the other is most important[Pg 483] in determining whether toproduce at home or to exchange, but the comparative advantages enjoyedin the production of the two articles in question.

It must be remembered that comparative cost as here used refers to costin effort, not to money cost,—a point on which there is oftenconfusion. The money cost of a certain product is often greater in a newcountry because wages are high, and wages are high just because psychiccost is low, that is, because labor can produce so much. At the time ofthe great gold discoveries in 1849-50, the price of goods in Californiawas much higher than in the East, and much higher in Australia than inEurope. A day's labor doubtless would produce as much food in Australiaand in California as in New England and in Norway, but it produced farmore gold. Hence butter and cheese were shipped by long routes fromNorway to Australia and from New England around Cape Horn to California,to be exchanged for gold. One of the standing arguments against foreigntrade is based on the idea that a country cannot profitably import goodsunless it is at an absolute disadvantage in their production. It isdeclared that as our country can produce these goods "as well" asforeign countries (meaning with as few days' labor), there is a loss onevery unit imported.

4.The equation of international exchange is that adjustment of priceswhich results in the equalizing of the imports and exports of thecountry. The superiority of a new country over an old one is notequally great in every line of industry. It is almost certainly mostmarked in those enterprises where natural resources are employed. Tocompete with the older country in less favored industries, capital andlabor in the new are forced to take a lower rate than they can earn inthe more favored. Without any government supervision, therefore, butsimply through the choice of enterprisers seeking the best investment ofcapital, industries are developed in which the country is either mostmarkedly superior or least inferior to its neighbors.

If the productive energies of men interchanged between industries andbetween countries with perfect readiness, a perfect equilibrium ofadvantage would everywhere result. In every country, in everyoccupation, labor and capital of given quality and amount would receivethe same reward. But the interchange of labor and capital betweencountries is never without friction. Adam Smith said that "a man is ofall sorts of luggage the most difficult to be transported." The higherwages in a new country are sufficient to attract constantly from theolder lands a portion of their labor supply; the higher rate of interestin the new countries attracts constant additions of capital; yet,despite these forces working toward equalization, the inequality mayremain and through the working of other influences even increase in thecourse of years.

The laborers, enterprisers, and investors in the one country are thus ina position of more or less enduring advantage relative to those of theother countries. The advantage is sometimes said to be a "monopoly"which they, or the country as a whole, enjoy; but in the absence of anycontractual limiting of competition, this is a misuse of the termmonopoly. This variation in the degree of scarcity of agents indifferent territories is not peculiar to nations as a whole. Differencesof the same nature exist between the Northern and the Southern states ofthe American Union, have continued for decades between Eastern andWestern states, and are found even between neighboring counties. Thedifferences between two countries, however, are likely to be moremarked, the circulation of factors being so active within a country thatit is allowable to speak broadly of prevailing national rates of wagesand of interest.

Every exchange of goods between the countries is made at a ratio thatreflects, or expresses, this abiding difference in comparative costs.The imports into the favored country represent regularly the results ofmore units of labor of a given grade than do the corresponding exports.The ratio[Pg 485] which expresses the disparity of advantage of productivefactors is called "the equation of international demand." This does notmean that the money value of the imports exceeds that of the exports, orvice versa. On the contrary, the equation itself embodies a maxim ofinternational trade that "in the long run," or "on the average," importsand exports must be equal in value (i.e., equation of demand). Thisbrings us to the theory of foreign exchanges, which is essential to anunderstanding of this feature of international trade.

§ II. THEORY OF FOREIGN EXCHANGES OF MONEY

1.Foreign exchange of money is the purchase and sale of the right toreceive a given kind and weight of metal at a specified time and place.Par of exchange is the number of units of the standard coin of onecountry that contain the same amount of fine gold (or silver) as thestandard coin of the other country. Usually the English pound is takenas the basis in the tables which express the ratio of the gold in thestandard coins of different countries. Thegold shipping point is parof exchange plus or minus the cost of moving the actual metal; it varieswith means of transportation and communication. The par of exchangebetween England and America being $4.866 and the cost of expressing andinsuring a gold pound between New York and London being approximately.03, the shipping point for the export of gold from New York is $4.896.At the upper and lower limits, there is a motive for shipping gold as acommodity. If each transaction were independent of all others, the costof exchange would be the weight of metal called for, plus grains enoughmore to pay for loss of interest, cost of freight, risk, and trouble. Insuch a case it would cost $4.896 to remit one pound; while a debt of onepound payable in London would at the same time be worth $4.836 to thecreditor in New York. When, in New York, a number of men having[Pg 486] billsto pay in London meet a number of owners of bills receivable in London,a market for London drafts is created and a rate of exchange resultssomewhere between the shipping points. In this is the explanation of thevariation of the rate, and of the facts that the cost of outwardexchange sometimes is less than the par of exchange and that the valueof foreign drafts sometimes is above par.

The balancing of foreign exchanges is of essentially the same nature asthe domestic cancelation of indebtedness. It is going on constantlybetween two merchants in the same town, between two banks in the sametown who represent groups of merchants, between men in neighboringtowns, between distant states like New York and California, and betweenthe trading nations of the world. The price of exchange to theindividual is reduced by the specializing of the business in the handsof a few dealers, permitting cancelation of indebtedness or offsettingof exchange, and greatly reducing the amount of bullion to betransported. Exchange varies above and below par as conditions change.When the movement of money is into the country, drafts on London arebought and sold for less than par, for every pound draft thus remittedto London reduces the need of shipping gold to this country, while everyLondon draft collected in New York at such a time increases the need toship gold.

2.International shipment of money is always just the amount needed tobalance the accounts due. The proposition that in the long run thevalue of imports must equal the value of exports, while the fundamentaltruth in the theory of international trade, must be understood in abroad sense. Into the balance between the traders of two nations entermany items: the cash values of the imports and exports of each;freights, insurance premiums, and commissions; the expense of Americanstraveling in foreign lands, and the cost of the foreign service of thisgovernment (such as the salaries of consuls and of diplomaticrepresentatives)[Pg 487] which count as the importation to America of anequivalent amount of food, clothing, and sundry services; subsidies andwar indemnities to foreign nations representing, as they do, anexpenditure, which at the moment may be paid in coin, but which, as isto be more fully explained, must be offset ultimately in some way byexports.

Many credit transactions affect the balance one way or another untilsettled. The loans made by European capital to the American governmentor to individuals and corporations in America, as well as the Europeancapital expended in purchasing American enterprises, require theremitting of gold to New York, and thus offset many imports of goods toNew York otherwise calling for the remitting of gold to London. In thedirection opposite to this, act the interest payments and the eventualrepayment of the principal loan, for these require either money or goodsto be exported from America to the value of the obligations. Loans thatrun for years thus offset annually (in their accruing interest) aportion of the exports of the debtor country. An excess of exports maytherefore at any given moment indicate either that the country is indebt or that it is getting out of debt. An excess of exports isgenerally looked upon as an evidence of national prosperity; but it isabsolutely inconclusive on the point. Finally, after all the items ofimports and credit paper purchased abroad are set opposite the items ofexports and promissory papers sold abroad, the balance is paid in goldbullion and is shipped one way or the other. Evidently the amount ofgold shipped is but a small fraction of the total volume oftransactions.

Industrial indebtedness is represented in various forms: bills of ladingfor goods shipped, drafts made by the creditor on his debtor for goodsshipped or property sold, checks or letters of credit of travelers,bonds and notes public and private. These are the objects dealt in bythe bankers who are the agents to carry on the work of exchange.

3.The territorial distribution of money is both a determined[Pg 488] and adetermining factor in international trade. It appears to be determinedin that the balance of all accounts for or against the country must besettled eventually in money. After any such a settlement one country hasless, the other more money than before. The change in the amount ofmoney at once reacts on prices and becomes a determining factor ininternational trade. The flow of money out of a country causes money totighten, interest rates on short loans in the large cities to stiffen,and prices slightly to fall. When prices fall, imports decline, as thecountry is not so good a place to sell in; when prices rise, importsincrease, as it is a better place to sell in. As the opposite effect isproduced on exports, there occurs immediately a change in the quantityof money which continues until the national credits and debits balanceand for a brief time remain in equilibrium. If the trade of a countrywith its neighbors continued long to give a balance of imports of goodsand of debit items (exclusive of money) it would ultimately be drainedof all its coin, and would default payment or cease to import. If thetrade constantly gave a balance of exports and credit items, money wouldcontinue to flow in, until prices rose to unexampled heights. In fact nosuch extreme is even remotely approached, for a slight movement of moneyin either direction at once influences prices and sets in motioncounteracting forces. Decade after decade the circulating medium ofleading countries changes only slightly in amount, and the fluctuationsduring periods of so-called "favorable balance of trade" and of"unfavorable balance of trade" represent only the smallest fraction ofthe value of goods passing through the ports of the country.

§ III. REAL BENEFITS OF FOREIGN TRADE

1.The direct advantages of foreign trade consist in the increasedefficiency it imparts to productive forces. In explanation of theadvantages of foreign trade it is said to be[Pg 489] a vent for surplusproduction and to give a wider market to what would otherwise go towaste. This involves the same fallacy as the "lump of labor," thedestruction of machinery, and the praise of luxury. If backward nationsnow give a vent for products which would otherwise rot in thewarehouses, at length a time will come when the world will have anenormous surplus unless neighboring planets can be successively annexed.Again it is said that the great purpose of foreign trade is to keepexports in excess of imports so that money may constantly increase inamount. The ideal of such theorists is an impossible condition where thecountry would constantly sell and never buy. In the commercial view thesole object of foreign trade is to afford a profit to the merchants,regardless of the welfare of the mass of the citizens.

The main advantage of foreign trade is the same as that of any otherexchange. It is hardly necessary to review the explanation here: theincreased efficiency of labor when it is applied in the way for whicheach country is best fitted; the liberation of productive forces for thebest uses; the development of special branches of industry withincreasing returns; the larger scale production with resulting greateruse of machinery and with increased chance of invention; the destructionof local monopolies.

The moral and intellectual gains of foreign commerce were formerly muchemphasized. Commerce is an agent of progress; it stimulates the arts andsciences; it creates bonds of common interest; it gives an understandingof foreign peoples and an appreciation of their merits; it raises acommercial and moral barrier to war; and it furthers the ideal of aworld federation, the brotherhood of man.

2.Free foreign trade thus has in its favor the presumption ofadvantage to the citizens; but various interests may be adverselyaffected. The general attitude of economic students for a century and ahalf has been favorable to a large measure of freedom in foreign trade.But the actual[Pg 490] practice of nations is opposed to the principles laiddown by the philosophers and accepted by nearly all serious students ofthe question. Germany adopted very restrictive measures under Bismarckin 1879 and by a recent law has discouraged trade still further. France,Italy, and other smaller nations of Europe have strong protectivetariffs. The United States has followed a restrictive policy for thelast century almost unvaryingly. The explanation of this contradictionis not entirely simple. Free trade is not the most desirable thing forevery one. Great interests are affected by foreign trade and certain ofthese interests are able to dominate legislation. The generalproposition of free trade between nations, as advocated by mosteconomists since Adam Smith, is rejected by a majority of the people, bythe politicians, and by the legislators.

CHAPTER 51

THE PROTECTIVE TARIFF

§ I. THE NATURE AND CLAIMS OF PROTECTION

1.A protective tariff is a schedule of import duties so arranged as togive appreciably more favorable conditions to some domestic industriesthan they would enjoy with free trade. Tariff duties were first laid toget revenues for the government. The first effect of the tariff is thesame as that of any tax that enters as a new factor into enterpriser'scost—the domestic price of the taxed article tends to rise. Otherresults then follow. If the article cannot be produced within thecountry (as oranges, spices, and coffee, in England, Norway, andSweden), its consumption is reduced. The lessening of demand may affectsomewhat the price in the producing country and may compel the foreignproducers to sell each unit for less than before. As such a tariff doesnot increase home production, it is for revenue, not for protection.

But if the article can be produced in the importing country at the newprice, "home industries" will start. If the whole demand at home is thussupplied, imports stop and therewith stop all revenues to the governmentfrom that source. This is a prohibitive or completely protective tariff.Most tariffs combine the characters both of revenue and protectivemeasures. Where the freight charges are low along the coast and on themain lines of transportation, some imports take place; while fartherinland, where freight charges are high, some home production of the samegoods takes place.[Pg 492] A tariff that reduces imports but does not cut themoff entirely is either a revenue tariff with incidental protection or aprotective tariff with incidental revenue. The difference is partly oneof legislative intention, partly one of degree only.

2.The tariff question has been the most discussed of economicquestions in American politics. The tariff bill passed by the firstsession of Congress in 1789 was primarily a revenue measure with ratesaveraging only about five per cent.; but incidentally it was protective(as most tariffs are), being laid on imports of iron and cloth, theproduction of which had been undertaken to some extent before, but whichthus were further encouraged. Between 1808 and 1812, the United Statesand England were in constant disagreement, and our government repeatedlylaid an embargo on British commerce, closing our ports to British ships,and British ports to our ships. The war from 1812 to 1815 almostannihilated American trade on the ocean. Added to this discouragement offoreign trade was the high tariff imposed, in the vain effort to getrevenue from greatly decreased imports. Altogether these causes almostcompletely stopped importation and forced the American people to rely ontheir own efforts for such goods. Some industries having been"stimulated" in a high degree, their destruction was threatened by therepeal of the high war tariffs. Many investments and interests were atstake, and the tariff became a most important question.

The first period of real discussion of the protective policy was between1816 and 1846. The result of the first twelve years was an increase ofthe tariff rates which, in 1828, reached a high point. By the compromiseof 1832, the rates were reduced by steps till 1841. Again from 1842 to1846 was a brief period of higher duties, followed by a policy which,relatively speaking, was one for revenue, from 1846 to 1860. Again inthe Civil War, 1861-65, the rates were steadily increased without muchdiscussion, the tariff not[Pg 493] being the leading question at a time whenthe prosecution of the war was absorbing nearly all attention.

The latest period of discussion was from 1874 to 1892. In the Tilden andHayes campaign of 1876 the tariff was made the leading issue and theadvocates of a lower tariff were very nearly successful. In 1880,protection again triumphed in the election of Garfield. In the electionof Cleveland in 1884, the issue of tariff reform had some part, but noeffective legislation on the subject was enacted in the next four years.In 1888, Cleveland was defeated in a campaign fought mainly on thetariff issue, and Harrison was elected as a pronounced protectionist. In1892, Cleveland was reëlected on the issue of tariff reform. From thattime, however, there has been a lull in the discussion of the tariffquestion. The campaign of 1892 was the last presidential election inwhich the tariff was the dominant issue. Since 1896, the money questionand imperialism have quite crowded the tariff issue off the stage.

3.A leading argument in favor of a protective tariff is that byencouraging an excess of exports it maintains a favorable balance oftrade. This notion of the favorable balance of trade appears in severalforms. One of these, already discussed in connection with foreignexchanges, is that the exports of a country in the form of merchandisemust exceed the imports if the country is to prosper. The idealcherished is to keep more merchandise constantly flowing out of thecountry than comes in. An interesting commentary on this delusion is thefact that this is the usual situation in poor debtor countries havingconstant interest payments to meet; while the opposite of the ideal isthe situation in rich creditor countries. England for many years in theperiod of her greatest prosperity has had a constant excess of imports,these being goods to the value of the interest payments due toEnglishmen from investments abroad.

4.Another argument is that the protective tariff keeps money at homewhich, if trade is free, will be sent abroad to[Pg 494] buy foreign goods, thusimpoverishing the country. This is the "favorable balance of trade"argument, with the emphasis on money rather than on goods. A superficialglance at the trade relations of an old and rich country with a newprovince seems to give evidence for such a belief. The older country islending capital (which it sends to the debtor country in the form ofgoods) and it has at the same time a larger supply of money. These twofacts—the lack of money and the poverty of the newer country—arelooked upon by the protectionist as due to the importation of goods. Thereal cause of the imports to the newer country and of its scantymoney-supply, it need hardly be said, is its comparative poverty. Europeand the United States, in their trade with China and South America, donot get gold in exchange, but merchandise of various sorts. It is truethat in the trade of England and New York with great gold-producingdistricts, such as California, South Africa, and Alaska, gold isreceived in return for merchandise, for to these districts gold ismerchandise and its export does not drain them of their supply. Thericher states in the Union do not drain the poorer states of money. Afew years ago the states of Kansas, Nebraska, Iowa, and their neighborswere filled with resentment against the money-lenders of the Easternstates. There was a widespread belief that hard times were due to aninsufficient currency. Attempted action took the form of the greenbackand free-silver movements, which were defeated by the opposition of theEast, but there can be little doubt that if the Federal Constitution hadnot forbidden it, the discontented states would have established aprotective tariff "to keep their money at home." Few advocates ofprotective tariffs are ready to admit that the money-supply of thecountry is dependent on the general wealth of the country, and on themethods of doing business, rather than on a protective tariff.

5.It is said that the tariff keeps "two profits" at home, foreigntrade gives but one. The word "profits" is here[Pg 495] used in the popularsense of gain from a single transaction. This argument becomes somewhatconfused, for certainly in the admission that there are "two profits" ina trade, the notion that "one man's gain is another's loss" is rejected.Both parties are said to profit and both profits are thought to besecured at home when two citizens are forced to trade with each other.There is an error in elementary arithmetic here, both as to the numberand as to the aggregate amount of profits. The purpose of a protectivetariff is to compeltwo of the citizens of a country to trade witheach other instead of trading withtwo citizens of a foreign state;the number of profits is therefore not increased by substitutingdomestic for foreign trade. What, then, as to the size and aggregateamount of the profits? The margin of advantage is not the same on allexchanges; the exchange is made if there is a margin to both parties, nomatter how small it is; but the generous "profit" on one transactionwhere the conditions of the two parties are very different may begreater than the total of petty margins on a dozen exchanges between twotraders of evenly matched powers. Can it safely be assumed that everytrade with a foreigner is less advantageous than one with afellow-citizen? Diamond cuts diamond, but two shrewd Yankees left tothemselves surely should not be worsted in bargains with the universe.If they could exchange to better advantage with each other they probablywould discover it as soon as the interested manufacturers and politicalorators who can prove so eloquently that they know the other man'sbusiness better than he knows it himself. Forcing the home trade isdoubtless to the advantage of one citizen, but it is not likely to be tothe advantage of both citizens.

6.The most effective popular argument for protection is that itraises, or maintains, the general scale of wages in the country. Thisargument is two-fold: first, when wages are low in a country it isclaimed that a tariff is needed to raise them; and, secondly, when wagesare high it is argued[Pg 496] that a tariff alone can preserve them. In Germanythe fear is of the higher paid and more efficient labor of England. InAmerica, where wages at all times have been higher than in England, itwas first argued that because of the greater cost of production, due tohigh wages, the tariff was needed to start certain industries; but afterthe tariff had long been established and the old argument had beenforgotten, it was said that the tariff was the cause of the high wagesand must be maintained to protect against the (so-called) "pauper" laborof the older countries. That wages generally are higher in new countriesand where a tariff prevails is always claimed to be one of the chieffruits of a protective policy. The cause of the high wages in Americaappears to be the productive efficiency of industry under existingconditions. Labor is surrounded here with advantages in the forms ofrich natural resources and of mechanical appliances such as never beforewere combined. Because of the scarcity of workers in particularprotected industries, wages may be higher in them than in some otherindustries; but such workers form a small fraction of the population.The claim that the general scale of wages in all occupations is raisedby the tariff protecting this fraction, is no less invalid than thesweeping claims in favor of trade-unions.

§ II. THE REASONABLE MEASURE OF JUSTIFICATION OF PROTECTION

1.For military and political reasons an otherwise uneconomic tariffmay be justified. It usually is admitted by the believers in free tradethat in the interest of diplomacy, to secure proper concessions, tariffsmay sometimes be levied. Even in England, where protective argumentslong have had little acceptance, Mr. Chamberlain, with his eye on atariff union and imperial federation of England and her colonies, hasbeen advocating this policy. In such a case there is no pretense thatthe justification of the tariff is[Pg 497] its immediate economic advantages;it is an expenditure for ultimate gain. By the same argument aprotective tariff is upheld as a means of defense—to encourage thebuilding of ships, arsenals, and factories for munitions. It is alwaysquestionable whether an outright expenditure would not be better,whether the government cannot build its own arsenals, ship-yards, etc.,more cheaply than it can foster private enterprise by means of a tariff.

2.Protection may be defended as encouraging infant industries and thusdiversifying the industries of the country. Most free-trade writersconcede a limited validity to this argument. If the natural resources ofa land are adapted to an industry, it may be called into being early bya fostering protective tariff. This is merely anticipating and hasteningthe natural order of progress. In the American colonies the manufacturesof iron, cloth, hats, ships, and furniture sprang up not only without"protection," but despite numerous harassing trade restrictions made inthe interest of the English merchants; and they continued in some casesdespite their absolute prohibition by Parliament. Can it be doubted thatmany of these industries would have developed and flourished in Americaunder no other fostering influences than those of rich resources and ofeconomy in freights? The growth of industries in the Middle West in thelast twenty-five years has been phenomenal. The discovery of natural gasand the presence of abundant coal, ore, and timber have enabled them todevelop without protection against the Eastern states. Industriescapable of eventual self-support must in most cases naturally appear indue time. Economic forces will bring them out. It is a trite but validremark that protective tariffs are often like hothouse culture,anticipating the season by a few weeks and at great cost. The questionis whether the mere possession of the hothouse is a luxury worth theprice, if meantime the products can be gotten more cheaply by exchange.English manufactures flourished because they were well established,[Pg 498] hadexcellent coal supplies, great stores of iron ore, and low-paid laborwhich did not have the opportunity of better alternatives, as did theAmerican workman. If America had importedmore (it would not have beenall) of her iron and coal, the English mines would have been exhaustedearlier, and America's advantage surely would have asserted itself intime. Her iron manufactures undoubtedly were hastened—they cannot trulybe said to have been created—by the protective tariff.

Industries are forced into an earlier diversification by tariffs. Thepeculiar advantages of a new country attract labor and enterprise into afew lines. Is it an evil? Contrast Iowa, Dakota, and Minnesota, orKansas, if you please, with New York and Pennsylvania. Is it so certainthat a dense population congested in cities and crowded in factories andmines is a more ideal social aggregation than is a community ofprosperous farmers? The smoky industrialism fostered by protection oftenputs a premium on a low grade of immigrant and keeps him an alien to theAmerican spirit. It would be surprising if Americanism on the Westernplains were not as good as in the Eastern cities. But theinfant-industry argument appeals strongly to the enterprise and thespeculative spirit of Americans, who like to do all things rapidly andon a large scale. Every village aspires to be a great industrial center.Americans are impatient of the suggestion that things "will come intime"; they like things to come at once.

3.The tariff develops a home market for the products of agriculture.It has been especially hard to reconcile the farmers in America to thetariff. While in England the protection that existed before 1846 wasalmost entirely for the benefit of the landholding interests, the tariffin America has been peculiarly favorable to manufactures. The"home-market" argument is the protectionist appeal that has proved mosteffective with the American farmers. This argument, which takes onseveral aspects, is akin to the[Pg 499] "two-profits" argument when it declaresthat the shipping of food to Europe and the importing of manufacturesinvolve a great cost for freight which could be saved by manufacturing"at home." Of course the farmer is supposed to pay this cost, althoughthere is nothing in the argument to show that it is not all paid by theEuropean, either the manufacturer or the food consumer. Home trade"saves the freights" for the farmer only in case he can buy goods undera tariff with less of his own labor and products than under free trade.The payment of freight charges is true economy when the goods can bebought at a distance on more favorable terms than near home. Thefreight-argument proves too much, for it condemns every exchange, withinthe country, of goods produced a stone's throw away from the consumer.

Again, the home-market argument dwells on the greater steadiness ofdomestic trade. War or political changes, it is said, may change thedemand for products. This is true, but no other changes have affectedAmerican agriculture so radically as the peaceful development ofdomestic transportation and the opening of the West.

The home-market argument is strongest when addressed, not to allfarmers, but to one class of farmers, those whose lands are situatednearer the manufacturing cities. The higher value taken on by land as itis converted from the extensive cultivation of corn and wheat todairying, fruit, and market-gardening, is pointed to as a benefit ofprotection. The decaying agriculture and deserted farms throughout thegreat industrial states during the past twenty-five years are patheticevidence that this benefit has failed to come to the average farmer justwhere it should be most expected. There is, however, a partial validityin the argument as applied to a comparatively small number of farmers,who gain as landholders, not as tillers of the soil.

4.The tariff may keep some of the natural resources of a new countryfrom becoming quickly exhausted. The export[Pg 500] of food takes out of thesoil and out of the country fertile qualities never to be returned. Theshipment of several hundred million dollars of food products year afteryear represents a tremendous drain from the soil of the United States.The assumption, however, that the use of the food in this country wouldpreserve the fertility of our own fields has been in the main mistaken.The fertile material in the food shipped for human consumption fivemiles away from the field is almost absolutely lost. Engineering skillhas as yet succeeded in saving hardly a fraction of the fertile organicmatter that flows into the sewers, that is dumped into river and ocean,and that is buried in heaps at the borders of our cities. On the otherhand, the increased use of iron, coal, and timber, as a result ofencouraging manufactures, has very effectually aided in exhausting thenatural resources of the country.

5.A new country has a limited potential monopoly in certain kinds ofproducts; a tariff may make it effective. The opening up of a newcountry with rich natural resources may be a great gain to the averageconsumer in the older countries, although it causes a loss to a specialclass of landowners. Whether the citizens of the older or of the newercountry shall reap the greater benefit in the trade depends on thereciprocal demand for the two classes of goods, as was seen indiscussing the equation of international demand. A wide margin ofadvantage may go to one party and a narrow margin to the citizen of themore favored land. To put it concretely: if America, having greatnatural resources for agriculture, continues to exchange food formanufactures up to the narrowest margin of advantage, England reaps mostof the benefits of the trade. An American tariff on manufactures fromEngland will, under such conditions, check the demand for Englishproducts and compel some Americans to leave farming. This reduction ofthe American supply of wheat or corn and of the American demand forEnglish manufactures compels a new ratio of exchange. It is conceivable[Pg 501]that exchanging fewer goods at a larger margin of advantage, will give alarger total of gain to the favored nation. Thus, by the shifting of theratio of exchange, foreigners may be compelled to pay a part of thetariff to enjoy the favored market. This is but a special case of themonopoly principle; the government by law artificially limits the supplyof goods offered by its citizens.

This argument is somewhat subtle, but probably is the soundest one inthe theory of protection. The supposed conditions seldom occur, but theymay exist, and probably have existed in America. When the great systemof internal transportation was developed in the United States beforethat of the other new countries, this country had such peculiaradvantages for the production of food that the quantity was enormouslyincreased and the prices fell. At such a time the tariff may work towardretarding the unfavorable turn in the ratio of exchange and towardreëstablishing early a more favorable ratio. But the limited applicationof the principle must be recognized. The potential competition ofundeveloped countries on all sides, seeking to develop their resources,to raise their own food, and to profit by the higher prices in theworld-market caused by the tariff, threaten the peculiar advantages ofthe favored land. A great nation with its manifold interests is noteminently fitted to practice the gentle art of monopoly.

§ III. VALUES AS AFFECTED BY PROTECTION

1.An increase of the tariff is favorable to many capitalists and tomany owners of natural resources. A denial of large general advantagesin protection is not the denial of all its influence on value. On thecontrary, it cannot be too strongly emphasized that manifold interestsare affected by the tariff. Owners of natural mineral resources areamong the first to benefit. When the price of iron is low, many iron-and coal-mines may yield no rent and have small prospective[Pg 502] values. Atariff forcing home production opens the marginal resources and givesthem a large capital value. Factory sites and surrounding lands leapfrom the level of rural prices to that of city real estate. The ownersof farms situated near the new industries have a home market and getscarcity prices, as they alone can supply the needed fresh vegetablesand dairy products. Wealth less favorably situated, however, is in manycases depressed in value because its products exchange for smalleramounts of other products.

2.A tariff is immediately favorable to some enterprises and to specialclasses of workmen. Enterprisers already acquainted with and engaged ina business always may hope to gain by the higher prices immediatelyfollowing a rise in the tariff rates on their particular products.Though they are granted no enduring monopoly by the protection, they forthe time enjoy the advantage of being on the ground and reap the firstfruits of the favoring conditions. The enterpriser usually profits whenthe price of his product suddenly rises. Usually skilled workmen areaffected slowly by competition when there is any considerable increaseof their special industry. The burden of higher prices is very soondistributed to a number of less favored citizens. A part of it may beborne by the retail merchant, a part by his customers. The weightfalling on each is usually small, often unsuspected, always hard tomeasure. The increased benefit is concentrated in a few industries andaccrues to a comparatively few producers. Here is a recipe for riches:get everybody to give you a penny; they'll not miss it, and it will meana great deal to you. Something like this happens in the case of manyprotected industries; every consumer of the article pays a penny more, afew wage-earners gain, and a few enterprisers wax wealthy.

3.A sudden reduction of the tariff causes local crises and may bringon a general crisis. The repeal of the tariff works in a direction thereverse of its enactment. The benefits[Pg 503] of the lower prices arediffused; the immediate injury is concentrated and acute. Factories areclosed, capital is depreciated, labor is thrown out of employment. Theorganic nature of local industry causes the evil to be felt by manyclasses. Merchants, professional men, servants, and skilled laborersthat are tributary to the depressed industry, suffer. The effects aretransmitted to commercial and financial centers and credit is shaken.The readjustment of industry is slow and much capital is lost in theprocess.

It is rarely appreciated how great is the tactical advantage enjoyed inpolitical contests by the advocates of a high tariff. They can so easilyimpress the popular judgment with the evident fruits of their ownpolicy, and with the immediate dangers of the policy of their opponents.The low-tariff advocates in America undoubtedly have made the mistake ofunderestimating or of quite overlooking these immediate effects. Theyhave been too abstractly doctrinaire, and have argued too absolutely forthe merits of free trade. They have opposed one extreme system byanother, with no thought of the inexpediency and injustice of sweepingchanges. There is a strong feeling among business men that any tariff,be it high or low, is better than a shifting policy. Despite the greatpreponderance of domestic production over foreign trade, it is perhapstoo much to say that the tariff is unimportant in our presentconditions. It can, however, be said that the tariff agitation hastaught that radical changes, especially sudden and large reductions, arefraught with evils, and that business can adjust itself in large measureto any settled conditions. The future of the tariff discussion inAmerica is hard to prophesy. The infant-industry argument now is oflittle force. With the widening of our international relations aregrowing interests favorable to reciprocity or to other freer traderelations.

CHAPTER 52

OTHER PROTECTIVE SOCIAL AND LABOR LEGISLATION

§ I. SOCIAL LEGISLATION

1.Under modern conditions many laws restricting free competition arerequired to secure the health and convenience of the citizens. Therapid growth of city populations has brought new social and economicproblems. The friction in social relations is greater when men arecrowded together. In 1790, three per cent. only of our population livedin cities of over eight thousand; to-day the percentage is thirty-three.Then the city dwellers numbered one hundred and thirty-one thousand; nowthey number twenty-five millions. Then there were but six cities ofeight thousand or over; now there are five hundred and forty-five. Thenthe largest city (Philadelphia) numbered fifty thousand persons; to-daythe largest city (New York) numbers three millions. Many laws aresurvivals suited only to the older rural conditions. In London, theseproblems were first forced into prominence, and a law passed after thegreat fire of 1665 to regulate the rebuilding of houses, streets,sidewalks, and sewers, foreshadowed alike the American law of specialassessments and the modern tenement-house legislation. A mass of lawswise and foolish has resulted from the attempt to meet the newconditions. The laws of nuisance and of sanitation have been rapidlychanging.

Why not leave such subjects to individuals? It is for the interest ofevery one that his back yard should not be a[Pg 505] place of noisome smellsand disagreeable sights. But men are at times strangely obstinate,selfish, and neglectful, and through one man's fault a whole communitymay suffer. The refusal of one man to put a sewer in front of his housewould block the improvement of a whole street. The obstinacy of one maybring an epidemic upon an entire city. There must be a plan, and by lawthe will of the majority must be imposed upon the unsocial few. Wherevoluntary coöperation fails, compulsory coöperation often is necessary.Thus health laws, tax laws, and improvement laws regulate many of theacts of citizens, limit the use of property, and compel men to a courseagainst their own wishes and judgments. The justification for theselimitations on the right of private property, on free choice of theindividual, on "free competition," must be found in the social resultsecured.

2.Tenement-house legislation is an important recent expression of thissocial protective policy. As city population grows denser, landincreases in value, and the evils of bad housing threaten the welfare ofthe great majority of city dwellers. Light, sun, air are shut out, andcleanliness, decency, and home life are made impossible. Two policiesare open to the public. It may be left to private enterprise to solvethe problem. If the tenant agrees to rent a disease-breeding house, heis the first to suffer. The interests of investors, it is said, willsupply as good a house as each tenant can pay for. The other policy nowadopted is to set a minimum standard of sanitation and comfort, to whichall builders and owners must attain. Property owners are no longer leftfree to determine plans, height of building, proportion of lot built on,lighting, materials, and workmanship. Complying with the legalrequirements, they are left quite free to collect whatever rent they canget. Such legislation is partly in the interest of the body oflandowners as against the selfish desires of some individuals. One badbuilding may bring down the rent of all on the street. Partly, however,[Pg 506]the regulation is in the interest of the tenants and of society as awhole, and against that of the landlord. The rents from slum propertyare threatened; hence the strong opposition always manifested againsttenement-house legislation by some landlords, architects, andcontractors, who fight it bitterly as an interference with theirinterests and as a confiscation of their property. It is not quitecertain how marked will be the effect of this policy in making the rentstoo high for the poorer tenants and driving them into the country. Butthis result, predicted by the enemies of the policy, is not soundesirable, and the enlightened sentiment of the public to-day favorsall efforts to destroy the breeding-places of disease, misery, andcrime.

3.Laws forbid adulteration of products for domestic use and providefor public inspection. English laws of the Middle Ages forbade falsemeasures and the sale of defective goods, and provided for theinspection of markets in the cities. Recent legislation in many landshas developed much further the policy of insuring the purity or thesafety of articles consumed in the home. The oleomargarin law passed byCongress was, however, designed as protective legislation in theinterest of the farmer. Usually, the self-interest of the purchaser isthe best safeguard for the quality of goods; but personal inspection byeach buyer frequently is difficult and time-consuming, requiring specialand unusual knowledge of the products, and special costly testingapparatus. The state undertakes, therefore, to set a minimum standard ofquality, and to apply it by the economical method of social coöperation.This policy extends only to staple products and to a comparatively fewarticles. It would be impossible as well as unwise to apply it to artproducts, except to protect the morality of the community. Thisinspection sometimes raises the price, but the evils are small comparedwith the convenience and the benefits resulting to the citizen. He isassured that the article he buys is of standard quality, and if hewishes a cheaper[Pg 507] quality there is no law to prevent his adulterating itfor his own use.

4.Other kinds of social amelioration undertaken by the state, throughfree, compulsory education, charity, and temperance legislation, arelikewise interferences with competition and freedom of contract. Manyof these are so customary that they are not thought of in this light.Schools are productive enterprises, education is industry, and thesupply of this service is always in large measure undertaken by privateenterprise and could be left entirely to it. But free elementaryeducation is the established policy, and is no longer debatable inAmerica and France. In England the policy is still debated, much as isthat of public ownership of trolley lines in America. One by one thestates are passing compulsory education laws, and thus interfering stillfurther with the freedom of the individual. The affection of parents canin most cases be trusted to provide for the education of children, butwhen family affection fails, the child and the state are the victims ofthe resulting ignorance, crime, and pauperism. State support of highereducation is more in dispute. It is a universally accepted view thatsocial welfare requires a more generous support for higher educationthan could be secured if it were sold at a competitive price; but whilein eastern America its provision is left mainly to private gifts, in theWest and South it is undertaken largely by the state. The justificationof this policy must be found, not in the benefit to the particularstudents, but in the benefit diffused throughout the commonwealth by theencouragement of science, arts, and letters.

The system of public relief for the defective classes of blind, deaf,insane, feeble-minded, and paupers, are examples of the socialprotective policy. The public interest undoubtedly is served by havingthese suffering classes systematically relieved, but the extent andnature of the provision are questions ever in debate. Still more debatedis temperance legislation, both as to licensing and as to prohibitingthe[Pg 508] liquor traffic. Nowhere is the manufacture and sale of intoxicatingliquor treated quite like the traffic in most other goods, because it isrecognized that the public interest is affected in a different way.While it is beyond question that society should protect itself againstthe drunkard, it is more doubtful whether it owes to the man, for hissake, protection against his own blunders. Not even the gods can savethe stupid. Temperance legislation is strongest in its social aspect.The opponent of it usually champions the individualist view; itspartisans uphold, in varying degrees, the social view.

Similar questions arise regarding lotteries, gambling, betting,horse-racing, etc. When a man backs a worthless horse against the field,money probably is transferred from the stupider to the shrewder party.The philosopher may say that the sooner a fool and his money are partedthe better; but the broken gambler remains a burden and a threat tohonest society. Gambling, lotteries, and speculation cause embezzlement,crime, unhappy homes, and wrecked lives. Here are to be found withdifficulty the true boundaries between ethics and expediency. A busybodydespotism may protect the fool, but it thereby helps to perpetuate andmultiply his folly; yet if the fool is left alone, he too often is aplague to the wise and the virtuous.

5.Usury laws are found almost universally in civilized lands. Byusury was formerly meant any payment for the loan of goods or money; nowit means only excessive payments. In former times moralists andlawmakers were opposed to all usury or interest. Most loans were made intimes of distress. The sources of loanable capital and the chances ofprofitable investment were fewer in the past than to-day. For the lastfour centuries there has been on the question of usury a gradual changeof opinion, beginning in the commercial centers and most rapid in thecountries with more developed industry. A moderate rate of interest isnow everywhere permitted; but in all but a few communities[Pg 509] the ratethat can be collected is limited by law, and penalties more or lesssevere are imposed on the usurious lender. It has been noted in anotherconnection that usury laws are practically evaded in a number of wayswithin the letter of the law. Many writers maintain that usury laws domore harm than good even to the borrower, whom they are designed toprotect. In a developed credit economy, where a regular money-marketexists, they are superfluous, to say the least, as most loans are madebelow the legal rate. Such laws, however, have a partial justification.In a small money-market they to some extent protect the weak borrower atthe moment of distress from the rapacity of the would-be usurer. Theirutility is disappearing, but in simpler industrial conditions usury lawsare fruits of the social conscience, a recognition of the duty toprotect the weaker citizen in the period of his direst need.

§ II. LABOR LEGISLATION

1.Factory laws now limit in many ways the employment of women andchildren, and the hours of work. Factory legislation began in England,early in the nineteenth century, to check some of the worst evils thenshowing themselves in the factories. It has since increased in Englandand has been copied rapidly by other countries. Some of the agriculturalstates of the Union have as yet no factory laws, but the statesindustrially more advanced have many. They are made, first, to apply tochildren. The evil of forcing children into factories is easilyrecognized. The child, subject to the commands of his parents orguardians, is not a free agent. At times a lazy father is tempted tosupport himself in idleness on the wages of his young children. Oftenpoverty leads the parents to rob their children of health, of schooling,and of the joys of childhood. Child-labor depresses the wages of adultsand the evil grows. Children laboring long hours in close and grimyfactories,[Pg 510] and growing into blighted and ignorant manhood, are a threatto society. In agricultural conditions, such as have prevailed generallyin America, there is far less need of limiting the hours of work and theage at which children may begin to work. The barefoot boy trudging overclover-fields to carry water to the harvesters may be the happier,healthier, and better for his work.

The work of women in factories tends to depress the wages of men, isinevitably harmful to family life, and, when the work is arduous andcontinuous, the evils are visited upon succeeding generations. In theearly days of the factory system in England, the hours of work werelengthened in order to make the machinery earn as much as possible. Thefirst laws regulating hours applied especially to women and children,limiting their work to ten or twelve hours daily. Later, this regulationwas made to apply to men, and now is found in most civilized lands. Inrecent years the agitation has been for an eight-hour day, and doubtlessit will some day be adopted in the majority of trades.

2.Many laws provide for the health and safety of workers in factoriesand mines. Both workman and employer are in many ways interested inproviding against danger from fire, bad ventilation and lighting, badsanitation, unprotected and dangerous machinery, and bad moralconditions in the factories and other places of work. What can theworkman do to protect himself? (1) He may refuse to work whenever theconditions are bad. But this requires that he inspect the factory andjudge of the sanitary conditions in each case, and that he then resistthe temptation to accept employment of which he may be sorely in need.(2) He may ask higher wages to compensate for the added risk. But thisis not practically possible with his insufficient knowledge ofconditions, and it supposes an equal caution in many other workers. Itis well that individual men are not excessively cautious, or the statewould lack brave citizens and defenders. It is better that theforethought[Pg 511] be in part exercised by the community collectively. (3) Theperson injured in health or limb may sue for damages. But this, with hismeans and knowledge, is often impossible, and is a costly process,yielding a pitiful recompense for a blighted life.

The employer is interested in attracting better workmen at lower wages,and in avoiding damages by making the conditions of work favorable. Thelaw seeks the same end by more economical ways when it sets a minimumstandard. Experience shows that certain safety appliances should alwaysbe present to prevent the evils; for a state to leave their provision toself-interest, is to trifle with the welfare of its citizens. Factorylegislation usually is opposed by employers because of the expense itcauses; but if the regulations apply to all factories, the expensebecomes a part of the cost of production and is shifted, like the otherexpenses of production, to the general body of consumers, of which theemployers form only a small part.

3.Laws regulate the form, time, and methods of payment in manufacturesand mining. Companies sometimes keep stores and pay the workers inmines and factories in goods, instead of money. Such a store in thehands of a philanthropic employer might easily be made, without expenseto himself, a great boon to his workmen, giving them more than thebenefits of consumers' coöperation. But the usual result is told by thefact that such stores are known as "truck stores," "pluck-me stores."They are most often found where some one large corporation dominates inthe community, as in mines, where the workers are in a very dependentcondition. If the higher prices demanded practically lower real wages,it would seem that the worker had an immediate remedy in his power todemand higher money-wages. Recognizing that this is for the most part anillusion—for it is just in such places that the conditions for freecompetition are least present—the law in many states prohibits thesestores. It regulates also the measuring of work, fixing the[Pg 512] size ofscreens and of cars used in coal-mining. The law is especially favorableto the hand-laborer in regard to the collection of his wages, requiringregular monthly or fortnightly or sometimes weekly payments. Mechanics'liens give to workmen in the building trades the first claim on theproducts of their labor.

4.In some cases the law forbids "contracting out," and the courts fixthe terms of the contract. In general, the law does not interfere withthe right of the citizen to make any formal contract he chooses. Itconfines itself to providing rules and agencies for interpreting andenforcing the contracts when made. Employers often compel workmen tosign a release from damages in case of accident. This practice wasforbidden even by common law, and many recent statutes have specificallyprovided that employers cannot "contract out" of the right to claimdamages. The courts are particularly watchful of the interests ofchildren, who are usually deemed incapable of entering into contractsbinding them to their injury. Sailors, likewise, have long beenprotected and guarded by the law, because, journeying far from home,they are peculiarly in the power of their employers. The English courtsmay even change the contract if the sailors have been coerced by theirmasters. The rights of married women to mortgage their property islimited in some states in recognition of the undue influence that may beexercised by their husbands. The attempts in the last twenty years tosettle the Irish land-question have resulted in a steady increase of theinterference of law and courts with the freedom of contract betweentenant and landlord. Though in many ways freedom of contract is thuslimited, competition is not entirely destroyed; it is turned in otherand usually better directions.

5.This group of social laws resembles protective tariffs in preventingfree competition, but differs from them in varying ways and degrees.Writers class all such laws as protective legislation, in that theydepart from the rule of free[Pg 513] trade taken in its broadest sense. It doesnot follow, however, that all these laws stand or fall together,—thatif the protective tariff is wrong, all are wrong. The justification ofevery such measure is limited and relative, and therefore of varyingstrength. All protective measures are alike in that the free choice ofthe citizen is forbidden by law. The argument for the tariff is economicand political. The tariff does not seek to prevent a moral evil; foreigntrade is morally as good as other trade. In a large majority of sociallaws the moral purpose is fundamental. It is the demand of humanity thatcompetition be placed on a higher plane. Tariff legislation is primarilyin the interest of a special well-to-do class, with which other citizensare compelled unwillingly to trade. Most social legislation is toprotect the weak from being forced into contracts injurious to theirwelfare and happiness. In any case, social legislation is not to bejustified by any but the most general abstract principle,—theattainment of the best social result. The best test of social protectivelaws is their contribution to a higher independence and to a freercompetition on a higher, more worthy, and more humane plane.

CHAPTER 53

PUBLIC OWNERSHIP OF INDUSTRY

§ I. EXAMPLES OF PUBLIC OWNERSHIP

1.Local political units generally acquire only industries whoseproducts must be used in the place where produced. The word industry isused here in a broad sense, including agents of psychic income notusually so classed, such as public parks. The grouping of publicly ownedindustries according to the size and importance of the political unitscannot be exact, because some classes of industries are owned by severalkinds of political units. Yet, especially with application to Americanconditions, an approximate classification may be made on this principle.Federal states consist of three main groups of political units:national, provincial, and local. Provincial units are the largestsubdivisions, as the American "states," or commonwealths, the Germanstates, and the provinces in other countries. The term local politicalunit is more complex and may mean county, township, village, city, andschool or sanitary district; but most of what is to be said of localownership refers to cities or to incorporated villages.

Nearly all public parks and recreation grounds are owned by cities. Aspopulation has become more dense, private yards of any extent becomeimpossible, in cities, for all but the wealthy. Public ownership ofparks insures recreation grounds to the common man in the mosteconomical way. Of late the movement for large and small public parksand playgrounds has gone on rapidly in American cities. Related[Pg 515] toparks are public baths, public libraries, art collections, museums,zoölogical gardens, etc. Some have declared that such a policy stopslittle short of a paralyzing socialism for the masses. Reason andexperience fail to reveal any such danger so long as the things suppliedgratify the higher tastes—as art, music, literature, innocent socialrecreation. Not until the necessities of life, as bread, clothing, andhouses, are supplied, is encouragement given to the increase ofimprovident families and to the breaking down of independent character.The means of local communication—streets, roads, bridges—were onceowned largely by private citizens. Here and there still are found tollroads and toll bridges built under charters granted a century ago, buttolls on public thoroughfares are for the most part abolished. A publicmarket, where the producer from the farm and the city consumer can meet,is an old institution that is now being established anew in many cities.The providing of apparatus for extinguishing fires is always a publicduty; the conveyance of waste water is increasingly a public function;and the supply of pure water, while often a private enterprise invillages, and sometimes in large cities, is increasingly undertaken bypublic agencies. Public ownership of gas and electric lighting is lesscommon, as the utility supplied is not so essential and the industry issomewhat less subject to monopoly; but the difference is one of degreeonly. Street-railroads are often under public ownership in Europe; butthere has thus far been no case of the kind in the United States, andonly one in Canada.

2.The American state owns and conducts industries mainly whoseproducts have a wider territorial use. The American commonwealth hasretired from some fields where once it was engaged in industry. Studentsof American history know that between the years 1830 and 1840 somestates engaged largely, even wildly, in the building of canals andundertook to construct railroads, to start banks, and to engage in otherenterprises. The undertaking of these industries[Pg 516] was determined oftenby political and by selfish local interests, and their operation oftenwas wasteful. A few enterprises succeeded, the most notable of thesebeing the Erie Canal in New York. The unsuccessful ones remainedworthless property in the hands of the state or were sold to privatecompanies, as in the case of the Pennsylvania railroad. This recklessstate enterprise was a bitter lesson in public ownership, and even afterseventy-five years is not without effect on public opinion. For a longtime no proposal for public ownership could have a fair hearing inAmerica. But railroads and canals are publicly owned, and more or lesssuccessfully operated, in many foreign countries, as in Prussia andother German states, in Switzerland, and in the new states of Australia.

There has been recently a rise of interest in forestry in America. Thisis especially likely to be a state enterprise wherever the forest tractsare entirely within the limits of the state, as is the case of theAdirondacks in New York. Most of the forests in Germany are eithercommunal or state-owned. The schools, a great industry for turning out aproduct of public utility, are largely conducted by the American stateand by local units rather than by the nation or by private enterprise.The state encourages researches in the arts and sciences, and givestechnical training. A variety of minor enterprises have been undertakenby states to supply salt, phosphate, banking facilities, even somemanufactures. In the prisons and public institutions, states, such asNew York, that have adopted the system of labor on public account engagein agriculture and manufacturing on a large scale, the products,amounting to millions of dollars annually, being used almost entirely bypublic agencies.

3.The nation owns and controls many industries of the widest use andmost general interest. Some industries grow out of the political needsof government. Established as a means of communication with militaryoutposts, the post became a convenient means of communication formerchants[Pg 517] and other citizens and grew into a great economicinstitution. In most countries the telegraph is publicly owned and hasbeen annexed to the post, to which it is very closely related inpurpose. The national improvements connected with rivers and harborswere first political—that is, they were for the use of the governmentalnavy; they became, secondly, commercial—for the free use of allcitizens engaged in trade; and they continue to unite these twocharacters. Forestry is most largely undertaken in this country by thenational government, doubtless because the large forest areas in theWest extend over state boundaries, and because large tracts of publiclands were still unsold at the time public attention was attracted tothe subject. Since 1890, the policy of reserving great areas forforests, and picturesque districts for national parks, has developedgreatly. In some countries mines are thought to be peculiarly fitted fornational ownership and control. In Germany, the state owns some coal,salt, and other mines. Coinage and banking are everywhere looked upon asa function of sovereignty, and yet it is no more necessary for a nationto own its own mint in order to control the monetary system than for itto print the bank-notes in order to regulate their issue. The Americangovernment has its own printing office and therewith its share oftroubles with organized labor. The fish commission, and the variousbranches of the department, coöperate with private industry in manyways. In Germany, compulsory insurance is provided for the workingman.This hasty survey suggests that the industries undertaken by governmentare both varied in nature and large in extent, although small inproportion to the mass of private industry.

§ II. ECONOMIC ASPECTS OF PUBLIC OWNERSHIP

1.Public ownership is primarily to control the essential agencies ofgovernment. A large part of public ownership and activity in industrydevelops from political functions.[Pg 518] As society evolves, what wasunessential to political life becomes essential. Civilized governmentrequires the use of a number of material agents. Buildings forlegislative and executive officers, custom-houses, post-offices,lighthouses, can be rented of private citizens, as post-offices usuallyare in small places; but it is obviously economical and convenient inlarge cities for the government to own the public buildings. Governmentcan reduce to a minimum its employment of labor by "farming out" thetaxes, as all countries once did to some extent, and as France continuedto do up to the French Revolution. It is now the settled policy forgovernment to own or control its essential agencies, but this does notinvolve in every case the employment of day-labor direct to clean thestreets, to collect garbage, etc. The more simple political functionsshade off into the economic. To coinage usually are added the issue oflegal-tender notes and certain banking functions; the post carriespackages, transmits money, and in some cases performs the function of asavings-bank for small amounts. The only open question is as to theproper limit to this development.

2.Public industry expands to supply as free goods many essentials ofgood citizenship, and to insure cheaper and more bountiful supplies ofothers. It is the ideal of Herbert Spencer and of a small survivinggroup oflaissez faire philosophers that government should confineitself exclusively to the most essential political functions, leavingthe economic functions absolutely alone. It should keep the peace,prevent men from beating and robbing each other, and preserve thepersonal liberty of the citizen. They assume that all of the economicneeds will be provided by competition, in the best way humanly possible,in quantities and at the rate needed. In many cases, however, thegeneral interest fails to harmonize with that of the individual. Theforest has an immediate utility to the consumers of lumber, and it hasalso a diffused utility in its influence on industry, on climate, and ontorrents and floods. Yet, as the private owner cannot[Pg 519] control enough ofthe forest to affect the climate, and could not sell climate even if hecould affect it, he will cut down the tree whenever he can gain by doingso. In this situation either government control or government ownershipof forests is essential.

In some cases the difficulty of private ownership is in the excessivecost of collecting for the service. The cost of maintaining tollhousesat short intervals on a turnpike sometimes exceeds the amount collected.Collection in other cases, as for the service of lighthouses to passingships, is impossible. Public industry secures, through the economy oflarge production, a cheaper and more efficient service, the benefits andcosts being diffused throughout the community. The benefits of the workof experiment-stations for agriculture are felt immediately by thefarmers, but are diffused to all citizens. A manufacturer able to keephis methods secret, or to retain his advantages for a time, can affordto undertake experiments in his factory, but the farmer seldom can. Thepublic ownership of parks for the use of all gives a maximum of economyin the production of the most essential utilities—fresh air, sunshine,natural beauty, and playgrounds in the midst of crowded populations.Municipal ownership of waterworks is an extension of the same idea. Notonly because large amounts of water are used by the public, but becausecheap, pure, abundant water is an essential condition to goodcitizenship, speculation should in every possible way be eliminated fromthis industry.

3.Public ownership tends constantly to include the industries of amonopolistic nature, locally supplying general necessities. This is noabstract principle; it is merely a statement of what is seen to behappening. Some industries are of such a nature that they driftinevitably into monopolistic control. Waterworks, gas, electriclighting, street-railways, telephone systems, are among these. Howeverfierce may be the competition for a time, sooner or later either onecompany drives out the other or buys it up, or both come[Pg 520] to anagreement by which the public is made to pay higher prices.

A feature favoring the growth of monopoly when such industries are leftto private enterprise, is the need to produce and supply the utility ata given locality. While two street-railways can compete on neighboringstreets, it is physically impossible for two or more to compete on thesame street. Two systems of water-mains or gas-mains can be put down, assometimes is done, but this is not only a great economic waste, but thetearing up of the streets is an intolerable public nuisance. Thisdifficulty is less marked in the case of telephones and electriclighting, and some persons still cling to faith in competition toregulate the rates in those industries; but faith in competition betweenwater-companies and between gas-companies has been given up by nearlyall students of the subject.

4.A second feature favoring monopoly in such industries is the markedadvantage of large production in them. These industries are usuallyspoken of as "industries of increasing returns." This advantage isenjoyed in some degree by every enterprise, but it is graduallyneutralized and limited (as has been noted elsewhere). The need toextend an expensive physical plant to every point where customers are tobe served, and the very much smaller cost per unit of delivering largeamounts of water, gas, electricity, transportation, etc., on the samestreet, offered a greater inducement for one competitor to crowd out orbuy out the other at a more than liberal price. Even then, larger netdividends and correspondingly larger capitalization are secured thanwere before possible to both companies combined.

5.A third feature favoring monopoly is uniformity in the quality ofthe product furnished. It is a general truth that competition is mostpersistent where there is the greatest range of choice open to thecustomer, and consequently the most individual treatment required in theenterpriser. An artist, even a storekeeper, attracts about him a body ofpatrons[Pg 521] who like his product (for the merchant's manner and method ofdealing are a part of the quality of his goods), and who cannot betempted away by slight differences in price. Rival companies in thestage of competition are seen to claim superiority for their particulargoods and to improve their service in every way possible. A newtelephone company, entering where a monopoly has held the field, worksat once a wonderful betterment in rates, courtesy, and service. But asthe product of all competitors attains the highest technical standardpossible at the time, the rivalry is reduced to one of price, and it isusually a "fight to the finish."

6.A fourth feature favoring monopoly in these enterprises is thenecessity of making permanent and exceptional use of the public streetsand alleys. If this right were granted by a general law to everycitizen, this feature would be sufficiently implied in the foregoingdiscussion. As it would be intolerable to allow private interests to usepublic property in whatever way they wished, the legislative body makesspecial grants in such cases in view of the circumstances. Not only isthe legislature (or council, or county board of commissioners, etc.)induced by the economic difficulties to withhold a charter to a secondcompany, but it is exposed to the greatest corrupting influences by theone already established. The knowledge of the opposition to beencountered in getting a franchise must keep competitors out, eventhough monopoly prices are maintained.

In view of these several features, which are so closely related thatthey form a common character, more or less fully shared by variousindustries, and especially in view of the necessity for the formalgranting to them of peculiar privileges in the form of a publicfranchise, the public, in order to protect the general interest, isforced to undertake an exceptional control of these industries.

7.Several courses are open to the public, acting in its politicalcapacity, to retain these monopoly advantages for the general welfare.First, it may do nothing, trusting[Pg 522] vainly to competition to regulatethe rate, or consciously leaving the result to be worked out by themonopoly principle; this is what in most cases has been done in the pastin America. Second, in granting the franchise it may attempt to fix nearcost the charge for the service or product, so that the franchise willbe worth little or nothing. Third, it may leave the rate to be fixed bythe monopoly principle, but charge for the franchise so much that thevalue of the monopoly is appropriated into the public treasury. Fourth,it may have public officials carry on the business, either selling theproduct at cost or making monopoly profits that go into the publictreasury. Various combinations of these plans are followed in practice,the most common plan being the fixing of maximum rates which, withimproved methods, generally become ineffective. It is difficult to fix auniform rate that is equitable, because conditions change, and, further,because a uniform rate must be applied to all parts of the town,although the cost of service varies greatly. It is difficult to sell thefranchise for near what it is worth, because of the uncertainty, of thepolitical blackmail, and of the limited number of competent bidders.There remains only the policy of public ownership to secure the profitsof monopoly to the public, either directly or in a diffused manner.

8.Public ownership is economically justified when it secures a utilityof widespread consumption, otherwise impossible, or insures the public abetter quality or a lower price. The question of public ownership isnot exclusively an economic question. There are incidental problems,such as its effects on enterprise and on political integrity, with whichit is not possible here to deal. In the main, however, public ownershipis simply a business proposition which must be justified by its economicresults. In the case of a general social benefit not to be securedwithout public ownership, as popular education or the climatic effect offorests, the only question to answer is whether the utility is worth thecost. In[Pg 523] the case of industries already in private hands, aswaterworks, gas and electric lighting, there is needed, to make a wisedecision possible, a knowledge of the effect a change to publicownership will have on value. If public officials can furnish some goodscheaper than they are furnished by private enterprise, it is because ofthe wide margin of monopoly profit, not because there is any magic inpublic ownership. The same general items of cost must be met. The firstcost of the plant and the annual interest payments are much the same.Experience shows that, because of political influence, wages are likelyto be higher under public ownership, but salaries of officials arehigher under private ownership. On the whole, public industry in theserespects probably has no advantage. Some items of cost may be less underpublic management. Public collection of dues along with taxes is anadvantage not enjoyed by private companies. Several public officialssometimes share the same office and thus reduce expenses. In small townsthe public electric lighting and waterworks have been operated moreeconomically under one roof. Public industry does not have to meet thecost of lobbying and blackmail which are often forced upon privatecompanies. But the greatest source of saving in public ownership is thevalue of monopoly privileges that, under private management, go intoprivate pockets.

The temptation to political corruption may be more insistent when alarge force of men is constantly employed, and when large supplies areconstantly purchased, by public officials, but the temptation is not sostrong or so centralized as it is in the granting of franchises towealthy corporations. Public industry is weakened by the absence ofcertain motives to excellence that are present in private business. Theincome of public officials not being dependent on the economy ofmanagement, the spur and motives of competitive industry are lacking. Nosocial discovery has made individual honesty and civic virtue useless togood government.

The decision in any specific case is one dependent on local[Pg 524] conditions,and the exact limits of public ownership are not fixed. Industry ischanging so rapidly that new experience is needed each year. The mainoutlines of public ownership, however, are now in large part determined.Some industries do well, others ill, under public management, andbetween these lie many debatable cases. Waterworks and probably electriclighting, because of the comparative simplicity of their operation, aremore suitable for public ownership than are gas-works. No absolute linedivides the one group from the other. But whatever the changes, thestudent of the theory of value must never overlook the fact that theincrease of public ownership is altering in manifold ways the prices ofgoods, and is reacting also on the production, distribution, andconsumption of incomes.

CHAPTER 54

RAILROADS AND INDUSTRY

§ I. TRANSPORTATION AS A FORM OF PRODUCTION

1.Transportation of goods and men is one of the most important modesof production. When utility was thought of as inherent in things ratherthan as resulting from a relation between things and wants, it was usualto consider only those industries as truly productive that broughtsomething physical into existence, as do agriculture and the extractiveindustries. Even after it was recognized that a change of form alsoimparted value, it was still denied that a changing of place could betruly productive industry. But when production is seen to be thebringing of things into right relations with wants, transportation maybe deemed to be the primary and typical mode of increasing income.Movement is necessary to the existence of animals. The animal, in theorder of evolution a higher form of life than the more fixed plants,goes to seek food, and has open to it a wider range of possibilities inlife. With slight exceptions, it is true that the only way in whichanimals can bring about better place-relations between their wants andgoods is by moving themselves. To this power man has added that ofmoving goods and thus adds enormously to income. Agents being valued inaccordance with their net productiveness, the nearness to market and theease of transporting the product are large factors in price. Thelocation of a field enters into its value as truly as do the chemicalqualities of the soil. A rocky field near a market may be richer, in anindustrial[Pg 526] sense, than the richest soil far remote, which can be usedby men only at the cost of their alienation from society. Means oftransportation set a limit to social and political groupings, to thesize of the market, and to the possibility of exchange. Indeed, allexchange value is conditioned upon the possibility of transportation.

2.Natural differences in the grades of fertility and of accessibilitydetermine first the most valued locations. Primitive man, dependent onthe bounties of nature, had to take things as he found them. Few placesunite the best grades of the essential things: water, food, fertilesoil, a favorable climate, protection against enemies. Between tribe andtribe went on ceaseless war for the few favored spots of the earth.Where transportation is possible, trade can supply one or more of themissing elements. International trade began early, wherever it could, tostrengthen economically the weak localities. Advantages intransportation are sometimes better than fertile soil and richresources. The early centers of civilization were on the banks of riversand the shores of seas. Around the Mediterranean were the ancientempires. Trading-towns grew up at ports and at the favored points oftrade: Tyre, Sidon, Carthage, Florence, Genoa, Venice, Antwerp, London,New York. The early settlements in America were grouped along the coast.Without the cheap communication afforded by water, the colonies wouldhave been cut off from the benefits of continuing contact with the oldercivilization. It would have been a great price to pay, even for a richcontinent.

3.The opening up of new water-routes of travel has profoundly alteredthe prosperity of nations. Sometimes the relation of cause and effectis the reverse of that just noted. The conquest of Asia Minor by theTurks closed the lines of travel with the East, destroyed the trade ofthe Italian cities, and stimulated exploration for new routes. The Warof 1812 in America stopped the coast trade and forced on the wagon-roadsbetween the New England and the Southern states a[Pg 527] great traffic, whichdeclined quickly at the close of the war. Again, the growth ofpopulation and industry shifts the center of trade, as it did from thesouth to the north of Europe, and as it is doing from England toAmerica. The discovery of new routes, however, has wrought the mostrapid and sweeping changes. These three causes united, about the time ofthe discovery of America, to overthrow the prosperity of the oldercities of Europe, while the opening of the resources in America, theabundance of silver and gold, trade with the colonists and the Indians,showered wealth and trade into the lap of Spain, Holland, Belgium,England, and the northern cities of Germany. Such changes continue underour eyes. The Erie Canal has an influence on values in every townshipfrom New York to Buffalo, and along the lake shores to the head of LakeSuperior. The Suez Canal marked an epoch in ocean travel. The AmericanIsthmian Canal will affect the value of many investments, from the Gulfof Mexico to the Pacific Coast. A marked change in transportation thusshifts the level of values in a locality. Fortunes are made and lost.One community rises and another sinks. Increments and decrements ofvalue on a great scale are unearned, and all classes of goods areaffected, though in varying degrees.

§ II. THE RAILROAD AS A CARRIER

1.Different modes of transport are more or less economical relativelyto the other industrial conditions. Not only new routes but new agentsof travel change the scale of values. In early societies, undevelopedindustrially, first men, then domestic animals, were used as beasts ofburden. The first vehicles are technically simple in design andconstruction; on land are used drags, sleds, carts; on waterways areused rafts, canoes, barges, and boats. Primitive means of transportationhad to be inexpensive, for poverty and the uncertainty of early societyforbade the tying up of large resources[Pg 528] in them. Technical efficiencyof means of transportation may be contrasted with economic efficiency.Technical goodness is absolute, and is measured in speed and weight ofcargo; economic efficiency is relative, and varies with the money costand money value of the services. A turnpike is more efficient than a mudroad, yet in some districts it is bad economy to build it. A railroad ismore efficient than a cart, yet in some places even pack-horses are moreeconomical. To be economical, the expenditure needed to supply theefficient agent must be warranted by the volume and value of traffic.

2.The most economical means of transportation before the railroad werethe waterways, natural and artificial. Some natural waterways stillafford the most economical means of transportation between favorablysituated ports. Coal is shipped most cheaply in sailing vessels fromWales around Cape Horn to ports along the western coasts of America. Apart of California's regular fuel-supply is obtained in this way. Coalhas been shipped from Pennsylvania to Europe, and in the anthracitecoal-strike in 1902, some was shipped from England to America. Inventionhas reduced the cost of construction and operation of vessels and hasincreased their safety and speed, thus multiplying the efficiency of thenatural waterways. The large cities in America are situated onwaterways, usually where there is a break in transportation requiringreshipment, as, for example, at New York, San Francisco, Buffalo, NewOrleans, Cincinnati, Chicago, Minneapolis, and St. Paul. Likewise manyof the small cities and villages, serving as local trading centers, owetheir existence to similar though less powerful influences.

Canals are begun as connecting links in a system of natural waterways toextend the advantages of cheap transportation. The Erie Canal not onlyserves the three hundred miles of territory along its banks, but itopened to commerce all the lands tributary to the Great Lakes. The greatadvantage of canals is cheapness of operation due to the simplicity ofthe machinery needed and to the great loads that can be moved[Pg 529] withsmall power. A cent a ton-mile is a paying rate on a canal. For heavy,slow-moving freight, the railroads can hardly rival the canals at theirbest. As canals, however, can be built only along a level country andwhere the water supply is at a high level, their construction is limitedto a small portion of the country. The law of extensive diminishingreturns applies strongly to the construction of canals. The first canalsare easily constructed and economically operated, but it is only withgreater cost and difficulty that the system can be successivelyextended. In temperate climates their use is limited by ice to a part ofthe year, and the summer's drought sometimes limits it still further. Atits best, therefore, the small land-locked canal is fitted only to be asupplementary agent in the system of transportation wherever industrydemands high speed and great regularity. Far different is the case ofthe oceanic canal in a tropical climate.

3.The railroad is rapidly surpassing in importance every other agencyof transportation. Even in respect to cheapness, the unique virtue ofwaterways in favored localities, the railroad has been making rapidgains. Improvements in roadbed, rails, cars, engines, and otherequipment are reducing greatly the cost of conducting traffic on themain lines of roads. The adaptability of the railroad excels that of anyother agent of transportation; it can go over mountains or tunnelthrough them. In certainty its superiority is marked; floods and snowsmay delay it for a day, but there is no seasonal stoppage of traffic. Inspeed, the railroad so far excels that the canal can survive only bydividing the traffic, taking the lower grades of freight, and leaving tothe railroad the passenger traffic and fast freight.

Because of these qualities, the extension of the railroads in the lastfifty years has been so rapid that it has not given time for a gradualadaptation of industry. It has worked in many places revolutionarychanges. The building of railroads in the Mississippi valley in theseventies lowered the[Pg 530] value of Eastern farms, ruined many Englishfarmers, and depressed the peasantry in all western Europe. With theprices that resulted when the fertile lands of the Western prairies wereopened to the world's markets, the stony and worked-out lands of theolder districts could not compete. Great regions are still to be openedin this manner in Russia, Siberia, Africa, and South America. While onecan only speculate upon the effects this development will have, thechanges promise to be less sudden and tremendous than those of the lasttwenty years. Many minor changes, of no less moment in limiteddistricts, result from the building of railroads. Local trading-centersdecrease in importance. Villages and towns, hoping to be enriched by therailroads, see trade going to the cities. Commerce becomes centralized.Enormous increase of value at a few points is offset by losses in otherlocalities.

§ III. DISCRIMINATION IN RATES ON RAILROADS

1.The railroad has more monopoly power in fixing rates at points alongits lines than is the case with other agents of transportation. Theownership of the wagons, ships, and canal-boats of a country is usuallydivided. Every point along the line of the turnpike or the canal and atocean ports enjoys competition between carriers, the great shippingcombinations not having been successfully formed as yet. In the earlydays of the railroads it was believed that a company or the governmentwould own the rails and charge toll to the different carriers, who wouldown cars and conduct the traffic as was done on the canals. Experiencesoon showed the utter impracticability of this scheme and the need ofunified management. The railroad, therefore, has a monopoly at allpoints on its line not touched by other carriers. This, like all othermonopoly, is limited by the need to secure some business and to meetcompetition at terminal points. The railroads in private hands earlybegan to "charge what the traffic would[Pg 531] bear" at every station, thuspractising various forms of discrimination disastrous in their effectson the citizens.

2.Discrimination as to goods is charging more for transporting onekind of goods than for another without a corresponding difference in thecost. When reasonably understood, this proposition does not apply to ahigher charge for goods of greater bulk, as more per pound for feathersthan for iron, the "dead weight" of car being much greater in one casethan in the other. It does not apply where there is a difference inrisk, as in carrying bricks and powder, or coal and crockery; nor wherethere is a difference in trouble, as in shipping live stock and wheat.Any difference that can reasonably be explained as due to a differencein cost is not discrimination; on the other hand a difference in costwithout a difference in rate is discrimination. Discrimination as togoods may be by value, as low rates for heavy, cheap goods and highrates for lighter, valuable ones. Coal always goes at a low rate ascompared with dry goods, and sometimes more is charged for coal to beused for gas than for coal to be used for heating purposes.Discrimination as to goods is the most usual and, if reasonablyemployed, one of the most justifiable of the various kinds of ratediscriminations.

3.Discrimination between places (local discrimination) is chargingdifferent rates to two localities for substantially the same service.This occurs when local rates are high and through rates are low; whenrates at local points are high and at competing points are low; whenless is charged for shipments consigned to foreign ports than fordomestic shipments; when more is charged for goods going east than forgoods going west. The causes of local discrimination are: first,water-competition, found at great trade centers such as New York and SanFrancisco; second, differences in terminal facilities, making someplaces better shipping-points than others; third, competition by otherrailroads, which is concentrated at certain points, only four thousand(one tenth) of the stations of the United States being junctions;fourth,[Pg 532] the influence of powerful individuals or large corporations andthe personal favoritism shown by railroad officials.

The effect of discrimination is to develop some districts and depressothers; to stimulate cities and blight villages; to destroy establishedindustries; to foster monopolies at favored points; and to sacrifice thefuture revenues of the road by forcing industry to move to the competingpoints to get the low rates. The power of railroad officials arbitrarilyto cause rates to rise or fall is happily limited in practice by theneed of earning as large and as regular an income as possible, but evenas exercised it has been at times as great as that possessed by manypolitical rulers.

4.Discrimination between shippers (personal discrimination) ischarging one person more than another for substantially the sameservice. This most odious of railroad vices, rarely practised openly,is done by false billing of weight, by wrong descriptions or falseclassification to reduce the charge below published rate-sheets, bycarrying some goods free, by issuing passes to one and not to allpatrons under the same conditions, or by donations or rebates after theregular rate has been paid. In some cases a subordinate agent shares hiscommission with the shipper, and the transaction does not appear on thebooks of the company. In other cases favored shippers are given secretinformation that the rate is to be changed, so that they are enabled toregulate their shipments to secure the lower rate.

One group of reasons for personal discrimination is connected with theinterests of the road. It is to build up new business; it is to makecompetition with rival roads more effective by favoring certain agents,as is very commonly done in the Western grain business; it is to excludecompetition, as by refusing to make a rate from a connecting line or toreceive materials for a new railroad which is to be a competitor; and itis to satisfy large shippers whose power, skill, and persistence makethe concession necessary. Another group of reasons has to do with theinterests of company officials.[Pg 533] It is to enable them to grant specialfavors to friends; or it is to build up a business in which they areinterested; or it is to earn a bribe that has been given them.

That the evils of personal discrimination are great, need hardly besaid. It introduces uncertainty, fear, and danger into all business; itcauses business men to waste, socially viewed, an enormous fund ofenergy to get good rates and to guard against surprises; it grantsunearned fortunes and destroys those honestly made; it gives enormouspower and presents strong temptations to railroad officials to injurethe interests of the stockholders on the one hand and of the public onthe other.

Apart from government, the railroad represents the greatest singleeconomic factor in personal distribution. It has introduced a new formof problem into economic society. It has created a monopoly comparableto the prerogatives of feudal lords. No other industrial agency inprivate hands so affects all the producing forces of society andexercises such a potent influence on values.

CHAPTER 55

THE PUBLIC NATURE OF RAILROADS

§ I. PUBLIC PRIVILEGES OF RAILROAD CORPORATIONS

1.Railroads enjoy peculiar public privileges through their charters,franchises, and the right of eminent domain. Railroads in our countryare owned by private corporations and are managed by private citizens,not, as in some countries, by public officials. They have been builtunder the motive of private enterprise, in the interest of the investor,not as a charity or as a public benefaction. Railroad-building appearsthus at first glance to be a case of free competition where publicinterests are served in the following of private interests. But, lookedat more closely, it may be seen to be in many ways different from theordinary competitive business. Competition would make the building ofrailroads a matter of bargain with proprietors along the line, and anobdurate farmer could compel a long detour or could block the wholeundertaking. But the public says: a public enterprise is of moreimportance than the interests of a single farmer. By charter or byfranchise the railroad is granted the power of eminent domain, wherebythe property of private citizens may be taken from them at an appraisedvaluation. The manufacturer, enjoying no such privilege, can only byordinary purchase obtain a site urgently needed for his business. Whymay the railway exercise the sovereign power of government and invadeother private property rights? Because the railway is peculiarly"affected with a public interest." The primary object is not to favorthe railroads, but to benefit[Pg 535] the community. These charters andfranchises are granted sparingly in most European countries. In thiscountry they have been granted recklessly, often in general laws, bystates keen in their rivalry for railroad extension. When thus greatpublic privileges had been granted without reserve to privatecorporations, it was realized, too late in many cases, that a mistakehad been made and that an impossible situation had been created.

2.In America and in many other countries, large grants of lands andmoney have been made to railroads on the ground of their peculiar publicnature. Railroads were granted not only peculiar powers and privileges,but also material aid. The railroad enterprise was uncertain, thepossibilities of its growth could not be foreseen, and private capitalwould not invest without great inducements. In European countries wherecapitalists were less enterprising or venturesome than in America,railroad extension was very slow except where the state in some mannerextended its aid to the enterprise. The American states abandoned theprinciple of non-interference most recklessly, and vied with each otherin giving lands, money, and privileges, in loaning bonds, in subscribingfor stock, and in releasing from taxation. These protective measuresfostering a special enterprise were expected by increasing wealth todiffuse a greater welfare throughout the community. Many of the stateswere forced to the point of bankruptcy by their reckless generosity, andsome of them repudiated the debts thus incurred. The national governmentthen took up the same policy and granted lands to the states to be usedfor this purpose. The first example of this was the grant to theIllinois Central road, in 1850, of a great strip of land through thestate from north to south. Grants were made in fourteen states, coveringtens of millions of acres of land. Then the national government, between1863 and 1869, aided the building of the Pacific railroads by grantingoutright twenty square miles of land for every mile of track and byloaning the credit of the government[Pg 536] to the extent of fifty milliondollars—a debt settled by compromise only after thirty years.

Counties, townships, cities, and villages along the line of projectedroads then entered into keen competition to secure them. Bonds, bonuses,tax-exemptions, and many special privileges were granted. To obtain thisnew Aladdin's lamp, this great wealth-bringer, localities mortgagedtheir prosperity for years to come. The promoters bargained skilfullyfor these grants, playing off town against town, cultivating thespeculative spirit, punishing the obdurate. Not the civil engineer, butthe financial engineer platted the devious lines of many a railroad onthe level prairies of America. The effects of these grants were in manycases disastrous, and since 1870 they have been forbidden in a number ofstates by legislation and by state constitutions. But before this era ofgenerosity ended, probably the railroads had received more public aidthan has ever been given to any other form of industry in private hands.

3.The railroads are now generally held to have peculiar public dutiescorresponding to their privileges. Do all these grants in the past makethe railroads other than mere private enterprises? One answer, that ofthose financially interested in the railroads, is No. They say that thebargain was a fair one, and is now closed. The public gave because itexpected benefit; the corporation fulfilled its agreement by buildingthe road. The terms of the charter, as granted, determine the rights ofthe public; but no new terms can now be read into it, even though thepublic now sees the question in a new light. Similar grants, though notso large, have been made to other industries. Bounties have been givento sugar-factories; tariffs have favored iron-forges and woolen-mills;factories have been given, by competing cities, land and exemption fromtaxation; yet no attempt is made on that account to control thesebusinesses in a peculiar way and to treat them as public enterprises.So, it is said, the railroad is still merely a private business.

But the social answer is stronger than this. As to the precedent oftariff- and bounty-favored enterprises, most careful students wouldadmit a close analogy in the two cases, but would maintain that thetariff policy also has been carried to an unjustifiable extreme, andthat it could not be used to vindicate a still greater assault on publicrights. But, further, privileges of railroads are greater in amount andmore important in character than those granted to any ordinary privateenterprise. The legislatures recognize constantly the peculiar publicfunctions of the railroads. In other private enterprises, investors takeall the risk; legislatures and courts recognize the duty of guarding,where possible, the investment of capital in railroads. Laws have beenpassed in several states to protect the railroads againstticket-scalping. Whenever the question comes before them, the courtsmaintain the right of the railroads to earn a fair dividend. Privateenterprise has been invited to undertake a public work, yet publicinterests are paramount.

If an extremely abstract view is taken there is danger of losing sightof the real problem, which is that of harmonizing these two interests inthought and in public policy. Yet the extreme advocates of the privatecontrol of railroads have resented indignantly any public interferencewith railroad rates and with railroad management as an infringement ofindividual liberty. At the time of the passage of the InterstateCommerce Act this position was inconsistently taken by those in whoseinterests free competition had been violently set aside at the veryoutset of railroad construction, and for whom government interferencehad made possible great fortunes. The railroads cannot change from apublic to a private character just as it suits their convenience. Theycannot be allowed to play Dr. Jekyll and Mr. Hyde; smooth and affable inthe character of public agents when public advantages are to be gained,and then as private enterprises ugly and scowling, flouting the publicinterests, charging all the traffic will bear, and resisting allreasonable regulation and[Pg 538] conditions. Though railroads are privateenterprises as regards the character of the investment, they are publicenterprises as to their privileges, functions, and obligations.

§ II. POLITICAL AND ECONOMIC POWER OF RAILROAD MANAGERS

1.In various ways railroad managers exercise great political influenceand power. Some writers maintain that the power to make rates onrailroads is a power of taxation. They point out that if rates are notsubject to fixed rules imposed by the state, the private managers ofrailroads wield the power of the lawmaker. By changing the rates onforeign exports or imports, the railroads frequently have made ornullified a protective tariff and have defeated the intention of thelegislature. High rates on state-owned roads have openly been used inlieu of protective duties. These facts go to show that a change ofrailroad rates between two places within the country is similar ineffect to the imposing or repeal of tariff duties between them.

The wealth and industrial importance of the railroads give themwidespread political power in other ways. It is commonly charged in somestates that the legislature and the courts are "owned" by the railroads.The railroads, in part because they are the victims at times of attemptsat blackmail by dishonest public officials, are compelled inself-defense to maintain a lobby. The railroad lobby, defensive andoffensive, is in many states the all-powerful "third house." Railroadseven have their agents in the primaries, they enter politicalconventions, they dictate nominations from the lowest office up to thatof governor, and they elect judges and legislators. The extent to whichthis is done differs according as the railroads have large or smallinterests within the state. How is this great political problem to bemet except by an appreciation of its importance and by a growth ofpublic integrity?

2.The economic power of the higher railroad officials enables[Pg 539] them toexercise certain functions of an important public nature. When therailroad was a young industry, its essentially public nature was notrecognized. It was at first thought to be simply an iron-track turnpiketo which the old English law of common carriers would apply. As this andsimilar notions proved illusory, the railroad manager became investedwith complex and often conflicting duties to the stockholders and to thepublic. He wore his conscience-burden lightly, and frequently madelittle attempt to meet the one and no attempt whatever to meet the otherobligation. The new field offered for speculation gave opportunities forgreat private fortunes. There were no precedents, no ripened publicopinion, no established code of ethics, to govern. It was a betrayal ofthe interests of the stockholders when directors formed "constructioncompanies" and granted contracts to themselves at outrageously highprices. It was an injury not only to shippers, but also to thestockholders, when special rates were granted to friends and toindustries in which the directors were interested.

It is believed that a better code of business morality has developed,and that the officers' relation of trusteeship toward the shareholdersis now more often recognized. But practical ethics need to be developedmuch farther than this. A railroad manager is engaged by thestockholders, is responsible to them, and looks to them for hispromotion. Hence their interests are uppermost whenever the welfare ofthe public is not in harmony with the earning of liberal dividends. Themanager feels bound to defend the principle of "charging what thetraffic will bear" in the case of each individual, locality, and kind ofgoods. If this ruins some men and enriches others, if it destroys theprosperity of cities to increase the earnings of the road, at all eventshe feels he has done his full duty. Railroad directors do not yetrecognize, and possibly never will, that their office is more than aprivate trusteeship, that it is a public trust.

3.The progress of consolidation among railroads is putting[Pg 540] into fewerhands greater financial and economic power. The early railroads, manyof which were built in sections of a few miles in length, have beenslowly welded into continuous trunk lines with many branches. The NewYork Central between Albany and Buffalo was a consolidation, byCommodore Vanderbilt, of sixteen short lines. The Pennsylvania systemwas formed link by link from scores of small roads. The growth ofconsolidation recently has been more rapid than ever before. Sixty percent. of the mileage of the United States is under the control of fiveinterests; seventy-five per cent. is controlled by a group of men thatcan sit about one table. The country is being divided territorially intogreat railroad domains, within each of which one financial interest isdominant. Great financial alliances and "community of interests" stillfurther unify the policy of the leading roads.

Toward this result strong economic forces are working. Consolidation hasmany technical advantages: it saves time, reduces the unit cost ofadministration and of handling goods, gives better use of the rollingstock and of the terminal facilities of the railroads, and insurescontinuous train service. It has the advantages of other largeproduction and the possible economies of the trusts. Most important,however, from the point of view of the railroads, is the prevention ofcompetition and the making possible of higher rates and largerdividends. The statement that competition is not an effective regulatorof railroads often is misunderstood to mean that it in no way acts onrates. It is true that competition between roads does not preventdiscrimination and excessive charges between stations on one line only;but competition usually has acted powerfully at well-recognized"competing points." The larger the area controlled by one management,the fewer are the competing points; the larger, therefore, is the powerover the rate and the more completely the monopoly principle applies. Itis a grim jest to say that consolidation does not change the railroadsituation as regards the question of rates.

§ III. COMMISSIONS TO CONTROL RAILROADS

1.Most of the states have undertaken, through commissions, to regulatethe railroads in the public interest. When it became evident thatpublic and private interests in the railroads were so divergent, itstill was not easy to determine how the public was to be safeguarded. Atfirst, some general conditions such as maximum rates were inserted inthe laws and charters; but these were not adaptable to changingconditions and, for lack of administrative agents, could not beenforced. The early efforts at state ownership were, as was noted above,futile and disastrous, the remedy of state ownership, as then applied,being worse than the disease. The old law of common carriers gave toindividual shippers an uncertain redress in the courts for unreasonablerates; but the remedy was costly because the aggrieved shipper had toemploy counsel, to gather evidence, and to risk the penalty of failure;it was slow, for while delay was death to the shipper's business, caseshung for months or years in the courts; it was ineffectual, for evenwhen the case was won, the shipper was not repaid for all his losses,and the same discrimination could be immediately repeated against himand other shippers.

Attempting to remedy these evils, thirty-one of the states haveappointed commissions and, as the most important states are included,this mode of regulation applies probably to four fifths of all trafficbeginning and ending in a single state. These commissions differ inpower, but in general they attempt to prevent excessive discriminationin rates and to check all railroad practices injurious to the publicwelfare. The commission principle, strongly opposed at first by therailroads, has been upheld by the courts and is now an establishedpublic policy. The state commissions, however, have fallen far short ofa solution of the problem. Though they have done much to make theaccounts of the railroads intelligible, something to make the ratesreasonable and subject[Pg 542] to rule, and much to educate public sentiment,on the whole their results have been disappointing. It has beendifficult to get commissioners at once strong, able, and honest; thepublic does not yet know its own mind well enough to support thecommissions properly; and—more fatal weakness still—the courts earlydecided that state commissions could regulate only the trafficoriginating and ending within the state, and this left untouched themuch greater volume and more important class of interstate traffic.

2.The Interstate Commerce Commission is an agency by which it washoped to secure a uniform national public control of railroads. Publichostility to private railroad management was greatest in the regionswhere the most rapid building of roads occurred from 1866 to 1873. Onecenter of grievances was in "the granger states" of Illinois, Wisconsin,Kansas, Nebraska, Iowa, and Minnesota; another center was in the oilregions of Ohio and Pennsylvania. The Eastern states were not withouttheir troubles, for the report of the Hepburn Committee of the New Yorklegislature in 1879 shows that discrimination between shippers prevailedto an almost incredible degree in every portion of New York state. Whenthe courts, in 1886, decided that the greater portion of the railroadrates could not be treated by state commissions, national control wasloudly demanded. Scores of bills were presented to Congress between 1870and 1886, and, despite the bitter opposition of the railroads, theInterstate Commerce Act was passed in 1887.

The act laid down some general rules: that rates should be just andreasonable; that railroads should not pool, or agree to divide, theirearnings to avoid competition; that they should, unless expresslyexcused, fix rates in accordance with the long- and short-haul principle(to charge no more for a shorter distance than for a longer one on thesame line and in the same direction, the shorter being included withinthe longer). The act provided for a commission of five men, to beappointed by the President, which might require uniform[Pg 543] accounts fromthe railroads, and which should enforce the provisions of the act.

3.The object of the Interstate Commerce Act has been but imperfectlyattained. This brief proposition sums up the story of years of effortsand defeated hopes. The powers of the commission have proved inadequateto attain the main purposes of the act—the prevention of discriminationand the securing of steady and equitable rates to all shippers. By thedecisions of the federal courts, the commission's power has been reducedfar below the intentions of the Congress that passed the law. Therailroads have in many cases refused to obey the orders of thecommission and have succeeded in maintaining their refusal. Admirableresults have been secured in the way of uniform accounting, uniformityof rates has been somewhat furthered at times, and the public has beenin many cases enlightened. But the greatest evils remain. Railroadsstill give secret rates in great numbers; many competent witnessesbefore the Industrial Commission in 1900 and 1901 testified thatdiscrimination had never been worse. From time to time the recognitionof the injury to dividends wrought by discriminating rates prompts somerailroad to offer its coöperation to the commission, and this inspiresnew hopes of an effective administration of the act. The pressure ofcompetition, however, soon forces the penitent road back into its oldways. On one thing the railroads and the commission are agreed: thatpooling should be permitted, though the commission wishes to have thisunder strict supervision. To this point the public has not yet advanced.

Despite the general acceptance now of the principle that the railroadsshould be controlled in the public interest, despite the barren legaltriumph of the commission principle, it is evident that the railroad isnot yet under social control. The future must determine whether thesolution is to be found in effective public regulation or in publicownership.

CHAPTER 56

PUBLIC POLICY AS TO CONTROL OF INDUSTRY

§ I. STATE REGULATION OF CORPORATE INDUSTRY

1.The great increase of late in the number of industries undercorporate control has brought new problems of social regulation.Inventions, machinery, better transportation, better communication,widening markets, have united to favor large-scale production, and thisin turn to multiply corporations. Corporate organization makes possiblegreater massing of capital, greater stability of policy, and (becausenot dependent on a single life) greater permanence than does individualownership. With these advantages the corporation brings also new socialproblems. The relations in corporate business are more complex thanthose in individual enterprise. The ordinary stockholder cannot havepersonal knowledge of the business or exercise personal supervision overhis investment. The corporate official controls chiefly not his ownwealth, but the wealth of others. When men deal personally with eachother their sympathies are more appealed to. But, as noted in the caseof the railroad, the corporate official at best seeks to satisfy hisemployers, often to the detriment both of the employes and of thepublic. Corporations are "soulless" because they permit less of theclose personal relation that makes for morality. At various points inthese later chapters on the relation of the state to industry, mentionhas been made of the measures society has taken to regulate corporateindustry. The purpose now is to survey the field more systematically andto see the extent[Pg 545] of this regulation, the difficulties arising, and theprinciples involved.

2.Numerous laws and commissions recently have been established toprovide public regulation of industry. The Interstate CommerceCommission is the most prominent of the agencies for regulatingcorporate industry, as the railroad problem is the most prominent of thecorporation questions. But before the advent of the railroad, banks hadbeen recognized as having an exceptional public character. Not onlystockholders, investors, depositors, and note-holders, but a large partof the public suffers losses by the failure of banks. As investigationby the various interested persons is quite impossible, the state throughits agents inspects the books of the bank in a manner not thought of inthe case of ordinary private business. The bank commission is the eye ofthe public, safeguarding the public welfare. State inspection ofinsurance companies, a later kind of corporate enterprise, grew out of asimilar need. Insurance to provide for sickness, old age, or death issocially desirable and is possible in an equitable way only by theassociation of a large number of policy-holders. But inspection of thebusiness by each policy-holder being impossible, regulation and controlthrough some public agency is needed. The tax commissions now found in amajority of the states have been created principally to deal withcorporations. In California, a debris commission regulates the relationsbetween the farmers and the miners using hydraulic processes. A numberof states have mining commissions, harbor commissions, laborcommissions, boards of arbitration, and other similar bodies. Theincrease of these public agencies to regulate corporate industry haslately been condemned by some as a useless multiplication of statemachinery. Doubtless some commissions have, through improper influences,been needlessly created; others having important duties have beenintrusted to incompetent political appointees. But most of thesecommissions are needed, though at first their work may be ineffective.

3.There is a strong and increasing demand for publicity in thebusiness of the ordinary corporation, as a protection to investors. Thelaw has looked upon corporations, with few exceptions, as privatebusinesses, having the right to keep every detail of their managementsecret from their rivals. The inner management, therefore, has beenclosely hidden from most of the stockholders, who, in the economicanalysis, are in the main the enterprisers. More and more the businessand capital of the country has thus come into the control of the few.The ordinary investor in corporate stock "buys a pig in a poke" andtrusts to the integrity of officers working behind closed doors,responsible to no one, too often speculating in the stock of their owncompanies. The unearned gains thus secured have tainted with dishonestymany a large fortune. No small part of the evil is the closing of theavenues of safe investment to the small capitalists, giving to a favoredfew a measure of monopoly in investments yielding large returns. Onlyrecently has it been recognized that no large corporation can now be aprivate business in the old sense. The evolution of industry has leftinvestors and shareholders without protection in advance of a wrong, andusually without legal redress when a wrong has been committed.

The demand for some remedy for a condition whose seriousness has beensteadily increasing has not come so much from radical quarters as frombusiness and financial circles. In England, some of the worst abuseshave been corrected by legislation. In 1900, a bill was drafted at thesuggestion of Theodore Roosevelt, then Governor of New York, which aimedeventually to make the corporation a quasi-public institution, open toinspection. The organizers of a company voluntarily accepting the actwere to be personally responsible for the statements in its prospectus;its issue of stock was to be limited to actual investment and to bepublicly made; its office and records were to be open to inspection.Though public opinion was not ready for this bill, and it failed ofpassage, the bureau of corporations of the new department[Pg 547] of commerceof the federal government, established in 1903 under PresidentRoosevelt, may be looked upon as a fruit of this initial attempt.

4.Greater publicity of corporation business is essential in theinterest of the public. With the interests of the investor are usuallyunited more general public interests; but in many cases the two groupsof interests conflict. Some persons favor control of corporations onlyto the degree needed to protect investors, but others place the policyon broader social grounds. The ability of a manufacturing corporation,at times, by threats of removal, to coerce unfair terms from thecommunity, from its employees, and from those who supply it withmaterials, has led to the proposal that factories shall be forbidden tochange their location without the consent of the state.

Especially does it seem desirable, if it is possible, to preserve thebenefits of competition, by forbidding rates and agreements in restraintof trade. The old English idea, inherited in our law, is that thehighest price that can be got in an open market, under ordinaryconditions, is in general a just price. The control of any line ofindustry by a few corporations makes secret agreement much more easy,and thus replaces a general market-price by a discriminating rate, thehighest that each individual will bear. A trust's price might still be areasonable one if the seller met competition in every market; but it isnot reasonable when opposition is crushed by local and by individualdiscriminations. The methods by which this result is obtained shrinkfrom the public gaze. They include secret agreements with railroadagents, a system of espionage on the business of competitors, secretspecial rates to the competitor's customers, to say nothing more ofcorrupt political influence. Publicity in corporation accounts is thefirst condition to a public and uniform price. The need thus to developpotential competition is especially strong where a monopoly in a naturalproduct exists. A more general recognition of the public nature ofcorporations[Pg 548] will lead to further legislation and to the appointment ofcorporation commissions, as has been done already in some states.

§ II. DIFFICULTIES OF PUBLIC CONTROL OF INDUSTRY

1.The progress of industry is compelling greater social contact andmore use of the agencies of government. The numerous exemplificationsof this general statement that have been met in the course of this studyhave a common cause. In simple conditions of industry, where most of theproductive energies were given to securing the necessities of life, thestruggle of men was with nature. Social relations then were simple andcrude, such as those of chattel slavery. Now, most men get theirlivelihood from their bargains with other men. The relations of men withnature now are fewer, and less close; the relations of men with men aremore numerous and complex. Efficient coöperation is a factor inproduction. Right social relations are more essential to industry than afertile soil.

The social institutions of any community are its answer, expressed inhuman consciousness and in formal laws, to this difficult problem ofliving together. Laws and ways for regulating industry may be good orbad. The good laws are those in harmony with human nature, giving thebest motives for work and the greatest happiness both in the effort andin its reward. The merit of laws, therefore, is relative to humannature; those good for one kind of citizens may be bad for another. Mencannot be legislated into honesty without limit. The best that ispossible is to enact laws that encourage the best in men as they are. Adishonest community neither has, nor is capable of choosing, men honestenough to supervise the others. Society cannot, by any amount of tuggingand pulling on legislative boot-straps, lift itself above its own moralplane. But though the change in formal law cannot far precede, it maylag behind and retard,[Pg 549] social progress. Law tardily adjusted to socialneeds tempts and corrupts men. A time has never been when a higherwisdom could not have corrected some ancient grievance, have leveledsome unmerited inequality, and, by making laws as good as men werecapable of administering at the moment, have freed their energies forfurther advances. It is only a spirit of moderate expectation that willnot be cast down by the results of legal "reforms." Hence it cannot behoped that abuses will not appear in the attempts to regulate privateindustry. Fallible men make mistakes and commit injustice, sometimesgreater than that which they are seeking to prevent.

2.Legislative interference with industry presents temptations tocommunity selfishness to misuse social legislation. Community greed isnot more lovely than individual greed. Many a citizen holds up a highstandard for the public official and bewails the corruptions of politicswhen the legislator votes for his own interest instead of for hisconstituents' interests. Such a citizen rarely reflects that theresponsibility for many legislative abuses comes back to the communityand to the individual voter. Can the water rise higher than its source?Is it a high conception of a representative's duty that he shouldout-talk, outwit, and out-vote his fellow-representatives, to get "agraft" for the men who elect him? In many communities, the one publicquestion of importance is tariff legislation in favor of the localindustries. This selfish issue bribes the electorate, and blinds it andits legislator to every question of the general welfare. A greatindustrial commonwealth steeps its public life in corruption when itsvoters sell their political birthright for a duty on iron. Manycongressmen are so burdened with the task of securing some publicexpenditure in their district to help their constituents that they havelittle thought and less interest to give to larger public questions. Ifa local improvement will furnish labor and increase the value ofsurrounding property, though it is most uneconomic for the generalcommunity,[Pg 550] the representative is expected to labor hard to secure it.Many citizens see little harm in "log-rolling" by the legislator,—thatis, in his voting for a law without merit in order to get another lawthat his constituents want. The guilt of this worst form of briberycomes back to the community that forces its representatives to such acourse, sinking public morality to a lower level.

3.The power of the legislature to affect private fortunes presentsstrong temptations to public representatives. That the legislator is sooften true to a high standard of public duty, goes to illustrate thefamiliar truth that the individual moral code is better than that ofcommunities. That some individuals betray their trust is lesssurprising. The Credit-Mobilier scandal, in connection with legislationin aid of the Union Pacific Railroad, implicated many congressmen. A fewyears ago, in one of the greatest states, it was discovered that aninnocent-looking bill, relating to the rights of property-owners onstreams, practically involved the gift, to a ring of men, of a quarterof a billion dollars' worth of coal-lands, lying under the navigablestreams, and belonging to the state. Such temptations for wealth-gettingare too great for men selected solely for their ability to obtainoffices and pensions for political supporters, and to secureclass-legislation for reputable citizens. The power of the legislativebodies to grant franchises and to permit the use of public property tocorporations, constantly gives opportunity for dishonesty and occasionfor scandal in the larger cities. The histories of the granting offranchises in New York, Philadelphia, Pittsburg, St. Louis, and manyother municipalities, are full of black pages. Public duties are tooheavy for the public integrity. Industrial power has grown faster thanthe civic conscience, and somehow the balance must be made even.

4.The power of the courts and of executive officers in theinterpreting and executing of laws governing business has becomegreater. With closer contact of men there is greater friction in socialrelations, and litigation increases.[Pg 551] Fortunes turn on the result of acivil suit. While juries often are corrupt, yet it is remarkable howwell the courts have kept their integrity in the midst of greattemptations. Professional pride and the noble traditions of the Englishjudiciary strengthen the individual's character on the bench, notinfrequently transforming a dishonest lawyer into a just judge; butpopular elections, selfish interests, and the social forces of wealthand ambition make the task at times too heavy.

The executive branch of government is necessarily intrusted with greatpower, increasing with the extent of social regulation. The Secretary ofthe Treasury has discretion as to the sale and purchase of bonds, andthus can affect the rate of discount and the selling price ofsecurities. One man's decision, if known in advance, makes possiblefortunes for private pockets. A recognition of the importance of thesefacts, which are typical of a great class of facts, must help to developa higher sense of public duty. Patriotism has been thought of toonarrowly. The enemies of early society were outside its borders, and thecitizen who traitorously gave them aid was held in abhorrence. Now,independently, in many quarters is voiced the conviction that thegreatest enemies of society are within its borders, and that politicalcorruption is the modern form of treason. A higher conception of civicvirtue is required to meet the added tasks of society. Public officialcontrol must be united with private industrial control in a way topresent the fewest temptations to the betrayal of public trust. Now, asnever before, must be felt the wisdom of Emerson's words: "The bestpolitical economy is the care and culture of men."

§ III. TREND OF POLICY AS TO PUBLIC INDUSTRIAL ACTIVITY

1.There has been a large increase of state socialism in recent years.The term state socialism, broadly understood, includes all the forms ofpublic participation in industry[Pg 552] that have been passed in review:ownership by towns, cities, state, or nation; laws regulating thefreedom of contract; agencies to inspect conditions and to enforce thelaws; commissions to supervise and control corporate industry. Fromevery direction comes evidence of the increase of state socialism withinthe past twenty-five years. To those accustomed to think of the spiritof the Germanic races as that of individual liberty and enterprise, itseems remarkable that this increase has been greater among people ofTeutonic origin (Germany, England, America, Australia) than among thoseof Latin race. The change seems to be a part of the movement ofdemocracy, even the measures of Bismarck in Germany having been taken toward off the demands of the radical party. The mere name of socialism nolonger frightens the citizens of a free state, and when men of strongindividualistic spirit even claim with pride that they are socialists,the meaning of that term is becoming very vague indeed.

2.State socialism must not be confused with collectivism, or radicalsocialism. The word socialism is so variously defined that the earneststudent sometimes despairs of getting a clear understanding of it. Thethought of socialism ranges from the simplest form of stateinterference, such as the support of public schools and publicfire-departments, up to complete public ownership of all industry. It iswell to describe as radical socialists those who would abolish privateproperty, and would strike at the very root of the existing order ofsociety. The modern form of radical socialism originated among Germanthinkers of the school of Karl Marx, but it has many supporters in otherlands. The typical radical socialist claims to possess the only purebrand of social reform, disdains any interest in state socialism, andscoffs at state control as mere temporizing, as not even a single steptoward radical socialism.

The typical state socialist agrees that these measures do not logicallyforce him toward the extremer view. He is at[Pg 553] heart an individualist,believing that the motive forces of society are in human character, notin governmental machinery; but he seeks to prevent some kinds ofcompetition, to put other kinds on a better basis; "to make the rules ofthe game fairer," but not to suppress it. According to this differencein ultimate plan, men and present measures can in general be classified.Yet one view sometimes shades into the other in the life-history of asingle individual. Believers in moderate interference sometimes movetoward the extreme, and the most radical thinkers, sometimes with noless honesty, become, with broadening experience, more and moremoderate. It would be surprising if any one who is thinking and growingin social philosophy should succeed in so exactly adjusting to eachother all his opinions, as to be absolutely consistent at a particularmoment in his views on social policy.

3.It is not safe to predict from present evidence a continued trendtoward extreme social control. Social prophecy is fascinating. Men liketo answer out of their ignorance the question, Whither are we tending? Adeeper study of social law should give this power, but it is not won byhasty generalization. Unripe social philosophers assume that because thetheory of biological evolution is correct, the particular theory ofsocial evolution which they choose to invent or accept is unimpeachable.Radical socialism is the exaggerated statement of a present social need.It is a bridging with hope, not with experience, of the chasm betweenreality and the dreams of the unsuccessful.

It is true that many evidences point to an increase in social controlfor some time to come. The laws, the institutions, the prevailingmorality of society, have not kept pace with industrial growth in thisperiod of sweeping change. What is seen, however, is a small arc of thecurve of progress. Much of the social regulation in the Middle Ages wassimilar to that which is now increasing. Legislation by gilds andprivileges of private corporations hedged industry about.[Pg 554] A reactionagainst this in the seventeenth and eighteenth centuries brought onnational and state control, and state interference of another kindrapidly increased until the time of Adam Smith. Then a strong reactioncame, and the next period of fifty years saw far less of interference.The years from 1825 to 1840 were those of the greatest state socialismever seen in America, but the results were so unfortunate that a violentreaction followed. The recent great increase of state activity is notlikely to be continued indefinitely. The path of progress is a spiral.There are forces already at work creating a resistance to any greatextension of this movement. Competition of the healthier sort cannot besuppressed without paralyzing results. Inequality and the opportunityfor ability to realize itself cannot be destroyed. The socialregulations must be of a sort to liberate the best energies of men, notto enchain them. If the evils of state regulation increasingly appear tooutweigh the benefits, a limit must be put to the movement. While socialcontrol may aid in lifting production and competition to a higher andmore moral plane, the ability of society will refuse to be ruled by thestandards of the weak and inefficient.

CHAPTER 57

FUTURE TREND OF VALUES

§ I. PAST AND PRESENT OF ECONOMIC SOCIETY

1.The meaning and scope of economics can be better seen at the endthan at the beginning of its study. The proposition with which thisinquiry opened may well be recalled in the closing chapter. The words ofthe formal definition of economics should at this point convey a fullermeaning. In the wide range of subjects passed in review has been soughtthe answer to one question: What determines and affects the values ofgood?

Perhaps now also can be better appreciated what the influence of such astudy might and should be on practical action. At times economicstudents have gained the ear of statesmen and rulers, and have exercisedmuch influence upon practical politics. It is sometimes bemoaned thateconomists have to-day so small a direct part in the government of ourrepublic. They certainly have a greater part to-day than they had twentyyears ago, but if they had not, there would be small occasion forregret. The immediate influence of the specialist on those in authorityis at most times less in a republic than it is in a monarchy, at thoserare times when a ruler shows the students his favor. That influence inAmerica is mostly indirect, but it is no less sure and lasting. Theresults of the earnest pursuit of economic inquiry in the universitiesand outside of them are already appearing, not in dramatic ways, but inthe more subtle, surer form of an intelligent public opinion.

2.Economic science has not reached a stage that permits of muchprophecy. Prediction is sometimes given as the test of science. Thistest, however, is one that only astronomy can meet in any remarkabledegree. Chemistry can tell much of what will happen in the laboratory,but nothing of the date of future powder-mill explosions. Geologyanswers the question "What?" with surmises, and "When?" with an estimateof a few million years more or less. Is it surprising that in humanaffairs still less prediction is possible? There are countlessunmeasured factors in human action. Such generalizations as are possiblemust be based on actions that appear and reappear with practicalconstancy. Though a number of facts unite to suggest some conclusions asto the immediate future, the experience of the last century bids onebeware of sweeping predictions. The close of the French Revolution was aperiod marked by much speculation regarding the future of society. Theoptimists, with faith in the perfectability of human nature and ofsociety, believed that all social ills were due to bad government; ifdespotism were but overthrown, man's nature would develop, untrammeled,to perfection. The economists of that day were sceptical, because,looking deeper, they saw sources of misery in the scantiness of man'senvironment, and in the sloth, ignorance, and incapacity of humannature. The pessimists—the communists, and socialists of thatday—seeing the same evils, had other explanations to offer. While theeconomists of that day believed the conditions of poverty and misery tobe inevitable, the pessimists pronounced them unendurable, and advocateda radical social change as the only hope of saving the masses fromstarvation. In such a variety of mutually contradictory views there musthave been much error, but likewise much truth if it could bedisentangled.

3.The unexpected changes in transportation and in industry altered thecourse of economic development in the last century. Much of theeconomic theory of that day appears absurd in the light of history. Theinventions of the period,[Pg 557] from Adam Smith's writings to Ricardo's (1776to 1820), were mostly for use in manufacturing. This suggested to theminds of that time the progressive cheapening of cloth, iron, pottery,and of all other products of machinery, but not the cheapening of food.Indeed, the situation in western Europe then suggested strongly theopinion that the products of the soil would steadily become moredifficult to get. The railroad was not of practical importance untilafter 1830; the steamboat was not applied to ocean travel until 1837.The opening of a rich continent and its annexation, by these newagencies, to the available resources of the older countries were notdreamed of. It was not fully appreciated that a great change in socialstandards, controlling the growth of population, was in progress. Thiswas the panorama of the progress of society as seen by both theconservative economists and the socialists of less than a century ago:continued invention, an increasing population, low wages, scanty food,growing wealth for the few, and growing poverty and misery for themasses.

4.The actual course of economic development in the nineteenth centuryfalsified the predictions alike of optimists, economists, andpessimists. Not foreseeing the great supplies of natural resources soonto be made available for the older countries, the men of that daynaturally thought of the supply of land as limited and fixed. Supply inthe economic sense means the amount available at the given time in themarket; but despite the great areas since brought into theworld-markets, the false idea of a century ago still persists in thetext-books, and shapes economic reasoning. It is vain to say that thecircumstances have been unique and that the general principle is stillvalid. Much of the so-called orthodox economic analysis was essentiallyerroneous as applied to the conditions of the past century; it iserroneous to-day and will be so for years to come, if it ever fits thefacts. New continents are about to be opened. The building of railroadsthe length of South America and to the center of Africa will[Pg 558] makeavailable new mineral wealth, rare woods, enormous forests, and some ofthe greatest food-producing areas on the globe. Population inChristendom has increased more rapidly than ever before in the historyof the world, but it has not overtaken the progress in resources. Therate of increase of population is slackening. The result of thiscombination of events has been a general rise of the conditions makingfor popular welfare. Despite the problems and the abuses that every newchange brings, the civilized world undoubtedly is more prosperous to-daythan ever before. The greatest misery and discontent is in the morebackward communities. This is past and present; what of the economicfuture? Is the present condition a normal one—is this prosperity likelyto grow or to decline? Thus far, surely, the economic student mayquestion the oracles; for though the distant future is veiled from man'sview, the role of economic theory is to show causal relations, toconvert mystery into reason, and thus to give a lamp to the feet of thepresent.

§ II. THE ECONOMIC FUTURE OF SOCIETY

1.Present industrial progress is largely due to material conditions,temporarily favorable. Many of the materials now being destroyed inimmense quantities have been slowly stored up through the ages and arenot renewable.[4] Till modern times man knew little of the world beneathits crust. Living, he scratched the earth's surface, and dying, left hisbones to fertilize the soil. But to-day, man exhausts the stores in theinterior of the earth, burns the treasures of the carboniferous age,casts the fertilizing elements into the ocean, and leaves the world anempty shell. Forests are being so rapidly cut off that the price offuel-wood and lumber in many parts of the United States has, withintwenty years, been multiplied[Pg 559] by three. The world's store of iron oreis not yet fully known, but much of it has been measured, and of thedeposits known to be within the United States over one half are said tobe owned by one corporation, and they are enough to continue its presentoutput no more than sixty years. Many other natural products are in likemanner gathered by civilized man from a stock created long ago. Whilethe supply of vegetable food promises to be ample, the supply of meatwill be maintained with difficulty as population becomes denser.

2.Many other inexhaustible sources of essential materials have not yetbeen developed. What has just been said is the darker side. Thecoal-mines can be emptied, but so long as the sun shines and the rainsfall, Niagara will remain as a source of light, heat, and power. Thetides flow on forever. In every thunder-storm enough force is dissipatedto run thousands of factories. The heat in the center of the globe,though not inexhaustible, would suffice for man's needs for manycenturies. The force in Mount Pelée, if chained and utilized, would runa million factories a million years. It is not too much to hope thatengineering skill will some day reach and utilize these sources. Such acheapening and diffusion of power would put a new face on many of theproblems of industry. New sources of materials undoubtedly will bedeveloped. It is reasonable to hope that before iron ore has becomeextremely scarce, a cheap and practicable method of extracting aluminiumfrom clay will have been perfected. Secure of these permanent sources,civilization will stand on a firmer foundation.

A great displacement of local values must accompany this shifting of thecenters of power and materials. When the coal districts are heaps ofslag and cinders, industry will be found near the water-power. Becauseof distance from raw materials, New England even now finds herself hardpushed in her rivalry with the Southern states in the manufacture oftextiles. The industrial map of our country will be greatly altered ahundred years hence. The possession of rich natural[Pg 560] resources to-daydoes not insure a community enduring prosperity.

3.The mass and quality of wealth will increase rapidly if social andpolitical conditions remain stable. The main method of increasingwealth must be the putting of energies and resources into more abidingforms. In order that a motive for saving may be present, there must bestable conditions. Increasing subordination of present to future will beaccompanied by a fall in the rate of interest. The growth of wealthmeans a higher quality of all artificial productive agents. A largerpart of the energies of men will then be directed merely to supervisingthe developed machinery. Man will live in a better environment, in abetter and richer world. Wages must rise as the quality of tools andmachinery improves. Population most probably will not increaseproportionately and the relation of the labor-supply to the resourceswith which it works should be more and more in favor of the laboringclasses. The difficult problems of the concentrated control of industryand of the control of wealth must be solved in the interests of all.

4.Improvement of the race biologically, through selection of theablest individuals, has been a great factor in human progress. Socialprogress is not necessarily the steady biological betterment of thenative ability of men. The education of the average member of society isbecoming yearly better; it is doubtful whether the innate capacity of anew-born babe in Europe and America to-day is greater than it was amongour Germanic ancestors in Roman times. Indeed, the progress of the pasttwo thousand years has been in social organization, in the enlargementand simplifying of the mass of knowledge which has to be reappropriatedby each new individual, rather than in race-breeding and in quality.

Few thoughtful persons now hold the view that the race can be rapidlyimproved biologically by the process of educating the individual.Education is cumulative in so far as it builds up a better environmentinto which other children[Pg 561] will be born, but the betterment is not dueto the inheritance by the child of the acquired knowledge and skill ofthe parent. If this question is open to dispute among biologists, it isonly as regards a minute increment of improvement. Practically,selection is the only means of improving the innate capacity of anyspecies in any large measure. Many forces were at work in the past tolift man above the brute, and especially to increase the averagebrain-power of the human race. The weak, the ignorant, the incapable inprimitive societies were ruthlessly killed off. The strong, thesagacious, and the enterprising left the largest numbers of descendants.

5.Progress will be checked if the native quality of the racedeclines. Under modern conditions, especially within the last quarterof a century, the successful elements of society are becoming lessfertile. Large families were the rule among the capable pioneers ofAmerica; now they are rare except in the lower industrial ranks.Democracy and opportunity are favoring this process of increasing themediocre and reducing the excellent strains of stock. Caste and statuskept successful generations of capable men in humble social ranks fromwhich only by chance some remarkable individual could rise. In ademocracy, those of marked ability can more easily move into thebetter-paid callings and professions. This individual good fortune,however, reduces the probability of offspring. In the higher socialranks are more bachelors and old maids than in the lower ranks, andfewer children are born to each marriage. The president of our oldestuniversity has shown that one fourth of the graduates of the lastgeneration have remained single, and that the average number of childrenof the married graduate is two. That group of men, therefore, has leftonly three fourths enough descendants to maintain its numbers, and asthe population has doubled within the same generation, that classrepresents only three eighths as large a proportion of the Americanstock as formerly.

This sterilization of ability has cumulative results. If society[Pg 562] werecomposed in equal parts of two distinct strains of stock, notintermarrying; if the total population kept intact from one generationto another (say each period of thirty years), but the superior straincontributed only three fourths of its own number, at the end of fivegenerations it would have sunk from one half to a little more than oneeighth of the population. A period brief in the life of nations wouldserve to leave it an almost negligible factor in social life. There canhardly be a doubt that at present our society is on the averageincreasing far more from the less provident, less enterprising, lessintelligent classes. There has not yet been time for many of thecumulative effects of this process to appear. Progress is threatenedunless social institutions can be so adjusted as to reverse the presentprocess of multiplying the poorest, and of extinguishing the mostcapable families.

6.If progress is to continue, there must be left a wide field for theambitions and for the competition of individuals. The results of anygiven ability are dependent upon the energy with which it is used. Thesocial machinery finds its motive force in the nature of men. In takingeconomic wants as the starting point of our study, it was not impliedthat men were entirely selfish. Sympathy widens; economic wants includefamily, friends, and, in a growing measure, humanity. The happiness of atruly socialized man consists in part in the happiness of his fellows.As social sympathy broadens, the sense of duty becomes a strongereconomic force. Men change, but not rapidly, and not always for thebetter. It is unsafe to overestimate the generosity of men. Individualwants and interests must, so far as can now be seen, continue to beamong the stronger forces that move society. Progress is made because toexceptional ability in general is now presented the hope of largerewards.

These dynamic forces making for progress are at present, however,threatened from two sides. Enterprise is threatened from the side ofprivilege or status. The avoidance of[Pg 563] certain kinds of work which, bysocial convention, come to be regarded as degrading, takes much abilityout of business. The freedom of America to so great a degree from thisdisdain of honest labor has been a large factor in her progress, but itis endangered when men become timidly conservative of social position.Progress is threatened, secondly, by democracy, with its tendency tocarry the notion of literal equality over into industry. When democracybecomes envious, it denies to exceptional ability an exceptional reward.The line of growth must be the resultant of the positive forces in thesetwo principles. The energy of the social reformer must be directed alongrational lines. If this can be done, the economic outlook is for a greatdevelopment of wealth and popular welfare. Economics must be looked uponas the study of the forces in human nature as much as of the materialresources of the world.

QUESTIONS AND CRITICAL NOTES

The Questions.—These questions are not intended to be used merely as[Pg 567]tests of knowledge of the text. They leave untouched many of the mostimportant questions in the reading, and they raise other inquirieshardly hinted at in it. The list began ten years ago with one or twoquestions on each topic, assigned in advance of lectures andrecitations, with the object of arousing the student's thought,quickening his observation, and stimulating his interest in thesubjects. The possibilities of helpful questions of this kind are hardlymore than suggested by the examples given, and every teacher will findpeculiar opportunities in his own neighborhood for other similarinquiries.

Other questions are more of the nature of those inProblems inPolitical Economy, by W. G. Sumner (published by Holt & Co., New York,1884), which are intended to be reasoned out in the light of principlesgiven in the class-room. Many teachers and students have found much helpin that little book, which in turn acknowledges large obligations toearlier lists of questions. The changed point of view in economic theoryhas, however, made most of the older problems of this nature unusableexcept after reformulation. Fertile in suggestions of both of the kindsof questions mentioned are two books by H. J. Davenport,Outlines ofEconomic Theory andOutlines of Elementary Economics (The MacmillanCo., New York, 1896 and 1897), though some of the questions implytheoretical views differing from those of this book. Excellent lists ofquestions with references to reading have been prepared by W. G. L.Taylor, in hisExercises in Economics (The University Publishing Co.,Lincoln, Neb., 1900). The list of problems of this kind can easily beextended to meet the special conditions of each community.

THE BIBLIOGRAPHICAL NOTES.--The few references and critical notes givenare intended as a help to teachers and advanced students desirous offollowing some of the more recent contributions to controverted pointsin economic theory. No attempt has been made to furnish a list of booksfor the beginner or the regular reader. Among accessible bookscontaining helpful lists of that kind may be mentioned:

[Pg 568]The Reader's Guide in Economic, Social, and Political Science, byBowker and Iles.

Outlines of Economics, by R. T. Ely (published by Macmillan, New York,2d ed., 1900). Contains both questions and bibliographies.

Introduction to the Study of Economics, by C. J. Bullock (published bySilver, Burdett & Co., 2d ed., 1900). The references to the literatureare given by pages or sections at the end of each chapter, and at theback is a list (about twenty pages) of the most useful texts, documents,and materials.

Financial History of the United States, by D. R. Dewey (published byLongmans, Green & Co., 1903). Contains excellent references on publicfinances, tariff, banking, and taxation of the United States.

Introduction to Economics, by H. R. Seager (published by Holt & Co.,New York, 1903). Each of the first twenty-six chapters is followed byfresh and well-selected references varying from one line to nearly apage in length. A good general bibliographical note is given on pp.61-2.

Chapter 1. The Nature and Purpose of Political Economy

1. Has political economy anything to do with woman suffrage, the liquorproblem, a republicanvs. a monarchical form of government, the silverquestion?

3. Shall a piece of coal be studied in geology, botany, physics,chemistry, or economics?

4. Do you expect to acquire wealth more easily as a result of the studyof political economy?

6. Is political economy necessary to the understanding of the businessworld, or vice versa?

7. How wide a knowledge would a complete understanding of industrialsociety require?

8. Did the discovery of America make the study of political economy moreimportant?

Chapter 2. The Economic Motives

2. What would be the chief differences between your use of it now and atthe age of five or the age of twelve?

6. Are the wants of a savage more easily satisfied than those ofcivilized men? Why?

8. If you ever worked for wages, or a salary, was that the only motive?What else?

9. James Bryce says that the incomes of American university professorsare much less than those of men of corresponding ability in law andmedicine. If true, why?

11. Which would you prefer, to clerk in a store at $1.50 a day, or tolay masonry at $2? Why?

Chapter 3. Wealth and Welfare

4. What is the difference in utility between the water in a solidmountain reservoir and the same water when it is flooding the valley?

8. Are the following wealth: food, tobacco, medicine, whisky, goodlooks, good health, a wooden leg?

9. Is a book full of useful information, wealth? Is a head full ofuseful knowledge, wealth?

12. Are services, music, a theatrical performance, a gambler's pack ofcards, wealth?

Chapter 4. The Nature of Demand

2. Do people actually expend their incomes so as to get the maximumutility judged by a standard they would admit to be morally sound?

4. If you never eat corn-bread, will the failure of the corn-crop affectyour grocery bill?

5. Give examples you have seen of a higher price of one thing causing anincreasing use of another.

Chapter 5. Exchange in a Market

1. Are merchants producers of wealth, or are their profits merelysubtracted from the wealth already produced?

3. Give examples within your observation of improved productiveprocesses increasing exchange; of the reverse.

7. Do you ever take account of a difference of five cents in decidingwhether to purchase?

9. Is there any causal relationship between commerce and manufactures?If so, in what way?

10. In a time of high excitement gold was sold for more at one side ofthe room than at the other side; how account for this?

12. What effect on prices should be expected from an invention thatmakes possible the carrying of fresh meat from South America to England?

13. Describe the method of selling any product you know about. What isthe market in which it is sold?

Chapter 6. Psychic Income

1. Is it possible to compare the value of the portrait-painter's servicewith that of the gardener?

2. To call the teacher's work unproductive, and the ditch-digger's workproductive was once usual, but is so no longer; give reasons for eitherview.

3. It is usual to call the use of a house for business purposes aproductive use, but its use as a residence an unproductive one. Whatreasons are there for and against this?

5. Give examples of personal services that are most immediatelyexpressed as gratifications.

Chapter 7. Wealth and its Indirect Uses

1. Give reasons for attributing exchange value to the waves of theocean; to a waterfall, a water-wheel, a loom, a piece of cloth, a dressmade of the cloth.

3. How can the use of a flock of sheep be of value to one who mustreturn them all to the owner?

4. Why should the use of a machine that never can be a direct cause ofgratification, have a value that men will pay for?

5. Give examples of wealth never becoming a direct cause ofgratification, yet whose possession is greatly valued.

Chapter 8. The Renting Contract

2. What is the form of contract used in the renting of farms, businessbuildings, and residences, in the community where you live?

3. Does the rent of pianos, type-writers, or masquerade-suits depend onthe value of the thing rented? Is the rental a moderate return on theinvestment?

Chapter 9. The Law of Diminishing Returns

1. Is it possible to do twice the amount of business in any store-roomby doubling the stock and the force of clerks?

2. Is it possible to expand a university indefinitely by increasing theforce of teachers and the equipment, without enlarging the buildings?

3. Why do men cultivate two acres instead of one? Where land isplentiful, why do not men cultivate two acres instead of one?

4. Are there any things, not free goods, that could be indefinitelyincreased without increasing difficulty?

5. English farmers raise thirty-five bushels of wheat per acre,Americans perhaps fifteen; why this difference?

6. Why did people go to Dakota and Iowa when there was still room in NewEngland?

Chapter 10. The Theory of Rent

2. Give examples you have seen of a rise of rent; the cause. Of a fallof rent; the cause.

3. Does the existence of the land of California have any effect on rentsin New York city? On agricultural rents in New York state?

4. If all the land on an island were equally fertile and equallyconvenient of access, would any of it pay a rent?

7. How do livery charges in a college town in commencement weekillustrate the subject of rent?

Chapter 11. Repair, Depreciation, and Destruction of Wealth

1. What is the difficulty in the definition: Rent is the payment for theoriginal and indestructible powers of the soil?

2. If the value of improvements on land is all counted, is thereanything over? Examples.

Chapter 12. Increase of Rent-bearers and of Rents

3. How would the rent of a rocky island be affected if it became asummer resort?

4. Mention any cases you may have seen where a greater value wasimparted to land by a newly discovered use.

5. A tunnel was made to drain a mine; the stock doubled in price. Was itreally the stock, the old mine, or the new hole in the mountain-sidethat had increased in value?

6. Criticize the statement that, in an economic sense, land is a "fixedstock for all time."

Chapter 13. Money as a Tool in Exchange

5. What is the difficulty in deciding whether to call the followingmoney: gold ingots, gold coin, silver dollars, copper cents, greenbacks,bank-checks, chalk-marks to keep account?

Chapter 14. The Money Economy and the Concept of Capital

3. If you were starting a factory on credit, would you rent the machinesor buy them with borrowed money? Why?

4. When a man says he has a certain capital invested in his business,does he mean to include the value of the land and buildings?

Chapter 15. The Capitalization of all Forms of Rent

1. What relation is there between the rate of interest and the price ofland bearing a given rental?

2. If a $100 share of railroad stock sells at par when interest on loansis at 5%, what will be its price when interest rises to 6%? Wheninterest falls to 4%?

3. If a business is very successful and its dividends double, what willbe the effect on the selling price of its stock?

Chapter 16. Interest on Money Loans

1. Some money-lenders in cities get 10% a day from fruit-vendors for theadvance of small sums of money, and the losses are very slight.Pawnbroking pays frequently 25 to 100% per year. In these cases whataffects the rate of interest?

4. In what ways can a lender collect a high rate of interest withoutappearing to do so?

5. What would be the effect upon the rate of interest in a new state ifit passed a law preventing the collection of loans by outside lenders?

6. Why has interest been about 10% in the West, 7% in the CentralStates, 5% in New York, 4% in Germany?

7. What is the money market? Who are the buyers and sellers, and what dothey buy and sell?

8. In a panic, interest rises on short loans and prices fall, while itis almost impossible to borrow money; does this show that the amount ofmoney determines the interest rate?

9. When gold is leaving England, the bank raises the rate of discount(interest); does this show that the quantity of money determines therate of interest?

Chapter 17. The Theory of Time-value

1. Give examples of a high cost for the use of wealth without theborrowing of money.

2. Give some examples of the neglect of repairs through lack ofresources, and show how it involved time-value.

3. What would be some of the first effects on production if interest onmoney loans fell to one half its present rate?

4. Which is the more important for the rate of interest, the amount ofmoney in the banks or the amount of goods in the country?

5. How would the rate of interest be affected if the amount of moneywere doubled at once?

Chapter 18. Relatively Fixed and Relatively Increasable Forms of Capital

4. What physical reasons account for the greatness of ancient Egypt, ofVenice, of Holland, of England, of the United States?

7. Are there different economic terms for hewn and unhewn blocks ofstone? What makes the difference?

Chapter 19. Saving and Production as Affected by the Rate of Interest

1. The savings of the people of the United States are nearly a billiondollars a year. What and where are they?

4. Do savings-banks and insurance companies stimulate saving, or do theyexist because of a disposition to save?

8. A woman cut the wool from a sheep's back, spun and wove it by oldhand-methods, and within twenty-four hours wore the dress made of it. Ismore or less time needed in production with the best machinery andprocesses?

9. Ricardo said that on account of the cheapness of food in Americathere was less temptation to employ machines than in England, where foodwas high. What is the fact about this temptation in America?

Chapter 20. Labor and Classes of Laborers

1. Is dancing labor? Is the dancing of a dancing-master labor? If hewould rather dance than eat, is it labor?

3. "Washing of clothes is unproductive labor; therefore as little of itshould be done as possible." Criticize the argument.

4. Would you say that differences in ability at manual trades are due topractice or to native talent? If to both, in what proportion?

5. Do sons usually follow the father's trade? Is it more or less commonthan formerly for them to do so?

6. Do you know from personal observation whether a Mexican, a German, oran American, is the best workman?

7. What important personal traits are needed to make a man an efficientmarket-gardener?

8. Which would be of the greatest economic advantage, to increase by 50%the intelligence, the physical strength, or the integrity of the workersof this country?

Chapter 21. The Supply of Labor

1. Has the principle of the survival of the fittest any influence on thepopulation of America?

2. What limits the number of wild rabbits? Of tame pigeons? Do the sameinfluences act in the case of men?

4. What relation is there between population and mountains, temperatureand water-supply?

5. It has been said that the supply of labor is fixed by biologic laws.Is it therefore not subject to economic influences?

6. What application do you think the principle of diminishing returnshas to the question of population?

Chapter 22. Conditions for Efficient Labor

2. Is there any relation between a republican form of government and thegrowth of manufactures.

3. What are the necessary conditions to the building of a house: (a)natural forces; (b) changes in material things; (c) humanactivities; (d) social conditions?

4. Is the public school system an economic factor? Where among the fourpreceding heads would you classify it?

5. From an economic standpoint, can we say that robbery really reducesthe wealth in existence?

7. With a given number of workers, what may be causes of differences inthe labor-supply?

10. Is there a strong selfish motive for men to increase theirefficiency in most industries? How effective is it?

12. Why is the variety of occupations greater or less than formerly?What is influencing the change?

15. With increasing division of labor is there greater or lessopportunity for the payment of laborers according to the piece-wageplan?

16. Discuss the following statement: Under the piece-work system theforeman looks out for the quality and the operative for the quantity ofthe work; under the time-wage system the foreman looks out for thequantity and the laborer for the quality of the work.

17. What remedy has the foreman for an inefficient laborer working underthe time-wage system?

18. Is time- or piece-work best adapted to the following kinds of[Pg 580]laborers: coal-miners, coopers, farm-hands, printers, engravers,shoe-factory hands, railroad brakemen, telegraph operators?

Chapter 23. The Law of Wages

1. What is the effect of free common schools on the comparative wages ofskilled and of unskilled laborers?

2. What would be the effect of technical and industrial schools on thewages of artisans?

3. If a man is not content with $2 a day, why does he not do work thatis paid $5 a day?

4. What is the effect on wages of differences in the danger,pleasurableness, social distinction, expense of preparation, ofoccupation?

5. If women are paid less than men for the same work, why are menemployed at all?

6. What is the difference between these definitions: wages is the shareof labor; wages is the payment by one man to another for his services?

7. If the supply of labor of any class were to be decreased 10% wouldwages rise in like proportion?

8. Since under the piece-work system a man is paid only for what hedoes, is there any reason for discharging a workman employed under thisplan whose efficiency falls below the average?

Chapter 24. The Relation of Labor to Value

3. Is common, unskilled labor "scarce" (in any reasonable sense of theword) in China? in the United States?

4. Can a manufacturer pay the same to laborers if the product will bemarketed next year, as he can if it is to be marketed to-morrow? If so,how is the value of the labor adjusted to its product?

[Pg 581]

Chapter 25. The Wage System and its Results

3. Will a day's work of a common laborer buy more to-day than it would ahalf century ago? Why?

4. Are the opportunities for workmen to rise to the rank of masters asgreat as formerly?

Chapter 26. Machinery and Labor

1. Do you think that the amount of work is reduced by new machinery?Point out ambiguities in the question.

2. What is the difference to the workman whether he becomes moreefficient or works with a better machine?

4. What kinds of laborers were thrown out of employment by the inventionof the type-writer? What kinds of labor found employment as a result ofits invention? Was the net result a gain or a loss of employment?

5. Answer the same questions with regard to the invention of railroads,mowing-, binding-, and threshing-machines; or the new roller-process offlour milling.

6. Can you describe from your own experience any example of readjustmentof labor due to introduction of new machinery?

Chapter 27. Trade-unions

1. Does it make any difference in the permanence of an increase of wagesbrought about by a strike, whether the employer is one of the moresuccessful or one of the less successful in that business?

2. Is there any similarity between the methods of trade-unions and theetiquette of the medical and the legal professions?

3. If you were an officer of a trade-union, would you begin a strikewhen trade was good or when it was poor?

4. If you can do more work in two hours than in one, can you do morecontinuously in sixteen consecutive hours than in eight?

7. If production is reduced one fourth by shorter hours, is "work made"to that degree for the unemployed?

8. If all day-laborers should agree to work with one hand tied behindthem, would their wages go up or down? Would it be good or bad for thewhole class of laborers?

Chapter 28. Production and the Combination of the Factors

1. What is production? Does the economic idea of production conflictwith the physical principle that matter cannot be created?

2. Is it production to buy fifty cents' worth of yarn and knit a pair ofsocks worth twenty-five cents if you enjoy doing it? If you do not enjoyit?

5. Outline the combination of factors that has produced New York breadmade from Minnesota wheat.

6. What is the largest manufacturing establishment in your home town?Would a number of smaller establishments of the same sort and with thesame aggregate capacity succeed as well? Why?

7. Have you observed the growth of any local industry from a smallbeginning to large proportions? If so, how do you account for it?

8. Would you prefer to begin your business career with a large companyor with a small merchant? Why?

10. Give examples of the industrial advantages of America as comparedwith Europe.

Chapter 29. Business Organization and the Enterpriser's Function

1. What is the relative importance of organization in sawing wood,building houses, running a small store, or a large factory?

3. What determines whether a crop is poor or good: the ground, theweather, or the farmer?

5. One has said: "The natural differences in powers and aptitudes arecertainly not greater than are natural differences in stature." Is thissound in an economic sense?

6. Who runs the business in a large store owned by a large family? Whohas the risk?

7. Who is the enterpriser in a stock company where there is a[Pg 583]superintendent elected by a board of directors, themselves elected byshareholders with one vote per share?

8. Who is the employer in a coöperative cooper-shop whose superintendentis elected by the workmen?

Chapter 30. Cost of Production

2. What is the difference to the employer between rent, interest, andwages as items of cost?

3. Is there anything in common between "cost, the onerous exertionnecessary to get goods," and cost as the money expenses of production?

5. When prices fall, what determines which factories shall close, andwhich workmen shall be discharged?

Chapter 31. The Law of Profits

1. Business being poor, one employer is making good profits; howdifferent will be the wages he pays from those paid by the unsuccessfulemployer?

2. How many of the men you know at the head of large businesses startedlife poor?

3. Was the rise in fortune due most often to chance, inheritance ofwealth, or exceptional ability and power of work?

5. Are the profits of the employer deducted from wages? Are the highwages of skilled labor deducted from the wages of unskilled?

Chapter 32. Profit-sharing, Producers' and Consumers' Coöperation

2. Is advertising of any social service or is its sole purpose to diverttrade from one merchant to another?

3. In what ways are retail stores wasteful in their expenditures? Canthis be avoided?

Chapter 33. Monopoly Profits

1. How is the blacksmith free to compete with the physician and how not?In what sense have we assumed that competition exists?

2. Is there competition between the owner of good land and the owner ofpoor land?

3. Has the owner of a poor gold-mine a monopoly? Has the owner of a richmine a monopoly?

5. In what sense is a street-railway a monopoly? What is the value ofits franchise?

7. If one company controlled all the petroleum in the world, what wouldit consider in fixing the selling price?

Chapter 34. Growth of Trusts and Combinations

1. What advantages are there to manufacturers in combination? What tothe public?

2. What relation has improved transportation and other means ofcommunication to trusts?

5. Does the public consider the growth of trusts to be good or bad? Whatdo students of the question think of it?

Chapter 35. Effect of Trusts on Prices

3. Describe any agreement of which you know, made between merchants ormanufacturers for the purpose of regulating prices. Did prices go up ordown as a result?

4. Would it be a good thing for society if a trust made great economiesin production, crowded out its smaller competitors, and maintainedprices just where they were before, dividing among its shareholders theamounts saved?

5. How would the effects on society be different if prices were reducedby better organization and the prevention of waste?

6. Is it good public policy to allow a trust to undersell its smallercompetitor in one district while it keeps up its prices elsewhere?

Chapter 36. Gambling, Speculation, and Promoters' Profits

1. Do you think that store-keepers fix the price of the produce they buyof the farmers? If so, to what extent?

5. Give other examples showing the difference between a gambling-houseand an insurance company?

9. Ought the profits of the farmer from a sudden rise in the value ofwheat be confiscated to the public?

Chapter 37. Crises and Industrial Depressions

3. In a period of depression is there less money than usual in thecountry? In the banks?

6. What economic changes occurred in your own community in the panic of1893-4, or in the years 1903-4?

Chapter 38. Private Property and Inheritance

1. If the law permits certain classes to be fleeced without redress, iswealth thereby reduced?

3. Is it right that the lucky inventor of a popular toy should make $100a day from it?

4. Is it right that an inventor should by patent laws be able to keepthe profits of his business high?

5. Do you know of any father who created more wealth because he couldbequeath it to his son?

8. If capital is needed in production why is the question of justiceraised when its use is paid for?

Chapter 39. Income and Social Service

4. Does luck have greater influence on business success in an oldcountry or a new one?

6. A rare coin and a piece of land sold for the same price one year, andthe next year both sold for double the amount. Was there an unearnedincrement in both cases, and of the same kind?

Chapter 40. Waste and Luxury

2. Do you feel a sense of injustice when you read of a millionaire'sball if you are not a millionaire?

3. Can you excuse the sense of injustice felt by the hungry man when hesees you wear patent-leather shoes and kid gloves?

4. Under private property, can men complain of the use made by others oftheir wealth on the ground merely that it was unwise?

8. Is smoking high-priced cigars economically justifiable, assuming thatthe smoker is wealthy and does not injure his health thereby?

9. Wines, balls, pensions are said to be good because they put moneyinto circulation. Criticize.

10. What is the difference between the consumption of wealth and itsdestruction?

12. Was the great Chicago fire, which led to the rebuilding of the city,a good thing economically?

Chapter 41. Reaction of Consumption on Production

2. Can people live on the future, consuming in advance of production?How is it with the nation in time of war?

4. It is said that the demand of the day-laborer for cheap white shirtshas reduced the wages of the women who make them. Criticize.

5. What effect on wealth would a change of climate have, whereby theconsumption of coal would be decreased?

6. If manna fell from heaven daily in a climate where clothing andshelter were unnecessary, what effect on wealth would result?

Chapter 42. Distribution of the Social Income

1. What different ideas does the expression "distribution of wealth"suggest to you?

2. What different methods of obtaining an income have you noted amongthe men you know?

3. How can a yard of cloth be said to be distributed to the labor andcapital producing it?

4. If two men of equal skill go fishing together, how would they find arule for dividing the catch?

5. If one is more skilful or stronger, or owns the boat and the tackle,how would it affect the division? Would any rule be attainable?

6. If socialism reduced the total product, would it still be desirablebecause of the better distribution?

7. What classes of thinkers are most inclined to take up socialism?(Classes considered socially, industrially, as to race, as to economicand historical training.)

Chapter 43. Survey of the Theory of Value

1. Mention any cases you can think of where merely changing the place ofthings added to their value; or changing their form; or where the merelapse of time added to the value of the thing.

2. What effect on wages and interest does the bringing in of foreigncapital have?

3. If, through greater efficiency of labor, wealth increases, whichshare benefits?

4. What would be the effect on wages, interest, and land rent of asudden addition of rich land to the country?

5. What would be the effect on interest, land rent, and wages of a greatincrease of national saving?

6. What concern have the poor in the abundance of capital? The rich inthe abundance of labor?

7. Walker says that the laborer gets what is left after the other sharesare deducted according to their law; wages are the residual claimant.Are the other shares independent of wages?

9. Are high wages and high interest seen to go together? Give suchexamples as you think of.

Chapter 44. Free Competition and State Action

Chapter 45. Use, Coinage, and Value of Money

1. If gold were to become as plentiful as iron, would it be worth moreor less than iron?

2. Some say Providence has indicated gold and silver as the materialsfor money. How has this been done?

3. Why does nearly all the gold produced in California leave the state?What keeps any of it there?

5. When gold comes out of the mine is the gain to the community greateror less than when the same value of grain is harvested?

7. What are the principal things besides money uses that cause a demandfor gold and silver?

8. The mint price of an ounce of gold, .900 fine, is alike at SanFrancisco and Philadelphia, $18.604. Why is gold ever shipped fromCalifornia to New York?

10. Note any habits of friends that result in their carrying more orless money than others of the same income.

11. What determines the amount of money needed by different persons,towns, states, and nations?

13. On an isolated island would it make any difference as to the valueof money if there were but one gold-mine or several competing ones,supposing that the output were the same?

Chapter 46. Token Coinage and Government Paper Money

3. The government of the island of Guernsey having no money, issuedpaper-notes to pay for the building of a market. They circulated andwere gradually taken up as the market earned its cost, during ten years.When they were all redeemed and burned, the[Pg 590] island had the market freeof cost. Explain how this could be done. (This is from Sumner'sProblems in Political Economy.)

Chapter 47. The Standard of Deferred Payments

1. If every piece of money should miraculously be doubled in a night,whose interests would be affected?

2. Is the fact of one man's gain and another man's loss by chance of anyeconomic or political importance?

3. What gives rise to the belief sometimes held that money is aninvariable standard of value?

4. Is there anything in the nature of mining that keeps the ratio of thesupply of gold and silver nearly uniform?

6. Does the principle of the substitution of goods have any bearing onthe value of metals under bimetallism?

7. Note carefully, and indicate the different meanings of bimetallism;of demonetization.

8. What is the extent of the influence one nation can have on the ratioof the two precious metals?

9. If money wages are higher and general prices are lower, how is thelaborer affected? Is this due to the appreciation of money?

10. Can you get a kind of money that will make the things that are sold,dearer, and the things that are bought, cheaper?

Chapter 48. Banking and Credit

3. Can a bank that issues its own notes afford to lend cheaper than theordinary capitalist?

7. If there are twenty banks in a town and no clearing-house, how manycollections would have to be made by all the banks daily assuming thateach day depositors of each bank receive checks on the other nineteenbanks?

8. Does a clearing-house enable the banks that belong to it to get alongwith a smaller cash reserve?

Chapter 49. Taxation in its Relation to Value

3. Is there any relation between the taxes paid and the benefits securedfrom government?

4. A recent newspaper item says: "This is the year real estate isassessed. Turn the cow loose in the front yard, tear down the fence,make things look generally dilapidated, for it will be money in yourpocket." What does this indicate regarding taxation?

5. The parts of an estate divided into fifteen equal shares by expertreal estate agents were soon after assessed variously from $900 to $2850for purposes of taxation. What does this indicate? (From Sumner'sProblems.)

6. In what ways may we understand the proposition that taxation shouldbe proportioned to ability?

Chapter 50. The General Theory of International Trade

1. Is it bad policy to let the people of Palo Alto spend money in SanFrancisco for things that could be produced at home?

2. Pensions are defended as putting money in circulation. Is this likeany tariff arguments you have heard?

4. If there were no legal bar to a tariff between the states, would atariff probably be imposed? If so, would it be a wise measure?

5. A nation withn dollars in circulation has to pay a war indemnityofn dollars to another country having the same circulation, how muchmoney will each then have, and what will be the effect on prices,foreign trade, rate of exchange? (From Davenport.)

6. If large shipments of wheat are made to England, will bills ofexchange on London be higher or lower in New York?

Chapter 51. The Protective Tariff

1. If all trade is exchange do not the members of a trust reduce theirincome when they raise the price of their products by artificialagreement?

2. Is there any likeness between trade-unions and tariffs? Betweentariffs and factory legislation?

3. Can it be of advantage to trade freely with one nation if generalfree trade is bad?

4. Who gained when Hawaiian sugar (before annexation) was admitted freeof duty, while other sugar was taxed?

5. If it would pay us to admit goods free, may we be justified in taxingthem to force concessions from the other country?

Chapter 52. Other Protective Social and Labor Legislation

2. What reasons are given in justification of laws closing barbershopson Sundays?

3. Can a person owning a lot on a residence street of a city erect aglue-factory on it?

4. What have you noted as to the benefits or hardships of restrictingchild labor in factories?

6. Can law fix the rate of interest at any point desired? If so, thenwhy not at zero; if not, then why fix any maximum rate of interest?

8. In what ways is the rate of interest affected by the rise or fall ofthe value of money?

Chapter 53. Public Ownership of Industry

2. What kinds of municipal industries have you seen in operation? Howsuccessful were they?

3. What are the main arguments for and against the city ownership andcontrol of gas and waterworks?

5. Name the industries that are owned and controlled by towns and citiesof which you have a personal knowledge.

7. What is the public sentiment in your home community as to theownership of industries by the town or city?

8. What forms of state activity favor survival of unfit men and badtraits of character? What forms help the fittest to survive?

Chapter 54. Railroads and Industry

2. Show in what way natural waterways have determined the location ofleading cities in America.

5. Mention in order of economic importance four things that would happenif all American railroads were suddenly to be destroyed.

7. Give instances you have seen or heard of where two shippers paiddifferent rates for the same service.

9. If your neighbor rides on a pass and you pay your fare, are youhelping to pay for his ride?

10. Do you know any large cities that are more favorable shipping-pointsthan neighboring towns? Give reasons.

Chapter 55. The Public Nature of Railroads

1. What legal rights do the builders of a railroad have that are notenjoyed by all citizens?

2. Can you see any clear distinction between the public nature of arailroad and of a horse and carriage?

3. What harm can there be in the acceptance of passes by judges,legislators, and other public officials?

5. Who has the greater political power, the president of thePennsylvania Railroad, or the governor of that state?

Chapter 56. Public Policy as to Control of Industry

1. What effect would it have if the state should make laborers work forunsuccessful employers at lower wages than for successful ones?

4. Why does the question of the control of the railways in the interestof the public present especial difficulties in America?

Chapter 57. Future Trend of Values

1. Make a list of the things discussed in this course that tend towardimproving the average condition of men.

3. State what kinds of material agents will probably increase in valuerelative to other kinds, giving reasons.

4. State what to your mind are three important economic problems whoseanswer is most uncertain, giving reasons.

5. If you had the power, what single public measure that you believewould be practicable and effective would you put on the statute books,in order to make a juster division of the social income? Give reasons.

INDEX

[Pg 597]Ability, variety,177-83;
physical differences,178;
intelligence,179;
training,180;
moral qualities,180;
inequality,181;
scarcity,182;
and occupation,203;
grades,212;
types,264;
selection,270-2;
sterilization,561-2

Abstinence, definition, kinds,163;
see Saving

Acquisition vs. social production,259

Affection in personal distribution,402

Agricultural classes, opposition to commercial,113

Agricultural stage,261

Agriculture, machinery in,238

Alternative uses, relation to costs,277

America, farms let on shares,59;
land changes hands,60;
exhaustion of the lands,82;
use of interchangeable parts,85;
destruction of forests,87;
coal deposits,88-9;
improvement of horses,91;
watch-factory,92;
price of horses in Boer War,95;
discovery of mines,102;
varied industrial conditions,108;
use of money,109;
expression of wealth,114;
land became part of world's supply,155;
standard of living,192;
size of families,193;
food supply,194;
increase of population,194;
army rations,196;
standard of food,196;
caste,199;
democracy and efficiency,200;
wage system dominant,227;
wages,232;
changing occupations,234;
favorable effect of machinery,242;
difference of race among workers,247;
industrial superiority,262;
Oriental competition,263;
fortunes,271;
profit-sharing,283;
producers' coöperation,296;
consumers' coöperation,300;
industrial stage,313;
crises,352;
gifts by wealthy men,368;
law of inheritance,373;
fortunes,375;
dress of workers,397;
colonial policy toward,425,426;
custom,426;
gold standard,432;
silver supplies from,441;
gold supplies,442;
paper money,448-9;
effect of silver supplies from,454,457;
effect of gold output,457;
banks,468-70;
discussion of taxation,479;
prices in California,483;
in different sections,484;
protective tariff,491-503;
growth of manufactures,497;
factory laws,509-12;
state enterprise,514-17;
early settlement on the coast,526;
trade in War of 1812,526;
canals,528;
railroad building,529;
aid to railroads,535

American Federation of Labor,245;
claims of,254

American Revolution, economic issues in,8

Animal economy, provision for wants,40

Animals, problem of numbers,185-6

Antisocial profits,289;
of monopoly,311;
from speculation,377;
antisocial use of ability,378

Appropriation stage,261

Ashley, W. J.,575

Assignats,448

Attribution of product,176

Austrian economists,570

Authoritative distribution,406-8;
[Pg 598]use of,410-11

Balance of trade, international,486-7;
so-called favorable,493

Bank-notes, and paper money compared,447;
typical,465-8;
in United States,469

Banks, and credit,462-70;
functions,462-5;
in United States,468-70

Barter, definition,31;
under simple conditions,32-5;
difficulty of,99;
decline,108-14;
economy in Middle Ages,110

Bequest, limitation of right,368

Bets, see Gambling

Bimetallism, international,457-9;
national,459-61

Biologic doctrine of population,186,187

Biology, shows inequality of talents,181

Birth-rate, of animals,187;
decreasing American,193,561

Böhm-Bawerk, E. von,570,571,572,577,580,583

Boycott,251

Brooks, R. C.,593

Building laws,505

Bullock, C. J.,568

Buyers, bidding,34;
margin of advantage,35

Canadian bank-notes,468,470

Canals, as carriers,528-9

Cannan, Edwin,571,573

Capital, origin of term,112;
concept in modern business,114-7;
definition,115;
not identical with money,115;
purpose of borrowing,116;
sum, expressed in years' purchase,121;
sum of expected rents,122;
value not primary,123;
stock,127;
value of stocks fluctuate,134;
time-value and,142;
fixed and increasable forms,152-3;
use by enterprisers,285;
insured by enterprisers,286;
in coöperation,295;
large,312;
amount in factories,315;
value affected by protection,501

Capitalistic, age,114,117;
monopoly,306

Capitalization, of all forms of rent,118-30;
rent-charges as an example of,118;
of land rents,124;
of uniform or varying series of rents,125-6;
increasing role,127;
of any continuing income,128;
of franchises,129;
of corporate incomes,130;
rate,147;
and interest,168;
influenced by taxation,475

Capitalization, theory of crises,353-4

Carlyle, T., on wage,229

Carnegie, Andrew,268,270,372,377;
economies of gifts to libraries,387,390

Carver, T. N.,578

Cassel,578

Caste, and efficiency,199

Chance, unavoidable,333;
average in industry,334;
artificial,334;
legitimate and illegitimate,335

Character, affected by expenditure,398;
highest point of production,400;
unity of choice determining,401

Charitable distribution,405-6

Charity, public,507

Cheating and gambling,335

Child-labor legislation,509

Choice, of goods, harmony in,400

Cities, wealth of, contrasted with feudal estates,111,113;
growth,504;
large, on waterways,528

City ownership,514-5;
see Public ownership

Clark, J. B.,398;
theory of profits and wages,418,573,575,584

Clews, Henry, on Wall Street finance,378

Climate, and income,48

Closed shop,249-50

Clothing and efficiency,196;
effect of choice of,396

Coal, use and exhaustion,88,558;
strike of 1902,251,252

Coinage,433-6;
definition,433;
free or gratuitous,434-6;
token,443-7;
free and gratuitous,443

Coins, light-weight,443-7

Collective bargaining,248

Collective enjoyment, as a mode of distribution,408

[Pg 599]Collectivism,552

Combination and wages,253-6;
of the factors,260;
opposes competition,429;
of capital, see Trusts

Comforts, relative meaning,11;
and luxury,388

Commercial monopoly,306

Commercial paper, discounting of,132

Commissions, to control railroads;541-3;
to control corporations,545

Commodity-money theory,450

Common denominator of values, see Money

Commons, J. R.,573

Communism, among Germanic tribes, questioned,365

Comparative costs, doctrine of,482-3

Competition, definition,33;
one-sided,33;
present limitations on,228;
the worker in,229;
reduced by trade-unions,248-50;
costly in mercantile business,298;
free, not equality of efficiency,303;
alleged cause of trusts,322;
persistence of,331;
and state action,422-30;
and custom,422-5;
economic harmony through,425-8;
social limiting of,428-30;
modern restrictions,504

Competitive distribution,409-10

Competitive price, forces governing,308

Complementary agents, and value,78;
intensive use of,78;
labor and wealth,175

Compulsory distribution,404

Conquest theory of property,363

Consolidation of railroads,539-40

Consumers, determining costs,280;
gain from trusts,325

Consumers', choice influences value,392;
choice influences wages,394;
coöperation,298-301;
League,394

Consumption, reaction upon production,392-401;
definition of economic,392;
reaction upon material agents,392-5;
reaction upon efficiency of workers,395-410;
effects on consumer,398;
as a conventional division of political economy,419

Consumption, tax on,475

Consumption goods, definition,20;
immediately enjoyable,21;
a part of income,41;
differential advantages,73-5;
diagram, grades by quality,75;
proposed uses,161;
saved,166;
see Goods

Continental notes,448

Contracting out, forbidden,512

Contract interest, see Interest

Contract rent, see Rent

Contract wages, see Wages

Coöperation, producers',295-7;
consumers',298-301

Corporation, securities,127-8;
public-service,129;
increase of,133

Cost, involved in improvements,90;
of operation,168;
in larger production,319;
of government,474;
see Comparative costs

Cost of production,273-81;
from the enterpriser's point of view,273-6;
psychic,273;
alternative,274;
money,274;
and price 276;
from the economist's standpoint,276-81,422

Courts and industrial legislation,543,550-1

Credit, sales involve interest,134;
and banking,462-70

Crises and industrial depressions,345-55;
caused by sudden tariff changes,502-3

Crusoe economy, subjective valuations,30;
time-value,131,140;
saving,166;
economic wages,208;
present and future goods,219-20;
need of judgment,265

Cultivation, margin of,64;
see Utilization

Custom, and rents,56;
and efficiency,199,200;
affecting distribution,409;
and competition,422-5,429

Daniels, Winthrop M.,571

[Pg 600]Davenport, Herbert J.,567

Death-rate, decreasing,192

Debts, public, as investments,133

Deferred payments, standard of,453-61;
definition,453;
ideals for a standard,455-7

Demand, definition,27;
social aspect of choice,28;
law of,28;
curve,29;
elasticity,29;
reciprocal, becomes exchange,30;
curve, diagram,35

Democracy, and efficiency,199;
effect on race progress,561,563

Deposit and discount,462

Depreciation and rent,85-7

Desire, see Wants

Destruction, and rent, of wealth,87-9;
accidental, of wealth,381-2;
intentional,382-3

Devine, Edward T.,587,594

Dewey, Davis R.,568

Differential advantages, in consumption goods,73-5;
in indirect goods,75-80

Diminishing returns, law,61-72;
definition,61;
of all agents,62;
technical,62;
economic,63;
other meanings of term,66-9;
general application to space relations,67-8;
confused with large production,68;
technical,68;
historical,68;
development of the concept,69-72;
applies to all wealth,70;
and population,184;
and productivity of labor,215;
the broadest principle of value,420

Diminishing utility, law,22;
diagram,24;
relation to diminishing returns,71

Directors, of railroads, obligations of,539

Discount, commercial,132,135

Discovery enlarges natural resources,156

Discrimination in rates, by monopoly,310;
in railroad rates,530-3

Distribution, personal and functional,359;
impersonal,360;
personal, nature of,402-3;
definition,402;
of the social income,402-11;
methods of,404-11;
as a conventional division of political economy,419

Dividends, manipulation of,130

Division of labor,201-4;
definition,201;
kinds,201;
advantages,202;
calls for directive ability,264;
growth of territorial,480-2

Dollar, meaning of,435

Drink, effect of,396

Durable agents, see Goods

Durableness of rented agents,55

Economic goods, definition of,19;
see Goods

Economic harmony, through competition,425-8;
definition,427

Economic law, nature of,206

Economic monopoly,306

Economic motives, see Wants

Economic production,258;
see Production

Economic rent, see Rent

Economic wages, see Wages

Economics, nature and purpose3-8;
definition,3,4;
subject matter,4;
place among social sciences,5,6;
as a science,7;
synonym for political economy,7;
democratic in aim,8;
importance,8;
aim of study,412;
a part only of social science,413;
central point of,413;
redefined,555;
relation to practical life,555

Economy, involves choice,27;
the barter,108;
the money,108-14

Education, free public,507

Efficiency, talent, and training as factors in,180;
resultant of many qualities,181;
of labor,195-204;
equality of, not essential to competition,423;
see Ability

Ely, Richard T.,568,584

Emery, Henry C.,585

Employer, adjusts labor to interest rate,220;
see Enterpriser

Employment, no lack of,183

Energy, sources of, and income,50

Engels, Frederick,416

England, idea of rent in,59;
long leases,59;
food supply during Napoleonic wars,69;
coal deposits,89;
wages,232;
[Pg 601]changes in 18th century,237;
loans,240;
abnormal effect of machinery,241;
coöperation,296,299;
use of term monopoly,304;
cotton crisis,345;
crises,348;
endowments limited,368;
grants to royal families,373;
gold standard,432;
prices in Napoleonic wars,442;
bank restriction act,448-9;
balance of imports,493;
discussion of protection,496

Enjoyable goods, see Consumption goods

Enterprise, income, and social service,376-7

Enterpriser, function of,265-72;
qualities of,267-70;
selection of,270-2;
his task,273-5;
his costs,275;
medium for consumers' estimates,280;
profits of,283;
origin of term,284;
his services reviewed,285-8;
his risk,287;
intermediary in industry,287;
lacking in coöperation,297;
relation to profit-sharing and coöperation,300;
as risk-taker,338

Environment, betterment,92,162

Ethics, definition,6;
and economics of time-value,144;
of consumption,395,398,401;
of railroad problem,532,539;
see Morality

Europe, industrial methods of,262

Exchange, in a market,30-8;
and demand,30,31;
advantage,31;
isolated,32;
of present and future goods,145-9;
as a conventional division of political economy,419;
foreign and domestic, of money,463;
international, see International trade

Extensive margin of indirect goods,78-9;
see Utilization

Extravagance to give employment,386

Factors, definition,260;
combination of,260-4;
cost of,274;
proportioning of,275;
mutual employment of,420

Factory, system, growth and effect,243-4;
change in number,314;
limits to growth,319;
legislation,509-13

Farmers and the tariff,498-9

Fauna and income,49

Feeling and utility,26

Fiat-money theory,450-1

Fisher, Irving,571,575

Fixed charges,168

Flora and income,49

Food, and income,50;
and efficiency,196;
effect of,396;
laws and inspection of goods,506

Foreign exchanges, theory of,485-8

Forestry, need of,88

Forests, destruction of,87-8

Franchises, for public utilities,96;
capitalizing of,129;
granting monopolies,522

Free competition, see Competition

Free coinage, money value,435

Freedom, economic,422-30;
definition,422

Free goods, definition,19;
on the margin of utilization,75

Free-silver movement in America,459-61

Free trade, see International trade

Future rents capitalized,125

Gambling vs. insurance,333-8;
definition of typical,334;
economic theory of336

George, Henry, his theory of value,417

Gibson, A. H.,577

Gilman, N. P., on profit-sharing,293

Glut theory of crises,351-2

Gold, fitness as money,102;
as money,432-3;
supply of,435;
discoveries,442;
as a standard,455,457;
increased output,461;
shipping point,485

Goods, definition,19;
adjustment to wants,21;
shifting series,27;
substitution,27;
series of,39;
relation of indirect to gratification,46;
enjoyable,47;
durable,47;
unripened,47;
[Pg 602]degrees of durableness,48;
limited number,52;
free and unlimited,152

Government, a condition of efficient labor,198;
as consumptive good and productive agent,473;
paper money, see Paper money

Granger stores,300

Gratification, defined,16;
and marginal utility,22;
temporary,39;
at different times,45;
time-value of,141,143

Greenbacks,448,451

Gresham's law,446-7

Hadley, A. T.,579,580

Happiness, and wealth,18;
and ostentation,388;
and character,401

Hildebrand,575

Historical diminishing returns,68;
confused with technical,70;
see Diminishing returns

Home-market argument for protection,498-9

Honesty, a condition of efficiency,198;
of public officials,551

Household industry in America,313

Immigration and protection,498

Improvements to increase products,90

Incidence of taxation,476

Income, as a flow of goods,39-42;
national, social, individual, private, objective, money,40;
gross, net,41;
of consumption goods,41;
present, future,41;
funded, unfunded,42;
as a series of gratifications,43;
psychic,43-5;
all sources of, are productive,43;
affected by objective conditions,48-52;
affected by increasing capital,152;
and social service,370-80;
from property,370-6;
from personal services,376-80;
justice of large,389-91;
distribution of the social,402-11;
and taxation,474-7;
affected by crises,354-5;
personal and impersonal shares,359-62;
personal,361;
complex sources of psychic,403

Increasable agents,153-5;
scale of increasableness,158

Increase, of product,90;
of agents,92,95;
of rent-bearer affects others,93

Indestructibility imputed to rented agents,55

Indirect goods, see Goods

Individualism, extreme, its ideal of competition,410

Industrial depressions, definition,346

Industrial revolution caused by machinery,237

Industrial stage,261

Industry, changes in, affecting money,101;
money reacts upon,102;
diversity of condition in America,108;
changes in Europe,109;
growing complexity as interest falls,168

Infant-industry argument for protection,497

Inheritance, effect on industry,12;
social effects,369-73

Insurance, origin,337;
economic theory of,338;
sound conditions in,338

Integration of industry,321

Intensive margin, see Utilization

Interest, opposition to, in Middle Ages,112;
the modern contract forms for borrowing wealth,114;
contract and rent contract,116;
on loans contrasted with rent-charges,120;
increased use of,121;
permitted by Rome,122;
two modes of approach,123;
"the prevailing rate" and capitalization,124;
on money loans,131-7;
gross and net,132;
in credit sales,134;
concealed,135;
evasion of legal rate,135;
adjustment of business to the rate,140;
rate of contract,147-8;
in sacrifice sale,149;
and time-value,150;
relation to rent,150;
[Pg 603]first use of term,151;
rate divides present and future uses,159;
and future goods, diagram,160;
equalizer of time-values,162;
rate of, and saving,165;
and capitalization,168;
and improvements,168;
rate relates present and future,220;
contract, with enterpriser,285;
conventional conception of,413;
contract, and deferred payments,454

Intermediate products and costs,279

Internal revenue,475

International demand, ratio of,484-5

International trade, general theory of,480-90;
as a case of exchange,480-5;
definition,480;
equation of international exchange, definition,483;
cash balance of,486;
real benefits of,488-90

Interstate Commerce Act, discussion of,537,542;
workings of,543;
importance of,545

Inventions, affect rent,85-6;
to increase rent-bearers,91;
adds to supply,156

Investment, and rate of interest,148;
and saving,165;
in stock of corporation,342

Ireland, tenants' improvements in,59

Iron law of wages,216

Jenks, J. W., on trusts,327,584,594

Jevons, W. S., on the coal-supply,88

Johnson, A. S.,572

Justice in taxation,477

Just price,547

Keasbey, L. M.,576

Knights of Labor,245

Labor, the old distinction between productive and unproductive,43,260;
and classes of laborers,173-83;
definition,173;
and play,173;
pleasurable,174;
and wealth,175;
direct and indirect services,176;
grades of,177;
scarcity,182;
supply of,184-194;
employer's and social view,184;
conditions for efficient,195-204;
objective physical conditions,195-8;
social conditions,198-201;
division of,201-4;
of different grades,212;
relation to value,215-25;
productivity of,215;
distance from gratification,219;
no unit of,224;
value of product insured by enterpriser,286;
economized in large production,318;
legislation,509-13

Labor theory of property,364

Laissez faire, ideal of,518

Land, rented in Middle Ages,57,110;
and diminishing returns,69,70;
and repairs,81-2;
continues to be rented,113;
products of increasing cost,154;
relatively fixed in quantity,154-5;
economic supply of,155-6;
produced,157;
not monopoly,303

Land grants, to railroads,535

Large industry, social effects of,244;
in United States,312-7;
advantages of,318-20;
economics of combination,321

Large production, confused with diminishing returns,68;
sharing of the economics of,325

Lasalle, Ferdinand,416

Latin Union,458

Law, definition,6;
nature of economic,206;
in relation to wealth,361

Legislation and local interests,549

Liberty of wage-worker,231

Lloyd, Henry D., on coöperation,296

Legal theory of property,364

Legal-tender, quality of paper money,447

Loans, short-time,132,137;
long-time,133,138

[Pg 604]Luck and profits,289

Lump of labor, error of notion,240

Luxury, relative meaning,11;385-91;
definition,385;
fallacy of,386-7

Machinery, need of repairs,83-4;
and natural resources,91;
definition,236;
and labor,236-44;
extent of use,236-8;
age of,237;
effect on wages,239-44;
evils of sudden introduction,239;
economy in large production,318

Malthus, Robert, on fixity of land,154;
on population,579

Malthusian doctrine,578

Manual workers, social service of,379

Manufactures, fallacious contrast with agriculture,67;
do not fix interest rate,124-5;
machinery in,283

Marx Karl,416,417

Marginal contribution of labor,213

Marginal labor,210

Marginal pair,34;
diagram,35

Marginal utility, definition,23-7;
in barter,32;
in use of goods,64;
of consumption goods,75;
of indirect goods,78-9;
of wages,211,213;
fixes cost of factors,277;
applied to gambling,336-7;
in insurance,338;
of income,399;
extension of the principle,420-1

Margin of advantage,34;
diagram,35

Markets, definition,36;
exchange in,36-8;
widening,36-7;
growth,263

Market value, built on subjective valuation,35,38;
of time,145

Marriage, postponement,190

Marshall, Alfred,573,574,583,594

Material resources, relation to efficiency,195

Material wants as motives,9

Medium of exchange, see Money

Merchants impart utility,31

Middle Ages, markets,36;
customary rents,56;
renting contract,57-9;
limited use of money,109-13;
rent-charges,118-22;
use of term interest,151;
death-rate,192;
caste,199;
system of labor,227;
industrial changes,237;
marine insurance,337;
no crises,348;
favored classes,373;
sumptuary laws,390;
custom,424;
competition,425;
prices,441;
depreciation of money,444-5;
small political units in,481;
control of industry in,553

Mill, John Stuart, on fixity of land,155;
on coöperation,296,361,368,398,417,572

Money, as a tool in exchange,98-107;
origin,98-103;
nature of use,103-5;
value,105-10;
as medium of exchange,99;
qualities,100;
materials,101;
an indirect agent,103;
as common denominator,104;
as storehouse of saving,105;
commodities with monetary use,106;
general use of,107;
defined,107,431-2;
and the concept of capital,108-17;
use in various countries,109;
increasing use in medieval cities,111;
not identical with capital,115;
time-value and,142;
form taken by saving,167;
movement of, before a crisis,346;
use, coinage, and value,431-42;
the precious metals as,431-6;
quantity theory of,436-42;
standard, or primary,432;
fundamental use,436;
average demand for,437;
effect of changes in supply,454,457,459;
territorial distribution,487-8;
and foreign trade,484

Money-changing,463

Money market, for short-time loans,137;
for productive loans,139

Money theories of crises,352-3

Monopoly, of labor,253;
profits,302-11;
nature of,302-5;
definition,304;
kinds of,305-8;
test of,308;
price fixed by,308-11;
meaning,312;
and supply,324;
[Pg 605]profits, social burden,326;
in protective tariff,500-1;
in localized public utilities,519-21;
public gain from,522;
power of the railroad,530,533

Moral qualities in industry,180

Morality, as motive,13-14;
of luxury,389;
opposes competition,429

Mortgages, nature of security,133

Motives, economic,9-14;
see Wants

Nail trust,329

Natural economy,110

Natural law, philosophy of,426

Natural resources, and income,49;
exhaustion of,89,558;
adapted and improved,90;
machinery an adaption of,91;
development of,560;
see Land

Natural-rights theory of property,364

National ownership,516-7;
see Public ownership

Necessities, relative meaning,11

Negro, simple wants,11;
caste sentiment regarding,199;
working hours,201

Normal price,37

Occupation and talent,203

Occupation theory of property,363

Oil trust,328

Open shop,249-50

Organization, of workers, need of,246;
required for efficiency,262;
and the enterpriser's function,265-72

Orthodox economists,415,416;
predictions of,557

Over-production theory of crises,351

Ownership, forms of,363

Paper money, bank-notes as political,466;
experiments,447-9;
definition,447;
theories of,450-2

Par of exchange, definition,485,486

Pastoral stage,261

Patten, S. N.,586

Permanent possession,53;
see Capitalization, Property

Personal distribution, see Distribution

Physiocratic school,415

Political corruption and industrial legislation,550

Political economy, see Economics

Political money, see Paper money

Political monopoly,305

Political security, and saving,163;
a condition of efficiency,198

Politics, definition,6;
and the tariff,503;
influence of railroads in,538

Population, growth in Europe in 18th century,69;
doctrine of,184-7;
related to resources,184;
animal stage of problem,185;
human population,186;
in human society,187-90;
excess,188;
control,188;
current aspect of,191-4;
resultant of many forces,191;
growth not fatalistic,191;
quality,193,561,562;
increase in the 19th century,194

Present and future, wants,44;
rents,125;
goods,145;
competing for labor,220-21

Price, definition,36;
market and normal,37;
under competition,308;
under monopoly,309-310;
of trusts affected by competition,331;
a social fact,360;
changes, see Money

Primitive society, war in,188;
custom in,424

Private property, and saving,164;
and monopoly,306;
and inheritance,359-69;
origin,362-6;
limitations,367-9;
vs. socialism,376

Producers injured by trusts,330

Producers' coöperation,295-7;
definition,295

Production, and rate of interest,166-9;
agents of,175;
two sources of economic,222;
and the combination of the factors,257-64;
nature of,257;
economic and personal,258;
[Pg 606]social,259;
vs. welfare,398;
unity of process,418;
as a conventional division of political economy,419;
by transportation,525

Productive goods, definition,20;
affect output of labor,195

Productive and unproductive industries,260

Productive labor, see Labor

Profits, unearned, by some directors,130;
on purchase of capital,138;
margin of,275;
loss of,282-91;
definition,282,291;
meaning of terms,282-5;
a species of economic wages,284;
fluctuation of,288;
statement of law,289;
pseudo,289;
chance,289-90;
conditioned on skill,290;
risk theory of,291;
to promoters of trusts,322;
of promoter,342;
of trustee,343;
before and after a crisis,347;
relation to wages,415;
Clark's theory,418;
in foreign trade,495

Profit-sharing,292-5;
definition,292

Progress, of the masses,232;
cause of,232-3;
must grow out of wage system,234;
marked by control over nature,261;
stimulated by luxury,388;
and refinement of desire,399;
by wise method of distribution,411;
due to temporary conditions,558;
social vs. racial,560;
depends on race quality,561;
depends on competition,562;
endangered by status and envy,563

Promoter, services of,342;
profits,342-3

Property, private, effect on industry,12;
effect on population,189,190;
and wealth,361-2;
definition,362;
and social expediency,370;
in land,374;
defense of,374-5;
see Private property

Property tax,475

Protective social and labor legislation,504-13

Protective tariff, claimed to be socially expedient,374,491-503;
definition,491;
nature and claims of protection,491-6;
measure of justification in,496-501;
values as affected by,501-3;
compared with other social legislation,512

Psychic income,39-45;
complex sources of,403;
see Income

Psychology of crises,354

Public control of industry, examples,544-8;
difficulties,548-51

Public interests, limiting private property,367;
paramount in social legislation,505-9

Public officers, interested in corporations,343

Public ownership of industry,514-24;
examples of,514-7;
economic aspects of,517-24

Public policy as to control of industry, see Public control

Public utilities, increase of rents from,96

Public wants, development of,472

Publicity of corporation management,546-7

Quantity theory of money,436-42;
definition,438;
objections to,439-41

Railroad, need of repairs,83;
and industry,525-33;
as a carrier,527-30;
economic vs. technical efficiency,527;
public nature of,534-43;
privileges of,534-8;
obligations of,536-8;
political and economic power of,538-40;
commissions to control,541-3

Railroad rates, discrimination in,530-3;
similarity to taxes,538

Rank of goods, technical,46

Rapp, George,266

Real wages, definition,207;
raised by machinery,242

Recreation, influence on efficiency,397

Religion, as economic motive,13-14;
[Pg 607]opposes competition,429

Remuneration, profit-sharing as a method,295;
methods of, see Wages

Rent, the renting contract,53-60;
origin of term,53;
several meanings,54;
essence,55;
as usufruct,55;
imputed durableness of rented agents,55;
gross and net,55;
economic and contract,56-7;
history of contract,56-60;
rent charge,58;
economic rent wider than renting contract,60;
connection with gratification,73;
varies with quality,75;
with quantity, diagram,77;
limits of,79;
economic and contract,79-80;
of wealth, affected by repair, depreciation, and destruction,81-9;
changes in,90-7;
of money,106;
basis of capitalization,122-4;
discounted,123;
relation to time-discount,150-1;
and wages, mutually influence,175;
"of ability," 178;
and wages,205;
"of labor," 205;
relation to wages,215-8,221;
as personal or impersonal income,359;
conventional conception of,413;
as usufruct,414;
in Middle Ages,424

Rent-bearers and rents,90-7

Rent-charges,58;
sale and purchase,118-22

Renting contract,53-60;
definition,57;
in the Middle Ages,57;
narrow use,58,59,60;
and economic rent,60;
hindered improvements,110;
contrasted with interest contract,116

Repairs, and rent,81-84;
do not prevent decay,85;
and time-value,143

Replenishing agents,154

Rhodes, Cecil,372

Ricardo, David, on fixity of land,155;
labor theory of value,224,398,417,442,574

Ripley, W. Z.,575

Risk by enterpriser,287

Risk theory of profits,291

Risk-taking, legitimate and illegitimate,335

Roosevelt, Theodore, efforts to control corporations,546

Rossignol, J. E. le,584

Roundabout process,46,576

Sage, Russell, on great corporations,377

Satisfaction, see Gratification

Saturation point for coinage,443

Saving, and rate of interest,159-63;
conditions favorable to,163-6;
influence on methods of production,166-9;
benefits,169;
future effect of,560

Scarcity, basis of economy,19;
effect on utility,73;
of various goods,76;
of present goods,146;
of common materials,153;
of all economic goods,153;
of human services,182;
of labor,207,225;
not synonymous with monopoly,302

Seager, H. R.,568

Seigniorage, definition,434;
and value,443-7

Self-interest, social effects of,427

Sellers' margin of advantage,35

Serfdom, conditions,227;
see Middle Ages

Services, a condition of income,207;
and wages,210,213;
social and individual estimates of,379;
see Labor

Shifting of taxes,476

Silver, fitness as money,102;
as money,432-3;
as a standard,455

Single-tax, purpose,374;
theory of value,417

Skill, condition of continuing profits,290;
of labor, see Ability

Slavery, as a system of labor,227

Smart,570,571,583

Smith, Adam, on money,103,181,182;
his "Wealth of Nations,"425-6,484,557

Social amelioration, various kinds,504-9

Social changes, and rents,94;
temporary,95

[Pg 608]Social classes, volitional control in,190

Social control, progress of,551-4;
see Public control

Social effects of a tariff,498

Social-expediency theory of property,365-6;
basis of private property,370;
of inheritance,370-3;
of class legislation,373;
of protective tariffs,374;
of rewarding talent,378;
in taxation,478

Social institutions and personal incomes,360

Social legislation, growing need,197,504

Social sciences, nature,5;
complexity,5,6

Socialism, extreme, its ideal of distribution,410;
radical, vs. social reform,552

Socialistic theory of value,416

Socialists, predictions of,553

Social prophecy,553

Social regulation of bank-notes,467,470

Social service and income,370-80

Specialization, and size of market,263;
of risk-taking,339-40

Speculation, in goods,336;
as risk-taking,338-42;
in all business,339;
as insurance,340;
by lambs,341;
legitimate and illegitimate,344;
income from,376-7

Spencer, Herbert,518

Spiritual needs as economic motives,13-4

Stages of industry,313

Standard of deferred payments, see Deferred payments

Standard of living, definition,191;
Asiatic,191;
American,192;
theory of wages,216;
result of sudden change in,387-8;
change in 19th century,557

State, function to direct competition,429-30;
function of the,471-3;
regulates railroads,541-2;
regulates corporate industry,544-8;
increasing functions,548

State ownership,515-6;
see Public ownership

State socialism, growth of,551-2

Status, as method of distribution,409

Storehouse of saving, see Money

Strength of men and women,179

Strikes,251;
violence,252;
cost,252

Subsidiary coinage,445-6

Subsistence theory of wages,217

Sugar trust,328

Sumner, W. G.,567

Supply, relation to utility,24-6;
curve, diagram,35;
of land in economic sense,155;
limitation of better qualities,158;
of labor,184;
and monopoly,324;
and trust prices,331

Sympathy, as an economic force,13,235

Talent and occupation,203;
see Ability

Tariff for revenue,491;
see Protective tariff

Taussig, F. W.,580

Taxation, in its relation to value,471-9;
definition,471;
purposes of,471-4;
forms of,474-7;
principles and practice,477-9

Taxes, as a mode of distribution,407

Technical diminishing returns,68;
confused with historical,70;
refers to limited time,71

Technical rank of goods,46

Temperance legislation,507

Temporary use,53;
see Rent

Tenement-house laws,505

Time, in relation to wants,44;
relation to gratification,161

Time-discount, of future rents,125-6;
rate fixed in practice,126

Time relations of goods to wants,46

Time-value, and interest,131;
theory of,141-51;
definition and scope,141-5;
fixing of rate,145-51;
and rate of interest,159-50;
relation to wages,219-22;
the highest problem of value,414

[Pg 609]Tin-plate trust,329

Token coins,445-6

Trade-unions,245-56;
objects,245-8;
methods,248-53;
claims of,254;
effects, on wages,253-6;
and profit-sharing,294;
monopoly of labor,308

Transportation, as a form of production,525;
changes in 19th century,529-30

Trant, book on trade-unions,254-5

Trustee, speculating,343

Trusts, in United States, growth of,312-22;
recent organization of,315-7;
economic possibilities of consolidation,321;
causes of,320-2;
in legal and popular sense,320;
effect on prices,323-32;
control of,332

Under-consumption theory of crises,351

Unearned increments, various kinds,96

Unions, see Trade-unions

United States, see America

Unproductive labor, see Labor

Unripe goods, see Goods

Usufruct, see Rent

Usury, in Middle Ages,113;
usury laws,508

Utility, broad sense,19;
see Marginal utility

Utilization, intensive margin,64;
extensive,65;
diagram,65;
equilibrium of two margins,66;
of indirect goods,78-9

Value, definition,20;
relation of labor to,222-5;
characteristics of,258;
cost of production explanation,277;
genealogy of, (diagram)278-80;
law of, and monopoly price,311;
law of, and trusts,323;
survey of the theory,412;
the unit of,413;
stages of value,414;
various aspects,419;
generality of the law,420;
effect of taxation on,475-7;
future trend of,555-63

Value theories, relation to social reforms,415-8

Volitional control, of population,188,189,191,193,561

Wage contract, terms of,229

Wage-fund theory of wages,217

Wages, related to scarcity,182;
and efficiency,196;
law of,205-14;
nature of,205-8;
and rent,205;
economic and contract,206;
real and nominal,207;
modes of earning,208-11;
methods of remuneration,211;
and the general law of value,211-4;
term "general rate,"211;
differences in,212;
statement of law,213;
and rent,215-8;
and time-value,219-22;
law of wages,215;
iron law,216;
and ambition,230;
rise of money form of,232;
real, changes in,232;
more better-paid callings,233;
raised by machinery,242;
in general industry determined by impersonal economic forces,255;
and profits,284;
and profit-sharing,295;
as personal or impersonal income,359;
influenced by consumers' choice,394;
relation to profits,415;
and protective tariff,495;
laws regulating payment,511

Wages system, and its result,226-35;
defined,226;
development,227;
as it is,229-31;
progress under,232-5;
gloomy view of,233

Walker, Francis A., theory of wages,417,578

Wants, material,9-12;
non-material,13-4;
of animals,9;
primitive,10;
civilized,10;
and progress,11;
growth,12;
refinement,12;
complex,14;
dependence on things,15;
relation to goods,16;
kinds,21;
changing,26;
recurrence,39;
in series,39;
present and future,44;
see Consumption

War, to remedy over-population,188;
affects productive agents,394

Waste, and luxury,381-91;
of wealth,381-5;
individual,384;
in public outlay,384-5;
fallacy of,385

Water routes, influence on local advantages,526-7;
[Pg 610]economy of,528

Wealth, and welfare,15-20;
definition,17,18;
and income,41;
related to gratification,44;
and its indirect uses,46-52;
conditions of economic,48-52;
in city and country, contrasted,111;
loan of, in Middle Ages,112;
concept, and capital concept,116;
and property,362;
inequality of,375

Welfare, and wealth,15-20;
and instinctive choice,395;
vs. production,398

Wieser,570,571,580,583

Wind and water as sources of power,51

Woman's work,510

Work, see Labor

Workers, effect of machinery on,239-44;
need of organization,246;
need of direction,265-7;
and profit-sharing,294;
gains from trusts,325;
health in factories,509-10

Years' purchase,120

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Effort	Objective result sought	Name of action
1. Pleasurable	Not useful	Play
2. Pleasurable	Useful	Labor
3. Painful	Useful	Labor
4. Painful	Not useful	No special name

Decade	Number Organized	Total Nominal Capital
1860-69	2	$13,000,000
1870-79	4	135,000,000
1880-89	18	288,000,000
1890-99	157	3,150,000,000
——————	——	———————
Total, 40 years	181	$3,586,000,000

Year	Number Organized	Total Nominal Capital
1890	6	$82,000,000
1891	13	168,000,000
1892	13	140,000,000
1893	5	226,000,000
1894	2	35,000,000
1895	7	104,000,000
1896	3	40,000,000
1897	6	93,000,000
1898	22	574,000,000
1899	80	1,688,000,000
——————	——	———————
Total, 10 years	157	$3,150,000,000

Date	Number	Number of Plants Acquired or Controlled	Total Nominal Capital
Jan. 1, 1904	318	5288	$7,246,000,000

Date	Number	Number of Plants Acquired or Controlled	Total Nominal Capital
1. Greater industrial trusts	7	1528	$2,660,000,000
2. Lesser industrial trusts	298	3426	4,055,000,000
3. Other industrial trusts in process of reorganization or readjustment	13	334	528,000,000
4. Franchise trusts	111	1336	3,735,000,000
5. Great steam railroad groups	6	790	9,017,000,000
6. Allied independent railroad groups	10	250	380,000,000
	——	——	———————-
Total,	445	8664	$20,000,000,000

Unit of Supply	Marginal Utility	Value of Whole Supply
10	36	360
15	30	450
20	25	500
30	19	570
40	15	600
50	10	500
60	5	300

Movatterモバイル変換

The Project Gutenberg eBook ofThe Principles of Economics, with Applications to Practical Problems

THE PRINCIPLES OF ECONOMICS

WITH APPLICATIONS TO PRACTICAL PROBLEMS

BY

FRANK A. FETTER, PH.D.

PROFESSOR OF POLITICAL ECONOMY AND FINANCE,CORNELL UNIVERSITY

CONTENTS

PART I

PREFACE

THE PRINCIPLES OF ECONOMICS

PART I

DIVISION A—WANTS AND PRESENT GOODS

CHAPTER I

THE NATURE AND PURPOSE OF POLITICAL ECONOMY

§ I. NAME AND DEFINITION

§ II. PLACE OF ECONOMICS AMONG THE SOCIAL SCIENCES

§ III. THE RELATION OF ECONOMICS TO PRACTICAL AFFAIRS

CHAPTER 2

ECONOMIC MOTIVES

§ I. MATERIAL WANTS, THE PRIMARY ECONOMIC MOTIVES

§ II. DESIRES FOR NON-MATERIAL ENDS, AS SECONDARY ECONOMIC MOTIVES

CHAPTER 3

WEALTH AND WELFARE

§ I. THE RELATION OF MEN AND MATERIAL THINGS TO ECONOMIC WELFARE

§ II. SOME IMPORTANT ECONOMIC CONCEPTS CONNECTED WITH WEALTH AND WELFARE

CHAPTER 4

THE NATURE OF DEMAND

§ I. THE COMPARISON OF GOODS IN MAN'S THOUGHT

§ II. DEMAND FOR GOODS GROWS OUT OF SUBJECTIVE COMPARISONS

CHAPTER 5

EXCHANGE IN A MARKET

§ I. EXCHANGE OF GOODS RESULTING FROM DEMAND

§ II. BARTER UNDER SIMPLE CONDITIONS

§ III. PRICE IN A MARKET

CHAPTER 6

PSYCHIC INCOME

§ I. INCOME AS A FLOW OF GOODS

§ II. INCOME AS A SERIES OF GRATIFICATIONS

DIVISION B—WEALTH AND RENT

CHAPTER 7

WEALTH AND ITS INDIRECT USES

§ I. THE GRADES OF RELATION OF INDIRECT GOODS TO GRATIFICATION

§ II. CONDITIONS OF ECONOMIC WEALTH

CHAPTER 8

THE RENTING CONTRACT

§ I. NATURE AND DEFINITION OF RENT

§ II. THE HISTORY OF CONTRACT RENT AND CHANGES IN IT

CHAPTER 9

THE LAW OF DIMINISHING RETURNS

§ I. DEFINITION OF THE CONCEPT OF (ECONOMIC) DIMINISHING RETURNS

§ II. OTHER MEANINGS OF THE PHRASE "DIMINISHING RETURNS"

§ III. DEVELOPMENT OF THE CONCEPT OF DIMINISHING RETURNS

CHAPTER 10

THE THEORY OF RENT: THE MARKET VALUE OF THE USUFRUCT

§ I. DIFFERENTIAL ADVANTAGES IN CONSUMPTION GOODS

§ II. DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS

CHAPTER 11

REPAIR, DEPRECIATION, AND DESTRUCTION OF WEALTH: RELATION TO ITS SALEAND RENT

§ I. REPAIR OF RENT-BEARING AGENTS

§ II. DEPRECIATION IN RENT-EARNING POWER OF AGENTS KEPT IN REPAIR

§ III. DESTRUCTION OF NATURAL STORES OF MATERIALS

CHAPTER 12

INCREASE OF RENT-BEARERS AND OF RENTS

§ I. EFFORTS OF MEN TO INCREASE PRODUCTS AND RENT-BEARERS

§ II. EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS OF INDIRECT AGENTS

DIVISION C—CAPITALIZATION AND TIME-VALUE

CHAPTER 13

MONEY AS A TOOL IN EXCHANGE

§ I. ORIGIN OF THE USE OF MONEY

§ II. NATURE OF THE USE OF MONEY

§ III. THE VALUE OF TYPICAL MONEY

CHAPTER 14

THE MONEY ECONOMY AND THE CONCEPT OF CAPITAL

§ I. THE BARTER ECONOMY AND ITS DECLINE

§ II. THE CONCEPT OF CAPITAL IN MODERN BUSINESS

CHAPTER 15

THE CAPITALIZATION OF ALL FORMS OF RENT

§ I. THE PURCHASE OF RENT-CHARGES AS AN EXAMPLE OF CAPITALIZATION

§ II. CAPITALIZATION INVOLVED IN THE EVALUATING OF INDIRECT AGENTS

PROFESSOR OF POLITICAL ECONOMY AND FINANCE,
CORNELL UNIVERSITY