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By the Same Author 

Railway Tariffs and the Interstatk 

Commerce Law. 1887. 
Progressive Taxation in Theory and 
Practice, 2d ed. 1908. 
French Translation, 1908. 
The Shifting and Incidence of Tax- 
ation, 3d ed. 1909. 

Italian Translation, 1906; French 
Translation, 1909; Japanese Trans- 
lation, 1 910. 
The Economic Interpretation of 
History, 2d ed. 1907. 
Japanese Translation, 1905; Russian 
Translation, 1906; Spanish Transla- 
tion, 1907. 
Essays in Taxation, 6th ed. 1910. 

Russian Translation, 1909; French 
Translation, 191 o; Mahratti Trans- 
lation, 1 910. 

^tixtvic^tx Citiiett ^tvit^ 

Principles of Economics 




iSlcFicftar Professor of political (Sconoma, 
Columbia 2Blnifaergita. 









Copyright, 1905, 
By Longmans, Green, and Co. 

Copyright, 1909, 
By Longmans, Green, and Co. 

First Edition, October, 1905 

Second Edition, revised, September, 1906 

Third Edition, revised and enlarged, 

September, 1907 
New Impression, revised, August, 1908 
Fourth Edition, revised and enlarged, 1909 
New Impression, August, 1910 

Russian Translation, 1907 
Japanese Translation, 1907 




IN the explanatory note which accompanied the first 
edition of this work, it was stated that *^The object 
of the author is not only to give the salient facts of 
economic life, and to analyze them in the light of modern 
research, but also to present a point of view from which 
to approach the great questions of modern economic 
policy. / In the second place the author believes that the 
function of economics is not only to explain what actually 
exists, but to show how it has come to exist] and to fore- 
cast both the probable and the ideal future. Throughout 
the entire work the author endeavors to reconcile the his- 
torical and the a priori methods, and to provide an analysis 
of existing industrial society in the light of a treatment 
which, while seeking to emphasize the importance of 
wealth, lays especial emphasis on the human side of the 
subject and the subordination of wealth to man." The 
justification of this attempt is evident from the unexpected 
demand for the work, which has led to a constant succes- 
sion of new editions. • 

Of the suggestions and criticisms that have been made 
in the various reviews of the book, only one seems to call 
for mention. Some surprise has been expressed that so 
Httle attention has been devoted to the problems of taxa- 
tion — a field which the author has elsewhere somewhat 
assiduously cultivated. This intentional omission is due 

4j («:<;• 

iv Preface to the Fourth Edition. 

to the conviction that it is inexpedient to attempt a treat- 
ment of public finance in a short treatise on the principles 
of economics. The science of finance is indeed in one 
sense a part of economics, but in another and better sense 
a quasi-independent science. The attempt to treat the 
problems of finance in a few chapters at the end of a 
treatise on economics, as do most of the English works, is 
bound to be unsatisfactory in the extreme. There is no 
more reason so to include Finance than there would be to 
include Statistics or any other semi-independent discipline. 
A treatment of finance that is in any sense adequate would 
require a volume. It is my hope in the not far distant 
future to issue such a companion volume. 

Several changes have been made in this work since its 
original publication. In the third edition the chapters on 
Money and Banking were entirely re-written and enlarged, 
about double the amount of space being given to the sub- 
ject, which was now treated in four chapters instead of 
two. In the present (fourth) edition the introductory mat- 
ter has been re-written and the chapter references have 
been made to include the important newer literature. In 
the body of the book the charts and tables have been con- 
tinued, so as to incorporate the latest available figures, 
and the facts in general have been brought down to date. 
It is my hope that in this revised form the work may 
continue to enjoy the favor which has hitherto been so 
generously accorded to it. 

Edwin R. A. Seligman. 
Camp Askenonta, 

Lake Placid, N. Y., July, 1909. 




I. General Treatises in English xvii 

II. General Treatises in Foreign Languages .... xx 

III. Periodicals xxi 

IV. Dictionaries and Cyclopedias ..." xxvi 

V. Government Documents 

A. Local and State Publications * . xxvii 

B. National Departmental Publications xxx 

C. Congressional Documents xxxix 

Z>. Indexes xlii 

£. British Official Publications xlii 

VI. Semi-Official Publications xliv 

VII. Bibliographies and Finding Lists xlvi 

VIII. List of Select Books xlviii 

Part I. 



I. Fundamental Concepts. 

1. References 3 

2. Economic Life 3 

3. Economics or Political Economy ? 6 

4. The Meaning of Wealth 8 

5. Wealth and Man 13 

6. The Measure of Wealth — Income and Capital ... 15 

7. Wealth, Money, and Property ig 

8. Public and Private Wealth 20 


vi Contents Pans I., II. 

Chapter Page 

II. Economic Law and Method. 

9 References 23 

10. Meaning of Economic Law 23 

11. Methods of Economic Investigation 27 

12. Relation of Economics to Other Sciences 28 

13. Relation of Economics to Politics and Other Moral 

Sciences 30 

14. Scope of Economics 34 

Part 11. 



III. The Natural Environment. 

15. References 36 

16. Climatic and Geological Conditions 36 

17. The Flora, the Fauna, and the Geographical Location . 40 

18. Changes in Environment 42 

19. Changes in Location • . . 45 

IV. The Population. 

20. References 48 

21. Density of Population 48 

22. Concentration of Population 51 

23. Distribution of Population 53 

24. Increase of Population 55 

25. Migration of Population 59 

26. The Law of Population 60 


V. The Economic Stages. 

27. References 66 

28. Economic Development 66 

29. Primitive Technique 68 

30. Transition from the Lower Stages of Civilization . . 71 

31. Self-sufficing or Isolated Economy 74 

32. Trade or Commercial Economy 76 

33. Capitalist or Industrial Economy 80 

Part II. Contents 


Chapter Pagb 

VI. The Historical Forms of Business Enterprise. 

34. References 84 

35. Primitive Economic Activity — The Clan 84 

36. The Family 86 

37. Help or Hire System 89 

38. Handicraft System 90 

39. Domestic System 92 

40. Factory System 93 

41. Associated and Corporate Enterprise 95 

vn. Economic Development of the United States. 

42. References 99 

43. Early Period of American Economic Life 99 

44. Growth of American Industry in the Nineteenth Century loi 

45. Recent Development of American Industry .... 104 

46. Modern Problems of America 106 

VIII. Development of Economic Thought. 

47. References 109 

48. Economic Theory in Classic Antiquity 109 

49. Mediaeval Economic Theory 112 

50. The Mercantile Doctrine 115 

51. Adam Smith and the Physiocrats 118 

52. Ricardo and Modern Economics 121 


IX. Private Property. 

53. References 125 

54. Origin of Private Property 125 

55. Growth of Property in Land 128 

56. Theories of Private Property 131 

57. Limits of Private Property 134 

58. Content of Property Rights 136 

X. Competition. 

59. References 139 

60. Nature of Competition 139 

61. Forms of Competition 141 

62. Dangers of Competition 145 

63. Limits of Competition 147 

64. Substitutes for Competition 150 

viii Contents Parts II., III. 

Chapter Page 

XL Freedom. 

65. References 154 

66. Origin and Growth of Slavery 154 

67. Decay and Disappearance of Slavery 158 

68. Liberty of Economic Action 163 

69. Various Kinds of Economic Freedom 165 

70. Individual Liberty as a Social Concept 170 

Part III. 


XII. The Meaning of Value. 

71. References 173 

72. Original Meaning of Value 173 

73. Marginal Utility — Law of Diminishing Utility . . . 175 

74. Individual and Social Value 179 

75. Value in Exchange 182 

76. Value and Price 184 

77. Value and Marginal Increments of Wealth 185 

XIIL The Measure of Value. 

78. References 189 

79. Meaning of Cost 189 

80. Individual and Social Cost 192 

81. Cost and Surplus 194 

82. Cost and Utility 198 

83. Social Surplus and Progress 201 

XIV. The Capitalization of Value. 

84. References 204 

85. Value and Rent 204 

S6. Law of Depreciation 206 

87. Law of Future Estimates 209 

88. Law of Diminishing Returns 211 

89. Forms of Value 214 

90. Value as a Differential 217 

91. Relation of Rental and Capital Values 219 

Part III. Contents ix 

Chapter Page 

XV. Determination of Market Value. 

92. References 222 

93. Demand and Supply 222 

94. Market and Normal Price 223 

95. Conditions of Exchange — Law of Comparative Utilities 

and Comparative Costs 225 

96. Rate of Exchange — Barter 226 

97. One Seller and One Buyer 228 

98. Monopoly 230 

99. Competition 233 

100. Conclusions 234 

XVI. Determination of Normal Value. 

loi. References 239 

102. Normal Demand — Elasticity of Demand 239 

103. Normal Supply — Cost of Production 242 

104. Law of Marginal or Maximum Cost 245 

105. Law of Minimum Cost 247 

106. Elasticity of Supply — Law of Varying Cost .... 249 

107. Law of Joint Cost 251 

108. Equilibrium of Normal Demand and Normal Supply . 253 

109. Influence of Normal Price upon Market Price .... 254 
no. Normal Monopoly Value 255 

XVII. The General Law of Value. 

111. References 260 

112. Value and Cost of Production 260 

113. Value and Efficiency 262 

114. Efficiency and Capitalization 266 

115. Valuation and Taxation 267 

116. Valuation and Regulation 271 

117. Valuation and Investment 273 


XVIII. Character and Factors of Production. 

118. References 275 

119. Production : Its Meaning and Relation to Consumption 275 

120. Kinds of Production 278 

121. Factors of Production 280 

122. Production and the Producer 282 

X Contents Part ill. 

Chapter Pack 

XIX. Labor. 

123. References 285 

124. Meaning of Labor 285 

125. Cost of Labor 286 

126. Efficiency of Labor 289 

127. Division of Labor — Nature and Advantages .... 290 
123. Division of Labor — Defects 294 

129. Combination of Labor 296 

130. Supply of Labor 298 

XX. Land. 

131. References 300 

132. Land as a Separate Factor of Production 300 

133. Fertility of Land 303 

134. Situation of Land 306 

135. Cultivation of Land 309 

XXI. Capital. 

136. References 313 

137. Kinds of Capital 313 

138. Function of Capital 316 

139. Creation and Growth of Capital 319 

140. Nature and Influence of Capital 321 

141. Investment of Capital 324 

XXII. Enterprise — The Concentration of Production. 

142. References 329 

143. The Meaning of Concentration 329 

144- Large-Scale Production 331 

145. Large-Scale Agriculture 334 

146. Consolidation and Integration of Production .... 337 

147. Growth of Combination 340 

148. Effects of Combination 344 

149. Limits of Combination 347 


XXIII. Profits. 

150. References 351 

151. The Shares in Distribution 351 

152. Ordinary Profits 353 

153. Aleatory Profits 357 

Part III. Contents xi 

Chapter Pagb 

XXIII. Profits {Continued). 

154. Speculative Profits : Nature 359 

155. Speculative Profits: Function . 363 

156. Monopoly Profits 366 

157. Regulation and Justification of Profits 368 

XXIV. Rent. 

158. References 37' 

159. Nature of Rent ZT^ 

160. Relation of Land Rent to Other Rents 373 

161. Rent and Price 376 

162. Growth of Land Rent 379 

163. Land Rent and Land Tenure 383 

164. Justification of Land Rent 388 

XXV. Interest. 

165. References 392 

166. Nature of Interest 392 

167. Interest and Forbearance 396 

168. Interest and Productivity 399 

169. Course of Interest 403 

170. Tendency of Interest to a Minimum 405 

171. Regulation of Interest 408 

XXVI. Wages. 

172. References 411 

173. Nature of Wages 411 

174. Wages and Cost 414 

175. Wages and Efficiency 416 

176. Rate of Wages 419 

177. Course of Wages 420 

178. Variations in Wages 422 

179. Wages and Profits 427 

XXVII. Wages, — The Labor Problem. 

180. References 429 

181. Labor Legislation 430 

182. Labor Organizations: Object and Functions .... 434 

183. Labor Organization : Methods 439 

184. Profit Sharing and Go-operation 442 

185. Arbitration and Conciliation 445 

xii Contents Part III. 


Chapter Page 

XXVIII. Money. — Nature and Value 

i86. References 448 

187. Origin and Functions of Money 449 

188. Kinds of Money 452 

189. Value of Money 456 

190. Nature of the Monetary Demand 458 

191. Changes in the Monetary Demand 461 

192. The Monetary Supply 463 

193. The Quantity Theory 466 

194. Commodities and the Price Level 468 

195. Index Numbers 470 

196. Distribution of Money 473 

197. Stability of Money 476 

XXIX. Money. — Practical Problems. 

198. References 481 

199. Coinage Problems 481 

200. Gresham's Law 486 

201. Production of the Precious Metals 488 

202. Choice of the Money Standard 493 

203. Embarrassments of Bimetallism 496 

204. The Struggle for Silver 498 

205. Abandonment of the Silver Standard 502 

206. Adoption of the Gold Standard 507 

207. Paper Money 509 

XXX. Credit and Banking. 

208. References 518 

209. Nature of Credit 518 

210. Instruments of Credit 521 

211. Development of Banking 524 

212. Modern Bank Operations 530 

213. Bank Statements 536 

214. The Deposit and Check System 539 

215. Bank Reserves 543 

216. Credit and Prices 550 

XXXL Credit and Currency. 

217. References 554 

218. Banks of Issue 554 

219. Regulation of Note Issues . 561 

220. Early American Systems 566 

Part III. Contents xiii 

Chapter Pack 

XXXI. Credit and Currency {^Continued). 

221. The National Banks 569 

222. The Money Rate 572 

223. The Money Market 576 

224. Currency Reform 580 

225. Credit and Crises 583 

XXXII. International Trade. 

226. References 587 

227. Basis of International Trade . 587 

228. Rate of International Exchange 593 

229. Growth of Free Trade 597 

230. The Argument for Protection 601 

231. The Argument for Free Trade 606 

232. Conclusion 608 

XXXIII. Transportation. 

233. References 613 

234. Transmission of Intelligence — The Post-Office . . . 613 

235. Railway Development 616 

236. Nature of Railway Business 620 

237. Principle of Railway Charges 624 

238. Classification 628 

239. Personal Discrimination 631 

240. Local Discrimination . 632 

241. Railway Regulation 637 

XXXIV. Insurance. 

242. References 641 

243. Nature of Insurance 641 

244. Growth of Insurance 644 

245. Theory of Insurance 649 

246. Methods and Regulation of Insurance 652 

xiv Contents Part IV. 

Part IV. 


Chapter Page 

XXXV. Government and Business. 

247. References 655 

248. Socialism 655 

249. Development of Public Ownership 658 

250. Conditions of Public Ownership 662 

251. Municipal Monopolies 666 

252. Government Regulation 669 

253. Bounties and Subsidies 672 

XXXVI. Poverty and Progress. 

254. References 675 

255. Luxury 676 

256. The Facts of Poverty 680 

257. The Causes of Poverty 684 

258. Relief of Poverty 687 

259. Prevention of Poverty 690 

260. The Future of Economic Life 693 

261. The Role of Economics 697 

INDEX 701 

Maps and Diagrams 

Distribution of Population in 1900 . . . colored^ facing 50 
Number of Inhabitants to the Square Mile, 

by States and Territories " 52 

Population according to Age Distribution 54 

Foreign Immigration to the United States, 

1840-1908 following 58 

Increase of Population in the United States 

and the Principal Countries of Europe .... facing 59 
Population : 

(i) Total Foreign Born at each Census ^ 

(2) Proportion each of leading nation- > colored^ following 60 
alities and foreign born . . .) 
Constituents of the Population of States 

and Territories, 1900 colored^ " 62 

Production of Corn ) facintr 

Production of Wheat) ^ ^ 

Production of Oats 7 " lo"? 

Production of Cotton ) 

Capital Invested at each Census 7 « 

Average Number of Wage Earners > 

Value of Products ) "101; 

Proportion of Wage Earners to Population j^ • • • • 

Annual Production of Iron Ore in the United 

States " 106 

Hand and Machine Labor Selected Units (a) ... " 294 
Hand and Machine Labor Selected Units {b) ... " 295 

Wages, Hours of Work, etc colored, " 422 

Results of Strikes, etc colored^ " 440 

Relative Wholesale and Retail Price of Food, 

1890-1907 "470 

Relative Wholesale and Retail Price of Fresh 

Beef, 1890-1903 ** 470 


xvi Maps and Diagrams 


Relative Prices of Raw and Manufactured 

Commodities, 1 890-1908 facing 471 

Comparative Movement of Wholesale Prices, 

1878-1901 " 471 

Production of Silver, 1 875-1 907 " 490 

Production of Gold and Silver, 1 845-1 907 .... " 490 

Production of Gold, 1 875-1 907 " 491 

Bank Notes, Paper Money, etc., 1878-1908 ... " 516 

Merchandise Exported and Imported " 591 

Reduction of Freight Rates, 1867-1900 .... following 620 
Percent of Total Expenditure, etc., Normal 

Families colored^ facing 681 

Poverty Chart (reproduced by permission 

from Rowntree's " Poverty ") 686 


I. General Treatises in English. 

Of the older works the treatises of Adam Smith and of some 
of the so-called Classical School are still indispensable to stu- 
dents. The three founders are : 

Smith, Adam. An Inquiry into the Nature and Causes of the 
Wealth of Nations. (London, 1776; best modern edition, with 
introduction, notes, marginal summary and enlarged index by 
Edwin Cannan, 2 vols., 1904.) 

Malthus, Thomas Robert. An Essay on the Principle of 
Population, or a View of its Past and Prese?it Effects on Human 
Happiness. (London, 1798; 8th ed., 1878.) 

Ricardo, David. Principles of Political Economy aftd Taxation. 
(London, 181 7.) — This work, together with his other important 
writings, has been edited by J. R. McCulloch in one volume 
under the title of The Works of David Ricardo with a Notice 
of the Life and Writings of the Author. (1846; frequently 
reprinted since.) 

The principal modern expounders of the general system set 
forth by Smith, Malthus and Ricardo are : 

Mill, John Stuart. Principles of Political Economy with some 
of their Applications to Social Philosophy . (London, 1848; 5th 
ed., 1880.) — This was the most widely read work from 1850 to 

Senior, Nassau William. Political Economy. (London, 1850; 
6th ed., 1872.) — Acute and original. 

Cairnes, J. E. Sofne Leading Principles of Political Economy 
newly Expounded. (London, 1874.) — Abstract, but remarkably 

b xvii 

xviii Suggestions. 

SiDGWiCK, Henry. The Principles of Political Economy. (Lon- 
don, 1883.) — Critical and philosophical, but somewhat remote 
from actual life. 

The reaction against the Classical School was inaugurated in 
England by 

Jevons, W. Stanley. The Theory of Political Economy. (Lon- 
don, 1871 ; 3d ed., 1888.)— -A work of the first magnitude. The 
same author's posthumous Principles of Economics (London, 
1905) is only a torso. 

Of modem treatises the best are as follows : 

Marshall, Alfred. Principles of Economics. (Vol. I, London, 
1890; 5th ed., 1907.) — The fullest and most elaborate of recent 

PlERSON, N. G. Principles of Economics. (Translated by A. A. 
Wotzel. Vol. I, London, 1902.) — Dr. Pierson was formerly 
Prime Minister of the Netherlands. A virile work, especially 
strong in the financial sections. Vol. II may be expected soon. 

Nicholson, J. Shield. Principles of Political Economy. (3 
vols., London, 1893-1901.) — On the Hnes of Mill, but brought 
down to date and with much historical material. 

Pantaleoni, Maffeo. Pure Ecofiomics. (Translated by T. 
Boston Bruce. London, 1898.) — An acute and profound work 
on fundamental principles. 

Flux, A. N. Economic Principles. An Introductory Study. 
(London, 1904.) — A solid production on rather conservative 

Bohm-Bawerk, Eugen von. The Positive Theory of Capital. 
(Translated by W. Smart. London, 1891.) — Professor Bohm- 
Bawerk was formerly Austrian Minister of Finance. 

Wieser, Friedrich von. Natural Value. (Translated by 
C. Malloch, London, .1893.) — This book and the one immedi- 
ately preceding are the two chief works of the Austrian School, 
whose views are akin to those of Jevons. 

Of American treatises the most important are : 

Walker, Francis A. Political Economy. (New York, 1883 ; 
3d ed., 1888.) — Until recently the chief American production. 

Treatises in English. xix 

Clark, John B. The Distribution of Wealth. (New York, 1899.) 
— Of fundamental and epoch-making importance. The same 
author's Essentials of Economic Theory (New York, 1907) covers 
a broader field. 

Hadley, Arthur Twining. Economics: An Account of the Re- 
lations between Private Property and Public Welfare. (New York, 
1896.) — Admirably written, but with a not entirely satisfactory 

Bullock, Charles Jesse, Introduction to the Study of Economics. 
(New York, 1897; 3d ed., 1908.) — Clear and sensible. 

Ely, Richard T. Outlines of Economics. (New York, 1893; new 
ed., revised by the author and T. S. Adams, M. O. I.orenz, and 
A. A. Young, 1908.) — In its new form, valuable and interesting. 

Seager, Henry Rogers. Introduction to Economics. (New York, 
1904; 3d ed., 1906.) — Displays a firm grasp of theory and a wide 
acquaintance with facts. In many respects the most available of 
existing text-books. The same author has also published Economics. 
Briefer Course (New York, 1909). 

Fetter, Frank A. The Principles of Economics. (New York, 
1904.) — Novel and suggestive. 

During the past few years a number of series for more pop- 
ular consumption have appeared. They are not yet completed, 
and the whole number of volumes is not yet definitely settled. 
Among these are: Appleton's Business Series, Methuen's 
Books on Business, Macmillan's Citizen's Library of Economics, 
Politics and Sociology, and the American Social Progress 
Series, Longman's American Citizen Series, Holt's American 
Public Problem Series, Putnam's Questions of the Day, and 
Ginn's Selections and Readings in Economics. 

On American Economic History attention is called especially 
to A Documentary History of American Industrial Society, 
under the auspices of the American Bureau of Industrial Re- 
search (Cleveland, 10 vols., 1909-1910), and The Economic 
History of the United States, under the auspices of the Carnegie 
Institution (about 10 vols., 1910-). 

Worthy of mention are two recent works on modern business : 

XX Suggestions. 

Hatfield, H. R., ed. Lectures on Commerce (Chicago, 1904; 3d ed., 
1906). — For American conditions. 

Ashley, W. J., ed. British Industries, a Series of General Reviews 
for Business Men and Students (London, 1903; 2ded., 1906). — 
For English conditions. 

The more important works on special topics will be found in 
the References at the head of each chapter. 

n. Greneral Treatises in Foreign Lan§;uages. 

The leading foreign works are: 

Wagner, Adolf. Grundlegung der Politischen Oekonomie. (3 vols., 
Leipsic; 3d ed., 1892-1894.) — By the chief advocate of "Pro- 
fessorial Socialism." Erudite, with remarkable bibliographies. 
A French translation appeared in 1905. 

RoscHER, WiLHELM. Grundlageu der Nationalokonomie. Ein 
Hand- und Lesebuch. (5 vols., Stuttgart, 1854-1894; with new 
editions of the earlier volumes almost every year until his death 
in 1894.) — By one of the founders of the Historical School. 
Contains an imposing array of historical notes. The first volume 
has appeared in English dress in 2 volumes. 

CoHN, GusTAV. Grundlegung der Nationalokonomie. Ein Lehr- 
buch fur Studirende. (3 vols., Stuttgart, 1885-1898.) — By the 
best stylist among the German economists. Conservative and 
interesting. The second volume has been translated into English 
under the title The Science of Finance. 

ScHMOLLER, GuSTAV. Grundriss der allgemeinen Volkswirth- 
schaftslehre. (2 vols., Leipsic, 1900-1904; 2d ed., 1908.) — A 
remarkable work by the present leader of the Historical School. 
Brilliant and fascinating, but weak in the theoretical parts. A 
French translation was published in 1905. 

Philippovich, Eugen von. Grundriss der Politischen Oekonomie. 
(3 vols., Tubingen, 1893-1907; 6th ed., 1909.) — Sane, impartial 
and concise. In many respects the best German work. 

Foreign Treatises. xxi 

Leroy-Beaulieu, Paul. Traite Theorique et Pratique (TEconomie 
Politique. (4 vols., Paris, 1895; 4th ed., 1905.) — A pellucid 
work by the chief of the Orthodox School in France 

GiDE, Charles. Principesd^J^conomie Politique. (Paris, 1887; nth 
ed., 1908). — The most widely read European text-book. Ameri- 
can translations appeared in 1889 and 1904. The author's Cours 
d'Economie Politique (Paris, 1909) is an enlarged version of the 
same book. 

Landry, Adolphe. Manuel d'^conomique. (Paris, 1909.) — The 
best French work. 

Pareto, Vilfredo. Cours d'Economie Politique prof esse a VUni- 
versite de Lausanne. (2 vols., Lausanne, 1896-1897.) — An acute 
work, by an Italian, attempting to combine the mathematical 
point of view with historical details. The author's Manuel d'Econo- 
mie Politique (Paris, 1909) is a translation of a briefer Italian work 
on the same lines. 

III. Periodicals. 

Classified by countries the chief periodicals are as follows : 

United States. 

American Economic Association Publications. This Association, 
formed in 1886, includes the leading American economists and a 
large number of prominent laymen. The publications include 
the Reports of the Proceedings of the Annual Meetings and a series 
of independent monographs on every phase of economics. Up to 
1897 these were published at bi-monthly intervals, and were col- 
lected in eleven volumes. In 1897 a series of shorter Studies was 
inaugurated, and larger volumes were occasionally published 
under the name of New Series. In 1901 the Studies were discon- 
tinued, and a Third Series of more elaborate monographs was 
commenced, published at quarterly intervals and still in progress. 
In 1908 a quarterly periodical known as The Economic Bulletin 
was added. 

xxii Suggestions. 

The Quarterly Journal of Economics. Published for Harvard Uni- 
versity. (Boston, 1886-.) 

Political Science Quarterly. Edited by the Faculty of Political 
Science of Columbia University. (New York, 1886-.) 

The Annals of the American Academy of Political and Social Science 
(Bi-monthly, Philadelphia, 1890-.) 

TJie Yale Review. A Quarterly Journal for the Scientific Discus- 
sion of Economic, Political and Social Questions. (New Haven, 

The Journal of Political Economy. Published for the University of 
Chicago. (Quarterly to 1906, monthly thereafter, Chicago, 

The American Journal of Sociology. (Bi-monthly, Chicago, 1896-.) 

The International Socialist Review. (Monthly, Chicago, 1901-.) 

Quarterly Publications of the American Statistical Association. 
(Boston, 1888-.) 

Journal of Social Science. (Boston, 1869-.) Containing the Trans- 
actions of the American Social Science Association. 

Sound Currency. (7 vols., New York, 1895- 1902.) Edited by the 
Reform Club Sound Currency Committee. 

Municipal Affairs. (6 vols.. New York, 1897-1903.) Edited by 
the Reform Club Committee on City Afifairs. 

Johns Hopkins University Studies in Historical and Political Science. 
(Baltimore, 1883-. One volume a year, composed of twelve 
numbers. 28 vols, and several extra volumes to 1910.) 

Columbia University Studies in History, Economics and Public 
Law. Edited by the Faculty of Political Science. (New York, 
1891-. Several volumes a year, each consisting of from one to 
four monographs. 37 vols. [100 monographs] to 1910.) 

Michigan Political Science Association Publications. (Ann Arbor, 
1893-. 6 vols, to 1910.) 

University of Wisconsin Bulletin. Economics and Political Science 
Series. (Madison, 1904-. 5 vols, to 1910.) 

American Periodicals xxiii 

University of Pennsylvania Series in Political Economy and Public 
Law (Philadelphia, 1888-. 22 monographs to 19 10.) 

Harvard Economic Studies. (Boston, 1906-. 4 vols, to 1910.) 

Cornell Studies in History and Political Science. Vol. I, 1907. 

University of California, Publications in Economics. Vol. I, 1908. 

Economic articles of more or less permanent interest are 
also found in the monthlies like the North American Review , 
Forum, American Monthly Review of Reviews, Atlantic Monthly, 
and in the weeklies like the Nation, Outlook, Independent and 
the Survey. The special periodicals and publications devoted 
to particular economic interests are too numerous to mention. 
Some of them will be found below under Section VI, Semi- 
official Publications. 

Great Britain. 

The Economic Journal. (Quarterly, London, 1890-.) The Jour- 
nal of the British Economic Association, since 1903 called The 
Royal Economic Society. 

The Economic Review. (Oxford, 1891--.) Published quarterly 
for the Oxford University Branch of the Christian Social Union. 

Journal of the Royal Statistical Society. (Quarterly, London, 

The monthlies like the Contemporary Review, Fortnightly 
Review, National Review, Nineteenth Century, Independent 
Review; and the British Quarterly and Edinburgh Reviews 
generally contain some articles of economic interest. The most 
important weekly devoted entirely to current economic topics 
is The Economist. 


Jahrbiicher fiir Nationalokonomie und Statistik. (Monthly, Jena, 
1863-.) Edited by Conrad. 

xxiv Suggestions. 

Jahrbuch fiir Gesetzgebimg, Verwaltung und V olkswirthschaft. 
(Quarterly, Leipsic, 1877-.) Edited by SchmoUer. 

Zdtschrift fiir die gesammte Staatswissenschaft. (Quarterly, 
Tubingen, 1844-.) Edited by Biicher. 

Archiv fiir Sociale Gesetzgebung und Statisiik. (Quarterly, Berlin, 
1888-1903.) Edited by Braun. Continued as: 

Archiv fiir Sozialwissenschaft und Sozialpolitik. Quarterly, Tubin- 
gen, 1904-.) Edited by Sombart, Weber and Jaffe. 

Zeitschrift fiir Sozialwissenschaft. (Quarterly, Berlin, 1898-.) 
Edited by Wolf. 

Vierleljahrschrift fiir Sozial- und Wirthschaftsgeschichte. (Quarterly, 
1904-.) Edited by Bauer, Below and Hartmann. 

Zeitschrift fiir die gesammte Versicherungswissenschaft. (1900-.) 

Finanz- Archiv. (Quarterly, Stuttgart, 1884-.) Edited by Schanz. 

Archiv fiir Eisenbahnwesen. (Monthly, Berlin, 1875-.) Edited by 
von der Leyen. 

Thunen Archiv. (Jena, 1905-.) Edited by Ehrenberg. 

Die neue Zeit. (Monthly, Stuttgart, 1883-.) Edited by Kautsky. 

Documente des Sozialismus. (Monthly, Stuttgart, 1901-1905.) 
Edited by Bernstein. 

Marx Studien. (Vienna, 1905-.) Edited by Adler and Hilferding. 

Publications of the Verein fiir Sozialpolitik. (Several volumes a 
year, Leipsic, 1873-.) 

Stoats- und sozialwissenschaftliche Forschungen. (Leipsic, 18 78-.) 
Edited by Schmoller [and since 1905 by Sering]. 

Sammlung nationalokonomischer und statistischer Abhandlungen des 
staatswissejischaftlichen Semiyiars zu Halle. (Jena, 1877 -.) Ed- 
ited by Conrad. 

Miinchener volkswirthschaftliche Studien. (Stuttgart, 1893-.) Edited 
by Brentano and Lotz. 

Annalen des deuischen Reichs fiir Gesetzgebimg, Verwaltung und 
V olkswirthschaft. (Monthly, Munich, 1868-.) Edited by Ehe- 
berg and Dyraff. 

Foreign Periodicals. xxv 

Abhandlungen aus dem staatswissenschaftlichen Seminar von S trass- 
burg. (Strassburg, 1893-.) Edited by Knapp. 

Socialgeschichtliche Forschungen. (Weimar, 1896-.) Edited by 
Bauer and Hartman. 

Staatswissenschaftliche Studien. (Leipsic, 1893-.) Edited by Elster. 

V olkswirthschaftliche Abhandlungen der Badischen Hochschulen. 
(Freiburg '/B., 1897-.) Edited by Fuchs, Schulze-Gavernitz and 

Berner Beitrage zur Geschichte der Nationalokonomik. (Bern, 
1886-.) Edited by Oncken. 


Journal des Mconomistes. (Monthly, Paris, 1843-.) Edited by 

Revue d'Economie Politique. (Monthly, Paris, 1887-.) Edited by 
Cauwes, Gide and Martin. 

Revue d'Histoire des Doctrines Economiques et Sociales. (Quarterly, 
Paris, 1908-.) Edited by Deschamps and Dubois. 

Revue de Science et de Legislation Financiere. (Bi-monthly, Paris, 
1903-.) Edited by Boucard, Jeze and Morel. 

Reforme Sociale. (Paris, 1880-.) Bulletin of the Societe d'Economie 

Bidletin de Statistique et de Legislation comparee. (Monthly, Paris, 
1 877-.) 

Annates des Sciences Politiques. (Bi-monthly, Paris, 1886-.) 

Journal de la Societe de Statistique de Paris. (Monthly, Paris, 

Travaux Juridiques et Economiques de VUniversite de Rennes. 
(Rennes, 1906-.) 

Revue Internationale de Sociologie. (Monthly, Paris, 1893-.) Edited 
by Worms. 

Musee Social. Annates and Memoir es et Documents. CMonthly, 
Paris, 1 896-.) 

xxvi Suggestions. 

U Rconomiste Frangais. (Weekly, Paris, 1876-.) Edited by P. Leroy- 


Giornale degli Economisti. (Monthly, Padova, 1875-1878 and again 
Bologna and Rome, 1886-.) Edited by Viti de Marco, Pantaleoni 
and Montemartini. 

Bulletin de VInstitut International de Statistique. (Biennially, Rome, 
1886-.) Edited by Bodio. 


Revue Economique Internationale. (Bi-monthly, Brussels, 1904-.) 
Edited by Hennebicq. 


Zeitschrift fiir Volkswirthschaft, Socialpolitik und Verwaltung. 
(Quarterly, Vienna, 1892-.) Edited by Bbhm-Bawerk, Philip- 
^vich, and others. 

Wiener staatswissenschaftliche Studien. (Freiburg VB., 1898-.) 
Edited by Bernatzik and Philippovich. 


De Economist. (Monthly, The Hague, 185 2-.) Edited by 


Nationoekonomisk Tidsskrift. (Quarterly, Copenhagen, 18 73-.) 
Edited by Jensen. 

IV. Dictionaries and Cyclopedias of Economics. 

Palgrave, R. H. Inglis, ed. Dictionary of Political Economy. 
(3 vols., London, 1894-1899, with a supplement, 1908.) — An ad- 
mirable work, but not devoting special attention to American con^ 

Local Documents. xxvii 

Bliss, William D. P., ed. The Encyclopedia of Social Reform, in- 
cluding Political Economy, Political Science, Sociology and Statis- 
tics. (New York, 1897; 2d ed., 1908.) — Serviceable. 

Lalor, John J., ed. Cyclopedia of Political Science, Political 
Economy and United States History. (Chicago, 3 vols., 1882.) — 
Inadequate for economics and now somewhat out of date. 

Conrad, Elster, Lexis and Loening, eds. Handworterbuch der 
Staatswissenschaften. (6 vols., Jena, 1890-1894; 3d ed., 1908-.) — 
The most complete and elaborate cyclopedia of economics in 

Elster, Ludwig, ed. Worterbuch der Volkswirthschaft. (2 vols., 
Jena, 1898; 2d ed., 1907.) — Of more importance to continental 

Schonberg, Gustav. Handbuch der Politischen Oekonomie. (3 
vols., Tubingen, 1882; 4th ed., 1896-1898.) — Comprises a series 
of thorough and valuable monographs by the leading German 

Staatslexikon. Edited by the Gbrres Society. (Freiburg '/B., 
1 889- 1 89 7, 5 vols.) — From the Catholic point of view. 

Stegmann and Hugo. Handbuch des Sozialismus. (Zurich, 1897.) 
— A Socialist Cyclopedia. 

Block, M. Petit Dictionnaire Politique et Social. (Paris, 1896.) — 
Not very elaborate. 

Say, Leon, and Chailley, Joseph, eds. Nouveau Dictionnaire 
d' Economic Politique. (2 vols., Paris, 1891-1892.) — Inferior to 
both Palgrave and Conrad. 

V. Government Documents. 

A. Local and State Publications. 

A large amount of material on economic topics is published 
by the various American governments, — local, state and na- 
tional. The municipal governments of the chief American 
cities publish annually reports of their various city depart- 

xxviii Suggestions. 

ments. Among them, of economic interest, are the reports 
dealing with city finances, water, gas and electricity, charities, 
health, housing, transportation and the like, and in a few cases 
like Boston and New York the reports of the Departments or 
Bureaus of Municipal Statistics. Few of the reports reach the 
high level exemplified by the New York Report of tJte Tenement 
House Department for 1904, the Cleveland Report of the Water 
Works Division of tJw Board of Public Service, or the Boston J 
Report of the Finance Commission for 1909. The state govern- 1 
ments publish the reports of labor bureaus. Of these, the best I 
are those of New York and Massachusetts; but New Jersey, 
Pennsylvania, Illinois and a few others issue fairly good re- 
ports. The annual reports of the New York Department of 
Labor appear in three volumes, containing (i) the General 
Report of the Commissioner and the Report of tJie Bureau of 
Mediation and Arbitration, (2) the Report of the Bureau of 
Labor Statistics, and (3) the Report of the Bureau of Factory 
Inspection. Occasionally special reports are published, as on 
Labor Legislation, Employers^ Liability, Welfare Institutions, 
Old Age Pensions, etc. 

The reports of the Massachusetts Bureau of Statistics of 
Labor comprise the Annuul Report on tlie Statistics of Labor, 
the Annual Report on the Statistics of Manufactures and vari- 
ous Special Reports. 

Both New York and Massachusetts also publish periodical 
bulletins, the Labor Bulletin of Massachusetts appearing every 
two months, the Department of Labor Bulletin of New York 
appearing quarterly. The reports of the other states are not 
so valuable or voluminous, but often contain matter of im- 
portance. An Analysis and Index of all Reports issued by 
State Bureaus of Labor Statistics was published by the Na- 
tional Department of Labor in 1893, and has since then been 
brought down to date from time to time. The separate states 
publish in turn the annual proceedings of the National Conven- 
tion of Chiefs and Commissioners of the various Bureaus of 
Statistics of Labor in the United States, as well as of the Inter- 
national Association of Factory Inspectors of North America. 

Local Documents. xxix 

The state governments also publish regularly the State 
Treasurers' and Comptrollers' Reports, Reports of Railroad 
Commissions, Reports of Bank and Insurance Examiners, Re- 
ports on Taxation, Reports of Inspectors of Food and Animals, 
Reports of Boards of Charities and Correction, Reports on 
Prison Labor, Reports on Mining Statistics, Reports of State 
Agricultural Experiment Stations, Reports of the Boards of 
Health, Reports of the Public Service Commissions and the 
like. A few also publish at regular intervals a State Census: 
the best is that of Massachusetts. 

Some of the states publish occasional reports of legislative 
or special committees. Of these the most common are the 
Reports on Taxation. A complete list of these will be found 
in the chapter on ''Recent State Reports on Taxation" in 
Essays in Taxation by the author of this volume. Deserving 
of mention on other topics are the Massachusetts Reports on 
The Unemployed (1895) ; Street Railway Companies (1901) ; 
Corporation Laws (1903) ; Old Age Pensions (1909) ; and the 
New York Reports on Tenement Houses (1894 and 1901) ; 
Trusts (1897) ; Canals (2 vols., 1899) ; Insurance (8 vols., 
1905-1906) ; Stock and Produce Exchanges (1909) ; Employers* 
Liability and Unemployment (19 10). 

Practically the only general guides to the legislation discussed 
in these reports are the exceedingly valuable Annual Compara- 
tive Summary and Index of State Legislation and the Annual 
Review of Legislation, both published by the New York State 
Library. These cover the entire country and contain an ac- 
curate and well-digested survey of the whole field of state 

The Legislative Reference Department of the Wisconsin Free 
Library Commission has published since 1905, under the 
editorship of C. McCarthy, a number of valuable Comparative 
Legislative Bulletins containing judicial decisions as well as the 
legislation of the chief foreign countries and the American 
commonwealths on various economic questions. 

XXX Suggestions. 

B. National Departmental Publications. 

The publications of the national government are of three 
kinds: regular departmental issues, special departmental re- 
ports and reports of congressional committees. 

The Department of Commerce and Labor, organized in 
1903, now publishes by far the largest mass of material of inter- 
est to students of economics. In addition to numerous new 
duties, it took over much work previously devolving upon 
other departments. For details see the Organization and Law 
of tJte Department of Commerce and Labor (1904 716 pages, 
with full histories). Various additional changes were subse- 
quently made. 

The Department publishes annually the Report of the Secre- 
tary. The other publications are issued by the separate bu- 
reaus or divisions as follows: 

I. The Bureau of the Census. The Census is published 
every ten years. The most recent issues are The Tenth Census 
(1880, in 24 vols.), The Eleventh Census (1890, in 28 vols.), 
Tlie Twelfth Census (1900, in 16 vols.). The Thirteenth Census 
(1910, in progress). The permanent Census Bureau, organ- 
ized in 1902, publishes in addition to the annual Report of the 
Director, a large number of Bulletins (about no up to 19 10) 
and Special Reports. These are of six classes : 

A. Decennial: Transportation by Water (1908); Express 
Business (1908) ; Fisheries Industry (as of 1907) ; Savings 
Banks; Criminal Judicial Statistics. 

B. Quinquennial: Manufactures (4 vols., 1907-1908, as of 
1905) ; Electrical Industries (as of 1907) ; Agriculture. 

C. Biennial: The Official Register of the U. S. (2 vols., 
1908), transferred in 1907 from the Department of the Interior. 

D. Annuul: Mortality Statistics (8th report, 1909); Statis- 
tics of Cities (6th report, 1909) ; Cotton Statistics (7 th report, 
1909) ; Census of the Lumber Cut. 

E. Semi-Monthly : Cotton Ginned. 

F. Occa^iono/.- Among the most important are: Mines and 
Quarries (1905) ; Street and Electric Railways (1905) ; Benevo- 

Departmental Publications. xxxi 

lent Institutions (1905) ; Wealth, Debt and Taxation (1906) ; 
Telephones and Telegraphs (1906); Insane (1906); Paupers 
(1906); Prisoners {k^o']); Women at Work (igoj) ; Marriage 
and Divorce (2 vols., 1908- 1909). 

The Census Bureau has also published the Philippine Census 
(4 vols., 1905) ; the Cuban Census (1908), and the Proceedings 
of the Conference of Governors on the Conservation of the 
Natural Resources (1909). It has reprinted in part the First 
Census of 1790 and has in preparation reports on Water Power; 
State, County and Municipal Securities; and Population and 
Industrial Centres. 

2. The Bureau of Statistics publishes, in addition to the 
annual Report of the Chief: (a) the annual quarto Report on the 
Foreign Commerce and Navigation of the United States in two 
bulky volumes, also including much detailed information on 
internal commerce and general economic conditions; (b) the 
annual octavo Statistical Abstract of the United States, a valuable 
condensed compilation; {c) a monthly quarto Summary of 
Commerce and Finance of the United States, often containing 
monographs on special topics; among which may be men- 
tioned those on Colonial Administration, Modern Tariff Sys- 
tems, Wholesale Prices in Great Britain and the United States, 
Reciprocity Treaties, Great Canals of the World; (d) a monthly 
Summary of Internal Commerce; and (e) occasional reports on 
special topics of domestic importance, like the Report on Lake 
Commerce (by Tunnell, 1895), various Reports on Wool and 
Manufactures of Wool (1887, 1888, 1894), the Report on the 
Warehousing Industry in the United States (1904). The 
Bureau also publishes the Statistical Abstract of the World. 
Section i (total imports and exports by years) and section 2 
(total imports and exports by countries) appeared in 1904. 
Section 3 (principal articles imported and exported by each 

xxxii Suggestions. 

country for a ten-year period) appeared in 1907. Section 4, 
including miscellaneous information, is in preparation. 

3. The Bureau of Labor publishes since 1886 an annual 
report and since 1889 special reports. The annual reports are 
as follows: (i) Industrial Depressions (1886); (2) Convict 
Labor (1887) ; (3) Strikes and Lockouts (1888) ; (4) Working- 
men in Large Cities (1889) ; (5) Railroad Labor (1890) ; (6) 
Cost of Production, Iron, Steel, Coal, etc. (189 1) ; (7) Cost of 
Production, Textiles and Glass (2 vols., 1892) ; (8) Industrial 
Education (1893) ; (9) Building and Loan Associations (1894) ; 
(10) Strikes and Lockouts (2 vols., 1894); (11) Wages of Men, 
Women and Children (1897) ; (12) The Liquor Problem (1898) ; 
(13) Hand and Machine Labor (2 vols., 1899) ; (14) Water, Gas 
and Electric Light Plants (1900); (15) Wages in Commercial 
Countries (2 vols., 1900) ; (16) Strikes and Lockouts, 188 1 to 
igoo (1901); (17) Trade and Technical Education (1902); 

(18) Cost of Living and Retail Prices of Food, 1903 (1904) ; 

(19) Wages and Hours of Labor (1905) ; (20) Convict Labor 
(1906); (21) Strikes and Lockouts, igoi to igoj (1907); (22) 
Labor Laws (1908) ; (23) Workingmen's Insurance in the U: S, 
(1909) ; (24) Workingmen's Insurance Abroad (1910). 

The special reports are as follows : (i) Marriage and Divorce 
(1889) ; (2) Labor Laws of some States (1892 ; 2d ed., 1896) ; 
(3) Analysis and Index of all Reports issued by Bureaus of 
Labor Statistics in the United States (1893) ; (4) Comptdsory 
Insurance in Germany (1893) ; (5) The Gothenburg System of 
Liquor Traffic (1893) ; (6) The Phospltate Industry of the United 
States (1892) ; (7) The Slums of Baltimore, Chicago, New York 

Departmental Publications. xxxiii 

and Philadelphia (1894) ; (8) The Housing of the Working 
People (1895) ; (9) The Italians in Chicago (1897) ; (10) Labor 
Laws of the United States (1904); (11) Restriction of Output 
(1905) ; (12) Coal Mine Labor in Europe (1906). The Bureau 
has also pubhshed three Reports on the Laboring Classes in 
Hawaii (ioT igoi, igo2 and 1905); on Labor Disturbances in 
Colorado (1905) ; and on Hours of Work of Government La- 
borers (1905). It has in preparation a report on Women and 
Children in Industry. 

The Bureau also publishes a bi-monthly Bulletin of the 
Bureau of Labor, with valuable original articles, a survey of 
foreign statistical labor publications, the decisions of the courts 
affecting labor, and all new labor laws of the separate states. 

4. The Bureau of Manufactures publishes since 1905 
the annual Report of the Chief SLiid sl variety of reports containing 
information derived from abroad through the consular officers 
and transmitted to the Department of Commerce and Labor 
from the Department of State through the Bureau of Trade 
Relations. These reports were issued to 1903 by the Bureau of 
Foreign Commerce of the State Department and from 1903- 
1905 by tbe Bureau of Statistics. They now comprise (a) Com- 
mercial Relations, or the annual reports of consular officers on 
economic topics ; (b) Review of World's Commerce, a summary 
of the above; {c) sl daily Bulletin, designed especially for the 
newspapers but also widely used by business men, known as 
Daily Consular and Trade Reports, containing reports from the 
consular officers as well as information from special agents and 
private investigators; (d) the monthly Consular Reports, com- 
piled from the Daily Reports; (e) Special Consular Reports ^ 
made in pursuance of special instructions. Among the forty 
odd volumes of such special reports the most important are 
those on Mortgages; Gas; Coal; Textiles ; Sheep and Wool; 
India Rubber; Tariffs; Trusts and Trade Combinations ; Streets 

xxxiv Suggestions. 

and Highways; Steamship Subsidies; Fruit Ctdture; Trade 
Guilds; Commercial Travellers; Merchant Marines; Money 
and Prices; Industrial Education; Windmills and Storage 
Warehouses; Cotton Seed Products; Woolen, Worsted and 
Shoddy; all of them treating of conditions abroad. The 
Bureau also publishes through the Tariff Division since 1907 
the Customs Tariffs of Foreign Countries y and since 1908 an 
annual Series of Trade of Foreign Countries. 

5. The Bureau of Corporations publishes since 1904 the 
annual Report of the Commissioner. It has also published spe- 
cial reports on the Beef Industry (1905) ; Transportation of 
Petroleum (1906) ; Petroleum Industry (2 vols., 1907) ; Cotton 
Exchanges (2 vols., 1908) ; Tobacco Industry (1909) ; Taxation 
of Corporations (1909) ; Transportation by Water in the United 
States (3 vols., 1909-10). 

6. The Bureau of Immigration and Navigation (so 
called since 1906) publishes since 1892 the annual Report of the 
Commissioner-General. It consists of four divisions dealing 
with immigration in general, Chinese immigration, distribu- 
tion of immigrants and naturalization. The last two divisions 
publish separate reports. 

7. The Bureau of Fisheries publishes since 187 1 Bulletins 
and Reports on the Fislwries. It discontinued in 1906 the 
volume kno^vn as the Annual Report of the Bureau, with ap- 
pendices, and has since then published the Annual Report of 
the Commissioner of Fisheries in the general annual volume 
of the Department of Commerce and Labor, the other special 

Departmental Publications. xxxv 

reports appearing as separate Bureau of Fisheries Documents 
under the head of Fish Culture, Aquatic Biology, Statistics of 
the Commercial. Fisheries, and Special Subjects. 

8. The Bureau of Navigation publishes since 1884 the 
Annual Report of the Commissioner , which contains a mass of 
material relating to domestic and foreign shipping. 

9. The Coast and Geodetic Survey publishes since 18 16 
the Annual Report of the Superintendent, as well as numerous 
charts and maps. 

10. The Bureau of Standards was set off in 1901 from the 
Coast and Geodetic Survey, and publishes, in addition to the 
Annual Report of the Director, many circulars and bulletins 
relating to weights, measures, photometry, thermometry, py- 
rometry, polarimetry, radiometry, and the like. 

11. The Light-House Board publishes since 1859 a bulky 
annual report. 

12. The Steamboat- Inspection Service publishes since 
1852 the Annual Report of the Supervising Inspector-General. 

All of the above twelve Bureaus publish their reports proper 
in the Annual Report of the Secretary of Commerce and Labor, 
but the annual reports appear as separate volumes with addi- 
tional data in the case of The Bureau of Immigration and 
Naturalization, The Bureau of the Fisheries, The Bureau of 
Navigation, The Light-House Board, and The Steamboat In- 
spection Service. 

The Treasury Department issues the Annual Report of 
the Secretary of the Treasury, which contains a survey of the 
Finances, and includes the Reports of the Treasurer, the Register 
of the Treasury, the Director of the Bureau of Engraving and 
Printing, the Surgeon General, the Supervising Architect, the 
Superintendent of the Life-Saving Service, the Director of the 
Mint, the Comptroller of the Currency, and the Commissioner 


xxxvi Suggestions. 

of tlie Internal Revenice. These reports are also published 
separately, the last three in enlarged form and wdth voluminous 

Among the numerous additional publications are the follow- 
ing: Division of Printing: Treasury Decisions (weekly and 
annual); Division of Bookkeeping: Estimat s o Appro 
priations (annual) ; Division of Customs : Customs Deci- 
sions (annual), Conference of Local Appraisers (annual) and 
Appeals Pending (quarterly) ; Comptroller of the Cur- 
rency: Abstracts of Reports of National Banks and Digest Oj 
Decisions; Bureau of the Mint: Report upon Production 
of Precious Metals (annual. Of international reputation), and 
Proceedings of the Assay Commission (annual) ; Commissioner 
of Internal Revenue : TJie Gaugers' Manual and Digest of 
Decisions; Comptroller of the Treasury: Decisions 
(quarterly and annual). Numerous monthly, weekly and 
daily Statement Sheets are also issued on the condition of the 
finances. A useful compilation is the Principal Laws relating 
to Loans and Currency (1900, with reissues from time to time). 

The Department of Agriculture publishes the annual 
Report of tJie Secretary, the Yearbook of the Department, with 
many original articles and a great variety of documents sep- 
arately issued by ihe various bureaus. Of these the most im- 
portant are the Bureau of Animal Industry; the Bureau 
of Plant Industry, with separate divisions publishing 
Vegetable Pathology and Physiology Bulletins, Botany Bulletins, 
Agrostology Bulletins, and Pomology Bulletins; the Forest 
Ser\^ce; the Bureau of Chemistry; the Bureau of Soils; 
the Bureau of Entomology; the Bureau of Biological 
Survey ; the Bureau of Stati tics ; the Office of Experi- 
ment Stations, which publishes the monthly Experimental 
Station Record as well as the Agricultural College Bulletins; 
the Office of Public Roads and the Weather Bureau, 
which publishes a daily Map, a weekly Bulletin, and a monthly 

Departmental Publications. xxxvii 

Review. Several of the above Bureaus publish separate an- 
nual reports. Numerous reports are issued by the Bureau of 
Statistics in its three sections : {a) the Division of Domestic 
Crop Reports (which publishes the monthly Crop Reporter), 
{b) the Division of Production and Distribution and 
(c) the Editorial Division, which publishes statistics on rural 
economics. These reports take the form of Bulletins (70 to 
1909), Circulars (16 to 1909), and Reprints from the Yearbook. 
The Department also publishes the Proceedings of the Annual 
Meeting of the American Association of Farmers^ Institute 
Workers, and many voluminous Special Reports, some of the 
most important of recent years being The Cotton Plant; Useful 
Fiber Plants of the World; Beet Sugar; and Co-operative 
Credit Associations Abroad. Among the larger reports in 
progress are those on Farmers' Co-operative Organizations, 
Tobacco, Wheat in Principal Countries, and Diseases of 
Cattle. In 1908 there were issued under the heads of Reports, 
Bulletins, Circulars, and Separates, 1522 publications in over 
sixteen million copies, about one third of them being Farmers^ 
Bulletins. The Division of Publications publishes a Monthly 
List of Publications, which forms a convenient bibliography of 
the Department issues. Bulletin No. 6 contains a bibliography 
of the Department from 1840 to 1901; and Circular No. 4 
(1909) contains a subject index of all Farmers^ Bulletins to 

The Department of the Interior publishes annually the 
Report of the Secretary, containing, in addition to condensed 
reports of the Bureaus, reports on the Territories, the Ter- 
ritorial Possessions, the National Parks and the Elee- 
mosynary Institutions. The Bureaus which issue separate 
annual reports and other publications are the General Land 
Office (with Decisions in Land Cases), the Indian Office, 
the Bureau of Pensions, the Patent Office (with the 
Patent Office Gazette, Decisions in Patent Cases and Indexes 

xxxviii Suggestions. 

to Patents), the Bureau of Education (with many Separates, 
Circulars and Bulletins, Bulletin No. 385 containing a bibli- 
ography from 1867 to 1907), the Geological Survey (with 
Bulletins, Monographs, Professional Papers and a separate 
volume on the Mineral Resources of the United States) and 
the Reclamation Service (in several volumes). 

The Interstate Commerce Commission (not subordinate 
to any of the nine executive departments) publishes since 1887 
the annual Report of the Commission. A separate volume pre- 
pared by the Bureau of Statistics and Accounts is the annual 
Report of the Statistics of Railways in the United States. The 
cases themselves are published as Decisions of the Interstate 
Commerce Commission of the United States. The Commission 
also issues annually the Proceedings of the Annual Convention^ 
of the National Association of Railway Commissioners. The 
Commission pubUshed in 1903 a monumental work in five 
quarto volumes, entitled Railways in the United States in igoz; 
a Twenty-two- Year Review of Railway Operations; a Forty- 
Year Review of Changes in Freight Tariffs; a Fifteen- Year 
Review of Federal Railway Regulation; a Twelve- Year Review 
of State Railway Regulation; and a Twelve- Year Review oj 
State Railway Taxation. Since 1908 the Commission issues 
Special Reports of which the first was Intercorporate Relations 
of Railways. Reports in preparation are on' Switching, Ter- 
minal and Industrial Properties, a proposed Balance Sheet, and 
Steamship Accounting. 

The Post-Office Department publishes the annual Report 
of the Postmaster-General. 

The War Department deals with economic topics through 
the Bureau of Insular Affairs. The chief of the Bureau 
issues his Annual Report (including the Report oftJte Philip pit 

Congressional Documents. xxxix 

Commission in several volumes) and a great variety of other 
documents. The Department also issues the annual Report of 
the Isthmian Canal Commission. 

The Navy Department deals in the annual Report of the 
Secretary with the subject of the Commercial Marine. 

The Smithsonian Institute publishes many annual reports, 
of which the one of chief interest to economists is the Report 
of the Bureau of Ethnology in one or more sumptuous quarto 

The International Bureau of the American Republics 
publishes since 1891 an annual Report of the Director, since 
1893 a monthly Bulletin of the Bureau and a large number of 
Reports, Handbooks, Bibliographical Bulletins, Maps, Law 
Manuals and Special Commercial Bulletins, many of them 
also in Spanish and Portuguese. 

For a clear account of the various branches of the Adminis- 
tration, see Fairlie, J. A. The National Administration of the 
United States of America. (1905.) 

C. Congressional Documents. 

Among the numberless Congressional Documents of recent 
years may be mentioned as of special interest to the students 
of economics: 

Reports of the International Monetary Conferences of i8y8, 1881 
and i8g2; of the India Currency Commission, i8g2; of the Berlin 
Silver Commission, i8g4. 

Senate (Aldrich) Committee, Report on Wholesale Prices, Wages 
and Transportation. (4 vols., 1893.) 

United States Strike Commission, Report on the Chicago Strike of 
i8g4. (1895.) 

(Senate) Committee on Education and Labor, Report on the Eight 
Hour Law, (1898). 

xl Suggestions. 

Anthracite Coal Strike Commission, Report on the Anthracite Coal 
Strike of igo2. (1903). 

(Senate) Committee, Report on Labor Disturbances in Colorado, 
1880-IQ04. (1904.) 

(House) Committee on Ways and Means, Tariff Hearings. (2 vols. 

(House) Committee on Ways and Means, Tariff Hearings. (9 vols. 
1 908- 1 909.) 

Joint Select Committee of Congress, Report on Alcohol in the Manu- 
factures and Arts. (1897.) 

(Senate) Merchant Marine Commission, Report. (1905.) 

Commission to Investigate the Postal Service, Report on Railway 
Mail Pay. (2 vols., 1901.) 

(Senate) Committee on Interstate Commerce, Hearings on RegU' 
lation of Railway Rates. (5 vols., 1905.) 

(Senate) Committee, Information on Postal Telegraph and T elephant. 
Lines, Postal Savings Banks, Government Life Annuities and 
Provisions for Old Age in Foreign Countries. (1898.) 

Donaldson, T. Report on The Public Domain. (1884.) 

The Immigration Commission, Report on Immigration. (Several 
vols., 1910.) 

Public Lands Commission, Preliminary and Second Reports. (1905.) 

Inland Waterways Commission, Preliminary Report. (1909.) 

Commission on Country Life, Preliminary Report. (1909.) This 
as well as the two preceding Commissions was created by the 
Executive, not by Congress. 

National Monetary Commission, Reports on Banking and Currency^ 
at home and abroad. (Several volumes, 1910-.) 

Far and away the most valuable report of recent years 
that of the Industrial Commission appointed by the Senate and 
the House, and published under the simple title of Report oj 
the Industrial Commission (19 vols., 1900- 1902). The list of 

Congressional Documents. xli 

volumes is as follows : I. Trusts and Industrial Combinations ; 
II. Trust and Corporation Laws; III. Prison Labor; IV. 
Transportation; V. Labor Legislation; VI. Distribution of 
Farm Products; VII. Capital and Labor in Manufactures and 
in General Business; VIII. Chicago Labor Disputes; IX. 
Transportation; X. Agriculture and Agricultural Labor; XI. 
Agriculture and Taxation; XII. Capital and Labor in the 
Mining Industries; XIII. Trusts and Industrial Combina- 
tions; XIV. Capital and Labor in Manufactures and General 
Business; XV. Immigration and Education; XVI. Foreign 
Labor Legislation; XVII. Labor Organization, Labor Dis- 
putes and Arbitrations ; XVIII. Industrial Combinations in 
Europe; XIX. Final Report. For the wealth of material, 
and the ability with which the results are presented, this huge 
report is unique in the annals of the government publications. 
The final volume gives an admirable survey of the economic 
condition of the United States. 

The American governments are exceedingly liberal in the 
distribution of documents. All local and state reports can 
usually be had for the asking ; but as the supply is limited, it is 
well not to delay. As to the documents of the national gov- 
ernment, the House and Senate publications can be obtained 
by appHcation to one's Representative or Senator; the depart- 
mental publications by appHcation to the respective depart- 
ments. There is now also a Superintendent of Documents, who 
is authorized by law to sell surplus documents in his charge at 
cost of printing from the plates. He publishes a monthly Price 
List of United States Public Documents for Sale. In a few cases, 
however, documents are sold by other parties. Thus the Con- 
gressional Record is sold by the Chief Clerk of the Government 
Printing Office; the Bulletins, Handbooks, etc., of American 
Republics Bureau are sold by the Director of the Bureau; the 
Official Gazette of the Philippine Government, by the Editor in 
Manila; etc., etc. Several private firms in Washington and 
elsewhere make a business of supplying government documents. 

xlii Suggestions. 

D. Indexes to Government Periodicals. 

PooRE, Ben Perley. A Descriptive Catalog of the United States 
Government Publications, 1^74-1881. (1885.) — Not entirely 

Catalogue of the Public Documents of Congress and all the Depart- 
ments of Government from i8gj-i8g6. (4 vols, to 1901.) 

Tables of, and Annotated Index to, the Congressional Series of United 
States Public Documents, ijth to j2d Congress. (1902.) 

LuNT, E. C. Key to the Publications of the United States Census j 
1 790-1887 (in American Statistical Association Publications, new 
Series, I, 1888). — A carefully classified guide. 

Lane, L. P. Aids in the Use of the United States Government Publi- 
cations (in American Statistical Association Publications, VII, 

Scott, G. W., and Beaman, M. C. Index Analysis of the Federc 
Statutes, together with a table of Repeals and Amendments. (2 vols.j 

E. British Official Publications. 

In Great Britain the official publications and reports, knowi 
as Blue Books, are in some respects more voluminous than ii 
the United States. The chief periodical report is the decennial 
Census. The Census of igoi appeared in 7 volumes. Th( 
Census of igii is in preparation. Most of the annual offi- 
cial reports fall under the heads of -Finance, Trade anc 

Finance. Among these, each in a separate volume or volumes, 
are the Finance Accounts; Financial Estimates; Returns showing 
Revenue and Expenditure ; National Debt Account; National Debt 
during Sixty Years; Consolidated Fund Abstract Accounts; Com- 
missioners of Inland Revenue I Income Tax Assessments ; Local 
Taxation Returns, Mint Report, Rateable Property Return; Savings 
Bank Returns, Commissioners of H. M.'s Customs. 

British Documents xliii 

Trade. These reports, issued by the Statistical Department of 
the Board of Trade, include the Statistical Abstracts for the British 
Empire, for the British Colonies and for the United Kingdom; 
Reports on the Trade of the United Kingdom with Foreign Coun- 
tries and British Possessions; Statistical Tables showing Progress of 
British Trade and Production; Merchant Shipping Returns; Canals 
and Navigation Returns; Navigation and Shipping Statements; 
Railway Accidents; Emigration and Immigration. Also monthly 
Trade and Navigation Accounts and a Board of Trade Journal. The 
Statistical Department of the Board of Customs issues annually the 
Report of the Commissioner of Customs, Colonial Import Duties and 
Foreign Import Duties. 

Labor. These reports, issued by the Labor Department of the 
Board of Trade, include Abstract of Labor Statistics; Abstract of 
Foreign Labor Statistics; Changes in Wages and Hours of Labor, 
Conciliation {Trade Disputes) Act; Strikes and Lockouts; Trade 
Unions; Directory of Industrial Associations ; Report of Chief 
Inspector of Factories and Workshops; Report of the Chief Registrar 
of Friendly Societies; Co-operative Contracts; Industrial and Provi- 
dent Societies; also a monthly Board of Trade Labor Gazette. 

Other annual reports are: 

Agricultural Returns; Department of Agriculture and Technical 
Instruction in Ireland; Registrar General; Irish Land Commission ; 
Reports on Mines and Quarries; Inspector of Sea and Salmon Fish- 
eries; Geological Survey; Returns relating to Poor Rates and Pauper- 
ism; Railway and Canal Commission ; Street and Road Tramways ; 
Trade and Finance of Foreign Countries ; Diplomatic and Consular 
Reports; Postmaster -General. There is also a Statistical Abstract for 
British India. 

Among the recent special Reports of departments and Parlia- 
mentary committees and commissions the most important are: 

Royal Commission on Agriculture (4 vols., 1896), and Reports 
of Assistant Commissioners (20 vols., 1896) ; The Sweating Sys- 
tem (8 vols., 1889); Labor (27 vols., 1894); Local Taxation (9 vols., 
1902) ; India Currency (1893 ^^^^ 1899) ; Financial Relations between 

xliv Suggestions. 

Great Britain and Ireland (2 vols., 1896); Standard Piece and Time 
Rates (1893 and 1900); Agricultural Labourers (1900 and 1901); 
Contracts given out by Public Authorities (1897); Wholesale and Re- 
tail Prices (1903); Employment of Women (1894, 1898, 1899); The 
Unemployed (1893 and 1904); Tariff Commission Report (8 vols., 
1904-1910) ; Eight Hours Day in the Coal Mines (3 vols., 1906); 
Income Tax (1906): Poor Laws (3 vols., 1909); Proceedings of the 
Colonial Conference (1907); Cost of Living (3 vols., 1907-1910). 

The most important reports and papers are summarized and 
criticised in an admirable quarterly review in each number of 
the Economic Review. Messrs. P. S. King & Son, of London, 
publish a convenient Monthly List of Parliamentary Papers 
issued in the preceding month. There is also a General Cata- 
logue of the Principal Parliamentary Reports and Papers pub- 
lished during the Nineteenth Century (1801 to 1900), with 
prices, and in many cases with an analysis of contents. 

For Australasia the best conspectus of the economic situation 
may be found in the annual Official Year Book of Australia 
(second issue, 1909) and the New Zealand Official Year Book 
(eighteenth year, 1909). The separate states also publish 
very good Year Books or annual Statistical Registers. 

For Canada an excellent summary will be found in the annual 
Canada Year Book issued by the Census and Statistics Ofl5ce 
of Agriculture, and covering the entire economic field. 

For other countries a convenient summary is the Jahrbuch 
der Statistik, ed. by Platzer (vol. i, 1909). 

VI. Semi-official Publications. 

The publications of the American government are supple- 
mented by a great mass of documents, periodicals and reports, 
issued by private and quasi-public associations. Local trade 
statistics are found in the Reports of the Cltambers of Commerce 

Semi-Official Publications. xlv 

of the principal cities. In New York City the Chamber of 
Commerce frequently publishes valuable reports on economic 
topics of state and national significance. Almost every im- 
portant branch of business has its own Trade Journal, many of 
which are edited with great ability. 

The Bulletin of the National Association of Wool Manufac- 
turers is published quarterly since 1864 and often contains 
articles of scientific merit. The Annual Reports of the Iron and 
Steel Association also deserve mention. In some cases like the 
Bankers^ Association and the Manufacturers^ Association an- 
nual conventions are held and extended reports issued. The 
publications of the Labor Organizations and Trades Unions 
are voluminous. The National Federation of Labor issues a 
weekly Bulletin and a Report of the Annual Convention. 

The annual reports of some of the great Railway Systems, 
Insurance Companies and Industrial Corporations can generally 
be secured without difficulty, and afford interesting side lights 
on economic development. Associations like the Free Trade 
League; the Asiatic Association; the Irrigation Congress; the 
Sound Money League; the Farmers^ Alliance; the National 
Child Labor Committee; the National Live Stock Association; 
the National Good Roads Association ; the Patrons of Hus- 
bandry; the National Dairy Association; the Stock Breeders^ 
Association; the Philadelphia Commercial Museum; the Na- 
tional Municipal League; the Association of Life Insurance 
Presidents, and many others of more or less permanence, issue 
fugitive, or periodical reports. Among the most important of 
such semi-official publications are those of the Merchants^ As- 
sociation, of the Bureau of Municipal Research, of the Russell 
Sage Foundation, of the National Civic Federation, — all of New 
York. The first has issued a number of volumes, among them 
the remarkable Inquiry into the Conditions relating to the Water 
Supply of the City of New York (1900). The last publishes 
annually several volumes deahng with almost every phase of the 
relation of capital and labor, and treating also the question of 
taxation. It also publishes a monthly National Civic Federa- 
tion Review. Many important questions of social conditions 

xlvi Suggestions. 

and legislation are treated in the annual Proceedings of the 
National Conference of Charities and Corrections. 

Vn. Bibliographies and Finding Lists. 

A series of bibliographies, prepared by the chief bibliographer 
of the Library of Congress (A. P. C. Griffin, since 1909 H. H. B. 
Meyer), has been published since 1902 by the national govern- 
ment. The dates and subjects are as follows: Reciprocity, 
(1902) ; Industrial Arbitration, Government Ownership of 
Railroads, Labor, Colonization, 2d ed., (1903) ; Chinese Immi 
gration, Banks, Budget, The Far East, Federal Control of Com- 
merce, 2d ed., (1904); Foreign Railroads, Philippines, (1905): 
Child Labor, Municipal Ownership, Negro Question, 2d ed., 
Employers^ Liability, British Tariff Movement, 2d ed., Foreig) 
Tariffs, Government Reputation of Insurance, Mercantile Ma- 
rine Subsidies, 3d ed., (1906) ; Federal Control of Commerce^ 
Railroads, 2d ed.. Immigration, 3d ed.. Income Tax, Iron and 
Steel, Reciprocity with Canada, Trusts, 3d ed., (1907) ; Currency 
and Banking, Deep Waterways, Eight Hour Day, First and 
Second United States Banks, Workingmen^s Insurance, Labor, 
2d ed., Postal Savings Banks, (1908) ; Valuation and Capitaliza- 
tion of Railroads, Sugar, (1909). 

Other good bibHographies on special subjects are: 
Marot, Helen. Handbook of Labor Literature. (1899.) 

Brooks, R. C. Bibliography of Municipal Problems {in Municipal 
Affairs, Vol. V, 1901). 

The Boston Public Library has published two useful works; 

A List of Books on Social Reform in the Public Library of the City of 
Boston. (1898.) 

Bibliographies. xlvii 

Ecofiomics: Selected Works in the English Language (1904.) — 
Compiled by Benj. Rand 

The three most complete bibliographies on socio-economic 
topics are in German: 

Bernstein, Edouard. Bibliographie des Sozialismus und der 
Sozialwissenschaften in each number of Dokumente des Sozial- 
ismus. (1901-1905.) — Annotated and valuable. 

Stammhammer, Josef. Bibliographie des Socialismus und Com- 
munismus. (3 vols., 1893-1909.) 

Stammhammer, Josef. Bibliographie der Social-Politik. (1896.) 

The only general bibliography in English is the short work 
of BowKER, R. R., and Iles, George S., The Readers^ Guide 
in Economics, Social and Political Science. (1891.) 

A comprehensive annual bibliography is published by the 
International Institute of Bibliography under the title Bihlio- 
graphia Economica Universalis. It now appears as a quarterly 
appendix to the Revue Economique Internationale. 

The most convenient English bibliography of current works 
was until recently to be found in The Quarterly Journal of 
Economics. This was discontinued in 1908 and replaced by 
the excellent bibliography in the Economic Bulletin of the 
American Economic Association. The best foreign bibliography 
is the Uehersicht iiber die neuesten Publikationen in Conrad's 
Jahrbucher filr National's konomie und Statistik. A combina- 
tion of bibliography and comment is found in the Kritische 
Blatter fiir die gesamten Sozialwissenschaften (monthly, Dres- 
den, 1905-). Edited by H. Beck. The periodical is composed 
of critical reviews by an international staff, each number serving 
as an introduction to a Bibliographie der Sozialwissenschaften 
which since 1906 is published for the International Institute of 
Social Bibliography in Berlin. It is the most complete and ex- 
haustive existing bibliography of economic and social science. 

xlviii Suggestions. 

Vm. List of Books to which Abbreviated References are 
made in the Bibliographies at the Heads of Chapters. 

AsHXEY, W. J. An Introduction to English Economic History and 
Theory. (2 vols., London, 1888-1893.) 

Ashley, W. J. Surveys, Historic and Economic. (London, 1900.) 

Bagehot, Walter. Economic Studies. (London, 1880.) 

Bohm-Bawerk, Eugen von. The Positive Theory of Capital. 
(Trans, by Smart, London, 1891.) 

Bowley, Arthur L. Elements of Statistics. (London, 1901, 3d ed., 

BucHER, Carl. Industrial Evolution. (Trans, from the 3d Ger- 
man edition by S. Morley Wickett, New York, 1901.) 

Cairnes, J. E. The Character and Logical Method of Political 
Economy. (London, 1857; 2d ed., 1875.) 

Cairnes. J. E. Some Leading Principles of Political Economy, 
newly Expounded. (London, 1874.) 

Cannan, Edwin. A History of the Theories of Production and 
Distribution in English Political Economy from lyyd to 1848. 
(London, 1893; 2d ed., 1904.) 

Carver, Thomas Nixon. The Distribution of Wealth. (New 
York, 1904.) 

Clark, John Bates. The Distribution of Wealth. (New York, 

Clark, John Bates. Essentials of Economic Theory. (New York, 

CossA, LuiGi. An Introduction to the Study of Political Economy. 
(Trans, by Louis Dyer, London, 1893.) 

Cunningham, W. An Essay on Western Civilization in its Economic 
Aspects. Ancient Times. (London, 1898.) Mediaeval and Modern 
Times. (London, 1900.) 

Cunningham, W. The Growth of English Industry and Commerce. 
Early and Middle Ages. (4th ed., London, 1905.) Modern Times. 
(4th ed., 2 vols., London, 1907.) 

Select Books xlix 

Davenport, Herbert Joseph. Value and Distribution. (Chicago, 

Dewey, Davis R. Financial History of the United States. (Am. 
Citizen Series, New York, 3d ed., 1905.) 

Ely, Richard T. Studies in the Evolution of Industrial Society. 
(New York, 1903.) 

Fetter, Frank A. The Principles of Economics. (New York, 

Fisher, Irving. Mathematical Investigations in the Theory of 
Value and Prices. (New Haven, 1892.) 

Fisher, Irving. The Nature of Capital and Income. (New York, 

Fisher, Irving. The Rate of Interest. (New York, 1907.) 

Flux, A. W. Economic Principles, an Introductory Study. (Lon- 
don, 1904.) 

Giffen, Robert. Economic Inquiries and Studies. (2 vols., 
London, 1904.) 

Hadley, Arthur Twining. Economics. An Account of the Re- 
lations between Private Property and Public Welfare. (New 
York, 1896.) 

Hadley, Arthur Twining. The Relations between Freedom and 
Responsibility in the Evolution of Democratic Government. (New 
York, 1903.) 

Hearn, William Edward. Plutology; or The Theory of the E forts 
to Satisfy Human Wants. (London, 1864.) 

Hobson, John A. The Economics of Distribution. (New York, 

Hobson, John A. The Evolution of Modern Capitalism. (Lon- 
don, 1894, 2d ed., 1907.) 

Jenks, Edward A. A History of Politics. (London, 1900.) 

Jevons, W. Stanley. Investigations in Currency and Finance. 
(London, 1884.) 

Jevons, W. Stanley. Methods of Social Reform. (London, 


1 Suggestions. 

Jevons, W. Stanley. Money and the Mechanism of Exchange. 
(London, 1879.) 

Jevons, W. Stanley. The Principles of Economics. (London, 

Jevons, W. Stanley. The Theory of Political Economy. (London, 
1871; 3ded., 1888.) 

Johnson, Alvin S. Rent in Modern Economic Theory. In Ameri- 
can Economic Association Publications. (3d Series, Vol. Ill, 
New York, 1902.) 

Keynes, J. The Scope and Method of Political Economy. (London, 
1891; 3d ed., 1904.) 

Maine, Henry Sumner. Ancient Law. (London, 1861 ; 8th ed. 

Maine, Henry Sumner. Lectures on the Early History of Insti 
tutions. (London, 1875; 3d ed., 1880.) 

Maine, Henry Sumner. Village Communities in the East aru 
West. (London, 1871; 4th ed., 1881.) 

Marshall, Alfred. Principles of Economics. (Vol. I, London 
1890; 5th ed., 1907.) 

Mayo-Smith, Richmond. Science of Statistics, part i. Statistic 
and Sociology. (New York, 1895.) 

Mayo-Smith, Richmond. Science of Statistics, part 2. Statistic 
and Economics. (New York, 1899.) 

Meade, E. S. Trust Finance. (New York, 1903.) 

Mill, John Stuart. Principles of Political Economy, with som 
of their Applications to Social Philosophy. (2 vols., London, 1848 
5th ed., 1880.) 

Nicholson, J. Shield. Principles of Political Economy. (3 vols. 
London, 1893-1901.) 

Nicholson, J. Shield. The Effects of Machinery on Wages. (Nei 
ed., London, 1892.) 

Nicholson, J. Shield. Strikes and Social Problems. (London 

Select Books. li 

Pantaleoni, Maffeo. Pure Economics. .(Trans, by Bruce, Lon- 
don, 1898.) 

Patten, Simon N. The Consumption of Wealth. (Philadelphia, 

Patten, Simon N. The Development of English Thought; A 
Study in the Economic Interpretation of History. (New York, 

Patten, Simon N. The Theory of Dynamic Economics. (Phila- 
delphia, 1892.) 

Payne, E. J. History of the New World called America, (2 vols., 
London, 1892-1899.) 

PiERSON, N. G. Principles of Economics. (Trans, by A. A. Wotzel. 
Vol. I, London, 1902.) 

RiCARDO, David. Principles of Political Economy and Taxation. 
(London, 181 7.) 

Ross, Edward A. Foundations of Sociology. (New York, 1905.) 

Seager, Henry Rogers. Introduction to Economics. (New York, 
1904; 3d ed., 1906.) 

Seager, Henry Rogers. Economics: Briefer Course. (New York, 

Seligman, Edwin R. A. The Economic Interpretation of History. 
(New York, 1902; 2d ed., 1907.) 

Seligman, Edwin R. A. Essays in Taxation. (New York, 1895; 
6th ed., 1910.) 

Seligman, Edwin R. A. The Shifting and Incidence of Taxation. 
(New York, 1892; 3d ed., 1909.) 

SiDGWiCK, Henry. The Principles of Political Economy. (Lon- 
don, 1883.) 

Smart, William. The Distribution of Income. (London, 1899.) 

Smart, William. An Introduction to the Theory of Value. (Lon- 
don, 1891.) 

Smart, William. Studies in Economics. (London, 1895.) 

lii Suggestions. 

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth 
of Nations. (2 vols., London, 1776. Best edition by Edwin 
Cannan, 1904.) 

Veblen, Thorsten. The Theory of Business Enterprise. (New 
York, 1904.) 

Walker, Francis A. Political Economy, Advanced Course. (New 
York, 1883; 3ded., 1888.) 

Walker, Francis A. The Wages Question; A Treatise on Wages 
and the Wages Class. (New York, 1876.) 

Walsh, Correa Moylan. The Measurement of General Exchange 
Value. (London, 1901.) 

Webb, Sidney and Beatrice. The History of Trade Unionism. 
(London, 1894.) 

Webb, Sidney and Beatrice. Industrial Democracy. (2 vols., 
London, 1894; 2d ed., in i vol., 1904.) 

Webb, Sidney and Beatrice. Problems of Modern Industry. 
(London, 1898.) 

Weber, Adna F. The Growth of Cities in the Nineteenth Cen- 
tury — A Study in Statistics, in Columbia Studies in History, 
Economics and Public Law. (Vol. XI, New York, 1899.) 

WiESER, Friedrich VON. Natural Value. (Edited by W. Smart; 
trans, by C. Malloch, London, 1893.) 

Wright, Carroll D. Outline of Practical Sociology. (Ameri- 
can Citizen Series, 7th ed., New York, 1908.) 

Principles of Economics. 

Principles of Economics 

Part I. 


1. References. 

A. Marshall, Pri7tciples of Economics {\(^-j), bk. ii ; J. B. Clark, Distribtc- 
tion of Wealth (1899), ch. ix, and Essentials of Economic Theory (1907), ch. i ; 
W. E. Hearn, Plutology (1864), ch. i ; W. Smart, Distribution of Income 
(1899), bk. i ; A. T. Hadley, Economics (1896), ch. i ; F. A. Fetter, Prin- 
ciples of Economics (1904), chs. ii, iii ; J. S. Nicholson, Principles of Politi- 
cal Economy (1903), Introd. ; H. Sidgwick, Principles of Political Economy 
(1883), bk. i, ch. iii ; F. A. Walker, Political Economy (3d ed., 1888), part i ; 
A. W. Flux, Economic Principles (1904), ch. i ; E. Cannan, History of the 
Theories of Production 2ind Distribution (2d ed., 1904), ch. i; H. R. S ea- 
ger, Introduction to Economics (1904), ch. iii; M. Pantaleoni, Pure Econo- 
mics (1898), part I, ch. v; W. S. Jevons, Principles of Economics (1905), 
chs. iii, iv, viii ; C. A. Tuttle, The Fundamental Economic Principle (Quart. 
Jour. Econ., XV, 1901); I. Fisher, Capital and Income (1906). 

2. Economic Life. 

The starting-point of all human activity is the existence of 
wants. To satisfy hunger and thirst, to secure shelter and to 
provide clothing were the chief aims of primitive man, and 
constitute even to-day the motor forces of all society. As man 
develops, his wants grow in number and refinement. However 
civilized he becomes, his material welfare forms the basis on 
which the whole larger life is erected. To secure the means of 
satisfying wants brings into play the economic activity of man. 
The process maybe expressed in the words — wants, efforts, 

4 ,■ ; Fundamental Concepts. [§ 2 

satisfactions. We start out with the existence of wants, we 
desire to secure their satisfaction, we can ordinarily accomplish 
this only through some effort. The economic life of man is 
concerned with such efforts and their results. 

The sum of all one's possessions, including at the time 
slaves, wife and children, was termed by the Greeks ecos 
(oiKos) ; and the method of managing them was called eco- 
nomics (olcovo/xLKri) — the control or rule {vofx6<;) of the house- 
hold (ot/cos). We still speak of the economical man as the 
one who orders the affairs of his household, who manages his 
possessions, with prudence and success. In the wider sense, 
whether he achieves success or not, the economic activity of 
man looks to a provision of the material means to satisfy his 
wants and those of his household. The science which deals 
with these economic activities is called economics or political 

Business means etymologically the state of being busy. The 
fundamental thing about which all men must ordinarily busy 
themselves is the satisfaction of their wants. To attain first 
a competence and then a surplus, to provide for one's liveli- 
hood and then to secure a profit, is the essence of business 
activity. Economics might therefore equally well be defined 
as the science of business activities. 

The motive that guides men in their economic life is some- 
times described as the economic motive. It may best be 
defined as the motive which impels every human being to 
satisfy his wants with the smallest possible effort, or which 
leads him to secure the most pleasure with the least pain. The 
existence of such a motive is undeniable ; it is in fact of deep 
and abiding importance ; it may even be declared the para- 
mount consideration in the working out of economic law. 
We must, however, not forget that this is not the only influence 
at work in economic hfe. Human beings are impelled by 
other motives as well ; and these other motives may often exert 
a perceptible influence in economic life. The study of eco- 
nomic history shows us that religious, political and ethical 

§ 2] Economic Life. 5 

considerations have profoundly modified economic action itself. 
In the economic hfe of a primitive Christian community the 
economic motive was of very different impoTtance from that of 
modern industrial life. Even in modern times the economic 
motive is not equally strong everywhere, or equally free from 
the admixture of other influences. The Indian ryot is not 
like the American farmer in his desire to "get ahead." The 
negro laborer in the South is not so amenable to the economic 
motive as the stock exchange broker. The salary of a govern- 
ment employee who hopes for official decorations cannot be 
explained in the same way as the wages of a carpenter. An 
analysis of all the motives that influence men in their economic 
life belongs to social psychology, and would disclose widely 
varying effects at different times and places, as well as in 
different individuals or classes at the same time or place. In 
searching for the fundamental laws of economics it is conven- 
ient to exclude all motives save the economic, since the latter 
is the one of basic significance, and since it would otherwise be 
impossible to formulate economic theory in general terms. In 
applying the law to actual life, however, we must be careful to 
study how its operation is modified by the other — even though 
minor — motives which affect economic action. 

If the " economic motive " is thus open to misconception 
as explaining the whole economic Hfe, the so-called " eco- 
nomic man " is a complete abstraction. By the *' economic 
man " is meant the human being dominated by the economic 
motive. Such a man, however, does not really exist. Not 
only do other motives affect the economic life, but side by side 
with the economic life itself are the aesthetic life, the religious 
Hfe, the intellectual life and the multiplicity of other human 
activities. It is indeed the function of economics to study 
that aspect of human activity known as the economic life. 
We must, however, not forget that we are studying man in only 
one phase of his existence. Although there is both an eco- 
nomic and a religious life, there is no economic man, just as 
there is no separable religious man. The business man has his 

6 Fundamental Concepts. [§ 3 

family, just as the clergyman has an appetite. The conclusions 
of economic science, therefore, are provisional, not final, con- 
clusions with reference to the conduct of life in general. 

3. Economics or Political Economy? 

Civilized man cannot be thought of apart from society. In 
fact human beings, whether civilized or not, have from the 
outset lived in some form of social union. Robinson Crusoe is 
not a type, but an anomaly. Without society man could never 
have developed. There would be no such thing as speech, 
morals, law or order. Economic life deals with man as exist- 
ing in society. Economics is hence a social science. 

Economics, however, is not the whole of social science. 
There are as many divisions of social science as there are 
important classes of social relations. Jurisprudence deals with 
the legal relations of society, with certain usages and customs 
which have received the sanction of precedent and have been 
crystallized into law. Ethics, or the science of morals, deals 
with another important group of social relations, for individual 
standards of conduct can be understood only in their relation 
to social ethics. Politics treats of the social relations of man 
looked upon as a member of organized society or the state ; 
it discusses the connection between the individual and the 
government. Sociology, or the fundamental social science, 
deals with society as a whole, and studies certain general prin- 
ciples that lie at the basis of each of the separate social sciences. 
Economics is one of these separate social sciences. The ethi- 
cal, the legal, the political and the economic relations of men 
are all outgrowths of social life ; and what is common to them 
all falls within the province of sociology. 

Why, then, do we speak of political economy? It may be 
frankly confessed that the term is inexact. In one sense 
politics, as we have seen, is simply a branch of social science. 
Politics deals with the state ; but the state is organized society. 
It is composed of individuals and cannot be conceived as 
apart from individuals. Yet when we use the term political. 

§ s] Proper Term. 7 

science, stress is ordinarily laid on the state ; when we speak 
of social science, the emphasis is put on individuals as mem- 
bers of society. It so happens that when the term political 
economy was first used by the Greeks, they thought only of 
the former meaning. Aristotle, after discussing domestic 
economy, tells us that states also, like individuals, must make 
both ends meet. There is, he says, a regal economy, or the 
art of managing the public household in monarchies ; there is 
a provincial economy, best suited to provinces; and finally 
there is a political economy, best suited to the " polls," or free 
state. Political economy therefore is to him substantially the 
art of providing a revenue for the state. When the subject 
was again discussed at the close of the middle ages, it was 
seen that the revenue of the state depends upon the revenue 
of the people, and political economy was now conceived of 
as the art of making a people wealthy and powerful through 
national development. It was soon recognized, however, that 
national progress depends chiefly upon the efforts of the indi- 
viduals themselves. Thus in more recent times the stress 
has come to be laid on the causes which condition the eco- 
nomic advance of the various classes of society, and since the 
emphasis is now put on the social rather than on the political 
causes, the science which deals with these problems is properly 
called social economics or, more briefly, economics. 

The world, however, is conservative ; and the old term 
political economy, which arose in former centuries when 
attention was centred on the political side, is still often used. 
Strictly speaking, we ought to employ the term political econ- 
omy only when we treat of the political aspect of economic 
relations, that is, of their direct dependence upon government 
action. People forget that economic activity is primarily 
social, and only in part influenced by political considerations. 
The force of habit makes them say political economy when 
they really mean social economics or economics proper. 

The foregoing explains the reason for dropping the first 
half of the old term, political economy. The change in the 

8 Fundamental Concepts. [§ 4 

second half is due to another cause, — the recognition of the 
scientific character of the study. Many modern sciences end 
with the suffix '• ics," as physics, poHtics or mathematics. 
When the writers of the seventeenth and eighteenth centuries 
first adopted the Greek phrase, they had in mind the endeavor 
to augment the wealth or " economy " of the state. Hence the 
term. The transition from the point of view of an art to that 
of a science has substituted for the old phrase the newer name 
— economics, that is, the science that deals with the economy 
of society and of the individuals of which it is composed. 

4. The Meaning of "Wealth. 

It is evident from what has been said tliat economic activity 
is concerned with wealth. In fact economics is often called 
the science of wealth. But what is wealth ? 

To the ordinary man wealth is equivalent to money. When 
we look a little deeper, however, we see that what he means 
is not money, but money's worth. A man's wealth nowa- 
days consists of anything which can be obtained, or sold, for 
money. But this is only a secondary meaning. Money is an 
institution of comparatively recent date ; there was wealth 
before there was money. Nor will it suffice to say that wealth 
is that for which something else can be procured through ex- 
change. For although there were exchanges in the shape of 
barter before there was any money, wealth existed even before 
men exchanged their possessions. The fundamental idea is 
something deeper. There are really three characteristics. 

(i) Originally wealth, as the word implies, denoted weal or 
well-being. Whatever a man had in abundance constituted his 
wealth, because it afforded him a surplus. It made him well 
off. The capacity of anything to satisfy a human desire is 
called its utility. When we speak of the utility of a thing, 
however, we do not pass any judgment upon its moral qualities. 
Whisky and opium may be injurious, yet so far as they satisfy 
existing wants they possess utility. They are called goods 
because they are good for the satisfaction of some want, no 

§ 4] Meaning of Wealth. 9 

matter how reprehensible that want may be. In order for 
anything to constitute wealth, the first requisite is that it should 
possess utility, that is, the capacity to satisfy some desire. 
This, however, does not suffice. Not all desirable things con- 
stitute wealth. The conception must be further limited. 

(2) The second characteristic of wealth is that it must be 
something external to man. Personal or internal goods are a 
contradiction in terms. What is meant is personal or internal 
qualities which are bound up with the individual himself, hke 
his physical, mental or moral characteristics. Health is not 
wealth, although it may be the basis of wealth. Man cannot 
part with these qualities ; he can only embody them in some 
product which will be serviceable to others. His personal 
qualities may thus enable him to acquire wealth, but they do 
not themselves constitute wealth. To speak of personal wealth 
in any but a metaphorical sense, as a wealth of humor or good 
spirits, is to confuse the fundamental distinction between man 
and his environment. Wealth exists for man, but man himself 
is not wealth (unless indeed he is a slave, and then he is wealth, 
not to himself, but to some one else). Wealth may be produced 
by man, but it is the product, not the producer, that constitutes 
wealth. The things that form wealth are always outside of 
man ; they are external, not internal, phenomena. 

This does not mean that wealth is necessarily something tan- 
gible. It is indeed true that the term " goods " is sometimes 
preferred to " commodities," because the latter is supposed 
to imply something tangible. "Commodity," however, really 
means that which " accommodates " or is " commodious " to us, 
just as goods are those things that are " good for us," — both 
in the economic sense. If, however, we use " commodity " to 
designate some tangible, visible object, wealth is not confined 
to commodities. Utilities may be conferred not only by in- 
animate objects but by human services. A concert satisfies a 
want ; what we pay for is not a physical object but a service. 
A teacher receives a salary ; what he gives in return is some- 
thing intangible. Services in almost every case bring about 

lo Fundamental Concepts. [§ 4 

some change in ncian's environment, and in that sense even a 
service may be classed as something material. But if by ma- 
terial we mean something that has an objective, visible exist- 
ence, a service must be considered immaterial. It confers 
utilities, it is external to man, it is to that extent wealth ; but it 
is not physical, visible, tangible wealth. Yet the higher the 
civilization, the more numerous will be these forms of impal- 
pable wealth. 

In reality, however, the distinction between commodities 
and services is slighter than would appear at first blush. For 
in each case we are really dealing with services. The sole use 
of a commodity is the series of services which it can render. 
Whether the music which we hear comes from a music-box or 
from a human voice, whether the boat is propelled by a man 
or an engine, is of no consequence. What we enjoy in each 
case is a service. The only difference is that a service dis- 
appears in the rendering, while a commodity often remains, 
and is capable of similar services in future. The service is 
evanescent, the commodity is often durable. The commodity 
may then be regarded as the embodiment of a series of stored 
up services, to be conferred piecemeal. But the distinction is 
vague. For many commodities, like coal, ice-cream and the 
like, disappear in the very act of rendering a service. Dura- 
bility is no criterion of wealth. An ephemeral service may be 
of far greater importance than a durable commodity. It is the 
character, not the length or repetition, of the service which we 
prize. The real relation between a concrete commodity and 
a service is that the commodity is a crystallized service or a 
series of services. The essence of wealth is an inflow of sat- 
isfactions : utilities consist of services, whether or not they 
are embodied in physical objects. The very idea of a ser- 
vice, however, implies something that flows in to one from 
the outside, whether the outside be a man or an object. 
Wealth is always something external. 

(3) The third characteristic of wealth is limitation of supply. 
A few goods and services exist in such plenty that the satisfac- 

§ 4] Meaning of Wealth. 1 1 

tion of our wants is not affected by any consideration of the 
quantity available. The deprivation of any unit in the supply 
will make no difference to us. We all need air, for instance, but 
in ordinary circumstances air is free to all, in unlimited quan- 
tities. Such goods are therefore called free goods. The vast 
majority of commodities, however, are not the free gift of na- 
ture. They exist in such limited amounts that we attach im- 
portance to definite quantities. If we wish to utilize them, we 
must be economical. Hence they are called economic goods 
and form the subject matter of the science of economics. 

Putting it in another way, it may be said that while all 
goods that render a service possess a certain kind of utility, 
only economic goods, or goods limited in supply, possess 
that grade of utility which results in value. As we shall see 
later, value is an estimate of the relative importance or utility 
of definite quantities of goods. When we speak of the value 
of a diamond, the word conveys no precise meaning unless 
we know how large and pure the diamond is. When we say 
a thing is useful, we do not measure its grade of utihty ; but 
when we say a thing is valuable or worth something, we at 
once ask : how much ? In the case of free goods, by which we 
mean goods the amount of which is unlimited, we attach no 
importance to any particular quantity, that is, we set no value 
on it. Wealth might therefore be defined as composed of things 
that possess value, and economics would then be the science 
of value. 

In what has preceded we have virtually affirmed that wealth 
means abundance, and at the same time connotes limitation 
of supply. This seems absurd. The apparent absurdity, how- 
ever, is removed by the statement that wealth consists of an 
abundance of things limited in supply. If the supply is lim- 
ited, man will make an effort to secure them ; the more scarce 
they are, the more valuable they will be and the more effort 
he will make. Economic action consists in getting the great- 
est results with the least effort. Anything which will afford us 
the same services with less effort will set free surplus energy for 

1 2 Fundamental Concepts. [§ 4 i 

other purposes, and thus increase our wealth. The irrigation 
tracts in the West represent much effort and much wealth ; 
if water were to become as plentiful there as in the East, the 
wealth of the country would be increased, because all the 
efforts devoted to securing water would now be devoted to 
something else, let us say to building railways. The water 
would no longer be wealth, just as the air is not wealth, but 
there would be more wealth than before because there would 
be a larger total inflow of satisfactions. Before, we had only 
the water ; now we have the water and the railroads. 

This also explains the seeming opposition between wealth 
and value. Wealth is composed of things having value, and 
yet the more we have of anything, the less its value. This 
statement overlooks the fact that, as we shall see later ( § 76 ), 
value is an expression of the relative importance of goods, 
while wealth denotes an aggregate of goods possessing value. 
In the example above, the value of water indeed disappeared, 
but was replaced by that of railroads, previously not existing. 
The reduced value of a commodity whose quantity increases 
may be compensated by the new value of something which 
did not exist before ; but the aggregate of wealth may be 
augmented. Thus increasing wealth does not mean decreasing 
value in general, for the lower value of some things is balanced 
by the higher value of new things. An increase of commodities 
can never of itself engender a decrease of wealth. 

To recapitulate, in order to constitute wealth, a commodity 
or service must have three qualities. First, it must possess 
utility : if the thing is of no use, it is not a good at all. 
Secondly, it must be external to the individual : a man may 
be skilful or intelligent, but he is not wealthy until he has 
transmuted his skill into some actual result. Thirdly, it must 
be limited in amount : if it is free to all, it may make him 
happy, but its possession will not differentiate him from his 
neighbor, and he will attach no specific value to it. 

Since modern society is based on the interchange of posses- 
sions, all this can be summed up in the statement that wealth 

I 5] . Wealth and Man. 1 3 

IS nowadays anything that can be exchanged. If it is not 
useful, no one will want it ; if it is not external, no one can 
part with it ; if it is not limited in quantity, no one will give any- 
thing for it. Historically and fundamentally, however, wealth 
is anterior to exchange. Things do not possess value because 
they are exchanged ; they are exchanged because they possess 


5. Wealth and Man. 

Wealth, then, forms the subject matter of economics. But 
in what sense ? 

If a man chops down a tree for firewood, he is adding to 
his wealth. Yet a discussion of the best axe to be used would 
not be an economic discussion. We all need light ; yet a study 
of the relative merits of gas and electricity would not necessa- 
rily be economic in character. We may study wealth from 
the technical as well as from the economic point of view. 
The technical study explains the qualities of the thing itself or 
in relation to other things : economics deals with these qualities 
only in their relations to man. A study of the relative merits 
of axes would be technical ; a study of the income derived 
from tree- felling is economic. Economics is therefore the 
science of man in his business relations to wealth. The 
emphasis is to be put on the human rather than on the mate- 
rial side of the problem. Since wealth in its economic aspects 
consists of anything that has commercial value, economics 
may also be defined as the science of value, in the sense of 
the science of human relations so far as they are affected by 

Wealth is at bottom a surplus of satisfactions. We may 
therefore approach the subject from either side, — that of satis- 
faction or of want. In other words, in dealing with the goods 
that constitute wealth we must be mindful not only of their 
acquisition, but also of their use ; not only of their production, 
but also of their consumption. In order to grasp the real 
meaning of wealth, we must ask not only, what have you got? 
but, what do you do with it? 

14 Fundamental Concepts. . [§ 5 

If a savage were to find a watch on the seashore, he might 
prize it as a trinket. As a watch it would be of no use to him. 
For watches to have any material value presupposes a society 
considerably advanced in intelligence. The same commodities 
may be relatively valueless to one generation and exceedingly 
valuable to another. At bottom it is demand which sets in 
motion those forces which result in giving a thing value. The 
social demand for a thing is due to the uses to which it can be 
put. But the uses to which it can be put depend not only on 
the thing to be used but on the individuals who use it. Wealth 
therefore depends in the last instance on man. 

Wealth can be increased only through the multiplication and 
better utilization of commodities. The more and better the 
commodities, the wealthier the population as a whole. This 
multiplication can take place only in obedience to an increased 
demand. Increased demand, however, means a diversification 
of wants. People now want more things of different kinds than 
in the earlier stages of society. The things they want, however, 
depend in last resort upon their aesthetic, intellectual and moral 
conditions. The physical appetite of civilized man differs from 
that of the savage only in its being more refined, — that is, 
more aesthetic. It differs not in quantity, but in quality. His 
other appetites also change with the development of civiliza- 
tion. The economic Hfe is therefore ultimately bound up with 
the whole moral and social life. There is a deeper meaning in 
Ruskin's statements : "There is no wealth but life," and "Nor 
can any noble thing be wealth except to a noble person." The 
economist in studying wealth must continually bear in mind 
those forces which make civilized human beings ; for, after all, 
it is not the wealth itself, but the human beings who create 
and who use the wealth, that are of fundamental importance. 
What a man does with his wealth is a vital question ; for upon 
the answer given to this question by society as a whole depends 
the growth of future wealth itself. 

This is equivalent to saying that civilization consists in the 
attempt to multiply wealth, and to render man more amenable 

§ 6] Measure of Wealth. 1 5 

to those higher forces which will lead him to employ his wealth 
in the true interests of progress. The goal of all economic 
development is to make wealth abundant and to make man 
more able to use wealth correctly. The real object of eco- 
nomics is to explain the process of making wealth cheap, and 
man dear. Education, science, art, ethics, — all have an eco- 
nomic side. 

6. The Measure of "Wealth — Income and Capital. 

Americans speak of a man as worth a million dollars : 
Englishmen would call an equally wealthy man at home worth 
ten thousand pounds a year. In the United States, land is 
assessed for taxation at what it will sell for ; in England, at 
what it will rent for. In the one case we estimate wealth by 
the capital value of property, in the other by the income value. 
Capital and income are thus here two phases of the same thing. 
Historically the reason is simple. In the middle ages land 
was the chief form of wealth, but was rarely bought or sold. 
Under the feudal system land had no selling value, but only a 
rental or income value. A man was rich when he had a large 
rent roll. The custom of measuring wealth by periodical 
income finally spread to all classes of society, because of the 
predominant influence of the landed interest. In the American 
colonies, on the other hand, land was abundant and free from 
feudal restrictions ; it was, therefore, almost from the begin- 
ning bought and sold like other commodities which exchanged 
hands for definite sums. Thus the selling or capital value 
came to be the measure of wealth in general. Income and 
capital are therefore two aspects of wealth. In the one case 
we measure wealth as a flow of services or stream of satisfac- 
tions ; in the other case as a stock of services or fund of 

The income measurement of wealth is the more fundamental 
psychologically as well as historically. We desire things at 
bottom because of their utility. They can impart this utility 
only in the shape of a succession of pleasurable sensations. 


i6 Fundamental Concepts. [§ 6 

These sensations are our true income. Income, in the eco- 
nomic sense, is the inflow of satisfactions from economic goods. 
When water is free to all, the pleasure of drinking it does not 
constitute an income, just as little as basking in the sun, which 
shines on rich and poor alike, is income. When water, how- 
ever, becomes so scarce that it acquires a value, its use affords 
in the broadest sense an income. 

The original conception of income is therefore pleasure or 
benefit income. In modem times value has come to be esti- 
mated in terms of money, and income is accordingly used in 
general to denote the inflow or revenue in money, — the money 
income as opposed to the pleasure or benefit income. If I 
rent my yacht to another, the return is called income, because 
the benefit comes in in the shape of money ; if I use the yacht 
myself, the return in the form of satisfaction is not ordinarily 
called income. Yet they are essentially analogous phenomena ; 
for no one would pay a sum of money for anything unless it 
afforded him an equivalent amount of satisfaction. Just as 
concrete articles of wealth existed before there was any ex- 
change, so income existed before there was any money. Amid 
a society based on money transactions, however, income de- 
notes any inflow of satisfactions which can be parted with for 
money. It may not be money income, but it must be capable 
of being transmuted into money income. 

As against the income, which is at bottom the service or 
satisfaction afforded by anything that has value, is to be put 
capital. When we buy anything we buy the right of securing 
such a satisfaction or stream of satisfactions, either from 
repeated services as such, or from the commodity which 
embodies such services. Every commodity is a store of 
such satisfactions. A suit furnishes a satisfaction or income 
every time it is worn, an axe affords an income every time it 
is used. We may therefore either pay for each service as it is 
rendered or give a lump sum, which capitalizes this anticipated 
income or flow of satisfactions. One may rent the dress-suit 
every night or buy it outright. The process of valuation 

§ 6] Income and Capital. 17 

through which we assign a capital value to this complex of 
future income values and through which we transmute the flow 
of satisfactions into a fund is a subtle one, to be discussed later. 
The process is taking place about us every moment. Nothing 
would have any capital value if it had no income value ; capi- 
tal is capitalized income. 

This view of capital has not always been recognized. The 
earliest use, indeed, of the word capitate at the close of the 
middle ages was to designate the caputs or principal sum of 
money from which a revenue was expected. Yet it has become 
customary among economists since Adam Smith not only to 
confine the term capital to wealth used for further production, 
in contradistinction to wealth devoted to immediate consump- 
tion, but also to differentiate capital from land. Capital 
would then be defined as that part of wealth which is the 
result of production devoted to further production. The 
consequence has been that capital has often been regarded as 
consisting chiefly of the tools, machinery, factories, ships, cars 
and finished products of all kinds used to increase production. 

This is, however, at variance with business usage. When a 
wagon builder, for instance, counts his capital, he always, 
includes his real estate. The factory may indeed differ in such 
important points from the land on which it is built as to 
justify the erection of a separate category for land, but in one 
sense they are both classes of capital. Again, he includes in 
his capital the stock of finished goods, irrespective of whether 
the wagons are to be used by farmers as tools to garner the 
crops or by milUonaires for pleasure. Finally, he includes 
things that have not been produced at all, for instance, mere 
privileges or patent rights granted to him by government. His 
capital thus comprises things that have never been produced, 
as well as things that may never be used for further production. 
Capital in this sense is simply wealth which yields or can 
yield an income. It includes everything that has a capital 
value. The wagon is capital to the livery- stable keeper because 
his business income is derived from renting its use day by day 


1 8 Fundamental Concepts. [§ 6 

to customers ; the wagon is capital to the farmer because it 
helps him to get an income from the crop; the wagon is 
capital to the millionaire because it embodies a series of 
incomes, which he actually enjoys in kind by riding, or which 
he could enjoy in money if he chose to let it out piecemeal or 
to sell it outright. If a broker fails, his creditors will insist on 
including in the assets or capital not only his stock exchange 
seat, which is not the result of any production, but his real 
estate holdings as well. Both have a capital value. Capital 
as contrasted with income, therefore, is all wealth regarded as 
a store or fund. 

In every progressive society men seek to enlarge their flow 
of satisfactions. This can normally be done not only by 
enhancing personal efficiency, but primarily by increasing oi 
improving the items of wealth which embody this flow of 
income. Economic progress thus normally rests upon the 
devotion of existing wealth to the further increase of wealth ; 
and the chief function of capital may accordingly without 
great error be declared to be its productive use. But it muse 
not be overlooked that the end of production is consumption 
and that at bottom capital is capitalized income. 

While income is, therefore, the fundamental test of wealth, 
it ordinarily makes no difference whether we measure a man's 
wealth by his income or his capital. Sometimes, however, a 
difficulty arises. A railway president or trust manager with a 
salary of fifty thousand dollars a year cannot well be called 
poor. Yet a system of taxation based on the measurement of 
wealth by capital, as in the case of the property tax, would 
exempt him completely. The capital estimate of wealth is 
here clearly inadequate. On the other hand, the customary 
restriction of income to money income is also occasionally 
embarrassing. When capital is so used as not to yield a 
money income, as in the case of one's yacht or jewels or 
private park, an income tax would not reach the owner at all. 
The injustice would be no less than in the preceding case. 
Some modern tax laws indeed include in taxable income the 

§ 7] Wealth, Money and Property. 19 

annual value of a house inhabited by the owner. But the 
mclusion of benefit income in the case of a house and its 
exclusion in the case of a yacht or park are not easy to justify. 
The really safe measure of wealth, applicable in all cases, is 
income in the sense of pleasure or benefit income. 

7. Wealth, Money and Property. 

Whether wealth be measured in terms of capital or of in- 
come, it is generally expressed in terms of money. For wealth 
in modern society is anything that can be exchanged, or that 
possesses an exchange value, and money is admittedly the 
universal medium of exchange. Hence wealth is sometimes 
identified with money. 

It is clear, however, that money is simply a commodity, and 
forms only a part of the entire stock of wealth. It is, indeed, 
a most important constituent of wealth, but acquires this im- 
portance chiefly because it is a representative of other wealth. 
Very litde of a man's wealth consists of money, although it 
can all be converted into money. Money is significant not 
for itself but as the universal purchasing medium. In modern 
society the money needed to carry on the daily business trans- 
actions is like the lubricating oil in a machine. Without the 
oil there would be difficulty in making the machine work ; 
without the money there would be embarrassment in conducting 
business. But just as too much oil would be not only useless 
but harmful, so the existence in a country of more money than 
is needed for the actual transactions would represent a waste 
of wealth which might otherwise be employed in production. 
Money is wealth, but wealth is not money. Wealth is money's 
worth, but wealth and money are by no means identical. 

Finally, we sometimes confuse wealth with property. In 
reality they are not convertible terms. Property is primarily 
a legal conception. It denotes the exclusive right of owner- 
ship in a definite amount of wealth. A man's property is what 
is legally his own, whether his own consists of capital or of 
income, of concrete goods or of mere rights. If a man mort- 

20 Fundamental Concepts. [§ 8 

gages his farm for half its value, his real wealth in land is 
reduced one-half; but the title to the land is still his, and in 
most states, like New York, he pays his property tax on the 
entire value. But this was not always so. Formerly the mort- 
gagee or lender entered upon the land and enjoyed its fruits ; 
later, he still owned the land legally, but left the mortgagor or 
borrower in possession ; now the land remains the property of 
the borrower, subject only to the lien of the lender. From 
the economic point of view the wealth is divided between 
them; legally the land is the property of one party, as in 
former centuries it used to be the property of the other. 
When a man borrows money on mortgage, he is creating a 
new form of property, but not new wealth. There is no more 
land than before, but there is an additional property right in 
the shape of a piece of paper or mortgage which represents 
the title to a certain income. So the real estate and rolling 
stock of a railroad constitute the property of the corporation, 
while the capital stock is the property of the stockholder. 
They form different kinds of property and can be sold sepa- 
rately ; yet this duplication of property rights does not increase 
the amount of wealth in existence. Property is a legal right 
to wealth ; it is not in itself wealth. 

8. Public and Private "Wealth. 

While there is in most cases little difference whether we use 
capital or income as the measure of private wealth, or the 
wealth of the individual, the distinction becomes important in 
the case of public wealth, or the wealth of the community 
as a whole. To compute the national wealth, as some cen- 
suses do, by adding to the government property the capital or 
selling value of all private property is erroneous, because, as 
has just been pointed out, we should be counting many things 
twice. The only true measure of public wealth is income. 

Sometimes it is mistakenly stated that the test of commer- 
cial value cannot be applied to public wealth. It is claimed, 
for instance, that rivers, climate and situation, which are not 

§ 8] Public and Private Wealth. 21 

and cannot be sold, form the essential constituents of public 
wealth. This involves the same confusion that was encoun- 
tered in discussing the so-called personal wealth of an indi- 
vidual (§4). Rivers and cHmate do not constitute wealth. 
They enable a country to acquire wealth, just as intelligence 
or strength enables a man to acquire wealth. They are the 
source of wealth, but they are not wealth. America under 
the Indians had the same rivers and climate as now, yet no 
one would speak of the America of a thousand years ago as 
wealthy. Until these natural advantages are converted into 
actual results they do not become wealth. When they are 
finally made to contribute to a flow of income in the shape 
of finished products or services, these products and services 
acquire a commercial value and constitute wealth. The fun- 
damental test of all wealth in modern times is income in the 
shape of benefits that can be parted with, and for which some- 
thing will be given. Public wealth, Hke private wealth, has a 
commercial value, but public wealth can be estimated only in 
terms of income, not of capital. 

The destruction of private wealth can never of itself incr^^ase 
public wealth, but the destruction of some forms of private 
wealth may bring about a far greater increase in other forms 
of private wealth and thus augment the public wealth. The 
abolition of slavery annihilated the wealth of the slaveholder ; 
but it created the property of the former slave in himself, and 
led to such an increase of productive power that the total out- 
put of society was greater than before. The property of a 
gas company may be rendered valueless by the discovery of 
a natural gas field owned by the community, as in Toledo. 
Yet the destruction of' the private wealth of the shareholder*- 
is far more than offset by the fact that each consumer of gas can 
now devote to productive purposes the sums hitherto necessary 
to pay the gas bills. We say, far more than offset, because the 
wealth of the shareholders was a capitalization of profits, while 
the wealth of the gas consumers is now increased by a sum 
equal to the total price of the gas, including both cost and 

2^ Fundamental Concepts. [§ 8 

profits. There is, in short, an addition to the net income of 
society, and therefore an increase of public wealth. 

Again, whether the annihilation of private wealth through a 
change from private to public ownership creates public wealth 
or not depends entirely on the success of the undertaking. If 
a government railway can be operated either more cheaply or 
with lower or more equal charges than a private railway, there 
will be an increase of public wealth. The test in every case is 
the flow of income to the individuals that constitute society ; 
but this flow under modern conditions always has a commercial 

Since income is the only adequate test of public wealth, we 
can speak of a wealthy country in two senses. If we think of 
the aggregate income, a large country will be called wealthier 
than a small one ; if we think of the average per capita income, 
a small country, like Belgium, would be wealthier than a large 
one like Russia. Inasmuch as the real object of our study is 
not wealth in itself, but man in his relation to wealth, it is 
clear that the second use of the term is preferable. It is the 
participation of an individual in the wealth of the community 
that makes social prosperity. 

The true scope of economics is therefore the study of the 
forces which contribute to the growth of the social income or 
public wealth, and which regulate the shares of classes and 
individuals in this flow of wealth. 


9. References. 

L. Cossa, Introduction to Political Economy {1893), Theoret. Part, chs. 
iii, vi; J. Keynes, Scope and Method of Political Economy (3d ed., 1904), 
chs. ii-iv, vii-viii; J. E. Cairnes, Character and Logical Method of Political 
Economy (2d ed., 1875), Lects. 3, 4; A. Marshall, Principles (5th ed., 
1907), bk. i. chs. V, vi ; N. G. Pierson, Principles of Economics (1902), 
Introd.; A. W. Flux, Principles {i^qa,), ch. i ; F. A. Walker, Political 
Economy (3d ed., 1888), part i ; E, R. A. Seligman, Economic Interpreta- 
tion of History (1902), part 2, ch. iii; W. J. Ashley, Surveys (1900), 
Preliminaries; A. C. Bowley, Statistics (1901), ch. i; R, Mayo-Smith, 
Statistics and Economics (1899), ch. i; H. Sidgwick, Scope and Method 
of Economic Science (1886), and in Miscellaneous Essays and Addresses 
(1904); G. C. Lewis, On the Methods of Observation and Reasoning in 
Politics (1852), ch. iii; A. Wagner, On the Present State of Political 
Economy (Quart. Jour. Econ., I, 1886) ; E. A. Ross, The Foundations 
of Sociology (1905), chs. i, ii. 

On the Mathematical Method. W. S. Jevons, Theory of Politi- 
cal Economy (2d ed., 1879), Preface; F. Y. Edgeworth, (i) Mathe- 
matical Psychics (i88i); (2) On the Application of Mathematics to 
Political Economy (Jour. Stat. Soc, LII, 1889) ; (3) On the Representa- 
tion of Statistics by Mathematical Formulce {Ibid., LXI-LXII, 1898- 
1899) ; !• Fisher, Mathematical Investigations in the Theory of Value 
and Prices in Conn. Acad., Transactions, IX (1892) ; C. Cunynghame, 
A Geometrical Political Economy (1904). 

10. Meaning of Economic Lavr. 

It is sometimes questioned whether there are such things as 
economic laws. The problem has often been complicated by 
the failure to distinguish between the various meanings of the 
term law. (i) Law may denote a body of customary usages, 
as the common law, or primitive law. (2) Law may mean a 

24 Economic Law and Method. [§ lo 

statutory enactment, as a law of Congress. (3) Law may sig- 
nify a rule of action or a precept, as a moral law. (4) Law 
may mean the statement of relations of cause and effect 
between phenomena, as a law of physics. When we speak of 
economic law, we properly use the word in the last sense. 
Everything that happens in the universe is related either as 
cause or as effect to some other thing. It is the function of 
science to ascertain this relation, and to formulate the law 
which explains the relation. In this sense every scientific 
law is a natural law, because it deals with the phenomena of 
nature, because it explains the natural or necessary relations 
between things. A scientific law states that definite causes 
necessarily lead to definite results. 

Since economics is the science of industrial relations, an 
economic law is a natural law so far as it interprets the rela- 
tions of human nature to industrial facts. Everything that 
occurs in economic life takes place in accordance with some 
law ; it is the function of the economist to ascertain this law. 
Only in this sense can we speak of an immutable economic 
law. An economic law does not mean a precept or rule of 
action ; there is nothing immutable about a rule of action. 
To speak of a law of free trade, for instance, is unmeaning. 
An economic law affirms that if certain causes exist, certain 
results are sure to follow. The facts themselves, whether of 
human nature or of the outward world, may differ ; but given 
definite facts, definite consequences will ensue. The relation 
between these facts is capable of being expressed in a state- 
ment of cause and effect, which we call a scientific law. 

It must not be overlooked, however, that economic laws 
are essentially hypothetical. We must be quite sure that the 
premises are true to actual life before we can draw a conclusion 
applicable to existing facts. So far as the premises are only 
partially true, the conclusions are only partly valid. This does 
indeed not prove that there are no economic laws, but only 
that the law may not yet have been ascertained, or that the 
particular statement of the law in question is only provisional. 

§ lo] Economic Law. 25 

In this respect economic law does not differ from any other 
scientific law. 

In one point, however, the laws of all the social sciences do 
differ from those of natural science. The social sciences deal 
with man, and man is himself a continually changing factor. 
Man is a product of history; economic institutions, like all 
other social facts, have their roots in the past. What is, is the 
outcome of what has been. With every mutation in outward 
conditions and social relations there comes a change in the 
economic facts or in the methods devised to secure adaptation 
of means to end. Nothing is so rare as the historical per- 
spective ; nothing so difficult to realize as the relativity of 
existing institutions. At one stage of scientific inquiry, for 
instance, it was assumed that private property was a natural 
phenomenon, an outcome of the very nature of man. It is 
now seen that private property is not an absolute, but an his- 
torical category ; that the conception itself was of slow growth, 
and that its content varies from age to age. What is true of 
private property is true of almost every other economic institu- 
tion. It has grown to be what it is ; it has once been differ- 
ent, and will again be different. While there is life, there will 
be change. 

In outward nature, on the other hand, we operate with 
forces that are in one sense unchanging. For instance, in dis- 
cussing physical or astronomical facts we are justified in taking 
for granted the existence of gravitation. In discussing econo- 
mic facts, however, it would not be safe to assume in every 
case the existence, in unimpaired activity, of the motive of self- 
interest. Not only may there be counteracting forces — for 
that is true also of physics — but the motive itself may suffer a 
change. We cannot appeal to the natural law of self-interest 
in the same sense that we speak of the natural law of gravita- 
tion. The one is dependent on man, the other is independent 
of man. In this sense there are no " natural " laws in social 
science. The frequent appeal in current discussion to the 
natural laws of society as something apart from man, and over 

26 Economic Law and Method. [§ lo 

which he has no control, is erroneous. There are no natural 
laws in the sense that man himself is powerless to alter the 
conditions which form the basis of the statement. 

The French school of Physiocrats in the eighteenth century 
first applied to economics the conception of natural law as a 
part of the order of nature, from the overwhelming necessity 
of which no one could escape. John Stuart Mill, although he 
still held fast to the old conception of natural law as applied 
to production, pointed out that the laws of distribution were 
themselves capable of being modified by human agency. 
Modern science has shown that what is true of distribution is 
equally true of production, and that there is no natural law as 
a part of a natural order in any field of economic inquiry. 
The old conception of natural law has been abandoned in 
economics, as it has been given up in politics and jurispru- 
dence. In its stead has been put the more modern idea of 
natural law, in the sense of scientific law. Modern natural 
law is essentially hypothetical in character and carries with it 
no moral implication. 

We must be careful, then, not to confuse the two concep- 
tions. An economic law is a natural law so far as it states that 
given conditions will lead to given results. An economic law 
is not a natural law so far as it implies that human effort is 
impotent to modify the conditions which lead to the results. 

It was as a protest against the natural law of the old econo- 
mists that the term historical law was introduced. Some of the 
newer writers urged that the essential point was to study the 
evolution of economic law itself as embodied in the changes 
of economic life. To them the only economic laws were the 
historical laws which throw light upon the growth of society 
and trace the development of economic relations. This, 
however, also involved an exaggeration, in that it put more 
emphasis on the past than on the present, and often failed to 
afford an adequate analysis of existing facts. This particular 
controversy has now fortunately been laid to rest. 

Another objection to the idea of economic law may be men- 

§ ii] Economic Investigation. 27 

tioned. We frequently hear it said that something is true in 
theory but not in practice. The fallacy of this statement is 
evident when we reflect that a theory is nothing but the formu- 
lation of a law, a statement of the necessary relations between 
facts. If a thing is true in theory, it must be true in practice. 
The difficulty is to formulate the correct theory. When people 
say it is easy to " theorize," they mean that it is easy to frame 
an alleged theory. Nothing is harder than to construct a true 
theory. For a true theory must fit into every fact ; otherwise 
it is not the correct theory. The hasty and untrue generaliza- 
tions of those that set themselves up as " theorists " are really 
responsible for the seeming antagonism. There can be as little 
divergence between true economic theory and actual economic 
life as between the theory of chemistry and chemical phe- 
nomena. It is the theory which must be made to fit the facts, 
and not the facts which must be twisted to suit the theory. 

11. Methods of Economic Investigation. 

With the broader conception of economic relations, the old 
contest over method has been relegated to the background. 
It was formerly much discussed whether economics was a de- 
ductive or an inductive science ; whether, in other words, we 
should start out from certain general principles, or attempt 
to reach these principles through the interrogation of facts. 
Sometimes the contrast between them was expressed by the 
term abstract or analytical, as opposed to the concrete or his- 
torical or comparative method. 

There is at present a substantial agreement among econo- 
mists that both methods are correct, and that it would be a 
mistake to assert the predominance of either. It is a ques- 
tion not of economics in general, but of the particular prob- 
lems to be solved. In some the one method is more fruitful, 
in some the other. In such a problem as the incidence of 
taxation the historical or inductive method would be of little 
avail, because of the difficulty of disentangling the fundamental 
cause from among the complicated facts of actual life. In 

28 Economic L^w and Method. [§ 12 

such a problem as the variation between piece wages and time 
wages the deductive or abstract method would probably not 
bring us to our goal so quickly. Each method has its advan- 
tages and its limitations. In the deductive method we can be 
sure of our conclusions only after checking them by the facts; 
in the inductive method we cannot formulate the law until we 
find that it is in harmony with well-established principles. 
In the one case we start from the principle and reach the 
facts ; in the other we start from the facts and attain the prin- 
ciple. Neither can be successfully divorced from the other. 
In most cases of reasoning, indeed, we use, consciously or 
unconsciously, each method in turn. 

Each method, again, when pushed to an extreme is either 
dangerous or barren. The earlier advocates of the abstract 
or analytical school sometimes framed their generalizations 
hastily, and, through their failure to make allowance for the 
numberless counteracting tendencies, often gave an appearance 
of unreality to their conclusions. Such, for example, was the 
celebrated wages-fund theory (§ 174). The more ardent fol- 
lowers of the concrete or historical school have sometimes ex- 
aggerated the difficulty of reaching general laws at all, and 
have left us to wander aimlessly in the forest of facts, putting 
off to an ever-distant day their analysis and utilization. On the 
other hand, the more moderate advocates of each method have 
accomplished a real advance. The historical school has shown 
that we can really understand what is only through a com- 
prehension of what has been, and that the problems of funda- 
mental importance to social well-being are those of change. 
The analytical school has shown that the particular is of 
value only as illustrating the general, and that no true progress 
in economic reasoning can take place until we frankly recog- 
nize the need and the existence of general principles. 

12. Relation of Economics to Other Sciences. 
In the modern hierarchy of thought the points of contact 
between the various sciences are continually becoming more 

§ 12] Relation to Other Sciences. 29 

numerous. We recognize the possibility of regarding facts 
from different points of view. With increasing differentiation, 
on the other hand, there also comes the recognition of in- 
creasing unity. 

With some sciences the points of contact have been empha- 
sized only in recent years, — as, for instance, with psychology 
and biology. The economist whose chief concern is with the 
law of value necessarily operates with the data of psychology. 
Vahie can have no existence apart from the mental conditions 
of man. The whole conception of demand is essentially psycho- 
logical. While, however, the connection between psychology 
and economics is real and intimate, it may be doubted whether 
the psychological treatment of economic relations can carry us 
much further than to the comprehension of the elementary 
principles of valuation. In the same way, it was at one time 
the fashion to apply biological concepts to economic life, and 
to speak of the economic organism, the economic structure 
and the economic functions. It is, however, coming more and 
more to be recognized that these are vague analogies rather than 
identities ; that the laws of life in the economic world are not 
the same as those in the physical world ; and that the only 
real aid which biology can give to economics is to enforce the 
conviction that in social as in animal life there is continual 
growth and perpetual change. 

With another class of sciences, mathematics and statistics, 
the relation is more intimate, but primarily from the point of 
view of method. Economics deals in one sense with quanti- 
tative relations. Market values are expressed in figures ; and 
mathematics is of undoubted aid in enabling us to make a 
short cut, as it were, through the mazes of figures. Both 
algebra and geometry have frequently been employed with 
success ; and it is remarkable that some of the greatest steps 
in advance in the pure theory of economics have been taken 
by those who, like Cournot or Gossen or Jevons or Marshall, 
approached the subject from the mathematical side. The 
advocates of the mathematical method, however, are apt to 

30 Economic Law and Method. [§ 13 

overshoot the mark. They often forget that the range of ques- 
tions with which they can deal is essentially limited, because so- 
cial processes cannot readily be reduced to exact quantitative 
form. They do not always remember that the variables with 
which they operate are often precisely the important factors in 
social life ; and that human aspirations and human needs can- 
not be pent up within the confines of a mathematical formula, 
no matter how broad it may appear. Within a narrow field 
the mathematical method can be used to great advantage, but 
it will always be of more use to the writer than to the reader. 

In the case of statistics the danger is of the opposite kind. 
In mathematics the difficulty is to get a law which will not be 
so all-embracing as to be inapplicable to real life. In statis- 
tics, even granted that we have collected the true figures, the 
difficulty consists in distilUng from them any general principle 
of lasting value. In the first case we run the risk of formu- 
lating unrealities ; in the second of stating platitudes. What 
was said in a preceding section of the abstract and the con- 
crete methods of investigation applies with augmented force I 
here. The mathematical method is the abstract method ' 
pushed to an extreme ; the statistical method is the concrete 
method pushed to a like extreme. Statistics form an indis- 
pensable adjunct to economic inquiry, but they are of value 
principally for purposes of illustration rather than of construc- 
tion. They show us that there is a reign of law in the moral as 
well as in the physical world ; they do not always enable us to 
ascertain the law. 

13. Relation of Economics to Politics and Other Moral 

When, however, we come to the moral sciences, of which 
economics itself is one, we notice a more intimate relation. 
These are politics, jurisprudence and ethics. 

( I ) The study of politics or the science of the state has 
gone through several stages. For a long time history was 
dominated by the " great man " theory of politics ; attention 

§ 13] Relation to Politics. 31 

was centred chiefly in the kings and the battles, the court 
intrigues and military problems. At a later period more em- 
phasis was put on the development of institutions compared 
with which any individual, however eminent, was insignificant. 
Finally, it was recognized that political life itself is closely in- 
tertwined with the economic life, and that the forms as well as 
the practices of government are profoundly influenced by the 
conditions of production as well as by those of distribution. 
Economic facts would then be the cause ; political phenomena 
the result. 

On the other hand, since all modern economic action is 
carried on within the framework of the state, when we deal 
with any practical economic institution no final solution of the 
problem can be reached until the effect of the political condi- 
tions be weighed. In discussing the economic consequences of 
government ownership, for instance, the status of the govern- 
mental civil service is a potent consideration. Political facts 
may profoundly modify the economic conditions, instead of 
being modified by them. While, therefore, politics deals with 
the relation of the individual to the government, and eco- 
nomics with one aspect of the relations of individuals to each 
other, there is almost always a distinct interaction between the 
two. It is a necessity for the publicist to comprehend the 
economic basis of political evolution; it is the business of 
the economist to remember the political conditions which 
affect economic phenomena. 

(2) What has been said of politics applies with still greater 
force to jurisprudence. All systems of law are in the main the 
crystallization of long-continued social usage. Social customs 
are coeval with the origin and growth of society itself; the 
mandatory force of the positive law comes at a later stage in 
the evolution. The unwritten gradually turns into the written 
law, until the positive enactment is invested with the sanction 
of a sovereign command. As society develops, the law is in 
a perpetual process of change. No code is final ; it always 
represents a given stage of social life. The law is the outward 

32 Economic Law and Method. [§ 13 

manifestation ; the social, and especially the economic, fact is 
the living force. The formal juristic conception may remain 
the same ; its content must be modified by every change of 
economic life. Legal history is really a handmaid to economic 
history ; legal development is inexplicable apart from economic 
forces. The economic fact in this sense is the cause ; the legal 
situation is the result. 

At any given moment, however, economic phenomena take 
place within a legal framework. The elemental forces of eco- 
nomic life cannot indeed in the long run be conditioned 
by legal forms ; but the law may for a time hold in check, or 
give a new direction to, economic forces. Take as an example 
the English law of primogeniture and of entailed estates as 
compared with the French laws which have led to the system 
of small farms. History is full of instances where the law has 
for good or for evil affected the economic environment. Just 
because the economic life, however, is prior to the legal system, 
there is always, at any given moment, the danger of a lack of 
harmony between the two. It is in the interval between the 
economic changes and the readjustment of the legal facts that 
the influence of law upon economics is keenly felt. Life indeed 
consists of a perpetual adaptation of outward forms to inner 
forces, and thus the economic basis of a legal system is really 
the important fact to the social philosopher. In practical life, 
however, we deal with outward forms, and thus the legal shape 
of the economic relations must never be lost from sight. In 
economics and jurisprudence there is continual action and 

(3) Close as are the relations of economics with both poli- 
tics and jurisprudence, the connection between economics and 
ethics is closer still. This has often been denied. In the 
popular mind there is even an idea that there is a real conflict 
between them. In truth, this seeming conflict can be traced 
back at least as far as Adam Smith ; for he based his system 
of political economy on the principle of self-interest, his system 
of ethics on the principle of sympathy. Thus there grew up 

§ 13] Relation to Politics, 


the idea that the two leading motives of human action are the 
purse and the conscience ; that the economic man is repre- 
sented by the one and the ethical man by the other; that 
there is a hopeless conflict between them ; and that economics 
and ethics have nothing to do with each other. 

The modern view, however, is different. Ethics, like juris- 
prudence and politics, is now recognized as essentially social 
in its origin. All individual ethics are seen to be the outgrowth 
of social ethics. The very conception of right and wrong was 
originally a social conception, afterwards transferred to the 
individual. Since man lives in society, whatever was recog- 
nized as making for the general good came to be regarded 
as the test of morality. For individuals to persist in doing 
what was not for the social benefit must finally have ended in 
the destruction of society, and therefore of the individual him- 
self as a member of society. Social, not individual, utihty 
therefore unconsciously became the criterion. When we say 
honesty is the best policy, we do not mean that it is always 
expedient for the particular individual to be honest, for we 
unfortunately know of cases to the contrary. What we mean 
is that honesty is the best policy for society, and therefore has 
become right for the individual as well. Ages upon ages of 
this experience have converted this and similar conclusions 
into a human instinct, and have thus made us realize the 
existence of the categorical imperative as the sovereign moral 
law. The whole ethical progress of man consists in conform- 
ing his actions to the ideal social welfare. 

There can therefore be no conflict between correct economic 
action and true ethical theory. Adam Smith's principles are 
indeed true, but they are complementary, not antagonistic. 
Sympathy or altruism pushed to an extreme involves the 
destruction of self and therefore the death of society; self- 
interest or egoism pushed to an extreme means the destruc- 
tion of others and therefore likewise the death of society. 
Social life can endure only through a balancing of these two 
principles, each reinforced by the other. Since economics, 


34 Economic Law and Method. [§ 14 

like ethics, is primarily a social science, the true economic 
action must in the long run be an ethical action. An indi- 
vidual may pursue selfish economic ends, and may augment 
his own wealth at the cost of moral progress ; but he is then 
subordinating public to private considerations. Broadly speak- 
ing, and regarded from the point of view of society as a whole, 
what is economically advantageous must in the long run be 
right ; and what is correct in ethics must in the end also be 
profitable to the business world. The modern economist there- 
fore has become just as mindful of the ethical aspects of every 
economic problem as the modern moralist has been forced to 
recognize the economic side of his ethical problem. 

14. Scope of Economics. 

From what has been said it will be seen that the scope of 
economics is varied. This cannot be expressed in the old 
way by distinguishing between pure economics and applied or 
practical economics. In the first place, no such sharp line 
can be drawn ; and, secondly, even if the two parts could be 
distinguished, they would not cover the whole field of economic 

The distinction between pure and applied economics has 
been much exaggerated. If the study of economic theory has 
any justification at all, it must fit into the facts of actual busi- 
ness life. There may, indeed, be such a thing as pure mathe- 
matics, which discusses conclusions from premises that exist 
only in the mind of the investigator and find no counterpart in 
actual life. But if there is such a thing as pure economics in 
this sense, it would be of no earthly use except as a logical 
exercise or a play of the imagination. Economics is the sci- 
ence of industrial relations, — not as they might exist hypo- 
thetically in the mind of the investigator, but as they really 
exist. Economic law must explain economic facts; the law 
inheres in the facts, the facts are the embodiment and illus- 
tration of the law. The attempted distinction between pure 
and applied economics is a clumsy way of putting the emphasis 


§ 14] Scope of Economics. 35 

on the two sides of the same thing, — the law in its relation to 
the facts. 

Sometimes the distinction is expressed in another way, as 
when economic science is opposed to economic art. This is 
indeed a distinction ; but economic art does not deal with 
principles at all, it deals with precepts. Economic art is an 
awkward expression for the economics of statesmanship. The 
legislator practises economic art; he may or may not study 
economic principle. If, however, he runs counter to the 
principle, he cannot succeed in the art. 

In the second place, the old distinction between pure and 
applied economics is untenable, because the discipline, whether 
in its abstract form or in its application, is made to deal only 
with actual conditions. The preceding analysis has disclosed 
the inadequacy of this point of view. Economics is to teach 
us to understand the principles of industrial life. Its chief 
object, indeed, is to explain to us what is. If all society, how- 
ever, is the result of an evolution, we can understand what is 
only by knowing what has been. Moreover, if the relation 
of economics to ethics is such a close one, it is equally evi- 
dent that we can criticise the present not only in the light 
of the past, but in the light of the future; and that a dis- 
cussion of social tendencies at once brings up the question 
of what ought to be. Economic inquiry is teleological as 
well as historical. 

In every phase of our study, therefore, we must endeavor first 
to ascertain how the particular relations have come to be what 
they are ; secondly, to explain what are the conditions of the 
problem as it actually exists ; and, finally, to forecast the prob- 
able changes in the institutions as a result of an alteration in 
the conditions of the problem. Economic science, in short, 
while it deals primarily with the present, cannot avert its glance 
from the past or from the future. 

Part II. 
Elements of Economic Life, 

Book I. 
Foundations of Economic Life. 


15. References. 

C. de Montesquieu, Spirit of the Laws (last ed., 1902) ; H. T. Buckle, His 
tory of Civilization in England {^%\. ed., 3 vols., 1873) J H. Spencer, Princi- 
ples of Sociology, I (1882), part i, ch. iii; E. J. Payne, History of America, 
I (1892), 298-480; Livingston Farrand, Basis of American History (Am. 
Nation, II, 1905), chs. i-iv ; Ellen C. Semple, American History and its 
Geographical Conditions (1903); A. P. Brigham, Geographic Influences in 
American History (1903); G. G. Chisholm, Handbook of Commercial 
Geography (4th ed., 1903); S. Trotter, Geography of Commerce (1903); 
N. S. Shaler, The United States (2 vols., 1894) ; and Nature and Man in 
America (1891 ) ; R. S. Tarr, Economic Geology of the United States (1900) ; 
F. H. Newell, Irrigation in the United States (1902); E. Mead, Irriga- 
tion Institutions (1902) ; W. E. Smythe, The Conquest of Arid America 
(1900); R. M. Hurd, Principles of City Land Values (1903), chs. iii, iv; 
Ross, Foundations of Sociology (1905), chs. viii, x. 

16. Climatic emd Oeological Conditions. 

Man, like all animals, is indissolubly bound to the soil. He 
is in last resort dependent upon nature for what he is and what 
he has accomplished. This is especially true of his economic 


§ i6] Climatic Conditions. 37 

life, which, as we have seen, consists ultimately of his relations 
to material things. The basis of economic activity is the 
material environment. The modern sciences of geology, of 
meteorology and of commercial and anthropo-geography have 
enabled us to comprehend phenomena whose significance was 
until recently but vaguely apprehended. The economic aspects 
of the natural environment may be subsumed under the four 
heads of the climate, the geological structure, the flora and 
fauna and the geographical location. 

Only a portion of the globe is habitable. The uninhabitable 
parts, moreover, change with the geologic ages. Large sec- 
tions of Northern Europe and America which are now the 
homes of a vast population were aeons ago in the perpetual 
embrace of the ice king. On the other hand, explorations 
in the sandy wastes of the Asiatic deserts have brought to 
light the ruins of numerous and populous cities. Not only 
economic life, but all life, is at the mercy of the elemental 
forces of nature. 

Even in the habitable portions of the globe the climatic con- 
ditions are of the first importance. At the very outset the 
influence of temperature is obvious. The rigor of the arctic 
regions and the bounty of the tropical zone are alike hostile 
to economic progress. Where the food supply is scanty and 
the low temperature benumbing, human resources are taxed to 
the utmost in securing the bare wherewithal of life, and no 
surplus energy is left to accumulate a store of wealth. Where, 
on the other hand, nature pours out her treasures with a lavish 
hand, and the torrid heat enervates and lulls into lethargy, 
scarcely any activity is needed to procure subsistence, and 
little is ordinarily exerted for other purposes. Although we 
have had civilization in hot countries, the real home of the 
greatest economic progress has always been in the temperate 
zones, where man is goaded out of his natural laziness by the 
prick of want, and lured on to effort by the hope of reward. 

In many other ways does climate affect economic life. The 
alternations of heat and cold, both seasonal and occasional, 

jS Natural Environment. [§ i6 

are of commanding importance. The character and length of 
the seasonal alternations condition the size and quality of the 
harvest. The variations of intra-seasonal temperature with 
its sudden oscillations go far to explain the nervous, active 
American temperament and its economic results, as compared 
with the comparative stolidity of the English, due to an equable 
climate. Scarcely second to the influence of temperature is 
the significance of the rainfall and the humidity. Insufficiency 
of moisture and lack of sunshine are alike inimical to economic 
welfare. Not only will differences in rainfall affect the forestry 
conditions, as well as the size and therefore the economic 
utility of the rivers, but in addition the laborious contest 
with a semi-arid region will create in the individual stalwart 
economic and political qualities. The so-called Anglo-Saxon 
individualism is largely the product of climatic conditions. 
When the Englishman leaves his moist and fertile home for the 
almost riverless wastes of the antipodes, he becomes, if not a 
socialist, at all events the next remove to one. In Australia we 
accordingly find government railroads, government insurance, 
government steamships, government frozen-meat industry and 
many other examples of government activity which would be 
viewed with dismay in the mother country. 

In the same way the individualist theory in America is 
largely the product of definite economic conditions, resting on 
a new climatic environment. What careful interpreter of 
American history does not know that the arduous struggles 
with a rebellious soil and an inhospitable climate caused the 
American of a century ago to turn to government whenever he 
thought he might secure help ? State roads, state canals, state 
railroads, state bounties, state enterprises of all kinds suited to 
the needs of the settlers were the order of the day. When, 
however, the mountains had been crossed and the fertile valleys 
of the Middle West, with abundant rainfall and a genial climate, 
had been reached, there came a wondrous change. Conscious 
of their new opportunities, the citizens now desired only to be 
let alone in their quest for prosperity. Private initiative 

§ 1 6] Geological Conditions. 39 

replaced government assistance and the age of corporations 
was ushered in. Insensibly the theory of governmental func- 
tions changed, and the doctrine of iaissez /aire carried all 
before it. The theory of individualism was a natural result of 
the economic, and at bottom of the climatic, conditions of a 
new environment. 

While the climate is one of the causes that influence the 
earth's surface, the economic life is profoundly affected by the 
entire geological formation. In the first place we have the 
fundamental fact of altitude, including the distinction between 
mountain and valley, coast and plain, with their varying degrees 
of production. Furthermore, upon the chemical ingredients 
and the physical constituency of the soil rests in last analysis 
its original fruitfulness. The difference between the soil of the 
black belt and the hill lands of Alabama explains the varying 
aspect of the negro problem there ; and in like manner the 
contrast between the arable and the grazing lands of the Far West 
enables us to comprehend the economic and political conflicts 
between the farmer and the ranchman. 

Of still more importance than the surface of the earth is 
what lies beneath the surface. There are writers who interpret 
the entire progress of humanity in terms of the metals. While 
this is assuredly an exaggeration, there is no doubt that the 
metals have played a dominating role in the history of economic 
progress. In more primitive times the advance of civihzation 
was in many places in large measure bound up with the copper 
and tin deposits. Even at present, with the active interchange 
of commodities, the mineral wealth in the shape of copper and 
iron fields, gold and silver mines, lead and tin deposits, goes 
far to explain the preponderance of the fortunate countries or 
sections where they are found. If we add to the metals the 
coal, the diamond and the oil fields, we shall readily recog- 
nize the enormous influence exerted, especially in modern 
times, by the existence of these mineral treasures in such 
places as Colorado, Pennsylvania, Western England, and South 

40 Natural Environment. [§ 17 

17. The Flora, the Fauna and the Gheographical Location. 

The character and extent of the vegetable and animal life 
are a result of the climatic and geological conditions that have 
just been mentioned. Upon the union in proper proportions 
of rain, sun and chemical ingredients of the soil depends the 
possibility of raising all the staple crops like hay, wheat, 
cotton, rice, tobacco, sugar, coffee or tea, or of obtaining the 
timber, rubber, cork and other products of the forest. The 
American Indian civilization was built up to a large degree 
on maize, as that of the Asiatic Indian largely rested on rice. 
If cotton was king in the South before the war, wheat and hay 
were to a great extent the monarchs in the North. The con- 
trol of these natural resources is responsible for many of the 
mutations of nations. To give only two examples : the strug- 
gle for the spice islands of the East is the key that unlocks the 
mysteries of the European political contests of the sixteenth 
and seventeenth centuries ; the sugar situation in Cuba led to 
the revolution which brought about our recent Spanish war, 
and thus indirectly the expansion of the American republic 
into imperialism. 

Of at least equal importance in early economic progress 
is the existence of animals that can easily be domesticated. 
The fact that the horse, the cow and the sheep were found in 
Asia rendered possible the transition from the hunting to the 
pastoral stage and laid the foundation of the later economic 
edifice of the more advanced Asiatic and European races. 
For these animals subserved the various ends not only of food 
supply and provision of clothing, but of means of locomotion 
and above all of beast of burden. Their absence in recent 
geological periods in America was perhaps the chief cause of 
the backwardness of the Indians. Where a relatively advanced 
civilization was reached, as by the Incas in Peru, it was in great 
part due to the existence of the llama, although the inferiority 
of this animal to the horse, the cow and the sheep explains in 
large measure the backwardness of the South American civili- 

§ 17] Geographical Location. 41 

zation. In Australia there was not even this resource, for the 
kangaroo could not be utilized and the blackfellow remained 
a savage. 

In contrast to the flora and fauna which are of importance 
from the first, favorable situation, although it also plays a role 
from the outset, becomes of signal importance in the later 
stages of economic life when commerce has developed. Prox- 
imity to the sea, possession of a safe and ample harbor, loca- 
tion on a river, — all these explain the maritime supremacy on 
which so much of past civilization has rested. It is no mere 
accident that the world's progress centred for many centuries 
around the Mediterranean, and that Egypt, Greece and Rome 
in turn controlled for thousands of years the destinies of the 
human race. Passing over the mediaeval Italian seaports and 
the German Hansa towns, it is again significant that the two 
greatest metropolitan centres of the world to-day, London and 
New York, have attained their position chiefly because of their 
maritime importance. Some writers have even gone so far as 
to maintain that all civilization can be expressed in terms of 
the great rivers and seas. Of the twenty largest cities of the 
United States, nine are found on the seacoast, five on the 
Northern lakes, and five on the Mississippi and Ohio rivers. 

It would, however, be a mistake to lay too much stress upon 
mere water communication. Trade conducted on terra firma 
has played a scarcely smaller role. Many a populous city is 
nothing but the development of a cross-roads village, become 
the busy mart of transit on a great thoroughfare. The centres 
of the Babylonian and Assyrian civilization of old were largely 
of this character ; and to a similar favorable inland situation 
must we ascribe the prosperity of numerous cities in all parts 
of the world to-day, such as Berlin, Manchester (England), 
and Denver, especially where the rivers are few or small. A 
distinguished French author, Demolins, has even ventured to 
explain the existence of the primary social types of humanity 
by the land routes which the various nations traversed in the 
course of the long migrations from their ancestral home to 

42 Natural Environment. [§ i8 

their present abodes. However exaggerated this insistence 
upon a single factor may be, there is Httle doubt as to the car- 
dinal influence of location upon commercial opportunities. 

With the further development of economic life, commerce 
becomes a handmaid not only to agriculture but to industry. 
The industrial centres are dependent not only on the commer- 
cial facilities for disposing of their products, but also upon the 
ease with which they can secure the raw material and cheap 
power. Contiguity to the coal and iron fields explains the 
growth of the great steel industries. The presence of local 
water power made possible the early centres of the textile 
industries in New England, as well as the rapid growth of 
Minneapolis in milling. The grain fields of the Middle West 
are responsible for the breweries in the Western and the distil- 
leries in the Eastern States adjoining the Mississippi. The 
slaughtering and meat-packing centres have gradually moved 
west with the change in the ranching frontier, and the incipient 
industries of the Pacific slope are still largely determined by 
their propinquity to the forests, the orchards or the river 


18. Changes in Environment. 

While man is thus subservient to nature in his economic 
activities, the subjection is not complete. In fact the distin- 
guishing mark of difference between men and animals is that 
while the natural environment moulds all living things, man 
alone can to some extent modify the environment. This 
partial control of economic resources depends on the spread 
of intelligence, the growth of technique and the command 
that science gives over the forces of nature. 

Of all the natural conditions the climate is the most difficult 
to alter. Yet even here a beginning has been made. We pass 
over with a mere mention such minor points as the mitigation 
of the effects of undue heat through the introduction of artifi- 
cial ice, or the creation of the proper atmospheric conditions 
in certain factories. More significant are the effects of forestry 
and irrigation. It is now coming to be recognized that forests 

§ i8] Changes in Environment. 43 

play an important role, not so much in affecting the rainfall, as 
in equalizing the flow of the rivers and thus obviating the sudden 
alternations of inundation and drouth with their devastating 
effects on cultivation. The afforestation of treeless lands and 
the reforestation of denuded hillsides are at present a part 
of the economic policy of every careful government. The 
marked increase in the American forest reservations, state as 
well as national, is therefore a subject for congratulation. 

The conditions of moisture are further affected by the 
drainage and reclamation of swamps and marshes. Prominent 
illustrations of such effects are visible in the English fens and 
the once submerged, but now dyke-protected, lands of Holland. 
The history of the Italian Maremma, again, shows the alternate 
consequences of neglect and intelligent effort on cHmate and 
soil. Even greater results can be achieved by diminishing 
aridity rather than by decreasing excessive moisture. Irrigation 
was practised by the Babylonians, the Persians and other na- 
tions of antiquity, and on a somewhat larger scale by the Arabs 
of mediaeval Spain. The recent damming of the Nile by the 
British constitutes perhaps the high-water mark of modern 
achievement. It is in the United States, however, that the 
greatest conquests of irrigation are to be expected. With the 
gradual exhaustion of the arable area in our public domain the 
demand for a reclamation of the so-called arid lands has been 
urged with increasing intensity. The success of the Mormons 
in Utah and the efforts of a few private companies in California 
and elsewhere in converting the desert into a smiling and 
exuberantly fertile district have shown what can be accom- 
plished. The Newlands law of 1902 which set aside for irri- 
gation purposes under national control the large sums to be 
derived from the sales of public lands marks the beginning of 
a new epoch in American history, for it will ultimately lead 
to the recovery of several tens of milHons of acres and to the 
influx of corresponding millions of settlers. 

The nature of the soil as affected by geological conditions 
is, as we have seen, of momentous significance. Yet nothing 

44 Natural Environment. [§ i8 

is more certain than the great influence of human effort on the 
character of the soil. Just as the best land can become the 
poorest through wasteful cultivation, so the worst land can be 
converted into the most fruitful. The application of manures, 
both animal and mineral, and the replacement of an extensive 
by an intensive cultivation with the proper rotation of crops 
will soon change the chemical ingredients of the soil. The 
problem is not one of technical possibility, but of economic 
profit. Up to this time there has been in the greater part of 
the western world such an abundance of successively fresh 
tracts of land that adequate returns have been achieved by the 
extensive methods of cultivation involving only the most super- 
ficial tillage. Even the so-called more intensive cultivation 
has denoted only the slightest application of capital to land. 
In the Oriental countries, on the other hand, the ignorance of 
scientific agronomy has made intensive culture depend almost 
wholly upon the hand and not the head. What is really meant 
by the possibilities of the application of science and capital 
to agriculture, in some such proportions as they are now 
utilized in industry, may be faintly discerned in the garden 
patches and truck farms in the neighborhood of great cities. 
In certain parts of Europe, in fact, the tenant on the expira- 
tion of the lease has the right of carting away with him a 
certain depth of soil. The land itself is thus coming to be in 
a sense the product of human energy. 

While the existence of the flora and the fauna ultimately 
depends on the physical environment, there is a large margin 
of indifference within which old species may be reintroduced 
or new ones made to flourish. Many plants in all parts of the 
world are not indigenous. To mention only a few American 
products, rice and cotton in the South, the sugar beet and the 
alfalfa in the West, as well as all kinds of vegetables and fruits 
throughout the length and the breadth of the land, have been 
introduced by human agency from abroad ; and the experiment 
stations are constantly at work improving the seed. To pass 
from plants to animals, there is no need of pointing out the 

§ 19] Changes in Location. 45 

marvellous results accomplished in bettering the breed and 
economic efficiency of the horse, the ox and the sheep, 
none of which were found here in the age of Columbus. 

19. Changes in Location. 

By far the most important achievement of man in altering 
the natural environment is to be seen in his success in over- 
coming the influences of location. This has been effected 
through a threefold improvement in the methods of trans- 
portation and communication, that is, the transportation of 
commodities, the transmission of power and the communi- 
cation of ideas. 

(i) Upon the transportation of commodities has depended 
the growth of all internal trade and international commerce. 
The very conception of commerce involves the transfer of the 
superfluities of one section to the consumers of another, that 
is, the weakening or the annihilation of distance as an eco- 
nomic factor. So long as commerce was dependent upon 
the sail-boat or the slow-moving beast of burden, this annihi- 
lation of distance found its well-defined limits in the cost and 
time of transportation. With the invention of the canal and 
the application of steam and electricity to land and sea trans- 
port, a revolution was effected in the saving of cost and time, 
and perishable as well as bulky commodities were now brought 
within the range of both ordinary and distant trade. The 
railway has largely replaced natural advantages of situation by 
artificial ones. A town on the railway line is for all economic 
purposes nearer the market than another off the line, even if 
possessed of a better natural location. A competitive centre 
at the junction of several roads enjoys a superiority which will 
enable it to overcome a rival more advantageously situated by 
nature but less well served. With the increase of facilities and 
lowering of cost, geographical situation is yielding to the facts 
of artificially created location. 

Changes in transportation facilities accordingly are largely 
responsible for the growth and decline of cities, sections and 

46 Natural Environment. [§ 19 

nations. With every shifting of trade routes, communities 
advance and recede. Again to confine ourselves to recent 
history, the completion of the Erie canal in 1825 gave to New 
York, then a city of secondary importance, a position of undis- 
puted pre-eminence ; the construction of many a railroad threw 
into decay the villages on the old post-roads not served by 
the new lines; the piercing of the Isthmus of Panama by the 
interoceanic canal will have the most far-reaching conse- 
quences on the industrial efficiency of the- South and the 
prosperity of Great Britain. 

(2) If transportation of this kind is so potent in affecting 
the distribution of commodities and thus, by providing a 
market, indirectly influencing their production, changes in the 
transmission of power are equally effective in their direct 
influence. So far as power is the result of fuel, whether coal, 
wood or oil, it might be claimed that the transmission of power 
is tantamount to the transportation of the commodities out of 
which the power is generated. The recent application of 
electricity, however, bids fair to revolutionize modern industry, 
not only by reducing cost, but by virtually overcoming distance. 
Through transmission of electricity water power is no longer 
limited in its beneficent results to the localities in the imme- 
diate neighborhood. With the gradual extension of the prof- 
itable area of such transmission, we may expect to witness a 
great change in the geographical dependence of industrial 
centres. Moreover, if the day-dreams of certain scientists 
are ever realized, so that in the not distant future we shall 
be able to pick up electricity from the surface of the earth, the 
last link in the chain of the industrial advantages of natural 
location of power will be destroyed. 

It must also not be forgotten that power in industry includes 
not only mechanical power, but human power. The provision 
of the labor force itself is vitally affected by changes in the 
facilities of transportation. In a modern metropolis it may 
be of comparatively little importance whether it takes a few 
hours more or less to transfer commodities to the home or the 

§ 19] Changes in Location. 47 

factory. Beyond a certain limit, however, almost every minute 
counts in the time required for the human worker to reach his 
home. The introduction of electric transportation prodigiously 
augmented the possible size and industrial power of modern 
cities, but the bringing of the suburbs within the city limits 
has greatly affected values, and changed the relative advan- 
tages, industrial as well as domestic, of outlying and inter- 
mediate areas. There is a well-nigh kaleidoscopic change 
going on in the conditions of geographical location. 

(3) Finally, the communication of intelligence has played 
its part in reducing the significance of geographical location. 
The post, the telegraph and the telephone have co-operated 
with other economic factors in giving to the modern market 
an international character. The least change in the visible 
supply of wheat in Minnesota or of cotton in Texas is reflected 
in the market at Liverpool. Any alteration in the conditions 
of the tobacco yield in Java or of the tea crop in China is felt 
in the exchanges of New York. But, above all, the dependence 
of particular sections or countries upon mere location has 
been weakened in a special sense by the spread of modern 
science. Science is international in its workings ; the utili- 
zation of discovery and invention is no longer the exclusive 
possession of a favored nation. The whole world is becoming 
akin in production, as in consumption. 

Thus it is clear that while external nature still plays its 
fundamental role in explaining the economic life of man, the 
progress of civilization is utilizing in countless ways certain 
natural forces to counteract and to minimize the influence of 
other natural forces. Nature at bottom remains the mistress, 
but man can within certain limits emancipate himself from the 
bondage, and secure a mastery which will insure prosperity 
and progress. 


20. References. 

C. D. Wright, Practical Sociology (Am. Citizen Series, 1904), chs. ii, v, 
viii ; R. Mayo-Smith, Statistics and Sociology {1895), part i ; A. F. Weber, 
Growth of Cities (1899), chs. iii, v, vi ; Twelfth Census, volumes on Popui 
lation ; W. F. Willcox, A Discussion of the Increase of Population (Twelfth 
CtnsnSr Bulletin, No. 4, 1904) ; U. S. Industrial Commission, Report, XIX 
(1902), 1-13; Tenement HouseDepartmentof New York City, First Peport 
(2 vols., 1904) ; W. Ogle, On Marriage Pates and Marriage Ages (Jour. 
Stat. Soc, LIII, 1890) ; J. Bertillon, Morbidity and Mortality according to 
Occupation {Ibid., LV, 1892) ; F. S. Crum, Marriage Pate in Massa- 
chusetts (Am. Statist. Assoc. Publications, V, 1896), and Birth Pate in 
Massachusetts (Quart. Jour. Econ., XI, 1897) ; R. R. Kuczynski, The 
Fecundity of the Native and Foreign Born Population in Massachusetts 
{Ibid., XVI, 1902); J. Tioxizx, Malthus and his Work (1885); H. Spencer, 
Principles of Biology, part vi, ch. xii ; S. N. Patten, The Law of Popula- 
tion Restated (Pol. Sci. Quart., X, 1895) ; F. A. Fetter, The Essay of 
Malthus (Yale Review, VII, 1899) ; E. A. Ross, Foundations of Sociology 
(1905), ch. ii; J. B. Clark, Essentials of Economic Theory (1907), ch. xix. 

21. Density of Population. 

While the problem of external nature is primarily physical, 
that of population is principally biological and sociological. 
Population, however, also has its economic aspects. It touches 
the field of production in so far as there is a relation between 
the size and constitution of the population and the creation 
of wealth ; it affects the subject of distribution because with 
a given quantity of production, the per capita dividend will 
obviously be influenced by the size of the divisor. 

The subject falls naturally under the heads of the status 
and the movement of the population. By the status of the 


§ 2i] Density of Population. 49 

population are meant its density and distribution ; under the 
movement of population we have to consider its increase and 
its mobility. 

The density of the population is conditioned by the charac- 
ter of the economic resources and the degree of economic 
development. That is, it depends not only upon the external 
environment, but upon the use made of it by man. The 
density and distribution of population as dependent upon 
drainage, altitude, temperature and humidity, which play a 
considerable role in the tables of the American census, may 
be passed over here as referable to the influence of the natural 
elements. The human element, by transforming the environ- 
ment, becomes the increasingly important factor in economic 
progress. It is manifest, for instance, that the hunting stage 
can support less inhabitants to the square mile than the 
pastoral, and that an agricultural population must be more 
thinly scattered than a population engaged in industry. In 
an agricultural community, again, the density of the population 
will vary with the character of cultivation. Population is in- 
deed conditioned by food supply ; but food supply depends 
not only upon the number of acres but upon the product per 

When a community is no longer self-dependent, and carries 
on exchange with another, greater inequality in the density 
of population becomes possible. Industrial and commercial 
communities barter their finished products for the raw materials 
of agricultural sections. While the total population still de- 
pends on the total food supply, the surplus food of the agri- 
cultural group is secured by the industrial and commercial 
group, with the result of a greater concentration of popula- 
tion in the latter. Density of population in any particular 
country or section which has outgrown primitive economic 
conditions thus depends not so much on the production of 
food as on the existence of the wealth which can procure food. 
England had all through the middle ages a far sparser popula- 
tion than France, because although they both exported wheat it 


to Population. [§ 21 

was more predominantly agricultural; but in the nineteenth 
century, with the prodigious increase in industry and com- 
merce, England became a food importer and the density of 
the English population soon exceeded that of the French. 
The following table, which gives the number of inhabitants per 
square mile in 1 900-1 901, will show the influence of economic 
conditions on density : 

Belgium 589 Switzerland 207 

England 437 France 188 

Netherlands 4^6 India 167 

United Kingdom .... 344 Spain 97 

Japan 296 Russia 51 

Italy 294 Turkey 33 

Germany 270 United States 25 

China 266 Canada 1.75 

Austria 226 South Australia .... 0.33 

The striking facts here are, first, that a very intensive agri- 
culture combined with a moderate commerce, as in China and 
Japan, can support a population as dense as that of a highly 
developed modern industry ; and secondly, that the greatest 
density is found in those countries, like Belgium, England and 
Holland, which unite very diversified industry with a fairly 
intensive agriculture. The relative capacity of economic 
stages to support population is illustrated by the conditions 
of the United States. The census of 1900, as appears from 
the map opposite page 50, divides the country into six groups 
with a density respectively of less than 2, 2 to 6, 6 to 18, 18 
to 45, 45 to 90, and over 90 inhabitants to the square mile. 
The first group comprises the hunting, trapping, fishing, lum- 
bering and mining sections ; the second includes the grazing 
communities ; the third contains the purely agricultural areas ; 
in the fourth group, still mainly agricultural, commerce and 
manufactures have commenced to make some progress ; while 
in the fifth and sixth groups there is a continually greater 
influence of industry. Computed by states rather than by 
sections, there are eight commonwealths with a density of 
over 100, namely, Ohio, Maryland, Pennsylvania, New York, 



Copyriohi, 1903, by Longmans. Green & Co. Hew York & London. 


[Reproduced from Re} 


jf Twelfth U. S. Cenaus.l 



Copyright, 19 

§ 22] Concentration of Population. 51 

Connecticut, New Jersey, Massachusetts and Rhode Island. 
The conditions in each state are indicated in the chart 
opposite page 52. It thus appears that in some of the 
industrial commonwealths of the United States the density of 
population is about equal to that of Europe. 

22. Concentration of Population. 

Slightly different from the density is the concentration of 
population. This refers to the distribution between city and 
country. A greater density generally, but not necessarily, 
impHes a greater agglomeration. New Hampshire, for in- 
stance, has a greater density of population than California, 
but a smaller urban population. 

The industrial revolution during the nineteenth century and 
the changes in transportation and commerce by which it has 
been attended are chiefly responsible for the drift of popula- 
tion to the cities. In 1790 3.14 per cent of the American 
people lived in cities of 1 0,000 and more ; a century later the 
seven colonies of Australasia with almost precisely the same 
population as the United States of a century earlier had 33.20 
per cent living in such cities. In 1790 3.40 per cent of the 
population of the United States lived in cities of 8,000 and 
over; in 1900 this proportion had grown to 33.1 percent. 
If we include in urban population centres of 4,000 people, the 
percentage is 37.3. In several states it is far higher. Taking 
the states whose urban concentration exceeds that of the aver- 
age for the entire country, the percentage of the population 
living in cities of at least 8,000 is as follows : Colorado, ^8 ; 
New Hampshire and Ohio, 39 ; Delaware, 41 ; California, 44 ; 
Pennsylvania, 46 ; Maryland and Illinois, 47 ; Connecticut, 53 ; 
New Jersey, 61 ; New York, 69 ; Massachusetts, 76; Rhode 
Island, 81. With the exception of Colorado, the chief seat of 
mining activity, it is obvious that these are all industrial and 
commercial centres. In a few states the urban concentration 
even equals or exceeds that of England and Wales, which 
amounted in 1901 to 68 percent in towns over 10,000, and to 

52 Population. [§ 22 

77 per cent in towns over 3,000. Of the other European 
countries Belgium and Holland alone slightly exceed the gen- 
eral average for the United States, while that of Germany is 
about the same, and that of France somewhat less. 

Within the cities themselves the concentration differs in 
various quarters in almost as marked a degree as it does in the 
different parts of a country. The business sections have 
chiefly a day population, the fine residential quarters a com- 
paratively low density, the crowded slums an exceedingly high 
concentration. Although the recent application of electricity 
to transportation has enormously extended the suburban area, 
there are still sections where the congestion in the centres 
increases from year to year, seemingly unafTected by rapid 
transit. In the tenth ward of New York, for instance — 
the most densely populated area of the civilized world — the 
numbers per acre which amounted to 524 in 1890 rose to 670 
in 1904 ; while according to the census made by the Conges- 
tion Exhibit in 1908 eleven blocks had a density of over 1,200. 
Compared with these, the highest European figures seem in- 
significant : Josefstadt in Prague, 485 ; Bonnenouvelle in Paris, 
434 ; Bethnal Green North in London, 365. 

When we reflect that in the United States as a whole over a 
third, and in several states two-thirds or three-fourths, of the 
people now live in cities, and when we notice that the progress 
of agglomeration is unabated, it is apparent that as a result of 
the changing economic conditions the problems of the national 
life of the future are to be in great measure city problems. 
These, however, are largely social and political. So far as 
they are economic in character they fall principally under 
such heads as the influence of city rents on the cost of 
living and rate of wages, the effects of concentration of labor 
and capital on production and distribution, and the con- 
sequences of urban growth upon depopulation of the rural 
districts and the scarcity of farm labor. Some of these will 
be discussed later. 


Note-.— This diagram does not include the District of Columbia, wlilch had 
4,Gi5.3 inhabitants to the square mile in 1900. 
25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 
































N. DAKOTA.... 










: Reproduced from reports oC Twelfth U. S. Census. 

§ 23] Distribution of Population. 53 

23. Distribution of Population. 

The other facts of distribution of population which have 
important economic- bearings are those of sex, age and occupa- 
tion. The percentage of females affects the labor market to 
the extent that women are wage-earners, while a considerable 
predominance of either sex not only influences marriage and 
fecundity but exerts an effect on social life in general. Under 
normal conditions in modern times there is a slight excess 
of females, in Europe about 1,064 females to 1,000 males. 
Although the birth rate of males exceeds that of females, there 
is generally a greater mortality among males, due in part to 
their more dangerous occupation, in part to their more un- 
regulated life. In less civilized older countries there is usually 
an excess of males, owing in all probability to the fact that 
more of the arduous labor there falls to the lot of the women. 
In new countries like America there is also a slight excess of 
males, ascribable chiefly to immigration, the percentage being 
51.2 males to 48.8 females. The contrast between the older 
and the newer sections is marked, Massachusetts having an 
excess of females (51.3 percent) while Wyoming has only 
37.1 per cent. That the causes affecting distribution by sex 
are largely economic is shown by the fact that in industrial 
and commercial centres, whether American or foreign, where 
the hard work and nervous strain fall chiefly on the men, the 
preponderance of females is always accentuated. 

Distribution by age has important social and political as- 
pects, especially as affecting the school, the voting and the mili- 
tary population.^ For economic purposes, however, the chief 
classification is that of the working population. Although 
the proportions of the productive classes vary considerably 
according to the conditions of child labor, the commonly ac- 
cepted limits are 15 and 65 years respectively. As has often 

1 Of the seventy-six millions of people in the United States in 1900, 
twenty-six millions, male and female, were of the school age (between 5 
and 20), twenty-one millions, male, of the voting age (over 21) and 
sixteen millions, male, of the militia age (18 to 44). 




been pointed out and as is illustrated by the chart below, 
the distribution by age may normally be compared to a pyra- 







/ 1 

y / 








■ h 






















y J 

\ 's^ 




o o 
in each »« '^ 


§ § 

Triangle X X represeuts an imaginary population completely stationary, increasing 
annually by a constant number of births and decreasing by an equal number of deaths 
distributed in a precisely equal degree among the various age groups. 

Figure A A represents a population about stationary, with a low birth rate, a low 
death rate and with little immigration or emigration. 

Figure B B represents a population with a high birth rate, a high death rate and much 

American conditions would be represented by a combination of the upper part of A 
and the lower part of B, making the curve look like a top. 

mid, with the infants at the bottom and the aged at the top. 
Where population increases rapidly, the base is broad ; where 
it increases slowly, the base is narrow and the upper part of 

1 From Levasseur, La Population Franfaise, Vol. II (1891), pp. 257- 


Increase of Population. 


the pyramid representing the older classes, bulges out, making 
it bell-shaped. Similar results are caused by migratory move- 
ments. In the case of a large immigration the middle-age 
classes expand and the curve may be compared to a top ; in 
the case of emigration the curve sinks in the middle and looks 
like a spindle. It is owing chiefly to this fact that in the in- 
dustrial states as well as in the urban centres, the curve is like 
a top, that is, with the largest proportion of productive classes. 
The difference between industrial and non-industrial states is 
illustrated in the following table of distribution by ages ar- 
ranged by percentages : 





United States . ....!. 






Massachusetts had almost ten per cent more of the productive 
classes than South Dakota. A similar lesson is enforced by 
foreign statistics. 

Distribution by occupation naturally follows very closely the 
utilization of the economic resources. Comparative statistics of 
different countries would therefore be meaningless. In the 
United States the tables on page 56 show the great increase in 
the industrial classes, and throw an interesting light on the 
relative importance of the various industries from the point of 
view of distribution of the population. 

24. Increase of Population. 

The increase of population is normally dependent on the 
existence of marriage. To the children born in wedlock must 
however be added the illegitimate births, which form in dif- 
ferent countries from 3 to 14 per cent of the whole. In some 
large cities like Paris the percentage is as high as 24, and 
where, as formerly in Bavaria, especially severe marriage laws 




exist, the percentage is even higher. The proportion of single 
persons over 15 years varies from 30 to 50 per cent in dif- 
ferent countries, the percentage in America being 40 for men 





Agricultural pursuits 

Professional service 

Domestic and personal service . . . 

Trade and transportation 

Manufacturing and mechanical pursuits 









Carpenters and joiners 600,252 

Dressmakers, seamstresses and milliners 585,685 

Steam-railroad employees 582,150 

Miners and quarrymen 563,866 

Iron and steel workers 290,611 

Machinists 283,145 

Painters, glaziers and varnishers 277,541 

Cotton-mill operatives 246,004 

Tailors and tailoresses 229,649 

Blacksmiths 226,477 

Engineers and firemen (not locomotive) 223,495 

Boot and shoe makers 208,912 

Saw and planing-mill employees 161,624 

Masons 160,805 

Printers, lithographers and pressmen 155.147 

Tobacco and cigar operatives 131,452 

and 31 for women. If, however, we more properly take the 
people between 40 and 60 years as the class that one would 
usually expect to see married, we find that the single persons 
constitute only 12 to 15 per cent of the whole. In the Ameri- 
can cities the proportion of single persons is larger, owing 

1 Exclusive of merchants, clerks, draymen and agents. 

§ 24] Increase of Population. 57 

partly to the postponement of marriage and partly to the large 
immigration of young unmarried persons. The normal mar- 
riage rate in most countries varies from 14 to 18 married 
persons annually for each thousand of the population, with 
considerable variations due to general economic conditions. 
Periods of depression, for instance, naturally diminish the pre- 
disposition to marriage, while on the other hand when the 
conditions for the employment of women are favorable, as in 
some of the New England towns, the marriage rate is excep- 
tionally high. 

Of almost more importance than the frequency of marriage is 
its fecundity. When we compare the number of births with the 
population as a whole, we speak of a crude birth rate ; when we 
compare the births with the number of women of child-bearing 
age (15 to 50 years), we speak of a refined or corrected birth 
rate. The average number of children to a family varies in 
different countries from 3 to 5. In the same country the 
fruitfulness depends not only on color and nationality, as in 
the United States, but also on social and economic conditions, 
according to the sway of prudential considerations. It is a 
notorious fact that the greatest fecundity is found in the poorer 
classes. It is now also well established that birth rates, like 
marriages, differ at present in cities of the same size according 
to the prevailing industry or occupation. The birth rate per 
thousand of the population as a whole ranges from the excep- 
tionally low figure of 22 in France to almost 50 in Russia and 
India. In the United States it is above 35, but falling rapidly 
in the Eastern states. In large parts of New England, in fact, 
the birth rate of native parents is lower than in France, so low 
indeed that were it not for the far greater fecundity of foreign 
parents there would be less births than deaths. 

The increase of population depends, as has just been inti- 
mated, not only upon the birth rate but upon the death rate. 
It makes a great difference to social progress whether a slow 
increase of numbers is due to the one or to the other cause. 
Whatever may be the conclusion as to the desirability of a low 

58 Population. [§ 24 

birth rate, there can be only one opinion as to the undesira- 
bility of a high death rate. In modem times, at least, civ- 
ilization endeavors in every way to arrest mortality and to 
prolong human life. 

It is quite unnecessary to fortify by statistical data the 
familiar fact that deaths vary according to seasons, age and 
sex. In hot countries the summer, and in cold countries the 
winter, are the most dangerous ; in all places infant mortality 
is by far the greatest ; and almost everywhere the male death 
rate slightly exceeds the female. In making comparisons we 
must again observe the distinction between the crude and the 
refined rate. The ordinary basis is the number of deaths per 
thousand of the population. Since, however, the rate varies 
with sex and age, the comparison is accurate only when made as 
between the same proportions of sex and age. A rate reduced 
to such proportions is called the refined or corrected death 
rate. Otherwise a country with a relatively larger number of 
children would have a higher death rate. For general pur- 
poses, however, it has been found that the results of computing 
according to the crude or to the refined death-rate method 
do not differ sufficiently to change the relative standing of 
countries. In the American statistics still further accuracy is 
sought by correcting the death rate for race as well as age dis- 
tribution. Using the crude figures, the normal death rate in 
modern communities now varies from 1 7 to 21 per thousand, 
the former being the figure for the United States in 1900. In 
the cities it is considerably higher than in the country, the 
rural rate sometimes being as low as 14 or 15, and the urban 
rate occasionally ascending in unhealthy American cities to 35 
or even 50. The death rate has been markedly reduced in 
recent times by the progress of science in controlling disease, 
by the growing infrequency of war, and by the economic 
changes which have virtually eliminated famine, except in 
relatively backward countries like Russia and India. The 
greatest improvement, however, has taken place in the urban 
death rate, owing to the immense strides in modern sanitation. 

1300 ' 













2 = 5J « 2 5 ^ i; 2 3 S S 2? 3 :? S S is ^ S § S § § 3 3 S 5r 5 5 









(To year ending Dec. 31, 1855 figures show alien passengers arrived; 
after year ending Dec. 31, 1855, innmigrants arrived.) 


after deducting alien departures, ooooooooooooooo 

(From 1899 to 1907 the figures are official estimates; 
from 1908 the figures are actual.) 


TO 10.000 POPULATION +.4.+,++.4.+.++. 




























































































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1800 1810 1830 1830 1840 1850 1860 1870 1880 1890 1900 







1800 TO 1900. 





1800 1810 1820 1830 1840 1850 I860 1870 

From Reports of Twelfth U.S. Census, Statistical Atlas. 

1880 1890 1900 

§ 25] Migration of Population. 5g 

food and milk inspection, housing improvement and park de- 
velopment. Within a century the death rate of Vienna has 
fallen from 60 to 23 ; within twenty-five years that of London 
from 50 to 25 ; and within half a century that of New York 
from 32 to 20. In fact, selected cities in certain countries 
now show a death rate even lower than in rural districts. 

25. Migration of Population. 

The final factor which affects changes in the population is 
migration. Internal migration from place to place as well as 
from occupation to occupation is the chief manifestation of the 
modern mobility of labor. In former times custom, caste, 
settlement laws and the like interposed serious obstacles to 
such movement. Now, under the pressure of the economic 
motive, population shifts with opportunities of bettering one's 
condition. Migration between countries assumes the form of 
emigration and immigration. While immigration swells the 
population of new countries, emigration only rarely diminishes 
the population of an old country ; for the gap caused by the 
emigrants is soon filled by the results of an increased birth 
rate due to the improved opportunities at home. Ireland is 
for special reasons a striking exception. 

Where people emigrate to places under the control of the 
mother country they form colonies. Colonies, however, are 
not only colonies of occupation, to afford an outlet for surplus 
population, but also colonies of exploitation, to furnish a vent 
for surplus production of commodities. In modern times we 
may even speak of a third kind of colonies like those of the 
United States, where the aim is neither emigration nor exploi- 
tation, but rather the political and economic elevation of the 
indigenous population. 

If we assume with the anthropologists one original habitat 
for the human race, practically all populations are composed 
of immigrants or descendants of immigrants. Formerly 
the migration was one of tribes or nations; now it is one 
of individuals. In the older civilizations these wholesale 

6o Population. [§26 

immigrations even of individuals have long since ceased. In 
countries like the United States, however, the movement is still 
in progress on a gigantic scale, probably for the last time 
in human history. Although the immigration has increased 
largely for the past half-century, it has not grown appreciably 
faster than the native population. The foreign born con- 
stituted 13.2 per cent of the total population in i860; and 
while the proportion rose slightly in the succeeding decade, in 
1900 it was again about the same — 13.7 per cent. This is 
contrary to the current opinion, but is none the less a fact. It 
is clearly shown on the maps and charts opposite pages 58, 
60 and 62, which also illustrate the great increase in recent 
years of immigrants from the South and East of Europe as 
well as the composition of the population in 1900. 

By combining the natural increase with that due to migra- 
tion we arrive at the total increase of population. Up to the 
civil war the population of the United States grew slightly 
more than a third every ten years. Since 1880 the decennial 
rate of increase has diminished, being about 25 per cent for 
the decade ending 1890, and about 21 per cent for that end- 
ing 1900. Notwithstanding this diminution in the rate of 
increase, it is exceeded only by Argentina, where the rate is 
approximately as large as that of America before i860. In 
Europe the rate of increase is only about one- half of that of the 
United States ; but while it is falling in the United States it is 
rising in Europe. On the chart opposite page 59 will be found 
a statement of the comparative increase of population in some 
of the more important countries during recent decades. 

The excess of births over deaths and the rate of increase in 
a few typical countries for 1900 are given in the table on the 
following page. 

26. The Law of Population. 

The chief problem in the increase of population is its rela- 
tion to prosperity. The so-called law of population, as framed 
by Malthus at the close of the eighteenth century, asserts that 








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o o 

tr I- 














































D D 
















5 26] 

Law of Population. 


there is a tendency of population to increase faster than the 
means of subsistence, and that this pressure of population on 
food, unless removed by preventive agencies, will lead to the 
positive checks of misery, vice and crime, by which alone the 



Excess of 

Per cent of 




United States . . 
England and Wales 
Germany .... 



Hungary .... 

30. 1 











equilibrium will again be restored. Three conclusions were 
drawn from this doctrine, applicable respectively to socialism, 
to wages and to economic progress. 

( I ) The first point is the one which originally set Malthus 
thinking. Some of the French idealists and their English 
followers had been advocating equalitarian or communistic 
schemes of social regeneration. Malthus contended that the 
pressure of population on subsistence would effectually pre- 
clude any such ideal consummation. (2) Again, although 
this came somewhat later, it was claimed that wages depend 
upon demand and supply, and that it was therefore hopeless 
for the laborers to fexpect more than a bare minimum wage 
unless their numbers were checked. (3) Finally, it was as- 
serted that economic progress in general was seriously men- 
aced by the danger of over-population, and it was contended 
that this could be averted only by the extensive application of 
prudence and self-restraint, — remedies in the efficacy of which 
Malthus himself had not much confidence. ^ ^ 

In the original framing of the principle, Malthus maintained 
that the ratio of increase was at best arithmetical in the case 
of food, but geometrical in the case of population. While the 
accuracy of these ratios has been successfully disputed, it still 

62 Population. [§ 26 

remains a question as to whether population really tends to 
increase faster than food. So far as food is concerned, there 
is no doubt that there are definite limits to its increase, even 
though these limits are more elastic than were originally 
thought. The area of cultivation may be extended, im- 
provements of all kinds may be applied, hitherto unsuspected 
forces of nature may be utilized ; but in the end, as we shall 
see, the law of diminishing returns, which was not at first 
thought of by Malthus, will make itself felt. 

With reference to population, however, two considerations 
have been advanced to offset the contentions of Malthus, — 
the biological and the socio-economic arguments. The bio- 
logical argument asserts that the power of reproduction itself 
diminishes with more complex and civilized beings, and points 
to the small families of the higher classes and to the increasing 
sterility of the New England women. This argument, however, 
is by no means indisputable ; and it is above all uncertain 
whether the diminishing ratio is natural or artificial, — that is, 
whether or not it is a result of volition. The socio-economic 
argument claims that, as a consequence of general social as 
well as economic reasons, the size of families varies inversely 
with wealth, and thus keeps down the ratio of increase. With 
the poorest classes every child is regarded as a prospective 
bread-winner, and to that extent not only a help in the near 
future but an additional support for old age. This leads to 
early and often improvident marriages and large families. In 
the next stratum of society the demands of education and of 
the maintenance of a social position induce more deliberation 
in marriage, and effectively bar the probability of so numerous 
a progeny. Finally, where wealth is abundant, the desire care- 
fully to train a few rather than to half train many children, as 
well as the wish to escape the nervous strain of a numerous 
offspring, conspire to restrict the number of children. The 
French peasant is not so different from the average American 
or European resident of a large city. The economic motive 
may be slightly stronger with the former, the other social 


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§ 26] Law of Population. 6'^ 

motives slightly stronger with the latter ; but in essence they 
are alike. Here again, however, the argument is not anti- 
Malthusian ; for the phenomena just described are the results 
of prudential considerations, and really fall under the head of 
the preventive agencies mentioned by Malthus. 

It might seem, then, that Malthus was right in his premises ; 
and since the preventive considerations are proverbially weak 
in the poorer classes, it might be claimed that he was also jus- 
tified in his gloomy forebodings. This conclusion, however, 
does not follow. The real antithesis is proximately at least 
not between population and food, but between population and 
wealth, or productive efficiency. Through a proper organiza- 
tion and utilization of improved methods, production of wealth 
in general may be so augmented as to permit an increase both 
in population and in prosperity. This has happened, for in- 
stance, all through the nineteenth century, even in the older 
countries of Europe ; the industrial revolution has not only 
multiplied national wealth, but has greatly increased popula- 
tion, while reducing misery, vice and crime. It might be 
contended, indeed, that this is exceptional, because the in- 
creased numbers have after all been dependent ultimately 
upon the food supply which they have secured from the newly 
opened areas of North and South America ; and it might be 
added that the population of these countries is increasing 
so rapidly that sooner or later they also will have no surplus 
food to export. Even granting this contention, however, and 
looking forward to the distant time when all the huge and now 
uncultivated areas of the earth's surface will be utilized for 
food production, it still remains true that the increase of 
wealth may for almost indefinite periods keep ahead of popu- 
lation. For, as was intimated in the last chapter, a really 
intensive capitalistic system of agricultural production has 
never yet been attempted on a large scale. If there is enough 
wealth to put into the soil, it can be transmuted into food. 
The diminishing returns from land can be arrested by the in- 
creasing returns of a rapidly augmenting efficiency of industry 

04 Population. [§ 26 

in general. The food may indeed cost more, but there will 
be more wealth with which to buy it. 

Not only can wealth be made to increase faster, but, as we 
have seen, the increase of wealth will in itself set in motion 
those economic and sociological forces which tend to reduce 
the rate of increase of population. Thus from both sides the 
antithesis of wealth and population may be weakened. Under 
favorable conditions population may increase gradually, and 
wealth rapidly. 

It is clear, however, that these favorable conditions include 
those of distribution as well as production. The communists 
against whom Malthus wrote were mistaken, but not for the 
reason alleged by him. They thought that a mere change in 
the distribution of wealth would suffice to bring prosperity. 
They failed, just as the socialists of to-day still fail, to realize 
that even an ideal distribution is valueless without enough to 
divide, and that their schemes would dangerously impair pro- 
ductive efficiency. On the other hand, the wages-fund doc- 
trine of the English classical economists erred, as we shall 
learn, chiefly in that it overlooked the connection between 
wages and production, and took no account of the fact that, 
given a greater productive efficiency, more workmen and 
higher wages are perfectly compatible. 

The problem of population as a whole is, then, not one of 
mere size, but of efficient production and equitable distribution. 
That is, it is a problem not of numbers alone but of wealth. 
Since man is the chief labor force, large numbers indeed, 
other things being equal, mean greater national strength and 
power. But the reverse may be true if other things are not 
equal. A small nation with greater productive efficiency, like 
England, will outrank a more populous country, like India. 
Smaller numbers with a fairly equable distribution of wealth 
are preferable to a dense population living in the extremes of 
misery and opulence. Mere numbers are therefore not the 
vital point. The world has alternated in its opinion and action. 
In classic antiquity, where the absence of advanced industrial 

§ 26] Law of Population. 65 

methods soon set a limit to production, over-population was a 
real danger, tempered first by emigration and then by infanti- 
cide. In the middle ages population was sparse, and yet, 
because of undeveloped production, kept down by famine and 
disease. With the growth of enterprise in the fifteenth and 
sixteenth centuries, increase of population was favored but not 
always secured. The conditions at the close of the eighteenth 
century seemed to lend color to the fears of Malthas ; but for 
well-nigh a century the concern in the advanced industrial 
countries has been not of an unduly rapid but of an unduly 
slow increase of population, until in France to-day it has 
become a problem not of excessive fecundity but of race 

The doctrine of over-population has therefore lost its ter- 
rors for modern society. The stress has been shifted from 
food to wealth and efficiency. Productive efficiency, however, 
depends not only upon character and education, intellectual, 
industrial and ethical, but also upon social organization and 
economic methods. The problem of population, in short, is 
to-day a part of the broader problem of the production and 
distribution of wealth. In this sense it is a result rather than 
a cause. If we increase productive efficiency and secure an 
approach to distributive justice, population will adjust itself to 
the new conditions either by increasing automatically up to the 
level of comfortable subsistence or by being voluntarily kept 
down to that level. 

66 Economic Stages. [§ 28 

Book II. 
Development of Economic Life and Thought. 


27. References. 

C. Biicher, Industrial Evolution (trans, by Wickett, 1901), chs. i-iii; 
R. T. Ely, Studies in the Evolution of Industrial Society (1903), part I, ch. 
iii; W. J. Ashley, English Economic History (2 vols., 1888-1893), passim ; 
E. Jenks, History of Politics (1900), Types i, ii; W. Cunningham, Growth 
of English Industry (3 vols., 4th ed., 190 5- 1 907), and Western Civili- 
zation (1900), passim; J. A. Hobson, Evolution of Modern Capitalism 
(2d ed., 1906), ch. ii; E. J. Simcox, Primitive Civilizations (1897) ; O. F. 
Peschel, Races of Mankind (1876); F. Ratzel, History of Mankind (3 
vols., 1896-1B98) ; J. Lubbock, Ra££s of Man (1888) ; and Origin of Civ- 
ilization (1870); L. H. Morgan, Ancient Society (1878); A. H. Keane, 
Man, Past and Present (1899) ; Spencer and Gillen, Native Tribes of 
Central Australia (1899), and Northern Tribes of Central Australia (1904) ; 
A. W. Howitt, Native Tribes of South East Australia (1904) ; O. T. Mason, 
Origin of Invention (Smithsonian \xi's,\\\.\\'dox\. Publications , 1895) ! PG. H. 
Grierson, The Silent Trade (1903), A. Loria, Economic Foundations of 
Society (trans, by Keasbey, 1899) ; G. Schmoller, 77^^? Mercantile System 
(trans, by Ashley, 1896) ; H. de B. Gibbins, Industry in England i,\?^7)\ 
T. Warner, Landmarks in Efiglish Industrial History (1899). 

28. Economic Development. 

Inasmuch as economic life is many-sided, it is not easy to 
single out the fundamental characteristics of its development. 
Most of the current explanations err in one of three ways : 

§ 28] Economic Development. 67 

some mistake the accident for the essence ; some are so in- 
complete as to be of little real use ; some are so general as to 
be either vague or inadequate. 

( 1 ) Of the first class a good example is the division into the 
three periods of barter, money and credit economy. In the 
first period men exchanged their superfluities through the me- 
dium of barter alone ; in the second period money was in- 
vented to facilitate trade ; in the third, credit was devised to 
supplement the money supply. All this is true enough, but 
does not go sufficiently deep. It does not show which is cause 
and which is effect. It does not tell us why these transitions 
occurred, nor explain the basic changes in the industrial organ- 
ization of which these transitions are only the outward forms. 
Of much the same character is the division of economic life 
into the three stages of the animal, the vegetable and the 
mineral economy. In the first period, we are told, men lived 
primarily on the results of the chase ; in the second, on the 
fruits of the earth ; while, in the third, science is continually 
expanding the scope of chemical substitutes for animal and 
vegetable food. It is obvious that even if this statement 
were correct, it would not make clear the fundamental facts 
of economic organization. 

(2) The second class of explanations comprises all kinds of 
half-truths or statements which while true in themselves are in- 
complete. In this category belong Maine's famous law that 
the world has progressed from a condition of status to one of 
contract, and Spencer's law of the evolution from militant to 
industrial society. Of a like nature is the assertion that the 
world has gone through the stages of slavery, serfdom and 
free labor ; or that it has advanced from common to private 
property, or from bimetallism to monometallism, or from cus- 
tom to competition. All such statements may be true and 
even serviceable within a limited field, but for the purpose 
of disclosing the real inwardness of general economic progress 
they are of minor importance. 

(3) The most conspicuous illustration of the third class of 

68 Economic Stages. [§ 29 

explanations is the venerable classification into the five stages, 
— the hunting, the pastoral, the agricultural, the commercial 
and the industrial stage. This description, however, is both 
inaccurate and vague. Not only is hunting not the first stage, 
but the sequence of the stages is not necessarily the one men- 
tioned. Moreover, the generalization is too broad to afford 
much help in the explanation of modern conditions. Rome is 
supposed to have gone through these stages, and yet the later 
Roman civilization differed in fundamental economic respects 
from our own. A version of economic history which would 
throw imperial Rome and modern England into the same 
category is manifestly too broad to be serviceable. Of a 
similar character is the division of economic life into the stone, 
the bronze, the iron and the steel age. The iron age covers 
so many heterogeneous forms of economic civilization that the 
classification is useful chiefly for archaeological purposes. 

Before proceeding, however, to give the more modern ex- 
planation of economic progress, it may be wise to dwell for a 
moment on the last two classifications which, when correctly 
put, still possess a certain use for the early periods of society. 

29. Primitive Technique. 

(i) At the outset and for a long time, man, like his simian 
ancestor, lived on wild berries, nuts, roots and herbs. He 
roamed about, as do some of the Australasians to-day, in small 
groups of twenty to fifty, in alternating periods of plenty and 
want, according to the season or the fortunes of the weather. 
Each group was for the purposes of the food supply entirely 
independent. Primitive man, however, as the physical confor- 
mation of his teeth and jaws shows, was not only herbivorous 
but carnivorous. When geographical reasons favored, he varied 
his diet by fishing, and in many cases he practised cannibalism, 
not only on his enemies, but also on the old and useless mem- 
bers of his own social group. 

(2) The root-grubbing period was, we shall not say suc- 
ceeded, but rather supplemented, by the hunting stage in 

§ 29] Primitive Technique. 69 

certain portions of the world where game was abundant. This, 
however, presupposes a certain technical development. Man 
is distinguished from his prey primarily by the use of weapons 
and tools. The history of civilization is very largely the his- 
tory of technique. There was at first no distinction between 
weapons and tools. The weapon was the only tool for both 
defence and offence. The earliest weapons consisted of objects 
ready at hand, — wooden sticks, animal bones, tusks and teeth, 
pieces of stone. 

(3) The combination of these was one of the great steps in 
advance. It changed the primitive club or missile into a 
moderately effective weapon. The affixing of a flint to a stick, 
or the fastening of jagged teeth to pieces of wood by wisps 
of grass or strips of hide or catgut were the first triumph of 
human ingenuity. The bone and the stone age lasted for 
countless generations. In the course of time implements were 
found serviceable not only for warfare but for the saving of 
toil ; in other words, by the side of the weapon we find the 
tool. In this transition perhaps the mightiest factor was the 
utilization of fire. What was a terror to brute creation became 
a servant to man. Originally obtained from a chance con- 
flagration, the spark of fire was zealously guarded, and was 
soon invested with sacred attributes. In some cases it even 
became the basis of the religion itself. Although we find 
savage races to-day who understand the secret of creating fire 
by friction, the easier method was to ignite the brand from 
the ever-burning flame. The chief function of the vestal 
virgins in Rome was to keep the perpetual fire ; and in the 
Catholic church to-day with its never-extinguished light we 
have the last survival of what was once a fundamental social 

(4) Fire was utilized not only for purposes of warmth, but 

1 The testimony given before the New York gas commission in 
1905 affords another curious illustration of the survival of this custom. 
One of the officials stated that whenever the location of the gas works 
is changed, the fire is transferred by a brand from the old to the new 
building. Under no consideration would a new fire be started. 

7© Economic Stages. [§ 29 

also for the better preparation and conservation of food, thus 
making man less dependent on his immediate surroundings. 
From that time on, although environment still makes the man, 
man to an ever- increasing degree succeeds in changing the 
environment. The most signal service of fire, however, was 
in the improvement of tools. Its uses became most marked 
when metals were employed. Even the tools of wood and 
stone, however, were greatly improved thereby. So slow was 
the development that it took countless centuries for the old 
stone or palaeolithic age to change into the new stone or neo- 
lithic age. We find flint weapons at least 100,000 years old. 
During this transition man had learned to rub, to sharpen, to 
bore, to cut, to plane and to polish the bones and stones so as 
to produce arrows, knives, javelins, hammers, millstones, 
daggers and saws. In all this he was simply imitating the ex- 
perience of parts of his own body : in the saw we have the im- 
proved tooth, in the hammer the strengthened fist, in the 
scoop the enlarged hollow of the hand, in the hook the crooked 
finger, in the javelin the lengthened arm, in the knife the 
sharpened nail. Hand in hand with this went the invention 
of the earliest utensils. From the animal's horn to the beaker, 
from the hollowed wood to the osier basket, from the natural 
gourd to the artificial jug, does not seem so great a step. Yet 
the invention of pottery has been deemed by some so im- 
portant as to constitute a revolution in human civilization. 
Weapons, tools, utensils, — these typify the onward march of 
the human race ; they are the outward technical manifesta- 
tion of man's intellectual progress and the physical basis of his 
economic development. 

(5) From the purely technical point of view the stone age 
was succeeded by that of metal. Without the use of fire for 
smelting this would of course have been impossible. Archae- 
ologists not so long ago thought that the copper and bronze 
ages everywhere preceded that of iron. This can, however, 
be accepted only with qualifications. It now seems probable 
that the rougher forms of iron were utilized before bronze was 

§ 3o] Transition. 71 

invented. In certain countries we find no bronze age at all, 
because of the lack of one or both of the constituent compo- 
nents, tin and copper. In the civilizations that grew up about 
the Mediterranean, however, first copper and then bronze 
drove out the primitive and rougher iron implements, until 
after several centuries the improved extractive processes 
assured the final victory to the finer iron tools and thus insti- 
tuted the true iron age. With the advent of this, man's 
mastery over nature was definitely assured. 

30. Transition from the Lovrer Stages of Civilization. 

It is obvious that metallic weapons and implements would 
be of the greatest service to both hunters and fishers, and in 
truth we find some of the more advanced hunting civilizations 
acquainted with the use of rougher iron. But the continuance 
of the hunting stage, as well as the character of its transition 
to a subsequent stage, depends not so much upon the kind of 
weapon as upon the conditions of nature and the relations of 
population to the land. Under certain circumstances where 
game began to become scarce, it was discovered, at first by 
mere accident, that a less precarious food supply could be 
secured by preserving various animals and caring for their 
increase, rather than by devouring at once the entire product 
of the chase. The domestication of animals was a discovery 
of momentous import, and with their multiplication first for 
food, then for transport, and finally for clothing, protection and 
pleasure, we have the conditions for the transition to the pas- 
toral stage. Although this is often called the nomadic stage 
because of the perpetual shifting of the community in quest of 
fresh pasture, the term is badly chosen, because there is on 
the whole less nomadism than in the hunting age. The chief 
result of the domestication of animals was the assurance of a 
permanent, even though an artificial, food supply, or at all 
events one that depended on the foresight and care of man. 
Cannibalism disappeared and famines became less frequent. 
Another consequence was the possibility of supporting a larger 

72 Economic Stages. [§ 30 

populatioia on the same area. Finally, the permanent posses- 
sion of cattle became an object of desire, and private property 
developed on a large scale, with corresponding differences of 
wealth and of social classes. 

It is, however, erroneous to assume that the hunter was nec- 
essarily succeeded by the herdsman. In the first place animals 
capable of domestication were not found everywhere. On the 
American continent no pastoral life was possible with the llama 
alone. Secondly, whole stretches of land, both in Africa and 
in Asia, were unsuitable for grazing purposes. It is only where 
all the geographical and climatic conditions were favorable, as 
on the great Asiatic and North African plains, that we find the 
transition to the pastoral age. 

In the same way it is erroneous to think that the herdsman 
was everywhere succeeded by the farmer. A certain degree 
of agriculture is often found combined with the hunting or 
fishing stage. In fact, it is only a small step from the original 
root-grubbing to primitive agriculture. When, again presum- 
ably by accident, it was found that the seeds would multiply 
themselves, and that the stick was more effective for grubbing 
than the finger, we have the beginning of the cultivation of 
the soil. Just as human foresight led men under certain con- 
ditions to preserve animals in order to secure an increase, the 
same quality led them under other conditions to preserve 
plants. If flock tending is a result of the domestication of 
wild animals, agriculture is a result of the domestication of 
wild plants. Because of the temporary patch near the hunter's 
tent, some, like Morgan, call this system horticulture ; because 
of the primitive tools, others call it hoe culture. Both terms 
are unfortunate, the one because horticulture (J. e. garden 
culture) at present signifies a very developed form of tilling 
the soil ; the other, because the hoe has even to-day been by 
no means completely superseded by the plough. 

What is reasonably sure is that the primitive tilling of the 
soil was carried on by the hunters' wives and daughters as a 
subordinate and auxiliary means of support. It was only at 

§ 3o] Transition. 73 

a much later period that agriculture acquired more importance, 
and it was not until the game supply had been practically ex- 
hausted that the chief reliance was put on agriculture, and the 
roving hfe of the hunter gave way to the settled habitation of 
the farmer. These periods in agriculture may exist, moreover, 
in connection not only with the hunting stage, but also with 
the pastoral stage. In fact, the most careful investigators now 
believe that the domestication of animals was not an achieve- 
ment of the hunter at all, but of the primitive farmer, and that 
the pastoral life was an outgrowth of early agriculture. Without 
a knowledge of all the details, therefore, it is impossible to 
assert the exact chronological sequence of the stages. 

Much the same may be said of the transition to the later 
stages of commerce and industry. The commercial stage does 
not necessarily follow the agricultural stage, but often precedes 
it. In the case of many coast peoples, the fishing and commer- 
cial stages appear at the same time, without the intervention of 
agriculture. And in more developed civilizations, like that 
of Venice, for instance, we find the pastoral stage develop at 
once into the commercial stage without reaching the industrial 

The time-honored classification of economic progress is thus 
not only inexact in itself, but of comparatively little service in 
explaining the great changes that have supervened since the 
adoption of agriculture. For this purpose a somewhat dif- 
ferent line of cleavage seems desirable. 

If we regard economic conditions from the standpoint of the 
relations of production to consumption — for these are the fun- 
damental economic facts — we may divide the world's history 
into three great stages, known respectively as the self-sufiicing 
economy, the trade or commercial economy and the capitalist 
or industrial economy. From another point of view these may 
also be called the isolated economy, the local or village econ- 
omy and the national economy. These we shall now proceed 
to consider. 

74 Economic Stages. [§ 31 

31. Self-sufficing or Isolated Economy. 

By this term is meant a form of organization where the 
economic unit or household produces everything that it needs 
and consumes all that it produces. In its t3^ical form the 
household raises the raw materials for food and for clothing, 
provides its own shelter and works up into finished products 
everything necessary for its final consumption. What little 
division of labor exists takes place within the household, and 
grows only with the expansion of the household's needs. 
Whether the household is small or large, however, it is always 
a unit by itself; it has normally no necessary relations with 
any other unit. Its economic characteristic is its self-suffi- 
ciency and therefore its isolation. 

This self-sufficing economy assumes many different aspects 
in the course of history. The economic unit may be either 
a family or a larger group. It may rest either on slave labor 
or on free labor. It is the universal form of the beginnings 
of society, in the root-grubbing or hunting stages, and is always 
found in the early periods of the pastoral and agricultural 
stages. It is seen in the frontier life of more advanced com- 
munities, for the family of the backwoodsman in the United 
States is in this respect like the earliest groups known to his- 
tory. It is found in Greece, where the landed estate was 
called the oikos. It is typified in the Roman familia, which 
is the name for the entire possessions of the Roman citizen, 
including his wife, his children, his slaves, his land and all his 
other belongings. It is represented in the manor of mediaeval 
Europe and in the plantation of the American slaveholder. It 
is found even to-day in the Russian mir, or village community, L 
and in some of the Danubian principalities. 

Everywhere the distinguishing mark is the self-sufficiency, 
or home production and home consumption, of the economic 
unit. It is not a question of slavery, for we find the same 
economic form in the mediaeval manor resting on serfdom, 
and in the primitive or still surviving community of freemen. 

§ 3i] Isolated Economy. 75 

It is not a question of autocratic power, for we find it equally 
in the democratic Russian mir and the aristocratic American 
plantation. However different the forms, the essence is the 
same. The landlord, whether a single person or a group, is 
the property lord. The estate forms a complex whole. Pro- 
duction is carried on by the group, and there is no sharp line 
between producers and consumers. The wants of the group 
members are satisfied by their own labor, and not by that of 
some other economic unit. As consumers they are no less 
independent than as producers. 

In the course of time, indeed, the households that possess 
natural or acquired advantages in the production of certain 
commodities learn to raise a surplus, and trade it off to other 
groups for various purposes, — at first propitiatory in character, 
but later in the expectation of securing similar advantages in 
return. In this way barter develops. But at the outset, and for 
a long time, there is no barter, because in a typical, self- sufficing 
economy there is no need of barter. In fact, the exchange of 
commodities seems wrong because it is unnatural. The pro- 
pensity to " truck," which Adam Smith considered natural to 
man, is in reality the outcome of a long evolution. To truck 
is etymologically to trick, just as barter in its original form 
(old French bareter) means to cheat.^ Even when exchanges 
develop, the transactions are always attended by rigid formali- 
ties, often invested with a religious sanction. 

The fact of exchange between the groups does not neces- 
sarily alter the organization of economic life, as long as the 
great mass of commodities are produced and consumed at home. 
Thus, for instance, we find in the later centuries of Greek life 
that many of the estates produced raw materials, and sometimes 
luxuries, to be sold in the cities which enjoyed an active com- 
mercial Ufe. So in Rome during the period of its greatest pros- 
perity, the large estates devoted themselves to some one product, 

1 This meaning has survived in our "barrator," although by a curious 
development it is now confined to the deceitful shipmaster, or to the 
cheating and meddlesome instigator of litigation. 

y6 Economic Stages. [§ 32 

like wine or oil or wheat for export, which was carried on by 
large trading companies. So, again, in the American plantation 
a single commodity, like tobacco or cotton or sugar, raised for 
export and handled in the towns, generally constituted the very 
foundation of its success. It is still true, however, that even 
in these cases the great mass of commodities used at home 
was produced at home. While there was trade between the 
units, there was little if any trade within the units, and while 
exchanges in the bulk even as between the units amounted to 
a large sum, they played a small role in the daily life of each 
household. Just as the plantation and not the towns gave the 
imprint to the civilization of the South, so the mir and not the 
cities typify the Russian economic life, so the estates and not 
the commercial companies shaped the history of republican 
Rome. In its essence the economic unit was still predomi- 
nantly self-sufficing. Even where there is a surplus produc- 
tion for the market, the consumers within the group are in 
an overwhelming degree dependent on the exertions of the 

With the growth of commercial intercourse both within and 
between those early economic groups, the self-sufficing char- 
acter of the unit begins to disappear, and there is gradually 
ushered in the next stage of economic hfe. 

32. Trade or Commercial Economy. 

The characteristic feature of this stage is the fact that pro- 
duction is no longer followed directly by consumption, but that 
there is interposed the process of exchange. The demand of 
consumers is now met primarily through the medium of trade or 
commerce. The significance of trade does not arise from the 
fact that there is trade between the units, for, as we have just 
seen, such trade is found in the later stages of the isolated or 
household economy. But we now have trade within the unit. 
The members of the household no longer, as before, produce 
what they need, but primarily produce what others need. We 
now have separate classes of producers and separate classes 

§ 32] Commercial Economy. 77 

of consumers. Men for the most part no longer consume their 
own products, but the products of others which they secure 
ihrough trade. In other words, instead of the self-sufficing 
economy we have the trade or commercial economy. 

The unit of economic life, although broader than before, 
still remains local in character, and the trade and industry are 
largely centred in the villages. Hence we also speak of it as 
the local or village economy. We can study this stage most 
clearly in mediaeval history. The eleventh and twelfth cen- 
turies witnessed an immense impetus given to commerce, due 
chiefly to the opening of new routes by the Crusades. The 
markets and fairs which had begun on a small scale in the pre- 
ceding centuries now became the rule, and soon assumed a 
more permanent form in the shape of villages and towns. The 
mediaeval town was shut off from its neighbors not only by the 
actual wall of stone and mortar, but by the no less important 
economic barrier of trade monopoly ; only the townsman, the 
burgess, might freely buy or sell ; oniy he was admitted to the 
many trade privileges. On the basis of this economic separa- 
tion was built up the political independence which is so marked 
a characteristic of early communal life. Although we call 
it the village economy, it is evident that the economic unit 
was not the village or town itself, but the village with the 
outlying territory. The lands or estates provided the raw 
materials which were worked up into finished products within 
the town. 

The breaking up of the older unit, moreover, enhanced the 
importance of industry. In the preceding stage industry was 
scarcely differentiated from agriculture. The farmer was his 
own carpenter, the farmer's wife did the haying and made the 
family clothes. Even where the estates became so large that 
there were separate classes of industrial workers, they were all 
under the control of the landowner. Now, however, the 
village workmen began to form an independent class, even 
though many of the workmen might have a little garden patch 
of their own. The point is that they no longer raised the raw 

^8 Economic Stages. [§ 32 

material for industry, but bought it. The farmers grew the 
material, the village artisans turned out the product and each 
class progressed by trading with the other. 

The new industry was based on trade in another sense. 
The artisan not only bought the raw material in small quan- 
tities, but sold in his shop or in his booth at the fair the 
products which he himself had finished. The workman was 
primarily a trader, and his success depended as much on his 
shrewdness in trade as on his skill in industry. It was only 
by degrees that the artisans pure and simple became a sep- 
arate class and that trade was carried on by the large mer- 
chants. For a long time business was chiefly of a retail 
character conducted in the local markets and fairs, and even 
when the scale of transactions in a few staple articles reached 
the stage of wholesale trade, the modern machinery of com- 
merce was entirely lacking. 

The increasing importance of the trader and the workman was 
the chief cause of the growing sense of liberty and equality ; 
the mediaeval town was the birthplace of modern democracy. 
It took a long time, however, for industry and trade to attain 
a dominant position. After some temporary victories in Italy, 
the trade centres won their first lasting triumph in the Low 
Countries, and it is accordingly there that we find the earliest 
example of modern republics on a large scale. 

In the later development of this economic stage there were 
indeed great accumulations of wealth gained in commerce or 
wholesale trade side by side with the wealth in land. We have 
not only the feudal landlords but the merchant princes. If we 
choose to apply the modern term capital to such accumula- 
tions, we find agricultural capital and commercial capital, but 
with rare exceptions no industrial capital. The wealth drawn 
from the land was under prevailing conditions not again put 
into the land, but consumed by the landowners ; the wealth 
accumulated in trade could not go on indefinitely multiplying 
ships and vans without increasing the commodities to be trans- 
ported ; but since these commodities were produced by hand. 

§ 32] Commercial Economy. 70 

the increase was slow. In last analysis, therefore, the economic 
civilization of this stage rested upon the petty village industry. 
Commercial prosperity and agricultural wealth were still as- 
sociated with the prevalence of the small workman and the 
village economy. 

This stage, it is true, assumes different phases. In some 
places agricultural prosperity predominated and the landowner 
was supreme ; in others, like the Hansa towns, we find busy 
marts of wholesale trade, and the predominance of the aristo- 
cratic commercial families ; in still others we find the centres 
of manufacture and the political mastery of the craft guilds. 
In all cases, however, we have the typical characteristics, — the 
small trader, the petty workman and the local economy. The 
large landowner sold his produce in the neighboring village 
market and drew thence his articles of consumption, outside 
of simple food. The merchant prince may have traded with 
distant lands, but the great bulk of the transactions was local, 
and the business of the national and international fairs was 
restricted to comparatively few articles. Most of what the 
workman produced was made to order for the local market. 
The village or town was the unit ; the foreigner was the man 
who came from a different town, not necessarily from a different 

This stage of economic life lasted in Europe for several 
centuries. Various causes conspired first to modify and finally 
to destroy it. The chief factor was undoubtedly the accumu- 
lation of wealth caused by the discovery of the new world 
and the opening up of the all-sea trade routes to the East. 
The discovery of immense sums of precious metal in America 
and the prodigious impetus given to commerce both East and 
West produced a heaping up of riches which were now applied 
on a large scale to further production in industry, and which 
gradually changed the character of all economic life. This 
accumulation of wealth, applied to industry, formed what came 
to be known as industrial capital, and there was thus ushered 
in the third stage. 

8o Economic Stages. [§ 33 

33. Capitalist or Industrial Economj. 

The characteristic feature of this stage is the appearance of 
capital on a large scale, applied in industry. With capital, 
there naturally came the capitalist, the owner of the capital, 
the employer of labor force and the director of industrial 
enterprise. In the isolated stage we noticed a unity pervading 
the whole economic process ; in the local and handicraft stage 
we saw that the unity was confined to production ; in the capi- 
talist stage production itself is split up. At first, as in seven- 
teenth and early eighteenth-century England, the capitalist 
makes his appearance at the beginning or end of the productive 
process : he buys the raw material at wholesale, or perhaps 
even disposes of the finished product at wholesale, leaving the 
remainder of the process in the hands of the independent 
workman. Somewhat later the capitalist acquires the working 
premises and finally the technical means of production. The 
workshop becomes the factory, the tools are replaced by 
machines, and the workman becomes the factory hand. In 
the meantime the various parts cf the process become so 
important that each separate stage falls into the hands of 
distinct groups of capitalists, each of them resting on the 
fundamental class of factory owners. Thus the supply of raw 
material, the provision of plant and factory, as well as the 
getting of the finished product to the consumer, call into 
existence distinct classes of capitalists for each step in the 
process. Finally the power of capital becomes so enormous 
that in some industries we find a movement toward integration, 
and the same capitalists, now associated into a single group, 
gradually acquire control of the entire process, from the ex- 
traction of the raw material to the ultimate disposition of the 
finished product to the consumer. Thus industrial society 
comes to be organized on its present complicated basis. 

Production is now no longer to order in small quantities, as 
in the previous economic stage, but large stocks are accumulated 
to be disposed of when the market is favorable, or large plants 

§ 33] Industrial Economy. 8 1 

are erected to fill anticipated large orders. The leisurely 
methods of the old system, regulated more or less by custom, 
give way to an intense competition which makes itself felt in 
every nook and corner of industrial society. The last vestige 
of barter transaction disappears, and money everywhere forms 
the link between exchanges. Credit outgrows its primitive 
forms of mere personal assistance and becomes an integral part 
of production and exchange. The desire to employ capital 
lucratively leads to the attempt to economize labor force, and 
brings about the invention of new machinery. The prodigious 
cheapening of production converts luxuries into necessities 
and widens the consuming power of the people. The multi- 
plication of wants brings new industries into existence, and 
finally gives more employment at increasing wages to the laborer. 
At the same time the enormous power of capital and the 
separation of. society into industrial classes create new and 
difficult problems. 

An important result of the capitalist stage is the supplanting 
of the local unit by the nation: Production and consumption 
no longer take place within the local boundaries, but what is 
produced in one district is often consumed in another. The 
local economy broadens into a national economy. The larger 
economic interests now require protection through the forma- 
tion of broader and stronger political units. Thus the petty 
feudal principalities disappear and the modern national states 
are born. Town is no longer arrayed against town, the free- 
man or burgess gives way to the citizen of the state ; the 
foreigner is now the man from a different nation, not from a 
different village. In the early stages of capitalistic develop- 
ment the nations oppose each other as the towns had previ- 
ously done, and this keen national competition leads to much 
good, although not unmixed with evil. 

More recently still, the further application of capitalist meth- 
ods, the improvements in transportation and communication, 
coupled with the growth of modern speculation, tend to pro- 
duce a world market for most products, and the perturbations 


82 Economic Stages. [§ 33 

of trade are quickly transmitted from country to country. We 
might thus even be tempted to speak of an international 
rather than a national economy. But although the signs are 
not wanting that the ultimate outcome will be the creation of 
such a world economy, it must not be overlooked that the 
economic unit to-day is still the nation, and that the national 
standpoint is being only slowly transformed by universal or 
international considerations. 

The capitalist stage is also called the industrial stage, because 
industry in the narrower sense is the chief occupation. In 
the first stage agriculture was the well-nigh exclusive form, in 
the second stage prosperity rested largely on trade, in this 
stage agriculture and trade alike step into the background. 
All products of course still come ultimately from the soil ; but 
an ever-increasing quantity of wealth consists of products 
several degrees removed from the soil. Production of wealth 
to-day means more and more the creation of finished products. 
Commerce, again, is still of great importance ; but commerce 
is now primarily the handmaid to industry rather than to agri- 
culture. Not only has the moneyed interest appeared as a rival 
of the landed interest, but the moneyed interest itself has 
become intimately bound up with industry. The great fortunes 
are gained to-day not in agriculture, nor even in commerce, but 
in industry. The typical rich man in the first economic stage 
is represented by the feudal landlord or the plantation owner ; 
in the second stage by the merchant princes, such as the Medici 
and the Fugger; in the third stage by the Carnegies and the 
Rockefellers. Agriculture and commerce have been trans- 
formed by the application of capital and of machine methods. 
The most prosperous condition and the widest diffusion of 
power, of culture and of civilization are found in industrial 
rather than in agricultural nations. 

Some countries, like China, were not touched by this move- 
ment, because of the policy of commercial exclusion. So that 
China is still in the village economy stage. Other countries, 
like Japan, were brought into the new movement but a few 

^ S3] Industrial Economy. 83 

decades ago, and are now in a process of rapid transition. 
Still other places, like some of the backward sections of 
Europe and America, lag behind in the movement. In classic 
antiquity, as we have seen, the second stage was not reached 
for a long time. Even, however, where commerce developed 
on a large scale and the civic centres flourished, industry was 
still of a petty, handicraft character, and the existence of 
slavery coupled with the absence of any such revolution in 
the world's trade as occurred at the close of the middle ages 
prevented both Greece and Rome from entering upon the 
later stages of the capitalistic era. Capital in classic antiquity 
was primarily commercial capital ; capital in modern times is 
predominantly industrial capital. 


34. References. 

C. Bucher, Industrial Evolution {1901), ch. iv ; Ashley and Cunningham 
(as in § 27) ; T. Veblen, Theory of Business Enterprise (1904), chs. ii, iii ; 
J. A. Hobson, Evolution of Modern Capitalism (1906), chs. iii, iv ; G. E. 
Howard, History of Matrimonial Institutions (3 vols , 1904), I, chs. i-iv ; 
H. S. Maine, Ancient Law (1880), ch. ix; and Early History of Institu- 
tions (1880), ch. iii; C. Gross, The Gild Merchant {1890) ; A. S. Green, 
Town Life in the Fifteenth Century (1895) ; W. A. S. Hewins, English 
Trade and Finance chiefly in the Seventeenth Century (1892) ; A. Toynbee, 
The Industrial Revolution (1884) ; G. Unwin, Industrial Organization in 
the Sixteenth and Seventeenth Centuries (1904); Cooke-Taylor, The 
Modern Factory System (1891) ; S. J. Chapman, The Lancashire Cotton 
Industry (1904). 

35. Primitive Economic Activity — The Clan. 

Business originally meant the " being busy " for a mere live- 
lihood ; it now means being busy for profit. In the same way 
business enterprise originally denoted any organized form of 
economic activity; it has now come to involve the idea of 
making a profit or securing a surplus. " Enterprise " is the 
Romanic form of the Teutonic "undertaking." When we 
undertake to secure any form of wealth, we have economic 
activity; when we undertake to secure profits through some 
organized activity, we have an undertaking or enterprise. 

With the immense growth of such activities in modern times 
increased importance is attached to the organizer. Not so 
long ago we called the head of the undertaking the " under- 
taker " ; nowadays with the restriction of the term to a par- 
ticular class of undertakings we have come to call him the 
head of the enterprise, or the entrepreneur. 


§ 35] The Clan. 85 

The earliest kinds of business undertakings are outgrowths 
of the family. The family itself, however, is the result of a 
long evolution. We have seen that our savage ancestors 
roamed about in small hordes or packs of a few dozen individ- 
uals, the numbers being dependent chiefly on the possibility of 
securing available food supplies from the berries and nuts, the 
chase and the waters. After the breakdown of the original 
monopoly of sexual relations on the part of the leader of the 
pack, the ensuing promiscuous methods of pairing gradually 
gave way to more or less permanent forms of marriage, in 
which kinship was counted through the mother. For amid 
such conditions of group, rather than individual, marriage re- 
lations it was indeed a wise child who knew its own father. 
These consanguine groups or collections of hordes which we 
meet almost everywhere at the dawn of history are known as 
clans (or, to use the Roman term, genfes) , and, from the fact 
that their members usually trace their kinship through the 
mother, are called uterine or maternal clans. In some cases 
where the primitive agriculture or hoe-culture carried on by 
the women assumed great proportions, or where we find an in- 
creasing significance attached to the domestic arts, like weaving 
and baking, the social importance of the female was reinforced 
by still stronger economic reasons, and we encounter a system 
of society known as the matriarchate, — the government by 
women. While the matriarchal system, however, is occasional, 
the maternal society based on the uterine clan is well-nigh 

Of the characteristics of this early gentile or clan society 
there is room to say only a few words. Of a family in the 
modern sense there was no trace, further than the temporary 
living together of the mother and the very young children. 
The only recognized relationship was kinship or membership 
in the clan. Owing in a large measure to the survival of the 
primal law of sexual monopoly of the head of the original 
horde, and perhaps also to a recognition of the injurious re- 
sults of inbreeding, the custom arose of contracting marriage, 

86 Historical Forms of Business. [§ 36 

or rather of entering into connubial relations, outside cff the 
dan ; and thus there developed one of the most rigid rules of 
primitive society, the system of exogamy, or the prohibition of 
marriage between members of the same clan, as constituting 
incest. Each clan traced its descent from, and often took the 
name of, some mythical ancestor, — generally an animal or 
plant. This totem, as it was called, became sacred and was 
soon protected by a system of " taboo " or religious prohibi- 
tion. The origin of the totem worship is still shrouded in 
mystery, but is probably to be sought in economic reasons, — 
the totem being at first the chief source of food supply which 
afterwards became so useful for purposes of barter that its con- 
sumption by members of the clan was forbidden. Where 
conditions were favorable to an increase of population the 
clans, although always preserving their own integrity, developed 
into the wider groups of phratries and of tribes, all of them 
connected, however remotely, by blood relationship. The 
clans, and in some cases the tribal groups, were the centres for 
common sports, celebrations and worship, and in the clan or 
tribal customs we find the germ of what afterwards developed 
into both law and morals. 

36. The Family. 

The decay of the clan or gentile society was again due 
largely to economic causes. Where conditions favored the 
growth of the pastoral system, private property in flocks and 
herds arose, and the paramount position of the father as the 
bread-winner and the defender of the property was recognized. 
Where the hunting and root-grubbing stage was supplanted by 
a developed agriculture, the labor of the man in tilling the soil, 
constructing the house and maintaining the patrimony became 
of signal importance. The male is now the chief factor in 
the economic process, and we accordingly find the patriarchal 
family. Famulus is the Latin for servant or slave : all the 
members of the new family group are the servants of the father. 
The family relations are primarily property relations. The 

§ 36] The Family. 87 

father owns the land, the flocks, the wife or wives, the children, 
the slaves, and exercises scarcely less authority over the other 
relatives that form a part of the family group. The father gives 
his name to the wife and children, and the patrimony is handed 
down from family head to family head. We now find that mar- 
riage by capture gives way to marriage by purchase ; and the 
group union of early gentile society is succeeded by the polyg- 
amy and finally the monogamy of the patriarchal head. The 
unity of this new family group is far closer and its discipline 
far more rigorous than that of the clan, and the recognition of 
these intimate economic relations leads to the growth of all 
those finer filial and fraternal ties which are the nursery of ethical 
progress. For a time the forms of the old gentile society are 
still preserved amid the newer and more vigorous patriarchal 
system, either under an agricultural regime, as in the recorded 
beginnings of Greek and Roman history, or under pastoral 
conditions, as in the story of the early biblical patriarchs. But 
with the undermining of the economic foundations of the 
clan system the whole structure of gentile society crumbled. 
Wherever territorial relations based on the community of 
wider economic interests replaced the old ties of blood re- 
lationship within the clan, tribal society developed into po- 
litical society and thus led to the origin of the state and of 
organized government. 

In Judaea, Greece and Rome, as in all countries that had 
to work out their own civilization, this gradual evolution can 
be clearly discerned. In other cases where a lower civilization 
was suddenly brought into contact with a higher one, the steps 
are often less gradual. Thus the contact of the Teutonic 
tribes with Rome engendered a rapid transition from gentile 
to political society, but with a decided abbreviation of the 
patriarchal period. Much the same is true of the influence 
of the English on the Irish septs, which lasted well into the 
middle ages, and on the Scottish clans, which finally disap- 
peared as a power only a century or two ago. 

The patriarchal family was thus primarily an economic 

88 Historical Forms of Business. [§ 36 

product. The family became and remained the basis of social 
and poHtical life. With the growth of industry and commerce 
and the opportunity for independent activity on the part of 
the various members, the old family group split up and was 
contracted into the family of modern times with its smaller 
and more immediate circle. Finally, the most recent develop- 
ment of economic life with its freedom and its system of 
competition has powerfully contributed to a still further loosen- 
ing of the family discipline ; woman has emancipated herself, 
divorce has become frequent, the age of the effective inde- 
pendence of the children has been continually pushed further 
back. Thus there have been ushered in all the ethical and 
social problems of modern family life, a discussion of which 
transcends the scope of an economic treatise. 

The family thus constitutes the earliest form of business 
undertaking only in the original sense of an organization to 
secure a competence rather than a surplus. That is to say, 
production was carried on within the family, by the family, for 
the family ; both producers and consumers were members of 
the family ; each worked for all ; each consumed the products 
of all. Yet the first attempts at business enterprise in the 
modern sense of an organization for gain, of producing for a 
market, are associated with the later developments of the 
family groups. The great slave plantations of the Roman 
Republic, for instance, were distinct business enterprises. The 
larger family groups which became the village communities of 
the early middle ages and which, when subjected to an over- 
lord, developed into the manorial system were occasionally, at 
least in part, business enterprises, as in England after the 
period of the early enclosures. We find examples of this 
co-operative family or group enterprise not only in agriculture, 
but also in commerce, as in the trade transactions of the 
mediaeval communes, and even in industry, as in the Russian 
artels or co-operative groups of laborers that have survived 
to this day. In its essence, however, the family was not well 
fitted for business, in the sense of profit-making ; and with the 


§ 37] Help or Hire System. 89 

increasing importance of the competitive life the abler in- 
dividuals who cut themselves loose from the family group 
forged to the front. With the greater conservatism which 
always marks the tillers of the soil we find this process slower 
in agriculture than in industry and commerce. It is accord- 
ingly in these latter directions that we must first look for the 
more developed forms of business enterprise. 

37. Help or Hire System. 

Where industry develops beyond the capacity of the family 
group and where the conditions are not favorable to the growth 
of slavery, we find the beginnings of industrial assistance from 
outside sources. The independent laborer who roves from 
house to house and from place to place does more of the 
work of the household. Carpenters, cobblers, glaziers, tin- 
smiths, masons, seamstresses, — these represent a few of the 
occupations conducted in this roving fashion. The itinerant 
workman receives a compensation for his services and often 
becomes for the time being a member of the family. This 
custom survives even to-day, not only in the New England 
institution which bears the significant name of " help " (even 
though the service has become somewhat more permanent), 
but also in the temporary assistance given to our Western 
farmers at harvest time by the " hired man." This system 
can thus best be termed the help or hire system.^ It is found 
in the early history of almost every society, and those familiar 
with the rural communities of Switzerland and Scandinavia 
will recognize it as the prevalent form to-day. 

In its essence, however, the help system is an intermediate 
and transitional form. The important factor is still the family 
group ; the consumer furnishes as before the raw materials 
and receives in return the finished product, the workman sup- 
plying the labor force and sometimes the tools. Gradually 

1 The term " wage-work," used by Biicher and his translator, Industrial 
Evolution, p. 162, is ill chosen, because the term wage-earner inevitably 
brings to mind the modern factory system. 

90 Historical Forms of Business. [§ 38 

the change assumes a more rapid pace. The smaller house- 
holds find that they need outside help more frequently but less 
intensively, and the larger family groups find it profitable to 
set some of their superfluous assistants to work for others. 
The custom arises of the consumer going to the workman 
rather than the workman coming to the consumer. Thus the 
occupations of the village blacksmith, the miller, and even the 
baker and weaver become settled trades. The itinerant work- 
man acquires greater permanence, and from assistants the 
laborers now evolve into a class independent of the family 
group. When this step is reached, we have what is known as 
the handicraft system. 

38. Handicraft System. 

Under this system the artisan is independent. He no 
longer works in the house of the consumer. He occupies 
his own house, he goes to market to purchase his raw mate- 
rials, he works up the raw material in his own home with his 
own tools and he sells the finished product to the consumer 
in his own shop. We no longer have production for the 
family, as in the family system ; we no longer have the raw 
material and the finished product belonging to the consumer, 
as in the help system. Every phase in the process down to 
the sale of the final commodity is in the hands of the workman 
himself. The workman or craftsman, moreover, finishes every- 
thing by hand, and it is for this reason that we speak of the 
handicraft system. This does not mean that things were not 
previously and even subsequently made by hand, but calls 
attention to the fact that the distinguishing mark is the grow- 
ing importance of industry and the rise of an independent class 
of workmen, who conduct business enterprises by themselves. 
Since the producer makes to order for a special customer, 
the system is also sometimes called the custom system, — a 
term still surviving in the custom-tailor of to-day. 

In the middle ages the workmen gradually banded them- 
selves together by trades into compact organizations known as 

§ 38] Handicraft System. 91 

guilds or crafts. Historically the system has therefore come 
to be known as the guild system. The guilds, however, were 
a result rather than a cause ; and in many parts of the world 
we find the handicraft system without the guilds. Under 
the guild system every workman might ultimately look forward 
to membership. Starting in as an apprentice, he spent a few 
additional years as journeyman, and when he had finally 
mastered all the details of the trade, he was admitted as 
master craftsman. To use modern terms, which had no 
meaning then, he was at once employer and workman, capital- 
ist and laborer. The modern differentiation of classes was 
unknown. At the height of their power the guilds often se- 
cured a political domination. In many countries they came 
to be virtually identical with the townsmen ; the division of 
labor between land and town assumed a sharply defined form, 
and the manor became more and more the simple purveyor 
of raw material for the guild. Just as the family system of 
industry corresponds to the typical isolated household economy, 
so the guild or handicraft system corresponds to the typical 
trade or local economy. 

The guild system characterized the industrial life of Europe 
for several centuries after the Crusades. With the increase of 
wealth, however, a twofold process went on. The guilds grew 
more grasping and exclusive, until they became monopolistic 
bodies, proving a drag upon industry instead of a help. 
Membership was confined to a select few whose right to 
practise the trade was inherited, and the mass of the workmen 
could no longer look forward to participation in its benefits. 
Nevver industries started wherever they could, in independence 
of the old crafts. Secondly, and more important, as the richer 
craftsmen amassed wealth, they as well as the larger traders 
desired to put it to productive uses. Thus, as we have seen, 
there developed a true industrial capital which could not well 
find employment within the limits of the old system. The 
guild or handicraft system slowly decayed, and there was 
ushered in the next stage, known as the domestic system. 

92 Historical Forms of Business. [§ 39 

39. Domestic System. 

Here for the first time we find a line drawn between the 
capitaUst employer and the workman. In the help system 
there was also an employer, but he was himself both workman 
and consumer. In the handicraft system the employer was no 
longer the consumer, but was still, in part at least, the workman. 
In the domestic system the employer and the workman are dif- 
ferentiated. The method of sale of the finished product, more- 
over, is another point which distinguishes the domestic system 
not only from the help system but also from the handicraft 
system. In the help system the product is not sold at all ; it 
is consumed by the employer. In the handicraft system, where 
production is carried on on a small scale and to order, the 
commodity is sold directly by the workman to the consumer. 
Now, however, where capital has made production on a larger 
scale possible, the market is so widened that the individual 
workman is no longer able to control the means or to devise 
the machinery for placing the products on the market. The 
capitalist alone can do this. 

The essence of the domestic system consists in the fact that 
while the workman still owns his tools and conducts the work 
in his own home, often with the aid of his family and in con- 
nection with some agricultural activity, he no longer disposes 
of the finished product. In most cases, in fact, he no longer 
buys or provides the raw material ; for the same capitalist who 
disposes of the product also finds it possible to purchase the 
raw material in larger quantities. The division of labor goes a 
step farther than in the guild system. Not only does one 
class produce the raw material, and another the commodity ; 
but the production of the commodity itself is now divided 
between two classes, the one buying the materials and market- 
ing the goods, the other furnishing the productive power or 
manual labor, the tools and the work place. 

The term domestic system is not a happy one, for under the 
handicraft or guild system the laborer also worked in his own 

§ 4o] Factory System. 93 

home. It is used, however, to distinguish this form of capitalistic 
enterprise from its successor where the laborer no longer works 
at home. Again, under the domestic system the laborer still 
works by hand, but since he is no longer in control of the en- 
tire process of production we distinguish it from the handicraft 
system. The term that was now applied to the domestic 
workman is manufacturer, the maker by hand {fnanus,/acere). 
Sometimes, instead of domestic or home work, we speak of 
commission work. The capitalist owner of a commodity com- 
mits it to another independent individual to be worked up and 
returned to him. In the clothing trade to-day we still dis- 
tinguish between custom work (the old handicraft system) and 
commission work. 

The domestic system, which developed during the seven- 
teenth century and reached its climax in England in the 
eighteenth, was modified with the immixture of capital into the 
successive stages of business. The most important change 
was due to the desire to economize in production and to ap- 
ply capital lucratively through the invention of labor-saving 
devices, or machines, which substituted mechanical power for 
human labor. In the textile industries, the period before 
1770 marks the early experiments, the period 1 770-1 790 the 
development of the great mechanical inventions, the period 
1 790-1 830 the appHcation of steam power, and the period 
after 1830 the widening of the market through the railway and 
the steamship.^ . The other industries soon followed, and there 
was thus inaugurated what is termed the factory system. 

40. Factory System. 

This system is the one under which the modem world lives. 
Here the capitalist employer not only provides the raw mate- 
rial and disposes of the finished product, but also controls the 

1 The important dates are : Kay's flying shuttle, 1738 ; Hargreave's 
spinning jenny, 1764; Arkwright's spinning frame, 1768; Crompton's 
mule, 1779; Cartwright's power loom, 1785; Watt and Boulton's steam- 
engine, 1785. 

94 Historical Forms of Business. [§ 40 

intermediate process. The machinery is so costly as to be 
beyond the reach of the workman ; and since the machines are 
the property of the employer the building in which production 
is carried on must also belong to him and is called the factory. 
The laborer is not his own master, as in the handicraft system ; 
he no longer owns the tools and the workshop, as in the 
domestic system : all that he does is to provide the human 
labor force which is applied through machines and in work- 
places owned by the capitaUst employer. The stupendous in- 
crease of production which is thus rendered possible reacts 
upon the laborer, both as producer and as consumer. Popu- 
lation increases enormously, and there is a continual drift from 
the country to the city. Industrial society receives its modern 
shape, and the social income is divided into the rent of the 
landowner, the wages of the laborer, the interest of the capi- 
talist and the profits of the entrepreneur. " Manufacturer " 
no longer means the handworker, but the individual who em- 
ploys others to work for him. The development of capital 
leads to keener competition and speculation, new classes of 
capitalist middle-men arise and the machinery of credit and 
exchange is transformed. The predominance of the industrial 
capitalist employer is so pronounced as to give to the whole 
form of business enterprise the name factory system. 

So markedly different is this from any of its predecessors 
that the process which brought it about is commonly termed 
the Industrial Revolution. If by revolution, however, we mean 
a sudden and complete overturning of the old, the name is ill 
chosen. For the process was a gradual one. It took several 
decades for the transition in the English textile industries to be 
consummated, and in the other occupations the supplanting of 
the domestic by the factory system proceeded step by step 
during the nineteenth century. Outside of England, the 
movement came later and more slowly, while even in England 
there are still a few trades, like those of the glass- workers, the 
cutlers and the chain -makers, in which the factory system has 
made only slight inroads. 

§ 4i] Corporate Enterprise. 95 

It must not be thought that each of these forms of enterprise 
is marked off from the others by sharp lines. In every stage 
we notice survivals. The family system is still found in the 
outlying regions of almost all countries where modern ideas 
have not completely penetrated, as, for instance, the Soufhern 
Appalachian mountains ; the help system survives in various 
kinds of domestic and other service ; the handicraft method is 
typified in the cobbler or custom tailor ; the domestic system 
plays a considerable role in the hand-loom weavers of Europe 
and the sweat-shops of modern cities with their commission 
work in the clothing trade. The economic life of a people, 
however, is characterized by the type forms, not by the sur- 
vivals of a preceding system. Modern business enterprise is 
based to an overwhelming degree on the factory system. 

41. Associated and Corporate Enterprise. 

We have thus far discussed the growth of business enter- 
prise from the point of view of the differentiation of the entre- 
preneur. We have now to treat it briefly from the point of 
view of associated production. Here we can trace four stages, 
— enterprises carried on by individuals, by partnerships, by 
corporations, by trusts. 

(i) We have seen that while the family was the earliest form 
of associated activity it was not well suited to the keen eco- 
nomic struggles inseparable from business life. Business enter- 
prise really begins with the business man, and the business man, 
now as then, is to a large extent born, not made. Sagacity, 
boldness, good judgment and administrative ability have always 
been the mental equipment of the successful merchant. To 
the extent that the individual has possessed these qualities, he 
has forged ahead. As business enterprises increased, however, 
the individual often found himself unable to cope with the 
situation single-handed. He therefore associated himself with 
others who possessed some of the qualities which he lacked. 

(2) The partnership was a device to strengthen enterprise at 
its weak points. It meant the association of various kinds of 

96 Historical Forms of Business. [§ 41 

ability, and often of capital and ability, and multiplied to 
that extent the economic efficiency of the unit. The partner- 
ship, however, has decided limitations. The personal relation 
between the partners and the need of implicit confidence in 
each* other necessarily restrict it to a few individuals. As 
soon as the business calls for the employment of a capital 
beyond the means or the desires of a few partners, a new form 
of enterprise is needed. This is supplied by the corporation. 

(3) Although according to the recent researches of Deloume 
and Weber the commercial corporation probably existed in 
the later centuries of the Roman Republic, in its modern 
shape it dates from the early mediaeval Italian cities. The 
earliest form was that of a so-called "bank," individuals 
associating their capital to form a joint stock, loaning it to the 
government on a pledge of certain revenues, and participating 
in the profits according to their holdings. Thus the beginnings 
of public credit and of corporate enterprise are found in- 
timately associated. The next important development of the 
joint-stock principle was in the trading companies of the six- 
teenth century, which were at first mere temporary associations 
for the purposes of a single voyage, but which gradually 
assumed a more permanent form. It was not, however, until 
the predominance of industrial over commercial capital in the 
nineteenth century that we find the immense expansion of cor- 
porate enterprise which marks modem life. 

The economic advantages of corporations are threefold, — 
joint stock, limited liability, perpetual life. Through the 
device of the corporate security, the number of the investors 
may be multiplied without limit. Every stockholder has a 
voice in the enterprise in proportion to his investment. He 
is liable for the debts or losses only to the limit of his own 
share. Modem states have been slow to recognize this prin- 
ciple of limited liability, but it now forms the very heart of the 
system. It removes the apprehension and distrust which lay 
at the basis of the overgrown partnership and the unlimited 
liability company. It has facilitated the marketing and trans- 

§ 4i] Corporate Enterprise. 97 

fer of the shares and has rendered possible the vast accumu- 
lation and the minute dissemination of capital. Finally, the 
corporation, unlike the individual, never dies until the busi- 
ness is liquidated ; the shareholders disappear, the shares 
remain. It has all the advantages of permanence and stabil- 
ity ; it can plan for the morrow as well as for to-day, and by 
proper choice and renewal of its board of directors it can con- 
tinually command the highest ability and adjust itself to altered 

As against these advantages there are undeniable short- 
comings. The " corporation problem " touches the threefold 
relation of the corporation to the investors, the employees and 
the public. The protection of the minority stockholders and 
of the " innocent investors," the mutual relation of the stock- 
holder and the bondholder, and the enforcement of real 
trusteeship on the part of the directors are matters that still 
remain to be adjusted. The conditions of employment are 
often modified by what is termed the substitution of the cash- 
nexus for the old-time personal bonds between employer and 
employee. The corporation proverbially has no soul. Finally, 
as against the public the corporation will often do what indi- 
viduals as such would shrink from doing. It is not a light 
task to raise the plane of corporate morality to that of individ- 
ual business ethics. With all its shortcomings, however, the 
corporation is indispensable to modern business activity. 
Without it the world would revert to a more primitive state of 
economic well-being, and would virtually renounce the inesti- 
mable benefits of the best utilization of capital. 

(4) Where the advantages of united capital on a gigantic 
scale become still more apparent, the associations of individuals 
into corporations are further developed into unions between 
corporations. These at first assume the form of more or less 
loose, agreements, fixing prices or conditions of production. 
A further stage is reached when receipts are pooled, and the 
unions adopt the name of pools. A still closer association is 
effected when the enterprises are united under a common 


98 Historical Forms of Business. [§ 41 

head, and known as trusts, because originally the co-operating 
corporations put their respective holdings of stock into the 
hands of trustees, who were to direct the joint enterprise. 
Where, as in the United States, this particular method of miion 
has been declared illegal, the same results have been reached 
by forming a new and independent corporation. What are 
to-day popularly called trusts are simply huge corporations. 
The trust problem is therefore in many respects a phase of the 
corporate problem. From this point of view, as we shall see 
hereafter, the so-called trust is as much a natural development 
from the small corporation as the corporation itself is an out- 
growth of the business partnership, or the partnership an evo- 
lution of individual activity. The reasons and limits of this 
development will be studied below. It is clear, however, that 
with the growth and differentiation of capital, under the pro- 
digious development of modern industry, the forms of business 
enterprise are steadily becoming more intricate. 


42. References. 

G. S. Callender, Selections from the Economic History of the United States 
(1909); E. L. Bogart, Economic History of the United States (1907); 
Katharine Coman, Industrial History of the United States (1905) ; C. D. 
Wright, Industrial Evolution of the United States (1902) ; J. D. Whitney, 
The United States (1889); J. B. Mc Master, History of the People of the 
United States (5 vols.. 1883-1900) ; G. L. Beer, The Commercial Policy of 
England toward the American Colonies (1893), ^^^ Origins of the British 
Colonial System (1907), and British Colonial Policy ly^^-iyd^ (1908) ; 
E. L. Lord, Industrial Experiments in the British Colonies { 1898) ; P. A. 
Bruce, Economic History of Virginia in the Seventeenth Century (2 vols., 
1896) ; W. B. Weeden, Economic and Social History of New England 
(2 vols., 1890) ; F. J. Turner, The Significance of the Frontier in American 
History (Am. Hist. Assoc, Report, 1893), ^97-22-j ; M. B. Hammond, 
The Cotton Industry (Am. Econ. Assoc. Publications, 1897). 

43. Early Period of American Economic Life. 

The United States is 'a particularly interesting illustration of 
economic development, because of its rapid pace and because 
of the co-existence of different phases. At the beginning the 
striking fact, as in all colonies, was the contact of an intellec- 
tually advanced population with primitive economic conditions. 
The white man brought with him the civilization of the old 
world, and was saved the necessity of the painful evolution of 
centuries. Possessing the use of perfected tools, the concep- 
tion of private property, the institutions of government and 
of the family, it was impossible for him to revert to the hunt- 
ing or nomadic stage. The impracticability of converting the 
savage at once into a husbandman led to the disappearance of 


I oo Economic Development. [§ 43 

the red man before the economic onset of the colonist. Yet 
in the presence of a vast and unsubjugated expanse of nature 
the immigrant had to start afresh and to unlearn many a lesson 
of his former home. Coming from a trade or local economy, 
he was thrown largely upon his own resources in a com- 
paratively isolated economy. Agriculture again became the 
predominant occupation ; an agriculture, however, now based 
not upon feudalism, but, in the North at least, upon the 
independent farmer. The attempts to introduce into the 
Middle states the types of mediaeval land relations could not 
be permanently successful ; and only in the South, for obvious 
reasons, was it possible to reintroduce the primitive system of 

The typical American was the backwoodsman, using his gun 
but wielding his axe, and depending primarily upon his hoe 
and plough. Step by step he cleared the forest and cultivated 
the soil, and in this continually renewed contest with nature 
hammered out those sturdy qualities of mind and heart which 
soon enabled him to add political to economic independence. 
The frontier is the home of democracy, because the frontier is 
the home of economic equality. As it was gradually pushed 
inland the communities which had left the frontier stage behind 
them developed from the family system of industry, through 
the help, into the handicraft and domestic system. The guilds 
which were fast decaying in the old world found no foothold 
in the new ; and as the villages and towns sprang up the in- 
significant industry was carried on by the independent handi- 
craftsman. Everywhere, moreover, agriculture was the chief 
source of wealth. 

In the South the increasing accumulations of wealth were 
put into more land and more capital. In the Middle states, 
and a Httle later in the Northern states, the new wealth took 
the form of commercial capital ; and as it was gradually pushed 
into industry the domestic system arose. At the time of the 
Revolution and down to the war of 181 2 the " manufacturer" 
was still the manual workman, and the whole industrial devel- 






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§44] Recent Growth. ipi 

opment was insignificant in the extreme. The war with Eng- 
land and the years of unrest which preceded it brought about 
a shifting of capital from commercial to industrial pursuits, 
and the factory system was fairly inaugurated, in a few of the 
textile industries at least. Under the fostering care of the 
"American system," as the new protective policy was called, 
the industries throve, — although we must not exaggerate the 
influence of legislation upon what would at all events have 
been the natural, even if slow, evolution of industrial capital. 
For this natural growth in the North and East was due to the 
pushing of the frontier beyond the Alleghanies, and to the con- 
sequent accumulation of agricultural profits which soon took 
the form of industrial capital under the impetus of the demand 
of an increasing population for manufactured products. Nor 
was this growth checked by the reversal of the tariff policy and 
the adoption, during the thirties to the fifties, first of the Com- 
promise, and then of the so-called Free Trade systems, dictated 
by the manifest interests of the politically dominant South. 
The South, as the exporter of cotton and the importer of 
manufactured products, had clearly no interest in the develop- 
ment of industrial, as over against commercial or agricultural, 

44. Growth of American Industry in the Nineteenth Century. 

The growth of prosperity during the middle of the nine- 
teenth century was due primarily to other causes, three in 
number : (i) the rich valleys of the Mississippi and its tribu- 
taries were reached by the tide of immigration ; (2) the aboli- 
tion of the corn laws in England opened a vast and profitable 
outlet for the increasing yield of wheat; (3) the discovery of 
gold in California furnished an immense treasury of mineral 
wealth. There was thus repeated on a large scale what had 
occurred in a smaller way a generation earlier. This conver- 
sion of agricultural and mineral wealth info industrial capital 
assumed, however, a slightly different form. Although the 
textile and iron industries now supplied a larger output for the 

OfcJa Economic Development. [§ 44 

increasing demand of a quickly growing population, the chief 
need and the most lucrative employment of capital was associ- 
ated with the development of modern transportation methods. 
The railroad becomes the most striking form of corporate en- 
terprise. Up to the middle of the century the few corpora- 
tions — chiefly banks, turnpikes, canals and railways — were 
compelled to take out separate charters. Now under general 
incorporation laws the railroads multiplied and soon brought 
in their wake all kinds of industrial enterprises. From this 
time on the country was fairly launched on the wide sea of 
corporate activity. 

The agitation which culminated in the civil war was at 
bottom the political expression of an economic antagonism 
between two divergent systems. The one was based on agri- 
culture, and heaped up its wealth in the transition forms from 
an isolated to a trade economy resting on slavery. The other 
had but just entered on the stage of the capitalist economy, 
and the influence of the rapidly developing factory system in 
providing a home market for the independent Western farmer 
soon united the economic interests into a compact and self- 
conscious whole. The phenomenal growth of the fifties, which 
menaced the economic preponderance of the South, brought 
the conflict to a head. The South possessed if anything the 
greater statesmen, the more gifted military leaders and the bet- 
ter navy ; but when the outlet for its staple crop was stopped 
up by the civil war it died of inanition and fell a victim to 
the economic superiority of its industrially diversified and 
therefore more enduring antagonist. 

It took the South a generation to repair the ravages of the 
desperate conflict, but with the beginning of the new genera- 
tion the inevitable results appear. Here and there in the 
South the march of industrial capitalism is under full swing, 
and the conversion of the handicraft and domestic stages into 
the factory system is proceeding apace. The transition in 
several of the Southern states is bringing to the front eco- 
nomic and political issues which agitated New England a 









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Recent Growth. 


generation or two earlier, and which were fought out in old 
England before the middle of the century. 

In the North the post-bellum period witnessed an acceler- 
ation of the movement which had so auspiciously begun. 
Notwithstanding the great increase of industry in the East, the 
rapid opening up of the far West and the application of capi- 
talist methods to the exchange, and even in part to the produc- 
tion, of farm products so stupendously augmented the output 
that the prosperity of the country still in large measure rested 
on its agricultural wealth. Toward the end of the century, 
however, with the practical exhaustion of the free land which 
enjoyed adequate rainfall, the industrial movement, which had 
been gradually creeping farther west, now furnished a con- 
tinually more lucrative opening for the employment of the fast 
accumulating capital. By 1900 over a third of the entire pop- 
ulation lived in the commercial and industrial centres, and 
about a third of the exports consisted of manufactures. 

The change in the character of the national production, 
and the transition from agricultural to industrial conditions, 
are illustrated by the following tables : 






Farm Products 




not given 

« « 





• 1,063 




Per cent. 


Per cent. 

Agricultural Products . . . 
Mining, Forest and Fisheries 



6.1 1 







1 04 Economic Development. [§ 45 

On page 105 will be found the details of the chief products 
of the United States, as well as the most important exports 
of manufactures. On the charts opposite pages 102-103, 
104-105 and 106 will be found statistics of the growth since 
1850 of certain agricultural products, general manufactures 
and iron ore. It will surprise many to learn that there were 
in 1900 six classes of manufactured products each aggregating 
over half a bilUon dollars in value of gross product, as against 
one agricultural product and no mineral products. 

45. Recent Development of American Industry. 

This vast increase in capital has not only engendered the 
transition to the period of trusts and huge corporations, but 
has emphasized the national and international significance of 
the modem movement. The economic unit in the United 
States is fast becoming a national unit. Industry is no longer 
confined to the old local limits. Commercial interests have 
overstepped the boundaries of any one state. Action by any 
one commonwealth inevitably reacts upon its neighbor. Eco- 
nomic and political methods framed on the old assumption 
that business is local are bound to create injustice and dis- 
satisfaction. Secondly, the trarfsition to a more intensive 
capitalism and the growth of industrial exports mark the 
economic as well as the political maturity of the country. 
The acquisition of Porto Rico and the Philippines is more 
than a mere accident. The foreign market is becoming an 
adjunct - to our industry rather than to our agriculture ; it 
assumes such importance because our economic welfare, so far 
as it rests upon international trade at all, will be affected more 
and more, not by what the foreigner must have in the shape of 
food, but by what he can be persuaded into wanting in the 
shape of finished products. 

There is, however, another side of the picture. The United 
States has so rapidly outgrown the swaddling clothes of its 
Vifant economic surroundings, and has stepped with such 
giant strides from its youthful social environment to the 

45] Recent Industrial Changes. 105 



1900 1900 

gross net 

Iron and Steel $804 I433 

Slaughtering & Meat Packing 790 684 

Foundry and Machine Shop . 645 378 

Men's and Women's Clothing 575 296 

Lumber and Timber . . . 567 308 

Flouring and Grist Mill . . 561 540 

Printing and Publishing . . 347 265 

Cotton Manufacture . . . 339 297 

Carpentering 316 177 

Woolen Manufacture . . . 297 212 

Tobacco Manufactures . . , 263 245 

Boots and Shoes 261 94 

Malt Liquors 237 203 

Cars 218 112 

Leather 204 186 

Masonry 204 125 

Bread and Bakery .... 176 89 

Lead Smelting and Refining . 165 77 





Corn . . . 

. $828 


Hay . . . 

. 484 


Wheat . . 

. 369 


Cotton . . 

• 323 


Oats . . 

. 217 


Forest Prod'ts 


Potatoes . 

. 98 


Orchard Prod' 

ts 84 

Tobacco . 



Wool (1901) 

. 51 (' 





Pig Iron 



Coal . . 



Copper . . 



Gold . . 



Silver . . 



Petroleum . 






Iron and Steel Manufactures 
Refined Mineral Oil . . . 
Copper Manufactures . . . 
Leather Manufactures . . 
Cotton Manufactures . . . 
Agricultural Implements 


Wood Manufactures . . . 
All Manufactures .... 
Per cent of Total Exports . 





















1 Arranged from the Twelfth Census of the United States (V»l. VII and 
Abstract), the Statistical Abstract of the United States, zxi^ The Mineral 
Resources of the United States. 

io6 Economic Development. [§46 

complex conditions of a full-grown industrial society, that the 
development has been most uneven. America presents in 
some respects the most striking contrasts. It is at once the 
youngest and the oldest of economic societies. It is the 
youngest, in the sense that there are still large tracts untouched 
by plough or harrow, awaiting the coming of the first settler and 
needing only irrigation to convert the desert into a garden. It 
is young because there are huge sections, only one step removed 
from the primitive economic stage, under conditions analogous 
to those which the old world faced many centuries ago. In 
another sense, however, America is not young, but old. No- 
where on the face of the globe has capital been applied to 
productive purposes with such intensity and such energy. 
Nowhere has man's victorious contest with the powers of 
nature been waged with such intelligence and such relentless 
vigor. Nowhere have the captains of industry prosecuted 
their quest for industrial supremacy with such alertness and 
ability. As a consequence, nowhere have the most ad- 
vanced forms of a highly organized, fully differentiated, thor- 
oughly complex industrial organism been evolved with such 
startling rapidity and such complete success. In the develop- 
ment of these new economic institutions America is leading 
the world and is showing other countries what stages they have 
still to traverse. While the movement toward combination of 
capital has even in Europe made only timid beginnings, it is 
revolutionizing American industry. In this sense America is 
old, — far older than most of its industrial rivals. 

46. Modern Problems of America. 

As a result of the forces just described, we are face to face 
with two sets of problems. The one set has its origin in the 
newer and less developed sections of the country, and may be 
illustrated by the currency question. This includes far more 
than is implied in the term itself. It involves, in large sections 
of the West and the South, not so much an increase of the 
money supply as a rearrangement of the economic forces and 


§ 46] Modern Problems. 1 07 

a readjustment of the relations of indebtedness to productive 
capacity. With every shifting of the frontier farther westward 
we have had such periodical readjustments. At the very 
beginning of our national life, when the frontier was located in 
western Massachusetts, came the economic outbreak known 
as Shays' Rebellion. A generation later similar causes produced 
on the new frontier the troubles which culminated in the stay- 
laws of Kentucky. When the frontier reached the Middle 
West, almost half a century later, the same movement assumed 
the guise of the fiat money craze. Finally, after the lapse of 
another generation, when analogous economic forces worked 
out their result, not only in the frontier life of the West, but 
also amid the primitive economic conditions of large sections 
of the regenerated but as yet undeveloped South, we reach 
the discussion of silver currency which began in the seventies 
and culminated in the nineties. With the disappearance of 
the frontier and the not far distant industrial' awakening 
throughout the entire South, it is probable that the money 
question will assume as subordinate a role in the future of the 
United States as it has assumed in the advanced countries of 

On the other hand, the second set of problems that confront 
us is due to the new and complex industrial conditions of the 
more advanced sections. These new conditions have given us 
the corporation problem, the wages problem, the tax problem, 
the colonial problem, the city problem. It is as idle to inveigh 
against the policy of territorial expansion, on the ground that 
such a scheme was not contemplated by Washington, as it 
would be futile to object to the regulation of combinations 
because this also involves a new departure. In the one case, 
as in the other, economic conditions have arisen which were 
unknown to the fathers, and which require for their solution 
a new analysis and a new method. 

What is peculiarly confusing, therefore, is the fact that on 
the one hand we have sections where the economic conditions 
are of a primitive type, while on the other hand in numerous 

io8 Economic Development. [§46 

parts of these sections themselves there have been grafted 
upon the still dominant and persistent primitive stock the 
shoots of the modern industrial type. The newer methods of 
transportation, as well as the modern media of exchange and 
distribution, have superimposed upon the simplicity of an 
undeveloped agricultural community the complexity of mod- 
ern industrial enterprise. The consequence is that the eco- 
nomic conditions of the country are supremely heterogeneous, 
although tending to become homogeneous. Because of this 
contest of the old with the new, we are in many respects still 
groping in the dark, dissatisfied in the more progressive com- 
munities with the survivals of old conditions, and trying to 
discern in the dim light of the future the final expression of 
the newer conditions which are soon to become universal. 


47. References. 

J. K. Ingram, A History of Political Economy (1888) ; L. Cossa, An 
Introduction to the Study of Political Economy (trans, by L. Dyer, 1893) » 
G. Cohn, A History of Political Economy (trans, by J. A. Hill, 1894) ; E. 
Nys, Researches in the History of Economics (trans, by Dry hurst, 1899) ; 
W. BdigeYiot, Economic Studies (1880), chs. iii-v; W.J. AshX^y , Surveys 
(1900), 263-309, and English Economic History, I (1888), ch. iii, II (1893), 
ch. vi ; L. L. Price, Short History of Political Economy in England from 
Adam Smith (1891) ; E. Cannan, History of Theories of Production (1904), 
chs. ix, x; S. N. Patten, Development of English Thought (1899), ch. v, 
and Dynamic Economics (1892), chs. i-vi; H. Eisenhart, Geschichte der 
Nationalokonomik (2d ed., 1891); A. Oncken, Geschichte der National- 
bkonomie, I (1902) ; A. Dubois, Precis de VHistoire des Doctrines Econo- 
miques, I (1903) ; J. Rambaud, Histoire des Doctrines Economiques (1899) 5 
A. Espinas, Histoire des Doctrines Economiques (1900); E. de Girard, 
Histoire de V Economic Sociale jusqu'' h, la Fin du XVI. Sihle (1900). 

48. Economic Theory in Classic Antiquity. 

It has often been said that economics is a modern science. 
In point of fact, it is only modern economics that is a modern 
science. Every economic stage which has been marked by 
any scientific thinking at all has had its own economic theory. 
The stars indeed moved for seons before man thought of as- 
tronomy. So economic phenomena existed for centuries be- 
fore any attempt was made to analyze them. Once formulated, 
however, the economic theory of any period is usually nothing 
but the reflex of its economic life. 

The earliest speculation on economic phenomena of which 
we have any knowledge is that of classic antiquity. Prior to 
the Greeks we find only ethical exhortations on social reform 


iio Economic Thought. [§48 

as among the Oriental nations, or practical treatises on agron- 
omy as among the Carthaginians. But both Aristotle and 
Xenophon, to mention no others, wrote distinct treatises on 
economics. Greek and Roman economic life was. not only 
based on slavery, but never outgrew the period of domestic 
industry and petty trade. This explains both the content 
and the omissions in Greek and Roman economics. Wealth 
existed, and we find the term discussed ; but stress was laid 
primarily upon the uses to which it might be put by the indi- 
vidual. The idea of value was apprehended, and the distinc- 
tion between utility and value pointed out; but no further 
application of the distinction was made. Private property had 
long been known ; and we thus find interesting theories as to 
its origin and justification as against the dreams of the com- 
munists, the socialists and the land nationalizers, who flour- 
ished then as now. Since the economic conditions were such 
that slave labor was highly productive, slavery was defended 
as a natural institution and as compatible with the highest 

In the early system of industry the relation of master and 
slave was like that of husband and wife, of parent and child : 
the slave, the wife and the child all belonged to the household 
head ; their labor was necessary to the family maintenance. 
When in later centuries the economic conditions of imperial 
Rome made slave labor less productive, it is significant that 
the writers first pointed out the moral shortcomings, and a 
century or two later the economic defects, of slavery. In the 
main, however, at the time of the chief prosperity of Greece 
and Rome, industrial capital did not exist as a controlling force 
in production : thus neither the term nor the idea is found ; 
capital is not yet differentiated from wealth. It is a striking 
fact that Aristot4e seems to have a premonition of a future 
industrial system when he says : " If the combs would make 
the web close, or if the keys of themselves struck the harp, 
masters would need no assistants nor slaves." But although 
capital had acquired no importance, a considerable division of 

§ 48] Theory in Antiquity. 1 1 1 

labor based on handicraft industry is found in actual life and is 
accordingly discussed in the economic treatises. 

If the theory of production was simple, that of distribution 
was entirely absent. For it was the landowner who controlled 
the processes, and owned the results, of production. The land- 
lord was the property lord, and even where commercial capital 
developed, it was the large landowner who also carried on 
the great commerce. Even where the independent trader 
developed, however, his gains seemed to be of the same nature 
as those of the landowner. There was thus no distinction recog- 
nized between land and capital, as factors in production. The 
landlord, again, was the slave owner ; there was thus no line 
drawn between land and labor, and no theory of wages. The 
doctrines of rent, profits and wages did not emerge, because 
the phenomena themselves did not exist as the incomes of 
separate social classes. There was not even a theory of indi- 
vidual income ; the mass of property yielded indeed a return 
or produce, but this entire produce simply went to swell the 
property, just as the expenses had been a part of the property. 
We have many terms for property, but no distinction between 
produce and income. 

This explains also the classical theory of interest. Funds 
were loaned not as capital, but as money. So far as there was 
any credit, it was primarily for consumption ; that is, the loans 
were mere personal loans made to tide over temporary em- 
barrassment. Even when money was loaned in agriculture or 
in trade, the function of capital was not understood, because 
only when capital is used in industry is it easy to realize its 
productivity. Interest was thus regarded as paid for the use 
of money, and, as money is in itself barren, interest was deemed 
unjustifiable. As a matter of fact, the interest charged on such 
loans did often have the effect of usury and frequently resulted 
in the subjection of the debtor to the creditor. In the absence 
of industrial capital there was some justification for the theo- 
retic opposition to interest. In the later centuries of impe- 
rial Rome, when commercial capital had developed, interest 

112 - Economic Thought. [§ 49 

became necessary ; but it was then defended in the Roman 
code by virtue of a legal fiction, not on economic grounds. 

During the later period of Greek and Roman life the origi- 
nal barter economy had given way to a money economy. 
The classic writers therefore devote some attention to the 
theory of money. The whole theory of price, however, was 
still much neglected, because trade was something outside of 
the ordinary activity of the slave plantation, and business en- 
terprise had but little scope under a system of handicraft in- 
dustry. It is thus easy to understand Aristotle's and Plato's 
condemnation of such vocations as something " unnatural," or 
Cicero's characterization of them as sordid and " unbecoming 
a gentleman." As with the private economy, so with the pub- 
lic economy. The revenues of government were derived 
chiefly from its own lands, worked in the same way as in any 
private household. Direct taxes were unknown except in ex- 
traordinary emergencies. The amassing of treasure, not the 
use of public credit, served for war purposes. Hence the 
Greek treatises on public finance deal with subjects that are 
almost completely absent from modern works. 

Classic antiquity, in short, had an economic theory which ex- 
plained its economic phenomena ; we must not criticise it on the 
ground that it does not explain our phenomena. 

49. Mediaeval Economic Theory. 

After the intervening of mental darkness and indus- 
trial stagnation, economic theory began anew with the growth 
of enterprise in the twelfth century. The new theory was the 
outgrowth of the new economy. The typical fact of this new 
economy was, as we have seen, the development of trade and 
commerce, no longer based on slavery. The great problem of 
mediaeval economics thus became the problem of exchange 
value and how to make this new kind of values conform to 
the demands of justice. Since things were no longer made to 
be consumed at home, as in the earlier centuries, but were 
now made to sell, the question arose, for what shall they sell. 

§ 49] Mediaeval Theory. . 113 

or what is the proper and reasonable price? The answer 
could not be the price as fixed by competition, because in the 
mediaeval economy there was no free competition. Goods 
were produced by the guilds, but the guildsmen could not 
underbid each other. Even in articles which came from out- 
side, to take advantage of one's neighbor by purchasing the 
wares before they reached market, or by buying at wholesale 
to sell at retail, was deemed a heinous offence. In an economy 
whose keynote was production to order, and where every one 
did just what his father had done, custom, not competition, 
fixed the price. With human nature as it is, however, men 
would always be found who attempted to overreich their 
neighbors. Since custom could not be relied upon, it became 
necessary for government to step in and to regulate the price. 
In point of fact, when mediaeval prices were not regulated by 
custom, they were fixed by statute. 

Economic theory thus discussed the question : what is the 
just or the natural price? It became in part a moral question, 
even though the answer must rest on economic considerations. 
The mediaeval economists were no longer the general philoso- 
phers, as in classic antiquity, but primarily the theologians. 
Economics became a part of theology. 

In framing his theory, the mediaeval economist had to take 
business life as he found it. The characteristic fact of mediae- 
val industry was the free laborer, the petty guildmaster. Slav- 
ery was fast disappearing, and accordingly, with the exception 
of a few of the early authors who were strongly influenced by 
the newly discovered writings of Aristotle, we find no defence 
of slavery. Again, since the whole economy was now based 
on industry and trade, the classical theory of business as an 
unnatural pursuit soon disappeared. Now arose the question : 
how should business gains be explained, — or, in other words, 
what fixes the price of the finished article? 

There could be only one answer to this question. Industrial 
capital did not exist, — that is, not as an important or typical 
fact. Since there was no conception of capital, there could be 


114 . Economic Thought. [§ 49 

no theory of profits. The guildmaster employed his own 
work, on his own tools. The labor expended was the chief 
consideration ; and cost of production became the explanation 
of the reasonable price, and the guide to the legislator in fix- 
ing tariffs. To carry on business for the sake of making gains 
was therefore still deemed immoral, but to trade in order to 
recover the result of one's labor was justifiable. Money mak- 
ing as such is wrong ; money making to support one's self or 
one's family by the proceeds of one's industry is legitimate. 
All through the middle ages the economic theory objected to 
a man charging more for a thing than it was worth, or buying 
a thing cheap and selling it dear, or selling a thing at a higher 
price for credit than for cash. For in all such cases it was 
presumed that gains were made without any actual labor 
having been expended. It was only as business enterprise 
developed that the other constituent elements of gain were 
recognized ; but the theory continued to include them in the 
actual labor cost. 

The other great mediaeval theory — the usury doctrine — 
may likewise be put under the head of exchange. For usury 
was regarded as the price paid for the use of money, itself the 
medium of exchange. In an age where the productive em- 
ployment of capital was unknown, the prohibition of interest 
did, on the whoje, more good than harm. As commercial 
capital developed, the force of the prohibition was weakened 
by the economic theory of damnum emergens and lucrum ces- 
sans : if the lender could show that he had suffered any loss or 
had been prevented from making any gains through not having 
the money, he might charge a return. The wedge was slowly 
pushed farther in ; but it was not until industrial capital had 
developed at the close of the middle ages that a distinction 
was drawn between legitimate interest and illegitimate usury. 
In the guild system proper, where no capital was needed, 
interest was an anachronism. 

The only other economic topic that was discussed in addi- 
tion to these two fundamental points, was likewise one of 

§ 5o] Mercantile Doctrine. 1 15 

exchange, — that of money. Money became of such para- 
mount importance that we find the treatment of money prob- 
lems no longer confined to the theologians, but participated in 
by specialists. The mediaeval writers on money form almost 
the only class of lay economists, pure and simple. 

Mediaeval economic theory, therefore, centred about the 
problems of exchange. Production was so simple that it was 
not discussed. In the absence of capital, there was no ques- 
tion of production on a large or small scale. Since the pro- 
ductive process was a unit, there was not even a discussion 
of the division of labor. Problems of distribution there were 
but few. Since there was no industrial capital, there were no 
profits ; since the workman was in the main his own employer, 
there were no wages, or so far as wages were paid, they were 
paid by the consumer, and not by any capitalist employer. 
Even though the conception of rent to the landlord now 
appeared, the land was not normally bought and sold, and the 
landlord's rent was regarded, not as a separate source of in- 
come, but as a kind of property, like that of the ordinary 
townsman. Finally, problems of consumption attracted little 
attention. In an age when custom reigned supreme, and 
when unusual expenditure was deprecated as ungodly, the 
effects of social expenditure and the connection between social 
demand and production were so slight that they were scarcely 

The mediaeval economists therefore were confronted with 
comparatively simple problems. These problems they attacked 
with ability and with some degree of success. It was not long, 
however, before the economic conditions changed, bringing 
with them new problems and fresh attempts at analysis. 

50. The Mercantile Doctrine. 

Modern economics may be said to date from the close of 
the sixteenth century. This century is marked by one great 
fact which could not have failed to arrest attention, — the 
revolution in prices which went hand in hand with the intel- 

1 1 6 Economic Thought. [§ 50 

lectual revolution due to the printing-press, with the religious 
revolution due to the Reformation and with the political rev- 
olution due to the weakening of the feudal system. The 
colonization of the new world led to a vast influx of the 
precious metals ; the discovery of the trade routes to the East 
opened up new channels of commerce and revivified industry ; 
the old regime of customary prices slowly gave way before the 
new force of competition; the guild system broke down as 
the power of capital made itself more apparent and as industrial 
conditions outgrew the narrow limits of the local economy. 
Thinkers like Bodin in France and Hales in England began 
to ponder these newer conditions of economic life and to 
discuss the relations of private wealth to public welfare. The 
economic theories from that time may be subdivided into 
three periods, — the mercantile theory, which first sought to 
crystallize the idea of the national economy; the theory of 
Adam Smith and Turgot, which represented the domination 
of the domestic system of industry, although in its cosmopol- 
itan ideas much influenced by the doctrines of the Physiocrats ; 
and finally the Ricardian theory, which marks the triumph of 
the factory system. 

The mediaeval thinkers had centred their attention on the 
money supply, and had used every endeavor to bring the pre- 
cious metals into the town and keep them there by controlling 
each individual bargain through manipulating the exchanges, 
and similar devices. The newer school of economists still 
emphasized the importance of the money supply, but owing to 
the changing conditions of trade were enabled to recognize 
the futility of the old measures. According to them, a surplus 
of coin is indeed desirable, but it can best be secured by an 
excess of exports over imports resulting in a balance of trade 
rather than by manipulating the exchanges so as to secure a 
favorable balance in each particular transaction or bargain. 
The first great economic controversies were those between 
the advocates of the Balance of Bargain and Balance of Trade 
theories. Because of their insistence on this mere exchange 

§ 5o] Mercantile Doctrine. iiy 

of merchandise, the newer writers are usually called the 

In truth, however, this was only an incidental result of their 
teachings. The breakdown of the local economy and its 
replacement by the larger unit led thinkers to search for 
the true causes of national wealth and national greatness. 
They saw that this could be attained only by an increase of 
national production ; and since industrial capital was now 
making its appearance, they emphasized the need and the 
value of national industry. Just as the older theory was dis- 
proved at the beginning of the seventeenth century almost at 
the same time by an Englishman (Mun), a Frenchman (Mont- 
chr^tien) and an Italian (Serra), so the practical policy of 
national expansion and the abolition of the local restrictions 
on trade and industry were pursued by statesmen like Sully in 
France, Cromwell in England and later by Frederick the 
Great in Prussia. 

Judged from the present point of view, the error of the Mer- 
cantilists lay in confounding a balance of exports over imports 
with a surplus of production over consumption (see below, 
§200). At the time the theory was first formulated, how- 
ever, an increase of national exports was indeed the most 
obvious method of measuring the increase of national produc- 
tion. In the early stages of capitalist enterprise and of inter- 
national competition, the policy of national protection was 
suggested as a means of national industrial growth ; but this 
system was itself an advance on the narrow exclusiveness of 
the mediaeval town. The Mercantilists all clamored for " Free 
Trade," but their free trade meant a freedom of exportation, 
and a liberation of internal trade from the trammels of the 
local economy. The enlightened Mercantilists looked upon an 
abundant money supply not as the cause, but as the result, and 
therefore as the best indication, of industrial growth and 
national prosperity. 

The problems which confronted the economists of the seven- 
teenth and first half of the eighteenth century were thus prin- 

ii8 Economic Thought. [§51 

cipally problems of production and exchange, from the point 
of view of the relation of government to the social structure. 
Hence the term political economy began to be used, and 
considerable progress was made in analyzing the problems of 
trade. The problems of distribution, however, were only just 
beginning; the domestic system of industry was differentiating 
a wages class ; and the growth of industrial capital was only 
slowly bringing into view the recipients of profits as against 
the recipients of the rent of land. The slight theory that we 
find on the subject is incomplete and often incorrect. It was 
difficult for the writers amid these half-developed conditions to 
go beyond the surface fact that low wages seemed to mean low 
cost and therefore successful competition with other countries. 
It was reserved for the great thinkers toward the close of the 
eighteenth century to voice the newer ideas on production and 
distribution alike, and to disclose the elements of public pros- 
perity, suited to the economic age in which they wrote. 

51. Adam Smith and the Physiocrats. 

If we were to sum up in two phrases the real contribution of 
Adam Smith to economics, it would be the theory of cosmo- 
politanism and the theory of distribution. Of these the one 
was original, the other partly borrowed ; but both were shaped 
by his economic environment. 

The statesmen of the eighteenth century had been pushing 
the Mercantilist doctrines to an extreme. While the system of 
national economic expansion had marked an advance as com- 
pared with the mediaeval system, the time soon came when the 
centre of economic interest was shifted from internal to exter- 
nal considerations ; and when what had seemed liberty from 
the one point of view now from the other appeared to be 
restriction. In certain countries at least the disadvantages of 
the system came to outweigh its benefits. Just as the guild 
system had originally been a spur to industry, but had ulti- 
mately become a drag upon it, so the mercantile system of 
regulation changed from a boon to a drawback. The advance 

§ 5^] Adam Smith. 119 

had consisted in emphasizing the national idea ; the retrogres- 
sion consisted in accentuating the exclusive idea. In the well- 
meant effort of the legislator to further industry, he often 
throttled it. The government now interfered with everything, 
and often accomplished less than nothing. The colonies, 
instead of strengthening the mother country, broke loose 
entirely or weakened her. Trade was conducted on the 
principle that what one nation gained the other necessarily 

The very expansion of international relations, however, and 
the immense growth of the foreign market induced the eigh- 
teenth-century thinkers to take a broader view. Adam Smith 
and the Physiocrats, each influenced by the doctrine of Natural 
Law, endeavored to show that economic phenomena, like all 
others, were reducible to principle. The most important cor- 
ollaries of natural law were to them private property and 
individual liberty. The liberty whose economic aspect they 
emphasized consisted of complete freedom in internal industry 
and in external trade. The demand for freedom of industry 
no longer meant freedom from the action of local government, 
but freedom from the action of national government as well ; 
the demand for freedom of trade no longer meant liberty of 
export, but liberty of import as well. Just as it was recognized 
that the various provinces of a nation benefited from freedom of 
exchange among each other, so it was claimed that the various 
nations of the world would equally benefit. Instead of national 
exclusiveness, economists demanded cosmopolitan freedom. 
Under the influence of the natural law each nation would then 
derive its maximum advantage. 

This importance of the natural law of freedom in economics 
was emphasized by both Adam Smith and the Physiocrats. 
Although the Physiocrats were first in the field with the pub- 
lished system — the word Physiocracy denotes "the rule of 
nature " — Adam Smith taught the identical ideas at about the 
same time in his lectures at Glasgow. The doctrine of cosmo- 
politanism was in the air. 

I20 Economic Thought. [§51 

The other great theory — that of distribution — we owe 
primarily to the Frenchmen ; not so much indeed to the Physi- 
ocrats as to the great statesman, economist and philosopher, 
who was only a half-Physiocrat himself, — Turgot. The leader 
of the Physiocrats — Quesnay, the court physician — struck by 
the abyss between the luxurious noble and the squalid peasant, 
concluded that agriculture was the only source of wealth, and 
the peasant the only productive member of society. In an 
age of periodical famine the food supply seemed to him of 
transcendent importance. Turgot only half accepted this idea ; 
but taking his cue from the Physiocrats with their idea of 
natural law and their effort to trace the final distribution of the 
wealth created by the farmer, he analyzed industrial society as 
he found it, and saw that the product of industry was divided 
into separate shares. We now for the first time have a theory 
of capital, a theory of rent, a theory of interest and profits, a 
theory of wages. 

This theory was adopted and developed by Adam Smith. 
He rejected, indeed, the doctrine of the Physiocrats that agri- 
culture alone yields a net product. On the contrary, he 
generalized the conception, and maintained that all industry 
might yield a product. Thus we often speak of Smith as the 
founder of the industrial system of economic theory as against 
the agricultural system of the Physiocrats. But the funda- 
mental doctrines of Smith in respect to the laws of distribu- 
tion were similar to those of Turgot. Both Turgot and Smith 
lived in the midst of the domestic system of industry. This 
was more developed in England than in France, where the 
abuses of the guild system still lingered and where agricul- 
ture was more important than industry. Thus we find Turgot 
sharing in some points the views of the Physiocrats, while Adam 
Smith was able in part to cut himself loose. Turgot and Smith, 
however, attempted to explain the laws of rent, profits and 
wages, because now for the first time the capitalist employer 
was differentiated from the landlord, and because the wages 
class had assumed a new importance. The laborer, however. 

§ 52] Ricardo. 121 

still controlled the process of production ; the " manufacturer " 
with Adam Smith is still the manual worker. 

Adam Smith, as also to a less extent Turgot, may therefore be 
called the theorist of the domestic system. He differs from the 
Physiocrats in accentuating the industrial rather than the agri- 
cultural element in wealth and production ; but he agrees with 
them in emphasizing the cosmopolitan rather than the national 
elements in public wealth. Because of this broader view they 
both attempt for the first time to study the whole range of 
relations between private property and public wealth, between 
liberty and industry. 

52. Hicardo and Modern Economics. 

Adam Smith wrote on the eve of the industrial revolution. 
It has often been observed that the year 1776 marked the 
publication of the Wealth of Nations and the Declaration of 
Independence, thus voicing the demand for liberty in industry 
as well as in politics. But it is equally worthy of note that the 
same year witnessed Watt's great discovery of the steam-engine. 
It took several decades for this and other great inventions to 
change the aspect of the industrial world ; but in less than half 
a century the transition had been accomplished in the leading 
industries of England, and was making rapid strides in the 
others. In France the process had scarcely begun; in the 
other continental countries the domestic system itself was still 
contesting the guild system. Hence the thinker who could 
analyze the new system of industry could be sought for only 
in England, for in no other country did that system exist. 
Ricardo was the first theorist of the factory system. 

It is no mere coincidence that Ricardo should have been a 
stockbroker. This man of genius, whose daily life trained him 
to observe the almost perfect sway of competition and the well- 
nigh complete fluidity of capital on the exchange, was well 
calculated to apply these considerations to a wider industrial 
world, whose characteristics were coming to be those of free 
competition and the supremacy of capital. Starting with a 

122 Economic Thought. [§ 52 

study of the money question^ Ricardo ended with an analysis 
of industrial society. The theories of cosmopolitanism and 
liberty he took from Adam Smith, but he developed them 
further, because this theory of free competition seemed to be 
even more applicable to the factory system than to the domestic 
system. The former theory of distribution, however, no longer 
quite sufficed. The manufacturer was now not the manual 
worker, but the employer who did no manual work. The 
" moneyed interest," which in Smith's time was only slowly 
forging to the front, was now becoming the dominant factor in 
English life. The antagonism between land and capital led to 
a new analysis of rent in contrast to profits. The mass of the 
working population had become wage-earners, but England's 
growing prosperity seemed to rest on the development of 
capital. Hence the law of wages was re-analyzed, in terms of 
profit, and the acme of truth seemed to be realized in the 
statement that wages and profits vary inversely to each other. 
Moreover, since capital had now assumed a new importance in 
the shape of machinery, the study of capital became largely a 
siudy of the economic effects of machinery. Everywhere in 
the civilized world of to-day the study of the theory of indus- 
trial phenomena goes back to the analysis of Ricardo. 

The Ricardian doctrines themselves, however, have been 
modified in some points by recent investigation. It would be 
surprising if the century that has elapsed since Ricardo wrote 
should not have brought about changes in conditions which 
were soon reflected in theory. In some respects the theories 
have been amplified rather than altered. The economic life of 
the last half-century has been marked by three great facts, — 
the increased consumption of the masses, the revolution in the 
means of transportation and the tendency of capital toward 
concentration. The changes in consumption have led to a 
deeper analysis of the central problem of value, especially 
through the efforts of Jevons and the Austrian school. The 
revolution in the means of transportation has given free scope 
to the force of speculation, and has led to its more careful 

§ 52] Modern Economics. 123 

study. The growth of capital has produced not only large- 
scale industry, but integrated industry, and has brought about 
a closer scrutiny of the monopoly problem. 

In other respects, however, the theory has been modified 
rather than amplified. The Ricardian doctrine of free compe- 
tition and natural liberty had two important practical corolla- 
ries : the one as applied to internal affairs meant laissez-faire 
or non-interference by government; the other as applied to 
foreign affairs meant free trade. The experience of the nine- 
teenth century has conclusively shown that both these demands 
are of relative rather than absolute validity, and that under 
certain conditions they may prove detrimental rather than 
beneficent. This has led to a fresh analysis of the theories of 
liberty and competition, more suited to the modern changes. 

Above all, however, the complete triumph of industrialism, 
which was in its infancy when Ricardo wrote, has brought into 
clear relief many tendencies which were then scarcely discern- 
ible. Ricardo had elucidated the law of rent, but his theory 
of profits was incomplete, the connection between interest and 
profits dimly appreciated, and the relation of both to rent not 
clearly apprehended. Above all, the position of the laborer 
and the relation of wages to profits were not thoroughly grasped. 
In the first flush of the new regime the function of the capitalist 
was naturally overestimated, and an undue emphasis put on 
production. So far as social reform was deemed at all practi- 
cable, it was thought to depend on the prosperity of the capi- 
talist and the care taken by the laborers to marry late and have 
small families. 

It was the social discontent of the middle of the century 
which was responsible for a change. Karl Marx did an admi- 
rable work in showing the essential relativity of economic 
institutions and in pointing out the influence of economic facts 
upon social and political life ; and his keen criticism of existing 
theory and actual society did much to bring about a revision of 
the laws of distribution. While the socialist criticism, however, 
was fruitful, its constructive analysis was erelong seen to be as 

124 Economic Thought. [§52 

one-sided as the one which it had endeavored to replace. It 
has been reserved for recent economic theory, especially in the 
works of Marshall, Walker, Clark and their followers, to take 
the saner view and to show how and why social progress and 
the growth of capital are intimately bound up with the advance 
of the mass of the workers. Thus the modern theory of eco- 
nomic life fits in not only with the facts of the business world 
but with the demands of social reform. The economics of 
to-day has finally reached the stage where it seeks to retain the 
cold impassivity of science and yet to reflect the warm glow of 
human interests and living ideals. 

Book III. 
Conditions of Economic Life. 



53. References. 

C. Letourneau, Property, its Origin and Development (1901); E. de 
Laveleye, Primitive Property (trans, by Marriott, 1878) ; F. de Coulanges, 
Origin of Property in Land (trans, by Ashley, 1891) ; E. Jenks, History 0/ 
Politics (1900), ch. X ; H. S. Maine, Ancient Law (1880), ch. viii, and 
Village Communities (i88i)i Lects. 3, 6; E. Kelly, Government or Human 
Evolution, II (1901), bk. i, ch. iii ; J. S. Nicholson, Principles of Political 
Economy (1893), bk. ii, ch. ii ; F. Seebohm, The English Village Com- 
munity (2d ed , 1883) ; F. W. Maitland, Domesday Book and Beyond 
(1897) ; J. Johnson, Rudimentary Society among Boys (Johns Hopkins 
Univ., Studies, II, 1884); G. B. Newcomb, Theories of Property (Pol. 
Sci. Quart,, I, 1886) ; E. Demolins, Comment la Route cree le Type Social 
(2 vols., 1 900- 1 903) ; L. Felix, Entwickelungsgeschichte des Eigenthums 
(4 vols., 1883-1896). 

54. Origin of Private Property. 

The institution of private property lies at the basis of modern 
economic life. It has become so ingrained into our modes of 
thought that we commonly regard it as a natural right. Never- 
theless private property, like every other economic institution, 
is the result of a long evolution. It is a relative rather than 
an absolute category. 

In the early stages of society the conception of private prop- 
erty is absent. Primitive man, like his brute ancestor, seized, 


1 26 Private Property. [§ 54 

but soon consumed, his articles of food. Even when he learned 
to provide for the morrow, and like some animals to accumu- 
late a store of provisions, he was able to retain control of them 
only so long as no stronger savage came his way. There may 
have been temporary possession, there was no recognized 
ownership. The earliest idea of property as distinct from 
possession was communal, not private. As the human hordes 
roamed about from place to place in the quest of food, they 
came to regard certain sections as their particular preserves, 
into which no other savages were admitted. Appropriation 
and user thus became the germs of property, but it was social 
and not individual user. As concerted action was generally 
necessary in order to secure subsistence, the food was distrib- 
uted according to definite rules by the representatives of the 
group. Even religious objects, like sacred stones and feathers, 
were preserved by the group as a whole. 

The first type of private property is found in the ornaments 
and the scanty articles of clothing. These were almost from 
the outset regarded as an integral part of the personality of 
the individual. The next step was reached when certain 
weapons were taken out of the general stock and associated 
with the exceptional prowess of some member of the group. 
The weapons, like the ornaments, were supposed in some way 
to reflect the personality of the individual, and when he died 
they were usually burned or interred with his remains. As 
civilization reached a higher stage, the movable shelters or 
wigwams and the scanty stock of tools and utensils were re- 
tained in the ownership of individuals. We can, however, 
scarcely yet speak of any differentiation of private property. 
Its social importance was insignificant in the extreme, and 
there was no motive for accumulation. After a narrow limit 
had been reached, additional ornaments became a burden, 
more weapons and tools were valueless. The group, not the 
individual, efforts were still the controlling factors in the eco- 
nomic life. 

The decisive step was taken with the domestication of ani- 

§ 54] Origin. 1 27 

mals. As soon as it was discovered how to preserve flocks 
and herds, it was possible for the individual to dissociate his 
economic life, to a small extent at least, from that of the 
group, and by giving freer rein to his own powers to start on 
the path of independence and prosperity for himself and his 
own immediate circle. Private property now assumed a posi- 
tion of increasing importance : it created, as we have seen, 
the patriarchal family, and it engendered the distinction of 
rich and poor. Wealth now consisted of flocks and herds; 
personal belongings in the shape of jewelry and treasure were 
prized not only for themselves but because they could be bar- 
tered for live stock. The original "chattels" are the "cattle." 
Human dependents, moreover, were needed to care for this 
increasing wealth : the wives and the children of the patri- 
archal head were regarded as his private property, and where 
even these did not suffice, we find the beginnings of slavery. 
The slave {famel) soon became the most important element 
in the family. On the other hand, there was no private appro- 
priation of land, because it was unnecessary. The herdsmen 
wandered, according to seasonal or climatic conditions, in 
search of fresh pastures, and the tribal customs were still suffi- 
ciently strong to prevent individuals from appropriating par- 
ticularly favored spots in the general area. 

Two points thus stand out clearly. First, private property 
consisted for a long time only of movables, animate or inani- 
mate, that is, of animals, human beings, and personal chattels. 
A community which is continually on the march cannot de- 
velop property in immovables. Secondly, the origin of private 
property is to be sought in user and seizure. Compulsion and 
even rapine are frequently the starting-points of the accumula- 
tion of wealth. Yet this selfish accumulation is the means of 
attaining a higher stage of welfare for the community as a 
whole. It increases not only production but civilization. The 
ethical stage of a pastoral tribe is superior to that of a group 
of hunters. The institution of private property, while intensi- 
fying many of the unlovely characteristics of human nature, is 

128 Private Property. [§55 

also responsible for those qualities, like thrift, foresight, fru- 
gality, energy, sobriety and sanity, without which no enduring 
progress was possible. Property was becoming private, but 
since the individual was still in large measure controlled by 
the group, the sanction of private property remained social 
in character. The individual was permitted to enjoy private 
property because it was recognized to be conducive on the 
whole to the interests of the group. From the very beginning, 
therefore, out of evil there came good ; out of the violence 
inseparable from early private property there evolved the 
orderliness of a stable society. 

55. GroT^th of Property in Land. 

The next step was taken when the developed agricultural 
stage was ushered in. This had two important results : it 
greatly extended slavery, and it created private property in 
immovables. It extended slavery, because profitable cultiva- 
tion of the soil was contingent upon an adequate labor force. 
Compulsory and gratuitous labor would naturally swell the 
gains of the owner. Increasing agriculture involved, under 
certain conditions at least, increasing private property in 

It also involved the creation of private property in immov- 
ables. As fixed settlements replaced the early temporary 
abodes, the need and utility of more durable habitations be- 
came evident. Private property in houses, however, rendered 
possible on a much larger scale the accumulation of personal 
belongings within the house, and this accumulation of wealth 
was brought about by the increased earnings of agriculture as 
contrasted with flock tending. The evolution of private prop- 
erty in land, however, was far slower than in the case of houses. 
In a few instances, where geographical and climatic reasons 
made it difficult for the pastoral group to eke out a living in 
common from the soil, as in Norway, and where there was less 
fear of attack from organized bands of marauders, the indi- 
viduals started out as farmers, each for himself and each 

§ 55] Property in Land. 129 

appropriating as much of the land as he needed. User soon 
hardened into ownership. So also when new colonies were 
planted by the offshoots of communities long acquainted with 
agriculture, the colonists, as in America, naturally brought 
with them the practice of individual land ownership and sepa- 
rate holdings. In most places, however, where the grazier 
slowly turned into a farmer, the communal practices dis- 
appeared only by slow degrees. Just as the nomad group 
had pitched its tents together and had allowed the flocks to 
graze in common, so now the village houses were grouped and 
separate plots of land in the surrounding area were temporarily 
assigned to the cultivators. These temporary assignments of 
different grades soon became permanent, although the method 
of using them was strictly subject to communal needs. For as 
population increased and the holdings were subdivided, the 
different grades of land were carved up into strips, the same 
individual often possessing sections in different parts of the 
arable area. This system of intermixed strips necessitated a 
whole body of communal rules in order to insure a proper 
cultivation. The strips were too small to be fenced off. In 
the open field system, as it was therefore called, not only was 
it clearly inadmissible for one man to use his strip as pasture 
with the risk that his animals might stray on the cultivated plot 
of his neighbor, but in addition far better results were obtained 
by planting large areas in the same way. Thus the mediaeval 
village community or mark was based on the idea of common 
cultivation, and the original community of property was long 
preserved not only in the forests, the free use of which under 
certain restrictions belonged to every member of the group, 
but also in the pasture land, where every one had the right to 
graze his cattle, and even in the arable land which, after the 
crops were taken off, reverted to communal use. 

While private property in land within the group was thus 
developing, there was another element at work, proceeding 
from above rather than from below. As the conquering tribes 
seized upon fresh tracts., it became of signal importance to 

130 Private Property. [§55 

defend the settled agricultural possessions. This duty was 
assigned to the military chieftains, who in many cases were 
the wealthiest flock-owners. With the transition to agricul- 
ture, the old personal and tribal relations gave way to territorial 
and political relations. In other words, the state developed 
and the local divisions and counties were put under the pro- 
tection of the over-lords. The tenants, or vassals, whether 
individuals or groups, now paid a portion of their agricultural 
earnings as the price of protection, and the military occupa- 
tion of the district by the chieftain before long hardened into 
the institution of private property. The war lord became 
the landlord. The marquis was originally the defender of the 
" March." The property rights of the cultivator jvere held to 
be subordinate to those of the lord. Thus was ushered in 
the system of feudalism, based on the preponderance of the 
manorial lord and the hierarchy of social relations. 

In some cases the cultivators lost their original prerogatives 
and dwindled into mere tenants without any property rights 
at all. In other cases they contrived gradually to free them- 
selves from their rents and other feudal payments, while at 
the same time the common cultivation gave way, under the 
impulse of more modern methods, to individual tillage. In 
this manner was formed the peasant proprietorship of many 
European countries. The land became thus the private prop- 
erty of either the lord or the peasant, until finally with the 
development of industrial capitalism real estate was put on an 
equality with personal property. In America and many parts 
of Europe land is now bought and sold almost as readily as 
any kind of chattels. 

Here again we notice the social sanction of private property. 
The origin of property in land as of that in flocks was often 
connected with force and fraud, but in this case as the other 
the community as a whole was benefited. The private prop- 
erty of the feudal chieftain meant the growth of security and 
social order, which formed the foundations of increased pro- 
duction. The development of landed property within the 

§ 5^] Theories. 1 3 1 

communal group of cultivators was the result of the recognition 
of the social importance of individual action. As long as 
common cultivation brought about the best utilization of the 
fields, it remained the prevalent system ; but when in more 
recent periods the application of capital to land made an 
intensive cultivation possible, the advantages of a more individ- 
ual method were soon manifest. The old common or open 
fields were now enclosed, and each landowner, freed from what 
had become the shackles of a common cultivation, turned 
his own plot to the best use. Private property in land thus 
reached its climax, because it carried with it individual free- 
dom of use. The augmented agricultural profits were due to 
increased production, so that private property here again re- 
dounded in the main to the advantage of the community. 
Real estate like personalty, immovables like movables, have 
become private property because of the recognition by society 
of the social advantages of individual ownership. 

56. Theories of Private Property. 

Two important corollaries follow from what has just been 
said : first, the justification of private property is its social 
utility, and second, the extent of private property rights must 
always be limited by their social consequences. 

The earliest theory of private property as found in some of 
the Roman writers is the occupation theory. The doctrine 
that property belongs of right to him who first seizes it is, how- 
ever, one that can apply, if at all, only to the earliest stages of 
development. Where no one has any interest in the property, 
no one will object to the assertion of a claim by a new-comer. 
When property is without any discoverable owner, we still to- 
day assign it to the lucky finder. But when the property is 
already utilized by others, whether as groups or as individuals, 
or when the property is newly created by human effort, the 
assertion of the right of occupation involves a theory of force 
rather than of justice. The occupation theory may explain 
how the present legal title to certain forms of property origi- 

132 Private Property. [§56 

nated; it cannot serve as a justification of private property, 
except in the rare case of previously unoccupied or unutilized 
wealth. The mere fact that a person has seized a thing is no 
reason why he should retain it. 

The next doctrine was the natural rights theory. Private 
property, so we were told by the philosophers of antiquity 
and the publicists of the later middle ages, is a natural right, a 
part of the law of nature. It will at once be asked, however, 
what is denoted by nature ? If by nature we mean the physical 
and animal world outside of man, it is clear that the only laws 
of nature are the laws of the necessary relations of phenomena 
and that the only natural right is that which flows from the law 
of might or of the power which explains these phenomena. In 
this sense all civilization is an endeavor to escape from the 
original reign of natural law among brutes. Nature is here 
opposed to human progress. Private property, then, is un- 
natural because it is not found in a state of nature. If, on the 
other hand, by nature we mean the constitution of the entire 
universe, including man, and if it is contended that private 
property is natural in the sense that it is necessary to the full 
self-realization of the individual as the bearer of the world idea, 
the obvious rejoinder is that we are applying the term natural 
right to our temporary idea of what ought to be right, and that 
history unmistakably shows a continual change in our ideas of 
what ought to be. The great philosophers of antiquity upheld 
private property in slaves as a natural right. Much of what 
we to-day consider natural, our descendants will deem un- 
natural. Our conception of nature in this sense is essentially 
ephemeral and mutable. 

Driven from this position, the natural rights school took 
refuge in the labor theory, and maintained that the real title to 
private property is derived from the toil and trouble experi- 
enced in creating it. Surely, it will be said, a thing belongs of 
right to him who produces it. But at once comes the reply : 
no one has created the land. As a consequence, we find 
thinkers of all ages, from Phaleas of antiquity to the disciples 

§56] Theories. 133 

of Henry George to-day, who contend that private property 
in land is unjust, while maintaining that private property in 
everything else is defensible. These critics, however, overlook 
the fact that the difference between land and so-called labor 
products is in this respect, at all events, one only of degree, 
because nothing is the result of individual labor alone The 
carpenter, it is said, rightfully owns the table which he has 
made. But to what extent has he made it? The tree which 
affords him the raw material was not created by him ; the axe 
with which the tree is felled is the accumulated result of 
centuries of invention expended by his ancestors ; the stream 
along which the log is floated is not of his making. To pass 
over all the other intermediate processes, how long would he 
be secure in the possession of the tools he has used or of 
the product he has finished, were it not for the protection 
afforded to him by the law? And finally, of what use would 
the tables be unless there were a demand for them on the part 
of the community ? The value of the table is as little the result 
of individual labor as is the value of the land. Society holds 
a mortgage over everything that is produced or exchanged. 

Since therefore neither occupation, natural law nor labor 
gives an indefeasible title to private property, some philoso- 
phers were led to frame the so-called legal theory of private 
ownership which is in essence that whatever is recognized as 
such by the law is rightfully private property. Obviously, how- 
ever, this is not an economic doctrine. Good law may be 
bad economics. The law generally follows at a respectful 
distance behind the economic conditions, and adjusts itself 
gradually to them. The legal theory tells us what property 
is, not why it is, nor what it should be. 

Thus we are finally driven to the social utility theory. This 
is really implied in the preceding theories and suppHes the link 
that binds them all together. In ancient as in modern com- 
munities, the individual is helpless as against society, however 
much under modern democracy society may see fit to extend 
the bounds of individual freedom. If we allow the individual 

134 Private Property. [§57 

to seize upon unoccupied wealth, if we recognize the existence 
of certain rights in what are deemed to be the products of 
labor, if we throw the mantle of the law around the elements 
of private property, — in every case society is speaking in no 
uncertain voice and permits these things because it is dimly 
conscious of the fact that they redound to the social welfare. 
Private property is an unmistakable index of social progress. 
It originated because of social reasons, it has grown under con- 
tinual subjection to the social sanction. It is a natural right 
only in the broad sense that all social growth is natural. 

57. Limits of Private Property. 

If then social utility is the real justification of private prop- 
erty, it is clear that the extent of private property rights must 
find its limit in social considerations. Take, for example, the 
modern problem of irrigation. The English common-law 
conception of private property — the property that reaches, 
as has been picturesquely said, from heaven to hell — is a 
product of a moist climate, of conditions where there is an 
abundance or superabundance of water, and where private 
interest could be safely depended upon to give the best 
results. But in the arid and semi-arid regions of our western 
empire neither occupation nor labor is deemed to give an 
equitable title to the river or the adjacent riparian lands. 
The new code of private property which is springing up in 
the West is one in which individual rights are clearly and 
forcibly held subservient to those of the community. 

What is true of irrigable land in the West is true in varying 
degree of many forms of private property in the East. " May 
I not do as it listeth me with my own?" is a cry far less fre- 
quently heard than of old. Private property as a concept 
will no doubt always remain ; but the content of the concept 
is continually changing. Property in human beings was at 
one time considered economically advantageous and morally 
defensible. Private ownership of the highways was not so long 
ago usual and justifiable. In the city of New York to-day the 

§57] Limits. 13; 

process of extinction of private property in docks is fast going 
on. On the other hand, the stealing of electricity or the 
tapping of a telegraph or telephone wire is at present punish- 
able as theft. If, as Carlyle tells us, no one believes what his 
grandfather believed, we may almost say that no one owns 
what his grandfather owned. 

The right of private property is a privilege conferred upon 
individuals by society. It is recognized as beneficial in general 
because of the consensus of opinion that in the main better 
economic results can be secured by the application of the 
principle of self-interest. In the present stage of the evolution 
of human nature, private property constitutes the chief incen- 
tive to better and greater production. The test therefore is 
always the social test. Where, however, the reason of the rule 
fails, the rule itself must fail. That is, where in certain cases 
the results of private property are clearly opposed to the 
social interests, society is justified in restricting the extent of 
the property right. Thus the private ownership of patents 
and copyrights is everywhere granted only for a term of years, 
the right of the owner thereafter lapsing in favor of society at 
large. Again, while property in land is in general beneficial, 
immense private holdings may sometimes check, rather than 
further, social progress; and may lead to well-considered 
movements either to restrict their size, as in New Zealand, or 
to alter the form of the property right, as in the recent Irish 
legislation intended to convert the tenant into a peasant, 

Interference with the existing rights of private property 
must always depend upon a convincing and irrefragable evi- 
dence of its necessity. For in the main private property and 
individual liberty have been the correlative products of human 
civilization. The hmits of economic freedom and economic 
competition which we shall discuss in the following chapters 
will throw light upon the bounds of private property. We 
shall see that the maintenance of property rights depends on 
the existence and the beneficence of competition. Where 

136 Private Property. [§ 58 

competition has given way to monopoly, the automatic control 
of property rights must be replaced by a more positive social 
control. Again, when the condition of equality, which under- 
lies the theory of competition, is absent, competition may 
lose its beneficent force and the economic interests of society 
may demand the fixing of a limit to the exercise of private 
property rights. Certain idealists would go much further and 
advocate communism or socialism. The communist demands 
the complete abolition of all private property; the socialist 
asks for the abolition of private property in the means of 
production while retaining it in articles of consumption. Both 
are so extreme that in their well-meant endeavor to rectify 
undoubted abuses, they would forego the chief advantages and 
concomitants of modem civilization itself. 

58. Content of Property Rights. 

Property rights may be classified under five heads : the right 
of gift, the right of disposition by contract, the right of use, 
the right of bequest, the right of unlimited acquisition. Of 
these the first and second are well-nigh unquestioned. ^A 
man may not only give away his property as he chooses, but 
he may sell, lease, loan or pawn it. It is only where rem- 
nants of the old feudal law of real estate survive that we find 
any limitation put upon such rights. The third right is some- 
what less absolute. As against the doctrine of " vested rights " 
of private property, the theory of " eminent domain " forms 
the entering wedge of social control which is being continually 
pushed further in by the principle of public policy. Again, 
a man may commonly use his property as he likes. But he may 
not use it in such a way as to create a nuisance to his neigh- 
bor. The individual right is subject to social restrictions. 

It is, however, around the fourth and fifth heads that the 
chief controversy has taken place. The right of bequest or 
inheritance is one of late growth. Long after private property 
was instituted its existence lapsed with the death of the 
original owner and the property itself reverted to the social 

§ 5^] Content. 1 37 

group. Long after the right of bequeathing chattels de- 
veloped, there was no such privilege connected with real 
estate. Wills and intestate succession are everywhere the out- 
growth of the family, — the immediate kinship which, as we 
know, was the product of economic forces. To insure the 
perpetuation of the property beyond the life of the testator 
became one of the most potent factors in the desire of acquisi- 
tion and in the economy of production. Where the economic 
and social importance of the family is great, we even find that 
the right of bequest becomes a duty, with the correlative right 
of inheritance on the part of the surviving members of the 
family. Such, for instance, is the portion legitime or legal right 
of the children in France and Germany, or the dower right of 
the widow in Anglo-Saxon countries. 

With the weakening of the family sentiment in modern 
times and its restriction to a continually smaller group, the 
movement for a limitation of inheritance has begun to make 
some headway. The great development of modern progressive 
inheritance taxes and more especially of collateral inheritance 
taxes is an illustration of this tendency. When the rate of 
such taxation reaches 15% as in the United States a few years 
ago, 18% as in England, and 20% or even 25% as in some of 
the states of Switzerland and Australasia, we are on the high- 
road to a considerable limitation of the right of bequest. 
There is every reason to believe, however, that just as the 
kernel of the intimate family will continue to subsist, the 
movement will be arrested at that point where it might imperil 
the tendency to acquisition. 

On the other hand, the right of unlimited accumulation of 
wealth has scarcely been affected. Even though it may be 
conceded that the heaping up of enormous fortunes may 
seriously strain the machinery of democratic government, there 
is an insuperable difficulty in fixing any point beyond which 
the further accumulation of wealth may be declared economi- 
cally or politically dangerous. We refer here to wealth in 
general, honestly acquired. Private property in certain things 

138 Private Property. [§ 58 

indeed is considered wrong, irrespective of amount; dis- 
honesty is as reprehensible and as frequent (or as infrequent) 
in a small as in a large business. Great fortunes in general 
can be honestly acquired only by conferring great advantages 
on society ; he who serves the community best will reap the 
greatest profits. The successful and upright business man 
retains the market only so long as he undersells his compet- 
itors, and to that extent benefits the consumers. To check 
profits would mean to check enterprise ; to check enterprise 
would mean higher prices and greater sacrifice. The limitation 
of wealth as such is impracticable and economically perilous. 

No one, however, would gainsay the essential reasonable- 
ness of the general feeling that prodigious inequalities of 
fortune are in the long run a menace to the stability of demo- 
cratic virtues. But the solution of the problem cannot be 
found by opposing private property as such, or by erecting 
a barrier to the accumulation of wealth. It is futile to deny 
or to minimize the basic importance of private property on 
which the entire civilization of modern times is built. The 
economic ideal may best be expressed in the words of Aris- 
totle of old, — that property should be private, but its use 
common. What he meant was to inculcate the idea of the 
public trusteeship of wealth, of the principle of the social 
responsibility of the wealth-getter. Economic progress is 
indeed intimately bound up with the institution of private 
property, and yet society is asserting a claim to be heard in 
its control and disposition. We are beginning to realize the 
duties as well as the rights of wealth. This moral obligation 
is based on the sound economic conception of social utility 
as at once the justification and the limitation of private 


59. References. 

A. T. Hadley, Freedom and Responsibility (1903), ch. v; R. T. Ely, 
Evolution of Industrial Society (1903), part 2, ch. i ; J. S. Nicholson, 
Principles of Political Economy (1893), bk. ii, ch. v; E. Kelly, Govern- 
ment, or Human Evolution, I (1898) ; P. Kropotkin, Mutual Aid a Factor 
of Evolution (1902); W. W. Willoughby, Social Justice (1900), ch. ix ; 
C. H. Cooley, Personal Competition (Am. Econ. Assoc, Economic Studies, 
IV, 1899); A. R. Wallace, Studies, Scientific and Social (2 vols., 1900), 
chs. xiv-xvii, xxiii, xxviii; A. Marshall, Some Aspects of Competition 
(Jour. Stat. Soc, LIII, 1890) ; Clark and Giddings, The Modern Dis- 
tributive Process (1888). 

60. Nature of Competition. 

Competition is in a certain sense the law of all life. Biology 
has made us familiar with the animal struggle for existence 
and has disclosed the process of natural selection, as resulting 
in the survival of the fittest. The chief form of this conflict is 
between the living being and the forces of nature, the struggle 
of the individual to accommodate himself to the environment, 
and the evolution under favorable conditions of those who 
survive by learning so to accommodate themselves. When 
nature is niggardly and her resources do not suffice for all, the 
struggle with nature is reinforced by a contest between the 
various groups or units to secure their share. It is here that 
competition emerges, — not a struggle against nature, but a 
conflict of one unit with another in order to enjoy the bounty 
of nature. 

It is a striking fact that the earliest form of competition 
is a group competition rather than an individual competition. 


140 Competition. [§ 60 

At all events, without going back to the beginnings of life, it 
is reasonably certain that the first competition found among 
human beings, as indeed is still the case with most animals, 
is the competition of one horde or pack with another in the 
endeavor to secure the means of subsistence. Thus from the 
very outset the principle of mutual aid emerges, and competi- 
tion between the groups is possible only because of co-opera- 
tion within the group. These early forms of co-operation are 
seen in the American frontier life when the neighbors come 
in to the " log-rolling," the " raising " of the building, the 
"husking bee" or the "sugaring off" of the maple trees. 
With the development and differentiation within the group, the 
principle of natural selection, that is, of competition, makes 
itself felt as between the members of the group ; but the 
process is slow because the welfare of the individual is deemed 
to be subordinate to that of the whole. As the groups become 
larger and more powerful, we notice continually higher forms 
of mutual aid, but we find at the same time more play given 
to the activity, or, in other words, to the competition, of the 
individual. Finally, in historic times the competition between 
nations is decided not only by the character of the state, as 
the most developed form of human co-operation, but still more 
by the results of the competitive struggle within the nation in 
developing those quaUties of body and mind on which politi- 
cal power ultimately rests. Competition in one form or an- 
other is coterminous with life itself. 

If competition, as a biological conception, is thus an ex- 
planation, in part at least, of progress, it becomes of even 
more importance when applied to the economic domain. 
The subject matter of economics is human relations to wealth. 
The difference between man and animals is not that man 
economizes wealth (for some animals do the same), but that 
he produces wealth. Competition, therefore in human eco- 
nomics is not simply a contest to divide an existing sum, but a 
struggle to share in an increasing stock. The first requisite 
of securing an additional share is to produce more. In this 

§ 6i] Forms of Competition. 141 

struggle to dispose of the increased product to the whole body 
of consumers, the victory will lie with those that can create 
better or cheaper products. The surest method of capturing 
the market is to undersell one's competitor. Thus competi- 
tion, as a business principle, means a struggle to augment 
wealth through a lowering of cost. If competition in biology 
leads only indirectly to progress, competition in economics is 
the very secret of progress. Under normal conditions com- 
petition is indeed the life of trade. The individual competitor 
may incidentally amass a fortune, but if he does so honestly 
(and dishonesty is not an attribute of wealth, but of individ- 
uals, whether rich or poor), it can only be by conferring upon 
the community still greater benefits. He conquers who does 
best for society. 

Competition in economic life, therefore, is a potent factor 
in the growth of capital. Working hand in hand with the prin- 
ciple of private property, it is the chief incentive to progress. 
Through it we secure the extension of the margin of utilization, 
the accumulation of the surplus available for human wants. 
Competition, moreover, is the great safeguard of society. 
It is the protection of the consumer against the high price 
which accompanies exorbitant profits ; for it is the automatic 
force which reduces the gains of the inefficient and makes 
profits depend on low, rather than on high price. It evokes 
in individuals the fundamental characteristics of energy, thrift 
and power ; and it harmonizes to a large extent the interests of 
the individual and of society, by making the success of one 
depend primarily on what he can accomplish for the other. 

61. Forms of Competition. 

The chief forms of competition are five in number, — com- 
modity competition, individual competition, market competi- 
tion, class competition and race competition. 

(i) By commodity competition is meant the competition 
due to the existence of social choices. Every individual is 
continually debating with himself whether to purchase one 

142 Competition. [§ 61 

commodity in preference to another. Where he is on the 
margin of doubt or of indifference the shghtest alteration in 
the price will cause him to substitute something else. The 
principle involved is hence called the principle of substitution. 
The vendor must constantly be on the watch lest any increase 
of price cause the disappearance of his sales. We substitute, 
however, not only one thing for another, but also one agency 
of production for another : in the crucible of economic wants 
everything is finally tested by its capacity to afford the greatest 
satisfaction. Not only will the consumer choose now this and 
now that commodity, but the employer will increase now his 
labor force, now his stock of machinery, so as to secure the 
best results. The least change in the rate of wages or of 
interest may lead him to substitute the one for the other. 
It is only by replacing the less efficient by the more efficient 
factor that the producer is able to induce the consumer to 
select one commodity in preference to another. Competition 
of factors of production is thus really an adjunct to commodity 
competition. Competition through substitution is hence im- 
portant in that it fixes a maximum limit beyond which prices 
cannot go. Every economic factor, like every economic good, 
may be in either actual or potential competition with another. 
The existence of competition, however, implies the mobility or 
free interchange of the factors of production from enterprise 
to enterprise and from commodity to commodity. When the 
fluidity of capital and the transferability of labor are complete, 
the competition is absolutely free. When there are hin- 
drances to this mobility, we speak of economic friction. The 
substitution of one commodity for another may be hindered 
by legal, social or economic causes. Under normal condi- 
tions, however, the competition is real and effective. 

(2) The competition of individuals with each other de- 
notes a rivalry, not between the producers of different com- 
modities or between the different factors of production, but 
between the producers of the same commodity or the same 
factors of production. Under normal conditions competition 

§ 6i] Forms of Competition. 143 

here puts every one on his mettle, and success is a measure of 
the contribution to the social fund. The more a laborer pro- 
duces, the higher his wages will be ; the larger the output of a 
particular cotton mill and the lower the cost at which it can 
market its goods, the greater will be the benefit to the con- 
sumer as well as the advantage to the particular producer. 
Competition between individuals is in its results a struggle to 
enhance efficiency, to increase faculty, to multiply productive 
power, to augment ingenuity, in short, to develop economic per- 
sonality. The more potent the personality, the greater will be 
the command over the powers of nature, the more rapid will 
be the development of the wealth which, although owned by 
individuals, yet inevitably ministers to the welfare of society. 

(3) By market competition we mean, not the competition 
of individuals in the market, but the competition of markets 
with each other. Market competition includes, indeed, both 
commodity competition and individual competition in the sense 
that in every market individuals as well as commodities com- 
pete with each other; but it is something over and above 
these. Every great city is continually striving to develop as a 
centre of distribution and exchange, in the well-founded hope 
that the wealth thus amassed will lead to productive efficiency 
in other lines. New York is competing with Baltimore for the 
grain trade ; New Orleans with Galveston for the cotton trade. 
Competition between markets seeks to overcome the factor of 
distance, and lies at the root of the problem of modern methods 
of transportation. Here again market competition leads to 
reduced cost, and the struggle for market supremacy can 
be fought to a successful issue only through more effective 

(4) Class competition is the result of the differentiation of 
modern society into groups of producers. We have not only 
the great division into laborers and capitalists, but the further 
separation of the latter into the owners of agricultural, com- 
mercial and industrial capital — that is, landowners, mer- 
chants and factory owners — and the still further subdivision 

144 Coippetition. [§ 6i 

of each class into minor groups. It pleases some writers, like 
the socialists, to erect this principle under the name of class 
conflict into the fundamental explanation of all economic 
change, and to regard it as involving not only the expropria- 
tion of the victim, but the ultimate downfall of society as well. 
In reality class competition, while as inevitable as the other 
forms of competition, is within proper bounds just as beneficial. 
Under a system of free competition capital will flow into in- 
dustry in preference to agriculture only when industrial pur- 
suits are more productive, that is, when the community as a 
whole sets more store by the products of industry. Whether 
the moneyed interest or the landed interest is more prosperous 
depends at bottom upon their success in making converts 
among the consumers, and the extent of conversion depends 
on what they can offer in the way of lower prices or better 
products. The laborers and the capitalists again represent 
competing interests, but the share of each in wages and profits 
depends ultimately, as we shall see, on their relative contribu- 
tion to the common product. 

(5) Race or national competition in its economic aspects is 
the final form of the modern struggle. The most marked 
characteristic of recent progress is the gradual substitution of 
peaceful rivalry of commerce for the sanguinary clash of arms. 
The modern weapon is not the javelin or the rifle, but the 
enterprise of the domestic producer aided by the exporter. 
Every nation that has reached commercial or industrial matu- 
rity endeavors to seek in the foreign market a profitable outlet 
for its own surplus productions. This attempt to secure a 
market is indeed responsible for an occasional war. In the 
main, however, the struggle to-day is one for cheapness, and 
in the end it is not the large army or navy but the most effi- 
cient producer that permanently retains the neutral market. 
It is not to be denied that both a large army and a large navy 
may be needed to protect the commercial or other national 
interests ; but the foundation of military greatness in modem 
times is primarily economic, and when economic efficiency 

§ 62] Dangers of Competition. 145 

has disappeared, military strength must also disintegrate. 
Great nations are now judged, not by the numbers of their 
battalions or ships, but by the volume of domestic production 
and foreign trade. Economic power represents potential mili- 
tary capacity. Here, again, national competition is salutary. 
The fundamental error of the old mercantilistic doctrine was 
the belief that what one nation gains in trade, the other neces- 
sarily loses. The modern doctrine is that every nation is 
helped by the prosperity of its neighbor, on the principle that 
the more wealthy the customer the greater will be his pur- 
chases. Both nations may gain, although one may gain more 
than the other. The foreign markets can be retained only by 
underselling ; the profits of one country can be secured only 
by conferring these advantages on the consumers of the others. 
National competition, like personal and class competition, can 
benefit the individual country only by benefiting the group ; 
it enriches one nation, but incidentally develops the others. 

62. Dangers of Competition. 

In describing the essential beneficence of competition in its 
various forms, we must not blind ourselves to its shortcomings. 
Some of these evils are inevitable. Where there are a contest 
and a victor, there must be a victim. There can be no 
struggle without some pang to the conquered. Suffering is an 
accompaniment of progress, just as sacrifice, at least in the 
sense of effort, is a prerequisite to enjoyment. In the animal 
world, where the sway of competition is relentless, the evil is 
pronounced. Progress there is purchased by the death of the 
victim. The fight is one of bestial instincts and brute powers, 
— the victory, however beneficial to the race, is secured at a 
tremendous sacrifice. Human competition, on the other hand, 
has in its economic form, as we have seen, something in 
common with, but also much in contradistinction to, brute 
competition. Economic competition may indeed involve the 
economic death of the unsuccessful competitor. The producer 
who is undersold by his rival will ultimately be compelled 


146 Competition. [§ 62 

to abandon the field. His adversary's success, which means 
progress for the consumer, spells his ruin. 

There are, however, two points in which brute and human 
competition are unHke. In the first place the economic de- 
feat may be only temporary. The producer who has failed 
in one business, often succeeds in another for which he is 
better fitted. His original failure may be the means of re- 
doubled efforts and final victory elsewhere. His downfall is 
not necessarily his end, but may be his real beginning. In 
the second place, in economic competition there may be no 
death at all, but only a relative defeat in the sense that the 
progress of both competitors is unequal. Laborers compete 
with capitalists, one country vies with another ; both may con- 
tinually gain, even though in different proportions. In brute 
competition the struggle is only for consumption ; in human 
competition the contest takes the form of production. In the 
end, indeed, the goal of both is enjoyment; but the means 
of reaching the end are different. This difference renders 
possible a participation by both contestants in the gains of 
production that are caused by economic competition. 

Even with these qualifications, however, competition is often 
a painful process, none the less painful because the struggle 
has been transferred from the arena of bodily strength to that 
of mental capacity. The competition, moreover, may some- 
times become so fierce that for a time at least it exhausts the 
powers of both competitors. This is the " cut-throat competi- 
tion " of which we have heard so much in recent years, when, 
in the effort to capture the market, prices are reduced below 
the cost of production. The temporary advantages to the 
consumer are dearly purchased through the ruin of all the pro- 
ducers. Here we see competition at its worst, because all 
competitors are pulled down to the level of the most unscrupu- 
lous. In the same way there may be excessive competition 
between laborers, as when the necessities of the laborers com- 
pel them to accept the standard of the worst-paid or hardest- 
worked laborer. In the one case as in the other this unfair 

§ 63] Limits of Competition. 147 

competition endangers the perpetuity of a successful business 
or of a prosperous working class. The question then arises as 
to whether it is not possible to conserve the chief advantages 
of competition and at the same time to lop off some of its 
excrescences ; to maintain the social benefits while minimizing 
the individual costs. In other words the question is : what 
are the real Umits of competition? 

63. Limits of Competition. 

The problem may be approached from three points of view, 
— the level of competition, the maintenance of equality and 
the existence of quasi-public enterprises. 

( I ) The fundamental distinction between brute and human 
competition, underlying all the others that have been men- 
tioned, is the point with which we have become familiar, 
namely, that while animals are governed by their environment, 
man, to a certain extent at least, can alter his environment. 
This is true not alone of the physical, but to a much greater 
extent of the socio-economic environment. The function of 
society is to raise the general plane of competition. Even in 
that extreme form of competition known as war, international 
agreements have succeeded in preventing a certain amount at 
least of wanton injury and needless suffering, without in any 
degree impairing the real intensity of the conflict. It is no 
longer true that "all is fair in love and war." In economic 
life, similarly, we often hear of unfair or cut-throat competition, 
with the implication that unworthy and reprehensible measures 
are being employed. With the development of business life 
there has been a continual movement away from the early 
brute-Hke struggle. The community to-day is frequently con- 
trasting " fair " with " unfair" competition. Not only does the 
idea of what constitutes a " fair" competition change from age 
to age, but it differs at the same age in different occupations. 
The practices of our railways are very different from what they 
were a generation ago. The professional ethics governing the 
competitive charges of a lawyer or a physician scarcely resemble 

148 Competition. [§ 63 

those of a tradesman. The code of business morals is not 
the same in Wall Street as in Worth Street ; the competition 
of farmers is often conducted on a different level from that 
of factory owners. Each group has its own standard, and the 
average man is satisfied if he conforms to it. The object of 
all progress is to elevate this standard and to give a continu- 
ally broader interpretation of what is economically " fair." 
Conformity to the standard, however, involves some interfer- 
ence with individual liberty. Through the force of public 
opinion, reflected in business usage or legislative enactment, 
competition is being made to assume a higher form. Dishon- 
esty is frowned down, factory laws are enacted, the scab and 
strike-breaker are reprobated, unscrupulous financiering is pun- 
ished. Competition is not destroyed, but its level is raised. 

(2) The second consideration is that of equality. Perfect 
equality indeed does not exist, since variety is the law of life. 
Competition does its work, in the economic as in every other 
field, precisely by giving the victory to the better equipped. 
When the disparity between the competitors, however, is enor- 
mous, the community often fails to reap the essential benefits of 
competition. If one individual can produce a commodity for 
ten cents, and if it costs his sole competitor fifty cents, a sell- 
ing price of forty-five cents will give him the command of the 
market ; whereas with a more capable group of competitors he 
might be compelled to reduce the price to fifteen cents. The 
greater the equality between the competitors, the more sub- 
stantial are the gains to the consumers. If the producer can 
in some way be rendered more efficient, so that the disparity 
will diminish, to that extent the community will gain. This 
is also, as we shall see, the principal argument in favor of the 
regulation of international competition through a protective 
tariff. In the same way the demand for a minimum wage 
and some of the other legitimate practices of trade-unions 
are intended to bring the weakest nearer the standard of the 
strongest. In its best aspects it is a levelling up, rather than 
a levelling down. 

§ 6s^ Limits of Competition. 149 

The point to be emphasized is that the strengthening of a 
weak competitor may redound to the advantage not only of 
the competitor himself, but to that of the whole group, and 
ultimately to that of the community. Competition remains, 
but is rendered less unequal. Here, as elsewhere, indeed, 
there is always the danger that the community may suffer 
more from the restriction on the strong than it gains from the 
advantage to the weak. This, however, is the danger of all 
democracy, which must be guarded against in other ways. 

(3) The third point is the existence of quasi-public enter- 
prises. Shortly after the so-called " merger decision " of the 
Supreme Court in 1904, in which the Northern Securities 
Company was declared illegal, a noted lawyer stated publicly 
by way of criticism that no one any longer beheved in the old 
adage that " competition is the life of trade." This remark 
rested upon a confusion of thought. Competition of a certain 
kind between railways is certainly not the life of trade. But 
why? Railways, like some other media of transportation and 
transmission of commodities, intelligence and power, differ 
from ordinary commercial enterprises in that they are quasi- 
public in nature. They carry on enterprises in which the 
public interest is so commanding that it must not be subordi- 
nated to private profit. In ordinary private business buyers 
and sellers make their individual bargains with each other ; 
and while, as we shall see, open competitive prices tend to 
uniformity, there is nothing to prevent the more powerful or 
the more favored purchaser from secretly securing a lower 
price. Much of the profit of the business man, indeed, con- 
sists in this skill in purchasing on favorable terms ; the very 
essence of usual business practice is this system of different 
prices to different customers. It is precisely the attempt on 
the part of railways to pursue this same policy which has cre- 
ated the " railway problem "" in the United States. It is now 
recognized that the railway has no more right to make per- 
sonal discriminations between its customers than has the 
government post-office. The wealthy merchant cannot buy 

150 Competition. [§64 

postage stamps cheaper than his smallest competitor; he 
ought not to be able to secure more favorable freight facili- 
ties. Competition in ordinary business means the different 
treatment of individuals, and is beneficial; competition in 
railway rates means discrimination between shippers, and is 
reprehensible. Competition in ordinary prices is the soul of 
trade ; competition in railway rates is the death of legitimate 
trade. The only kind of competition that is desirable in 
quasi-public enterprises is the competition of service and of 

Competition therefore is a force that must not be abused. 
It is applicable only in a slight degree to certain kinds of 
business, it works most beneficially in the presence of com- 
parative equality, and its level of action stands in need of 
a continual elevation. Within these limits, and with these 
conditions, it is a vital and salutary force. 

64. Substitutes for Competition. 

As opposed to competition there are three possible regula- 
tors of economic phenomena, — custom, co-operation and 

(i) Custom at one time played a far greater role than 
it does to-day. In the more immobile communities of the 
Orient, as well as in the early middle ages of Europe, society 
was largely governed by status rather than by contract. 
People were born into certain conditions and occupations, 
and to emerge from these was difficult or impossible. In 
the rigidity of the Indian caste system we see the highest 
development of custom. Prices also were largely customary 
prices ; the entire mediaeval conception of justum preiium 
centred in the attempt to enforce the customary price. Cap- 
ital was to a great extent fixed in land, and thus immo- 
bile ; labor was not permitted to shift at will from place to 
place or from trade to trade. Nevertheless, even in the stage 
of the customary economy competition was not entirely ab- 
sent. At bottom values were far more dependent upon the 

§ 64] Substitutes for Competition. 151 

working out of subtle and masked competitive forces than 
is usually conceded. To-day custom still plays a perceptible 
although fast- dwindling role in the determination of some 
economic phenomena. Even in the backward and primitive 
sections of our country the storm and stress of modern com- 
petitive life are making rapid inroads. The economic theory 
of industrial society now rests on competition, not on custom. 

(2) Co-operation is in some aspects the opposite, but in 
others the corollary, of competition. We have seen that from 
the very beginning there was mutual aid within the group, in 
order the better to carry on the competition between the 
groups. There is even to-day no competition within the fam- 
ily, although a very lively competition between families. So in 
the same way the stockholders of a corporation co-operate, in 
order the more effectively to compete with another corpora- 
tion. There are in fact all kinds of associations, voluntary 
and compulsory, including church and state, which fill out 
modern social life and which have more or less economic 
influence, working in perfect harmony with the struggles of 
the market. This kind of co-operation is compatible with 

Co-operation in its technical sense, however, means the 
abandonment of competition in distribution and in production. 
In distributive co-operation, the customers who are members 
of the co-operative societies select one of themselves as man- 
ager of the store and share any resulting profits. As they are 
expected to make no purchases elsewhere, there is no compe- 
tition. Such co-operative stores are found principally in Great 
Britain. They have never flourished in America because they 
have been unable to supply the commodities as cheaply as the 
great department stores. In productive co-operation the ob- 
ject is to eliminate the capitalist and to remove competition 
between the workmen. The laborers elect one or more of 
their number to control the enterprise, and divide among 
themselves the gains. Co-operative production has achieved 
some notable triumphs in both Europe and America, but as 

1 5 2 Competition. [§ 64 

we shall see (§ 184), its scope is exceedingly restricted, and 
there are great obstacles to its general adoption as a substitute 
for competition. 

(3) While co-operation implies an abandonment of compe- 
tition either between consumers or between laborers, there is a 
third form of co-operation which implies abandonment of com- 
petition among capitalists or managers of business. This is 
usually called combination. If the combination is incomplete, 
however, it is still subject to the force of competition; if 
it is complete, it has become a monopoly. Monopoly there- 
fore is the ultimate outcome of the cessation of business 

Monopoly has existed in many forms, and there are accord- 
ingly several categories of classification. Monopolies are either 
private or public, and public monopolies are either fiscal or 
social. Fiscal monopolies are enterprises conducted by gov- 
ernment for fiscal reasons, like the salt or tobacco monopoly 
abroad. Social monopolies are enterprises conducted by 
government primarily for social reasons, like the federal 
post-office, or the South Carolina dispensary system. Private 
monopolies, on the other hand, are of three classes, — personal, 
labor and capital monopolies. Personal monopolies rest upon 
natural talent ; a great actor or musician is in a class by him- 
self. Labor monopolies rest upon labor organization and 
affect chiefly the employer, although indirectly the public. 
Capital monopolies are the ones with which the consumer in 
general usually comes into contact. 

Capital monopolies, finally, are of four kinds, — legal, natural, 
franchise and ordinary business monopolies, (i) Legal mo- 
nopolies were at one time common, through grant of the 
monarch to favorites. They are to-day found only in the 
restricted form of patents and copyrights. (2) Natural mo- 
nopolies are those which depend on natural location, as in 
the case of certain specially favored lands, mines or waters. 
(3) Franchise monopolies take the form of quasi-public en- 
terprises like railways, telegraph and telephone companies, 

§ 64] Substitutes for Competition. 153 

gas, water and electric light companies, whose profitable oper- 
ation depends on the grant of a franchise to use the public 
highways, on, above or below the surface. Strictly speaking, 
they might be classed as a subdivision of natural monopolies. 
Here experience shows that competition is in the long run 
impossible and undesirable, either because, as in the case of 
railways, it leads to discrimination, or because, as in the case 
of the so-called municipal monopolies, it leads to an unen- 
durable interference with the streets or an unnecessary dupli- 
cation of plant. (4) Ordinary business monopolies, finally, 
cover the great mass of modern enterprises known as trusts, 
and as to the essential monopolistic character of which there 
is room for doubt, as will be explained later (§ 149). 

It is clear that private monopoly is a satisfactory regulator 
of price only in personal monopolies, where the consumer is 
glad to recognize and to foster exceptional talent, as well as in 
patents and copyrights where society is willing for a time to 
forego the advantage of competition for the sake of stimu- 
lating invention, and thus ultimately reaping the benefits. In 
all other cases of private monopoly, the consumer is to a cer- 
tain extent at least left defenceless. Where there is no reliance 
upon competition, recourse must be had to some form of legis- 
lative control. Unregulated monopoly can therefore only in 
most exceptional cases be a substitute for competition. 

Competition hence remains the permanent and controlling 
force of economic society. It is not all pervasive or uniformly 
advantageous. But in its fundamental aspect it lies at the root 
of progress, and when stripped of its excrescences and applied 
under proper limitations it is as beneficent as it is widespread. 
In the complex society of the present day, however, the limi- 
tations on the principle often assume almost as much impor- 
tance as the principle itself. 


65. References. 

H. J. Nieboer, Slavery as an Industrial System ( 1900) ; J, K. Ingram, 
History of Slavery and Serfdom (1895) 5 J- E. Cairnes, The Slave Power 
(1862); T. H. Green, Liberal Legislation and Freedom of Contract in 
Works (Nettleship's ed., 1888), III; J. F. Stephens, Liberty, Equality 
and Fraternity (1873) ; H. C Adams, Economics and Jurisprudence (Am. 
Econ. Assoc, Economic Studies, II, 1897) ; A. B. Hart, Slavery and Aboli- 
tion (Am. Nation, XVII), Actual Government (Am. Citizen Series), § 196; 
A. T. Hadley, freedom (1903), chs. iii, iv, vi ; R. T. Ely, Studies in Evo- 
lution of Industrial Society (1903), part 2; E. Kelly, Government (1901), 
II, bk. i, ch. v; J. S. Nicholson, Principles, bk. v, chs. ii, iii, and Strikes 
and Social Problems (1896), chs. iv, vii ; J. S. Mill, Principles (1880), bk. v, 
ch. x; S. and E. Webb, Industrial Democracy (1904), part 3, ch. iv, and 
Problems of Modern Industry (1898), ch. x ; D. G. Ritchie, The Principles 
of State Interference (1896) ; H. Rashdall, The Rights of the Individual 
(Econ. Rev., VI, 1896) ; G. G, Groat, Trade Unions and the Law in New 
York (Columbia University Studies, 1905), ch. xi ; Peace with Liberty and 
Justice (Addresses at the meeting of the National Civic Federation, 
'905) > J* R- Commons, Immigration and its Economic Effects (Indust. 
Commiss. Report, XV, 1902) ; Turner, Chiyiese and Japanese Labor in the 
Mountain and Pacific Coast States {ibid.) ; Report and Recommendations 
on Immigration, ibid., XIX, 1902, 957-1030; various articles on Immi- 
gration in American Academy of Social and Political Science, Annals, 
XXIV (1904), 151-239; Conference of the National Civic Federation on 
Immigration, 1905. 

66. Origin and Gro^wth of Slavery. 

Industrial liberty, like private property, is the result of a slow 
evolution. The ordinary picture of the freedom of the un- 
tutored savage is as fanciful as the rest of the fairy tales of our 
youth. Primitive man lacked freedom in three ways : he was 
in abject dread of nature, of his stronger comrades, and of the 

§ 66] Growth of Slavery. 15^ 

social group. In his ignorance of natural phenomena he was 
a prey to all kinds of fear and superstition and an easy victim 
of the sorcerer or medicine man. Living in a society based on 
brute strength, he was at the mercy of the more stalwart savage. 
Dependent, as we have seen, on the horde or clan for existence, 
he was hemmed in by social customs that could not be in- 
fringed and by group prohibitions which it would be folly to 
evade. Civilization, and not primitive nature, is the creator of 
liberty. Knowledge has emancipated man from superstition, 
law and order have protected him from the oppressor, social 
progress has evolved in every phase of life a sphere of liberty, 
ever more secure from the encroachments of absolutism. 
Economic liberty like political liberty, freedom of thought like 
freedom of speech, are the product of the most advanced 
stages of society. 

The freedom which is of special concern to the economist is 
of two kinds: bodily freedom as the basis of all labor, and 
freedom of economic action apart from control of one's own 
labor. The first involves personal liberty in the narrower 
sense and leads to a study of slavery. The second comprises 
a number of phenomena to be discussed in § 69. We take up 
first the subject of slavery. 

The origin of slavery has until recently been much mis- 
understood. It is commonly stated that there are four causes 
of slavery : conquest, debt, crime and birth. Slaves, we are 
told, were recruited from the victims of war ; from the ranks 
of those that voluntarily sold themselves or were unable to dis- 
charge their debts ; from the criminals who earned a punish- 
ment only short of death ; and from the offspring of existing 
bondmen. This statement is accurate enough, but it sheds no 
light on the real problem of the origin, the spread and the 
decline of slavery. 

Slavery is obviously an institution designed to secure the 
services of others by force. It presupposes the need of labor 
on a moderately large scale. In the earliest stages of society 
well-nigh the only work done by man consists of hunting and 

156 Freedom. [§ 66 

fishing, each in itself to a great extent a pleasurable activity. 
Every member of the community concerns himself with such 
work, and there is neither need nor room for compulsory labor. 
It is only when private property develops that we find the 
beginnings of slavery. In exceptional cases we can trace pri- 
vate property and intertribal barter among fishing groups, as 
in some of the Indian tribes on the North Pacific coast. Here 
the slave is utilized to a certain extent in work connected with 
fishing and in domestic labor. In general, it may be said that 
slavery can exist in the primitive economic stage only when 
subsistence is easy to procure without the aid of capital. 
When this condition is lacking, as among the Australians as 
well as among the great mass (although not all) of the Ameri- 
can Indians and the Eskimos, slavery is unknown. 

As we have seen, however, private property acquires social 
importance only with the pastoral stage. The slave can now 
be employed as the cowherd, the swineherd, the shepherd. 
The patriarchal family develops, and the slave becomes an in- 
tegral part of the family group. Slavery, however, is still rela- 
tively insignificant. Even large flocks and herds can be tended 
by a few herdsmen, and the existence of a great mass of 
poverty-stricken freemen renders recourse to slaves unneces- 
sary. The accumulation of large numbers of domestic slaves, 
moreover, is prevented by the exigencies of a roving existence. 

When we come to the agricultural stage, the conditions 
change. Cultivation of the soil is arduous, and yet with an 
adequate force of laborers it is profitable. On a given plot of 
land every additional laborer means up to a certain point an 
increased yield ; the existence of settled habitations renders 
possible the employment of domestic servants in various 
capacities. The more slaves, the more wealth and ease for 
the slave owner. 

In the early stage of the agricultural period slavery is still 
relatively inconspicuous. After the immediate needs of the 
master and his family have been met there is little use for 
additional laborers. It is only with the growth of barter and 

§ 66] Growth of Slavery. 1 57 

the increasing possibility of surplus products that it becomes 
profitable to augment both one's land and one's slaves. In 
other words, a market for agricultural production must develop, 
and the landed estates must be managed as business enter- 
prises. Slavery becomes highly lucrative, and on the great 
estates there is now such a diversified activity that large 
numbers of slaves are employed not only as domestics but in 
all kinds of industrial work. Thus in Rome the development 
of slavery on an extended scale did not take place until the 
later centuries of the republic, when slavery on the latifundia 
became the dominant form of great business enterprise. In 
the same way slavery became an important factor in America 
only when the cultivation of tobacco and later of cotton on a 
considerable scale for the foreign market made the labor of slave 
gangs profitable. 

It will be observed, however, that in addition to the exist- 
ence of a market one other factor is necessary to the spread of 
slavery. This is a supply of free land. It is only when there 
are large tracts of virgin and unoccupied soil that slavery be- 
comes at once lucrative and, from the point of view of the 
landowner, necessary. It is obvious that if any one can occupy 
and till on his own account a plot of land he will not vol- 
untarily work for others, except for a remuneration so large 
that it will exceed what he himself can raise from the soil. 
The landowner who cannot secure voluntary assistance ex- 
cept on what he regards as ruinous terms resorts to forced 
labor. As long as there is a boundless expanse of good land 
available, slave labor, which implies a superficial cultivation, is 
still economical. It pays better to bring fresh land under the 
plough than to put more effort into old land ; it is more profit- 
able to increase acreage than to redouble effort. Even when 
the land becomes poorer through an exhaustive culture, slavery 
is still profitable in the older sections, not so much for the 
raismg of produce as for the raising of slaves to be sold to the 
newer and more distant lands. To the landowner it is imma- 
terial whether he secures his wealth from the produce of land 

158 Freedom. [§67 

or of slaves : as long as the supply of fresh land maintains the 
value of slaves, their increasing numbers will counterbalance 
the decreasing fertility of his land. Finally, when slavery has 
become the dominant factor in production, it is profitably 
employed not only in agriculture, but also in industry. 

Thus in classic Greece slavery developed with the growth of 
intermunicipal markets, and grew strong with the expansion of 
the colonies on all sides of the Mediterranean. The great 
city-states became not only the chief marts but also the chief 
breeders of slaves, and slavery finally dominated industry as 
well. With the advent of Roman sovereignty slavery received 
a new lease of life, and became lucrative not only on the 
Italian mainland but in the great stretches of subjugated states. 
As long as the career of conquest and fresh accessions of 
territory continued, slavery flourished. In the same way the 
European immigrants into the new world, whose ancestors had 
just seen the last vestiges of forced labor disappear at home, no 
sooner reached American soil than they introduced in all its 
rigor the ancient system of slavery. If the system dominated 
only agriculture and not industry, it is to be ascribed to the 
fact that a controlling industrial civilization had, for reasons to 
be noted in a moment, evolved from the stage of slavery to that 
of freedom, first in Europe as against the colonies in general, 
and then in the North as against the South. It was cheaper 
for the South to buy its industrial products in the free North 
or in Europe than to make them herself. 

67. Decay and Disappearance of Slavery. 

To the same cause, the conditions of supply of fresh land, 
must we ascribe the decay and the final disappearance of 
slavery. When the supply of new land diminishes, the eco- 
nomic disadvantages of slavery make themselves apparent. 
As Cairnes pointed out, there are three defects in slave labor : it 
is given reluctantly, it is unskilful, it is wanting in versatihty. 
As long as there is an ample supply of exuberantly fertile soil, 
superficial cultivation suffices. But with every decade's culti- 

§ 67] Decay of Slavery. 159 

vation of the same plot the productivity suffers and the need 
of more unremitting labor appears. The landowner now finds 
it to his interest to mitigate the rigors of slavery and by per- 
mitting the cultivator to do some work on his own account to 
induce him to labor somewhat more strenuously for his master. 
The slave in Rome gradually turns into the co/onus, just sls 
several centuries later the Anglo-Saxon thegn is replaced by 
the villein, — the slave by the serf. Serfdom differs from 
slavery chiefly in that the individual acquires certain personal 
rights and is attached to the soil. He goes with the land, but 
cannot be divorced from it. The serf is still bound to work a 
certain part of his time for the landlord. With the final ex- 
haustion of free land, however, the landlord finds that he can 
derive more profit by freeing the serf completely and by letting 
him occupy the land on a fixed rental, in produce or in money. 
This process is gradual, differing according to the general 
economic conditions of each country. Ultimately, however, 
the last trace of serfdom disappears, and the cultivator becomes 
the hired man or the free tenant farmer. 

There are generally five steps in this transition from slavery 
to liberty : (i) the acknowledgment by the master of certain 
personal rights on the part of the slave; (2) the grant to the 
slave of certain property rights, as the privilege of the Roman 
slave in later times to acquire a peculium or independent fund 
by working in his leisure moments for himself; (3) the con- 
ferring of the privilege of marriage, whereby the master ab- 
dicates the right of breeding human beings like animals ; (4) 
the manumission of the slave, while reserving certain partial 
rights to his services; (5) complete emancipation and com- 
mutation of all services into a fixed money rental. 

The transition from slavery to serfdom and from serfdom to 
freedom can be traced in Western Europe, where the increase 
of population and the resulting diminution of fresh land forced 
the adoption of better methods of cultivation. The process 
was accelerated by the growth of a free industry and com- 
merce in the towns; and although temporary mutations 

i6o Freedom. [§67 

caused the landowners here and there to resist emancipation, 
serfdom was finally abolished, either because it was no longer 
really profitable, or because the community now recognized 
the greater need and value of the free industrial workman. 
In the first case, as in England, serfdom died a comparatively 
quiet death ; in the second case, as on the Continent, where 
the landowners were more tenacious of their rights, it needed 
a revolution to bring about the disappearance of the last traces 
of serfdom. 

In America, where at first only the fringe of the arable area 
was occupied, the resulting inability to secure an adequate 
labor force through free workmen, apprentices or redemp- 
tioners soon led to the adoption of slavery, first of Indians, 
then of negroes. In the Northern states, where the land was 
poor and a better cultivation necessary, slavery never took a 
deep hold except on the plantations of Narragansett Bay and 
of the Hudson valley. In the South both climate and soil 
made slavery profitable. As the seaboard lands became 
poorer, the continuance of slavery depended on the continual 
acquisition of fresh lands, — a fact that led to the Mexican war 
and the attempts to secure Cuba. The opening of the lower 
Mississippi valley so augmented the price of slaves that not 
only the older seaboard states, but even many of the hill sec- 
tions of the interior commonwealths where slavery would never 
have developed of its own accord, now found it to their inter- 
est to raise slaves for the market ; and from that time the 
entire South was practically a unit in favor of the "peculiar 
institution." The South was forced into the conflict because 
it well realized that without fresh supplies of land slavery was 

Emancipation came as a war measure; but even without 
emancipation at that time slavery would soon have disappeared. 
Left to itself, without any chance of territorial expansion in 
the presence of a more vigorous and free industrial system, 
slavery would slowly have become unprofitable, and would 
have changed into some form of serfdom to be ultimately 

§ 6;] Decay of Slavery. i6i 

merged into the more remunerative system of freedom. Lin- 
coln's proclamation, like the Czar's ukase of the same decade, 
accomplished by a s4;roke of a pen what it had taken Western 
Europe centuries to attain. In America the transition was an 
economic revolution, in Russia a reform, because in the one 
country slavery, and in the other serfdom, was abolished. In 
both cases the change in the law only slightly anticipated the in- 
evitable result of a fast-approaching change in the economic facts. 

The disappearance of slavery is therefore not due primarily 
to moral teachings. The greatest moral philosophers of Greece 
defended slavery because they could not conceive of a social 
system without it; the clergymen of the South honestly ap- 
pealed to the Bible because in their opinion it was necessary 
to social stability. The ethical defects of slavery were men- 
tioned by many Roman writers, but it was not until its eco- 
nomic shortcomings were realized by teachers and public 
alike that slavery disappeared. The civil war was indeed 
borne on the waves of a great moral uprising, but human 
nature in the North was no different from that in the South, 
and had the climatic and economic conditions of the North 
been like those of the South, there would have been no such 
moral uprising. A higher morality, it is true, continually trans- 
forms social life, but in order to accomplish lasting results it 
must be in intimate touch with the great underlying economic 

With the virtual exhaustion of free land, slavery in modern 
society has gone, never to return. It is only in a few of the 
tropical colonies where land is still abundant that there is any 
possibility of its continuance; and if the colonies did not form 
so relatively insignificant an appendage of modern industrial 
states, the possibility might become a probability. It is un- 
likely that we shall see anything more severe than the carefully 
regulated contract labor of some of the English possessions. 
Even here, however, as well as in the case of the "culture " sys- 
tem of Java and the peonage of Spanish America, care must be 
taken not to permit a relapse into a state of virtual serfdom. 


1 62 Freedom. [§ 67 

Slavery and serfdom have been defended on five grounds. 
(i) It is claimed that slavery is preferable to cannibalism ; that 
it is a great advance to spare the victim rather than to eat him. 
It is forgotten, however, that when the great development of 
slavery came, the enslaving part of mankind had long passed 
out of the cannibal stage. (2) It is contended that slavery 
protects labor, and that in the middle ages, for instance, pro- 
tection was more important than freedom. This is, however, 
an assumption which from the point of view of the workman 
cannot be proven. (3) It is said that slavery inculcates the 
habit of work. There is no doubt that some of the negroes 
were drilled into comparative thrift and orderliness in the 
South. But this assumes that nothing else would effect the 
same result, — an assumption belied in all countries where free 
labor has developed independently. It also forgets that some 
of the negroes came from tribes where work was by no means 
unknown. (4) It is asserted that slavery permits the evolution 
of a leisure class. This, again, is based on aristocratic postu- 
lates. It completely ignores the possibility of a democratic 
development where leisure and culture will no longer be the 
possessions of a favored few. (5) Finally, it is claimed that 
compulsory labor is necessary for the economic progress of 
countries where the natives will not work. This argument 
overlooks the fact that the ultimate end of economic progress 
is man rather than wealth, and that every resource of modern 
civilization in the line of industrial and technical education 
must first be exhausted before' the claim can be admitted. 
Labor is indeed necessary for economic progress, but a so- 
called progress which rests on the perpetual exploitation of the 
laborer is not worth having. Slavery, whether total or partial, 
exerts its pernicious and insidious influence on slave and 
slaveholder alike. The modern conscience refuses to permit 
it, and fortunately the economic facts are almost everywhere in 
harmony with the modern conscience. These economic facts 
rest on the disappearance of free land. 

§ 68^ Economic Liberty. 163 

68. Liberty of Economic Action. 

While bodily freedom is thus the result of a slow develop- 
ment, the liberty of economic action in general is also a recent 
product. Economic liberty of both kinds has been evolved 
because it has been recognized as conducive to wealth and 
general progress under modern conditions. As opposed to 
the theories of ancient and mediaeval absolutism, with its con- 
tinual interference in the economic life of the individual, the 
modern doctrine is that a man may commonly be depended 
upon for utilizing his opportunities and turning his energies to 
the best account ; that an adult of sound mind usually knows 
what is most advantageous for him, and that in making the 
most effective use of his own abilities he will ordinarily do the 
best for the community. It involves the substantial identity 
of private interest and public welfare, and it is to-day almost 
everywhere in the civilized world either an accomplished fact 
or a cherished ideal. 

If we look- more closely, however, we shall find that free- 
dom is more than the mere absence of restraint or interference. 
In contrast to this mere negative conception of Hberty, as 
advanced by Spencer and adopted by the average man, we 
must put the positive conception as framed by Green and 
elaborated by recent thinkers. Economic freedom, like all 
liberty, is not an attribute of primitive man, but has been ham- 
mered out by centuries of toilsome effort. Individual liberty is 
the product of social effort. If it is to be a constructive rather 
than a destructive force, if it is to minister to social progress 
rather than to social dissolution, it must be accompanied by 
two other conditions. 

Of these the first is equality. By equality we do not mean 
absolute equality. A certain degree pf inequality inheres in 
the nature of things. Men are born with an inequality of 
physical, mental and moral attributes which no amount of care 
can eradicate ; and as soon as private property develops, these 
natural inequalities inevitably produce their results in inequality 

164 Freedom. [§68 

of possessions. The real equality that is important for eco- 
nomic purposes is threefold : first, legal equality, or the cer- 
tainty that one man is as good as another before the law, 
and that his economic rights will be equally protected ; sec- 
ondly, equality of opportunity, in the sense that no man .s shut 
out by legislation or social prejudice from free access to any 
vocation or employment for which he deems himself fitted ; 
thirdly, such a relative equality, at least in the conditions of 
bargaining, as not to put one party to the contract at the vir- 
tual mercy of the other. Without such a threefold equality 
freedom becomes illusory ; for liberty based on gross inequality 
means the liberty of the stronger and more unscrupulous to 
impose his will on the weak. Liberty without equality is the 
power of the one, but the subjection of the other. The liberty 
to invest one's, capital in slaves was stoutly defended by the 
ante-bellum Southerner, but his liberty involved the other's 

In addition to equality the growth of competition and the 
complexity of modern economic life have brought into promi- 
nence a second condition of liberty. The enormous power 
exerted to-day by the accumulations of capital as well as by the 
combinations of labor is in the present state of human devel- 
opment peculiarly susceptible of abuse. These abuses may be 
within the margin of the law, and yet none the less socially 
reprehensible. Unless great power is tempered by responsi- 
bihty, it is apt to run wild. We are beginning to hear of the 
responsibilities of wealth, but the adage noblesse oblige applies 
to all forms of economic power, whether represented by wealth 
or not. What is needed, and what is gradually being devel- 
oped, is the sense of social solidarity ; in other words, the 
conviction that no one can really dissociate himself from the 
welfare of his neighbors, and that his every action must be 
judged by its influence on society at large. It was this idea 
that found vague expression in the " fraternity " of the French 
revolution ; it is the same idea that is again more forcibly 
advanced to-day under other names. The application in the 

§ 69] Kinds of Economic Freedom. 165 

economic sphere is no less valid than in others. Liberty 
without responsibility is license. 

Real economic liberty, therefore, is constructive in that it 
implies not simply an absence of restraint, but such a positive 
complex of conditions, resting on law and custom, as to insure 
to the greatest possible number the opportunity of a free 
development of their faculties. Liberty, when based on equal- 
ity and responsibility, means wealth for the individual and 
progress for society ; liberty without equality and responsibility 
may mean advance for the few and retrogression for the 
many. Liberty as a negative concept is disruptive; liberty 
as a positive concept harmonizes society and the individual ; 
the one is a menace, the other an aid, to lasting economic 

69. Various Kinds of Economic Freedom. 

(i) The first and most obvious form of freedom is that of 
marriage and divorce. Marriage indeed is far more than an 
economic contrivance, even though the historical forms of 
marriage have been influenced by economic forces to a greater 
extent than is commonly recognized. Freedom of marriage 
especially is a product of the modern economic life. Restric- 
tions on the right of marriage were in the middle ages an 
attribute of personal subjection, and were utilized as fiscal 
resources by the lord. Even with the advent of physical free- 
dom, however, we find the right of marriage dependent on 
certain property qualifications, as in Southern Germany at the 
beginning of the nineteenth century. This also was merely a 
survival of aristocratic traditions, — like the still existing prop - 
erty qualifications for marriage in the case of army officers in 
continental Europe. Freedom of divorce, on the other hand, 
existed in early society, but was at first based on inequality. 
After the patriarchal and modern family had been constituted 
the husband could divorce the wife, but not vice versd. The 
newer right of divorce which rests on equality is in large 
measure the result of the economic emancipation of woman. 

1 66 Freedom. [§ 69 

Into the wider ethical and religious aspects of this great 
problem the present is not the place to enter. 

(2) Next we have freedom of movement. In the middle 
ages the right of internal migration was often restricted. 
Under the settlement laws in England, for instance, it was 
virtually impossible for a workman to leave his native parish. 
In modern times the growth of freedom has brought {he right 
not only of internal but of international migration. The 
restrictions on emigration still existing in Russia, for instance, 
are a relic of mediaevalism. On the other hand, the prohibition 
of immigration which is sometimes found in modern countries 
must be judged in the light of liberty in the positive sense, as 
explained in the preceding section. Chinese immigration into 
the United States, for instance, is forbidden. Cheap Chinese 
labor would undoubtedly help in developing the resources of 
the Pacific slope ; but the vital objection to it is the permanent 
inequality between the Chinese and the American workman. 
Immigration in general is to be welcomed in a young coun- 
try like America with relative underpopulation, because even 
though the standard of life of the immigrant may be lower 
than that of the native, he or his children will soon reach the 
American level. The Chinaman, however, refuses to assimilate, 
and will not adopt American methods. He retains and per- 
petuates his lower standard, and thus, if present in sufficient 
numbers, would inevitably drag the American standard down to 
his own level. Freedom of immigration, which in this case 
means prosperity for the employer and comparative comfort 
for the immigrant, implies permanent degeneration for the 
American workman and thus ultimate economic decay. It is a 
specious Hberty, because based on inequality. 

When, however, there is any prospect of speedy equality and 
the immigration is not artificially fostered by foreign govern- 
ments or interested transportation agencies, interference with 
the freedom of immigration is uneconomic. This was the 
error of the Know-nothings in the fifties, as it is of the anti- 
immigrationists at present in the United States. That the low- 

§ 69] Kinds of Economic Freedom. 167 

class immigrant is the chief source of supply of the sweat-shops 
and in many respects complicates the labor problem is un- 
doubtedly true and ominous. The remedy, however, consists 
not in abolishing immigration, or even in restricting it ma- 
terially, but in raising the standard of pay and conditions of 
work through labor organization, public opinion and legal en- 
actment, and in making this possible by increased production 
and successful enterprise. In a country, indeed, where the 
labor market is already overstocked, the force of this argu- 
ment will be much impaired. But the time has not yet come 
in the United States when the immigrant in general is to be 
shut out or his advent materially restricted. 

(3) We come next to the freedom of occupation. The 
right of choosing one's profession was in former times hedged 
in by all manner of barriers. At its worst the system of caste 
and custom prevented progress because it put men into voca- 
tions for which they were not fitted. Freedom of occupation 
insures as far as possible the right man for the right place, and 
this leads to enhanced production and better distribution. 
The only restriction which modern society permits is the evi- 
dence of fitness, in those occupations where incompetence 
would imply irresponsibility and involve injury to others as well 
as to oneself. The certificates required from doctors, dentists, 
engineers, plumbers, pilots and the like are not a hindrance, 
but an aid, to true liberty. The apprenticeship regulations of 
the trade unions, however, are sometimes good, sometimes bad. 
Where they are designed to insure good work, or even to pre- 
vent the degradation of wages and the workman's standard of 
life through the irruption of large numbers of underpaid ap- 
prentices, there is much to be said for the practice. But when 
the object is simply to keep out competent workmen and to 
erect a monopolistic closed corporation, as in the late stages 
of the guild system, the limitation is clearly indefensible. 

(4) Another kind of freedom is the freedom of association. 
The chief forms of association for economic purposes are com- 
binations of labor and combinations of capital. In classic 


1 68 Freedom. [§69 

Rome, as in modem Russia, where both poHtical and economic 
aims were sought we find a stern repression of labor associa- 
tions. Even after the right of political and religious associa- 
tion had been won, however, combinations of labor were 
prohibited. Under the modern factory system such combina- 
tions have assumed the form of trade unions. It was not until 
1824 in England, and considerably later in America and con- 
tinental Europe, that the prohibition was removed. The legiti- 
macy of union, as such, is now accepted because it is recognized 
that it tends to secure the real freedom of the laborer. The 
individual workman in a large factory is at a clear disadvantage 
in dealing with the employer ; the union, as we shall see 
(§ 182), restores the equality by securing the right of collective 
bargaining. In the same way the right of free association of 
capital in the form of corporations and other combinations has 
been acquired chiefly in the past half-century. Here again, 
however, when the nominal liberty of association results in a 
" restraint of trade " or virtual monopoly inimical to the general 
interests, the community is justified in curbing its excesses 
whenever the contest involves a crass inequality or is con- 
ducted without any sense of social responsibility. The greatest 
care, however, must be observed in the analysis before the in- 
fringement of the right of association can be conceded. To 
abandon liberty because of a mere apprehended but imaginary 
inequality would be to sacrifice both liberty and equality. A 
clear case must be made out before the law should be invoked 
against the combinations of either labor or capital. 

(5) The fifth category, freedom of consumption, needs only 
a word in this place. The sumptuary laws of old which pre- 
scribed in detail what should be eaten or worn were sometimes 
well intentioned, but always mistaken. By restricting the ex- 
pansion of wants, they really checked economic progress. 
Modern society has abandoned such a system completely, and 
where it becomes desirable in the interests of the public health 
or safety to prohibit the use of certain commodities, like over- 
ripe fruit, or infected meat, or opium, the end is attained far 

§ 69] Kinds of Economic Freedom. 1 69 

better by a prohibition of sale, under the police power of the 
state, than by a restriction of consumption. 

(6) We come, sixthly, to freedom of production, including 
freedom of contract and enterprise. Here, again, the emphasis 
has been shifted in modern times. The world has outgrown 
the time-worn conception of the citizens as the children of an 
all-wise and benevolent paternal government. It has been 
realized that governments are not always benevolent and never 
all-wise, and that with the growth of capital and competition 
better results can be secured by the repeal of the complicated 
and often contradictory provisions which throttle production 
and check individual initiative. It was this that the French 
manufacturers meant when they told Colbert ^^ laissez-nous 
faire^' and thus introduced a celebrated phrase. That was 
indeed the necessary destructive process of pulling down the 
barriers which impeded progress because they checked equal 
opportunity. It has been found requisite, however, in recent 
times to modify both the theory and the practice of laissez- 
faire in order to safeguard the interests of various classes of 
society. The complex requirements of modern life have ne- 
cessitated a governmental regulation of many business enter- 
prises in behalf of producers, of consumers, of investors or of 
the general public. The difference between mediaeval and 
modern interference is to be found chiefly in the fact that the 
one sought to prevent competition while the other endeavors 
to enlarge its domain and to raise its level. The only excep- 
tion to the rule that rational modern interference is not de- 
signed to prevent competition is found in those few cases 
where competition itself becomes wasteful and inefficient. 
The modern aim, however, is always to increase liberty 
through the attainment of equality and responsibility. Factory 
laws give the operatives a fair chance ; railway regulation at- 
tempts to secure equal treatment of shippers ; supervision of 
banks, insurance companies and other corporations is designed 
to enforce financial responsibility. In all these cases interfer- 
ence is justified only as leading to a surer and greater general 

170 Freedom. [§ 70 

liberty. We have to deal with the positive, not the negative 

(7) Finally, we have freedom of trade. This is virtually 
included under the last head, since trade is a species of pro- 
duction. It forms, however, so important a part of the subject 
that it has generally been treated separately. The modern age 
has seen the emancipation of internal commerce from mediaeval 
restrictions of all kinds. The great controversy to-day centres 
about international trade. Here, again, the general hypothesis 
must be in favor of freedom. Free trade, however, is not 
necessarily and always beneficent. If the relative inequality of 
two countries in the production of a certain commodity is 
great, free trade may hinder in the weaker country the growth 
of an industry which might become relatively profitable or even 
highly necessary. Under such conditions protection, by build- 
ing up the industry to the point where there will be a domestic 
competition, may help in creating that relative equahty between 
the domestic and the foreign producer which will ultimately 
redound to the interests of the consumer as well. As we shall 
see later, however (§ 232), such a policy is defensible only 
when protection actually increases real productive efficiency, 
and when the undoubted intermediate economic loss does not 
outweigh the ultimate advantage. Only in such a case is in- 
terference with freedom legitimate, because only then is it in 
the interests of a more real and beneficent ultimate freedom. 

70. Individual Liberty as a Social Concept. 

We see, then, that in modern life liberty is a result rather 
than a cause. It does not mean simply the absence of restraint ; 
for that is license, not liberty. All social progress is the result of 
a certain restriction of the liberty of some in the interest of all. 
These restrictions are imposed by custom, by voluntary associ- 
ation, by law. Good manners and social usages which prevent 
men from doing what they like are a mark of civilization. 
Associations like the church, the clubs and business unions lay 
down rules to which each member must conform. Government 

§ yo] Individual Liberty. 171 

enacts many laws whose wisdom is unquestioned and obedience 
to which is compulsory. In every case there is necessarily an 
infraction of liberty in the crude sense. Moreover, especially 
in industrial matters, the cry of individual liberty often becomes 
a mere shibboleth invoked by the individuals against others 
instead of themselves. The railway magnate restricts his own 
liberty by pooling arrangements, but objects to interference by 
the shipper. The slave owner wanted freedom of trade, but 
scouted freedom of man. The manufacturer demands protec- 
tion against his foreign competitor, but objects to factory laws. 
The cotton grower acclaims the rise of prices brought about 
by manipulation on the exchange, while the spinner decries 
the liberty of speculation. The factory owner joins the selling 
bureau which restricts output or fixes prices, but objects to the 
" tyranny " of the labor union. The labor union adopts pro- 
visions relating to apprenticeship, the open shop and the boy- 
cott, but opposes lockouts and trusts. The lawyer refuses to 
consort with the "shyster" and the doctor with the quack, 
because they desire to maintain the standard of their profes- 
sions ; but they sternly reprobate the effort of the trade union- 
ist to prevent the " scab " from reducing the level of his 

Liberty, then, must be looked at from the social as well as 
from the individual point of view. The individual has become 
what he is largely through associated effort. This, however, 
inevitably implies a certain subjection of the individual to the 
group. The liberty which is compatible with social progress 
involves the readiness of the individual to work for a common 
end. If this readiness is not voluntary, it must be developed 
by persuasion or by force. All liberty is a balancing between 
the powers of anarchy and of tyranny. Individual freedom 
that is oblivious of the rights of others or of the best interests 
of the majority leads to an anarchy that is destructive of real 
liberty ; group restrictions that are forgetful of the possibilities 
of the individual lead to a tyranny that is equally destructive 
of real liberty. From the economic point of view only that is 

172 Freedom. [§ 70 

real freedom which is calculated to reconcile the greatest 
possible production in the group with the greatest possible 
consumption of every individual within and without the group. 
The liberty of one, therefore, must not endanger the economic 
progress of others. 

Just as the political interpretation of liberty is democracy in 
government, so the economic liberty which is conducive to 
progress can exist only with a relative economic democracy. 
It implies at least economic opportunity, and opportunity 
depends on a ceftain degree of equality and responsibility. 
In this sense the best government is not that which governs 
least, but the one which secures the surest conditions of a 
wider ultimate freedom. Economic liberty in the last analysis 
is the result of action, not of inaction. 

Part III. 
Structure and Process of Economic Life. 

Book I. 
Value : General Principles. 


71. References. 

W. Smart, Introduction to the Theory of Value (1891), chs. ii-viii; J. B. 
Clark, Philosophy of Wealth (1886), ch. v, and Distribution of Wealth 
(1899), chs. xv-xvii; M. Pantaleoni, Pure Economics (1899), part i, ch. 
iv ; A. Marshall, Principles (1898), bk. iii; N. G. Pierson, Principles 
(1902), part I, ch. i, § 3; W. S. Jevons, Theory (1888), ch. iii; F. A. 
Fetter, Principles (1904), part i, div. A ; T. N. Carver, Distribution 
(1904), ch. i; H. Sidgwick, Principles (1883), bk. i, ch. ii; A. W. Flux, 
Economic Principles (1904), ch. ii ; E. v. Bohm-Bawerk, Positive Theory of 
Capital (1891), bk. iii, chs. i-ix ; F. v. Wieser, Natural Value (1893), 
bk. i ; C. M. Walsh, Measurement of General Exchange Value (1901), 
ch. i ; H. J. Davenport, Value and Distribution (1908), ch. xvii. 

72. Original Meaning of Value. 

Value is the Latin term corresponding to the Saxon " worth." 
The fundamental idea which underlies worth is capacity to 
satisfy a want. If we need a nail, but find a broken one, we 
say that it is worth nothing, — that it is valueless, or not avail- 


174 Meaning of Value. [§ 72 

able, for our purpose. Value or worth thus implies usefulness 
or utility. The nail is valueless for us ; if it " avails " nothing, 
it is of no use. Since value implies capacity to satisfy wants, 
there are as many kinds of value as there are classes of wants. 
Things have a scientific value, an aesthetic value, a religious 
value, a philosophic value, a political value and so on. The 
value with which economics has to deal is economic value, — 
a small subdivision of the whole. As this is a treatise on 
economics, we shall hereafter use the term value in the sense 
of economic value, that is, the value of anything for economic 
purposes. But just as we know (§ 2) that the economic life 
is not the whole life, so we must not confound economic value 
with value in general. When we defined economics at the 
close of section 4 as the science of value, it must be remem- 
bered that what is meant is the science not of all value, but 
only of economic value. 

Incidentally we may point out the original dependence of 
moral considerations on economic facts. A thing was at first 
" good " in the economic sense, as we still employ the phrase 
a stock of goods and commodities. The ethical use of 
good came much later. In popular parlance we still speak 
of the broken nail as *' no good," without desiring to pass 
any moral judgment on it. In the same way the original 
concept of " dear " was not ethical, but economic. A com- 
modity may still be dear even if we do not love it. So also 
what is ethically precious to us was originally of economic 
importance ; we still speak of precious stones in this economic 
sense. To-day we esteem somebody, when originally we put a 
money value on him {aestimare, from aes, money). In mod- 
ern times we appreciate a quality, but at first we set a price on 
it {ad-prettum). In fact, so fierce was the struggle for exist- 
ence among the early Romans, so important for their very 
stability was the quality of bravery, that the thing of chief 
value to them, the characteristic which "availed" the most, 
was "valor," a term which has now become with us of ex- 
clusively ethical import. 

§ 73] Marginal Utility. 175 

This close connection of ethics and economics must, how- 
ever, as we have seen, not blind us to the fact that the real 
subject of our discipline is economic. The utility with which 
we have to deal is the economic utility, the capacity of a 
thing which we must economize in order to satisfy a want. 
The use of whisky may be ethically reprehensible, but as long 
as men desire it, and as long as they must be economical 
with it, that is, as long as it is not a free good, but an economic 
good, whisky will have an economic usefulness, — it will be 
used to satisfy the craving for drink ; and it will have a value 
in the market. The ethical judgment of the community may 
indeed affect the economic situation. The practice of drink- 
ing to excess may be visited with such severe social reproba- 
tion that the appetite for drink may be held in check, and 
the utility of whisky will then diminish because the desire for 
it will have decreased. The study of human wants is largely 
a matter of social psychology, and the character of human 
wants is continually being modified by moral considerations ; 
but when we are dealing with the serviceableness of a com- 
modity for satisfying want, we are operating with economic 
quantities. The economist must continually bear in mind the 
moral aspects of the situation as modifying the conditions; 
but, the conditions once given, the economic problem is a thing 
by itself. 

As a preliminary definition, then, we may say that the value 
of anything is the expression of our estimate of its utility, 
meaning by utility its capacity to satisfy human wants. 

73. Marginal Utility — The Law of Diminishing Utility. 

It is obvious that this definition is incomplete. Iron is more 
useful than diamonds, yet diamonds are incontrovertibly more 
valuable. In what sense is value an expression of utility? 

If a starving wayfarer suddenly spies an apple, it will have a 
supreme utility for him because it stands between him and 
death. If he finds a second apple, it will still be welcome, but 
will fill a somewhat less intense want. With every additional 

176 Meaning of Value. [§ 73 

apple his appetite will be more appeased, until with let us say 
the tenth apple he will reach the point of satiety and be on the 
margin of doubt whether to consume any more. The utility 
of each apple — its capacity to satisfy his desire — has di- 
minished until the tenth apple is the last which affords any 
utility at the moment. The utility of this tenth apple is 
called final because it is the final apple, or marginal because 
on the margin of desire. 

It is plain that the marginal utility of any apple depends on 
the quantity at one's disposal. The greater the quantity, the 
less keenly will he feel the particular want. If he had only 
five apples, the utility of the fifth, that is, the marginal utility, 
would be considerable because his last want satisfied would 
still be urgent. The degree of marginal utility depends on the 
strength of the want last satisfied, or, it might be said, on the 
need we have of more. 

The second point is that at any given time the utility of 
each apple is equal to that of the last and therefore to that of 
any other (of the same size and quality). If the available 
supply is five apples, any one of the five may be considered 
the marginal unit, that is, the last unit in point of time. The 
wayfarer will lay his hands on any one of the five without par- 
ticular choice ; whether he begins with one or with another is 
immaterial, because he knows that one is as good as another. 

Thirdly, in estimating the utility of the entire supply of 
apples, we must distinguish between the total utility and the 
effective utility of the stock, that is, the utility which is of any 
effect when we compare given quantities of different goods. 
The total utility of a stock is obtained by adding the utility of 
each apple to that of its predecessor. It will accordingly grow 
until the point of satiety has been reached. Ten apples 
possess more total utility than five. The effective utility of 
the stock, however, is equal to the marginal utility of the final 
unit multiplied by the number of units. The effective utility 
of four apples is four times the marginal utility of the fourth. 
The effective utility of the stock grows, but not up to the point 

§ 73] Marginal Utility. 177 

of satiety ; after a limit has been reached, it begins to decline. 
The effective utility of eight apples may- be less than that of 
five, even though the total utility is undoubtedly more. 

This can be made clear when we remember that we have 
many wants and that the degree in which things satisfy our 
wants depends on their relative importance. In addition to 
apples, the wayfarer needs other kinds of food, clothing and 
shelter. If he has only five apples, his desire for them may be 
so strong that he thinks of nothing else ; but if he has eight 
apples, his desire for the apples may be overtaken by his desire 
for let us say three articles of clothing. If there were a hun- 
dred apples at his disposal, knowing that he had sufficient for 
many future meals, he would turn his attention almost entirely 
to still other needs. Air, for instance, is indispensable to life, 
but it is so abundant that it has no marginal utility at all and 
hence no effective utility, although its total utihty is limitless. 
If the supply of air was shut off, however, he would abandon one 
by one his other needs, until finally his only desire would be 
for air. In other words, as long as he thinks chiefly of apples, 
which he will do as long as he can get only five, he wants all 
five ; but as soon as he thinks of other things (which he will do 
when there are say eight apples) the less will be the impor- 
tance which he will attach to the eight. The smaller the 
number of units, the more rapid will be the rise in their margi- 
nal utility. If in the case of five apples the marginal utility of 
each is five units of satisfaction, the effective utihty of the stock 
will be five times five, or twenty-five ; but if in the case of eight 
apples the marginal utility falls to three, the effective utility of 
the stock will be eight times three, or twenty-four. Yet the 
total utility of eight apples is certainly more than that of five. 

It is important to note, moreover, that the word margin 
is used in two senses, or, rather, that there are two different 
kinds of margins. When we speak of the marginal use of a 
commodity to any one, we think of him as on the brink of not 
wanting any more. He may reach the margin because, with 
the diminishing utility of each increment, he will, if the supply 

178 Meaning of Value. [§ 73 

is large enough, come to the point where there will be no 
consciousness of any economic usefulness at all. The margin 
becomes a margin between the economic world and the non- 
economic world, a margin between the sphere of economizing 
and that of unconcern or waste. On the other hand, when the 
supply is limited, the diminishing utility of each increment will 
be arrested at a point below which the consumer will prefer to 
abandon the use of an increment for something else. The 
margin here is a margin of indifference between an increment 
of one commodity and an increment of another commodity. 
Since these increments are not necessarily the same, the mar- 
gin of indifference may be reached at a point where the tenth 
increment of one commodity balances the twentieth of another, 
where, in other words, the marginal utility of the one commodity 
is twice that of the other. Both marginal increments will 
still possess a positive utility. This second kind of margin is 
an economic margin, that is, a margin or border between two 
or more economic goods, not as in the first case a margin 
between economic and non-economic goods. The first kind 
of margin, where we compare different increments of the same 
thing, may be called the non-economic margin, because at the 
margin the utiUty is zero and the commodity is no longer an 
economic good. The second kind of margin, where we com- 
pare the same or different increments of different things, may 
be called the economic margin, because at the margin the 
utility of each thing is still measurable and appreciable. We 
shall have repeated occasion to call attention to the errors 
that result from confusing these two kinds of margins. 

To recapitulate : the utility of a commodity is called mar- 
ginal because the desire for additional quantities must some- 
time reach a limit or margin as compared with the desire for 
other commodities. There is always one unit in the supply 
which marks the margin of this desire ; and with every change 
in the supply or the desire, the margin will move up or down. 
This unit is called the marginal unit or increment. With a 
fixed quantity the utility of each unit or increment is for prac- 

§ 74] Individual and Social. 179 

tical purposes equal to that of the marginal unit, because if any 
unit were withdrawn the final unit would naturally be put in its 
place. The real loss would be the loss of the marginal unit. 

Value, then, is not simply the expression of utility in general, 
but of marginal utility. When we speak of the value of a com- 
modity, we think not of its usefulness in general, but of the 
utility of a definite quantity as compared with other goods ; 
and in so doing, we think not of the total utility of this quantity 
in itself, but of its effective utility, that is of the utility of the 
marginal unit multiplied by the number of units. 

74. Individual and Social Value. 

Value as a universal conception would be true of the indi- 
vidual living apart from society, if there were any such beings. 
The estimate put by the individual on one commodity as com- 
pared with another is the foundation of all value. Robinson 
Crusoe would assign a value to apples as compared to nuts, the 
value of each being in agreement with their marginal utility to 
him. As a matter of fact, however, we live in society, not on 
a desert island. Economics, as a social science, treats of the 
relation of man to man, of class to class. The value with 
which we deal is therefore the result of social forces. It is 
society as a whole which sets a value on things. Society is 
indeed composed of individuals, but it is the aggregate of in- 
dividual wants that shapes value. The want of the individual 
affects value only as it influences this aggregate. If a rich 
maniac, for instance, should offer a thousand dollars for a com- 
mon spoon for which every other person would give only five 
cents, his subjective estimate would have no appreciable in- 
fluence on the value of the spoon, and if he actually paid a 
thousand dollars, society would be justified in locking him up 
and in punishing the seller. Of course, when the supply of an 
article is limited and the desire of the individual such that the 
article possesses a peculiar utility for him, not shared by the 
rest of the community, his subjective estimate may seriously 
influence its value. This is true, however, only for the reason 

i8o Meaning of Value. [§ 74 

that because of the limitation of supply the subjective estimate 
of the single individual forms so large a part of the collective 
desire. To get my ancestor's watch out of pawn, I may pay 
if necessary far more than its value to any one else. The 
border between an enthusiastic collector and 'one with a 
"screw loose" is»sometimes a narrow one. Ordinarily, how- 
ever, the desire of any one individual forms only an insignifi- 
cant part of the collective desire. 

Value, therefore, depends upon the fact not only that each 
individual measures the relative urgency of his own various 
wants, but that he compares them consciously or unconsciously 
with those of his neighbors. I not only measure the relative 
satisfaction that I can get from apples or nuts, but the quantity 
of apples I can get for the nuts depends on the relative es- 
timate put upon both by the rest of society. If an apple is 
worth twice as much as a nut, it is only because the group that 
uses both apples and nuts finds, after comparing individual 
preferences, that the desire unsatisfied by the lack of an apple 
is twice as keen as that unsatisfied by the lack of a nut. 
Value, therefore, is not merely the expression of marginal util- 
ity ; it is the expression of social marginal utility. 

This serves to explain how a thing which has no direct 
utility to the individual may yet possess a value for him. If 
by chance I secure a locomotive, it is in itself useless to me. 
If, however, I can dispose of it to a railroad company, it acquires 
a value, because in other hands it will serve a social purpose. 
The locomotive now has an indirect utility for me because 
through it I can secure things of direct utility. Its indirect in- 
dividual marginal utility to me is the result of its direct marginal 
utiUty to the community, that is, to that part of the community 
where marginal comparisons are made between locomotives and 
other goods. Of all the valuable things in existence only an 
infinitesimal fraction possesses any direct utility for any one 
man ; yet the more of them any one has, the richer he is, pro- 
vided he can dispose of them to others. Thus, while .social 
utility is made up of a combination of individual utilities — that 

§ 74] Individual and Social. i8i 

is, while a thing cannot be useful to society unless it is usefulto 
the individuals that compose society — the indirect marginal 
utility of a thing to any individual is the result of its social 
marginal utility. To a member of society the indirect mar- 
ginal utilities form the chief element in value. Hence in 
society the individual marginal utility which controls value may 
be said to be the reflection of social marginal utility. Our 
readiness to part with nuts or apples will depend not so much 
on the degree in which we as isolated individuals prize nuts as 
compared with apples, but chiefly on the degree in which other 
people prize apples as compared to nuts. This estimate is the 
controlling consideration. Value is a result of the community 
of wants. 

The problem with which we set out in the last section is thus 
solved. There are, in fact, two solutions, — one depending on 
the distinction between total utility and marginal utility, the 
other depending on the distinction between individual utility 
and social utility. As to the first, iron in the abstract is indeed 
more useful than diamonds ; but a pound of iron does not sat- 
isfy as many or as urgent wants as a pound of diamonds, and it 
is therefore not so valuable, even to an isolated individual. 
When we say that iron is more useful than diamonds, we re- 
fer to iron in the abstract. When we say that iron is less val- 
uable than diamonds, we refer to a definite quantity. It is 
therefore true that a commodity may possess more utility and 
at the same time less value than another; but the utility to 
which we then refer is not the marginal utility. The total 
utility of eight apples is greater than the total utility of five, 
but the effective utility may be less. When the Dutch mo- 
nopolists destroyed a portion of the pepper crop to increase 
the price, the total utility of the supply fell, but the marginal 
utility, and hence the effective utility, and the value rose. 

At the same time it may conceivably happen that to any one 
individual a pound of iron may in and of itself be more useful 
than a pound of diamonds. Yet this fact will not control 
value. For the indirect utility of iron is far greater than its 

1 82 Meaning of Value. [§ 75 

direct utility, in precisely the same way that the wants of a 
community are more important than the wants of any indi- 
vidual. Even though a pound of iron may at a given moment 
be more directly useful to an individual, it is always true that a 
pound of iron does not satisfy as many or as urgent social 
wants as a pound of diamonds. When we speak of the value 
of iron or of diamonds, we refer to their social utiHty, not to 
their individual utility. Or, to put it in another way, the mar- 
ginal utility of iron or diamonds to a man living in society is a 
reflex of their social utility. Therefore iron is always less valu- 
able than diamonds, because the social marginal utility of a pound 
of iron is always less than the social marginal utility of a pound 
of diamonds. Value in society is the expression of social mar- 
ginal utility. Social economics deals only with this kind of value. 

75. Value in Exchange. 

Since value is a social conception depending on a compari- 
son of divers goods, and since this comparison is ordinarily 
made in society by their transfer from man to man, it is clear 
that the value with which economics has to deal is exchange 
value, or value in exchange. Speaking roughly, we may say 
that the value of anything is what it will exchange for. Speak- 
ing strictly, we mean that the value of an article may be 
expressed in terms of any other article for which it will 

Earlier writers made a distinction between value in use and 
value in exchange, but they confused value in use with total or 
absolute utility. As soon as we grasp the fact that the utility 
with which economics deals is marginal utility, the old distinc- 
tion between value in use and value in exchange disappears. 
Other writers sometimes use the terms subjective and objec- 
tive value when referring to individual and social valuation 
respectively. The terms are awkward, because they obscure 
the fact that at bottom value is not an external characteristic 
of a thing, but an expression of its relation to an individual. 
Value is the result of an estimate of a quality, not the quality 

§ 75] Value in Exchange. 183 

itself. In this sense there is no objective value. It can be 
called objective only in the sense that when society attaches 
a value to a commodity it is something to which the individual 
or subjective valuation must conform in making an exchange. 

The study of Robinson Crusoe is important as reminding 
us that the foundation of value is independent of exchange. 
Strictly speaking, it is independent of exchange only as be- 
tween man and man, not as between commodity and com- 
modity or between want and want. Crusoe exchanges or 
weighs off in his mind apples and nuts, and thus gets an esti- 
mate for their value to him. "Value in use" is thus really 
only one kind of "value in exchange," although it is a pe- 
culiar kind of exchange. As soon, however, as we deal not 
with Crusoe, but with men in society, we find that not only 
does the individual as before measure one want against an- 
other, but that the satisfaction of that want depends upon the 
estimate put by other individuals on their respective wants. 
Value in individual economy always presupposes at least two 
things ; value in society presupposes in addition at least two 
men. In other words, value in society — that is, in actual 
life — is value in exchange; and this value in exchange is 
nothing but the expression of its true value in use to the 
members of the social group, that is, of its marginal utility. 

Strictly speaking, the value of a thing exists only at the 
moment when it is exchanged for or compared to something 
else, just as the utility of a thing exists only at the moment 
when it satisfies, or is conceived of as satisfying, a want. 
Since, however, men learn by experience to attribute utility 
to things which can gratify a want, so they attribute value to 
things which they know can be exchanged for other things. 
Thus value comes to mean exchange power, or the estimate 
of exchange power. 

It is accordingly plain that when we define the value of a 
thing as the expression of its social marginal utility, we mean 
that value is an expression of its exchange power; for ex- 
change power is based on the comparative estimate of direct 

184 Meaning of Value. [§ 76 

social utility, which gives to every owner of the commodity the 
indirect individual utility that fixes value in society. As we 
can estimate this exchange power only by comparing one thing 
with another, value is sometimes, but less accurately, spoken 
of as a ratio, or a ratio of exchange. Value is indeed relative, 
but it is not a relation or a ratio ; it is an expression of our 
estimate of the relative exchange power of anything. 

76. Value and Price. 

Since value is an expression of our estimate of relative ex- 
change or purchasing power, the value of anything can be 
ascertained only by comparing it with other things. When we 
measure a commodity in terms of some one other commodity, 
we speak of price. If the value of a cow is equal to that of 
five sheep, we say that the price of a cow is five sheep. In 
civilized society we have become accustomed to measure all 
values in terms of a single commodity called money ; so that 
by price we now mean the money value of anything, — the 
amount of money for which it will exchange. 

Value and price have thus come to be interchangeable 
terms. Sometimes, however, value is used in a special sense. 
Thus we speak of a thing as selling for less than its real value, 
or of a shopkeeper charging more than it is worth, when we 
mean that the price to others in the long run will be higher 
or lower. So the department stores advertise " great values " 
when they mean that the goods are sold at exceptionally low 
prices compared to the seller^s estimate of their utility to the 
public. Ordinarily, however, when we say a thing is worth 
five cents, we mean that the price is five cents. 

While the value of anything is thus virtually equivalent to its 
price, we must not confuse values in general with prices in 
general. When we conceive of a single commodity, like 
money, as a standard, we consider it as a fixed point, not 
subject to fluctuation.^ Prices hence may rise or fall with 

^ As to the difficulties that arise from fluctuations in the money stan- 
dard, see, below, § 197. 

§ 77] Increments of Wealth. 185 

reference to this standard. But we cannot speak of a general 
rise or fall in values, because there is no fixed point. Cows 
may rise in value as compared with sheep, but sheep them- 
selves may fall as compared with poultry, and poultry may vary 
as compared with something else. Value expresses a relation ; 
hence, if the value of some articles diminishes, it means that 
the value of others must increase. But if the price of certain 
articles falls, it does not follow that the price of other articles 
will rise. There may be a general rise or fall of prices, be- 
cause we measure prices in one commodity, money; there 
cannot be a general rise or fall of values, because money also 
has a value.-^ 

77. Value and Marginal Increments of Wealth. 

We have thus far spoken of value as the expression of 
social marginal utility. /To be more exact, it should be stated 
that marginal utility (and hence value) depends not upon the 
commodity as a whole, but upon the marginal increments of 
wealth in the commodity. This might be called Clark's law, 
from its first formulator. Professor John B. Clark. 

To prepare the way for grasping this principle, we must call 
attention to several points. In the first place, the rapidity 
with which the utility of successive increments of a commodity 
diminishes depends largely on its combination with others. 
One scarf-pin is all a man needs, the utility of a second would 
be doubtful, a tenth would be useless. But with many cravats, 
we can use more scarf-pins. Put before the same man a finely 
cooked dinner or a loaf of bread, and not only will he enjoy 
the first more, but he will be willing to pay a higher price 
for the bread as a part of the dinner. > 

Secondly, in all commodities except the simplest of a class 
there is always to be found a combination of various utilities. 
A plain deal table suffices to hold books; one of polished 
rosewood satisfies a more refined want and possesses an 

1 When Wall Street speaks of a " general slump of values," it means 
only a fall in the prices of securities traded in on the stock exchange. 

i86 Meaning of Value. [§77 

additional utility. I may have an ample supply of boots, 
yet a new pair with golf rubbers in the sole may be desired 
for that reason alone. Each new utility in an object practi- 
cally makes it a new object. All commodities are virtually 
made up of such combinations or bundles of utilities. 
y Thirdly, the marginal increment of a man's wealth is made 
up of varying proportions of such separate utilities. /Every 
one purchases first necessaries, then comforts, then luxuries. 
But what is luxury to one man may be almost necessity to 
another. What is bought with one's last dollar is the marginal 
increment of enjoyment ; but the more dollars we have, the less 
the utihty of each. To a man with a very small income the 
final dollar may afford the luxury of a few pints of beer ; to 
the rich man the dollar spent in beer is not marginal. His 
marginal increment of wealth may take the form of luxuries 
like champagne or pictures, but they will generally consist of 
particular attributes of commodities. It may be the fashion- 
able cut of his garments, the last touch given to the delicious 
dinner by a cordon bleu, the sumptupusness of his books, 
the elegance of his carriage, the artistic quality of his china 
or silverware. The garments, the dinner, the books, the car- 
riage, the china, — each possesses various kinds of utility ; but 
what makes the particular objects desirable to him is not the 
primary, elementary utility in each, but the final marginal 

/Fourthly, since each of the separate utilities of an article 
becomes at a certain point marginal to different classes of 
men, its value depends not upon its marginal utility as a whole, 
but upon that of the increments of utility each estimated 
separately./ If value were the measure of marginal utility as a 
whole, all but the simplest commodities would be worth far 
more than they are. Take, for instance, a fine automobile. 
There are at least five different qualities which give it a value. 
These are, in the order of importance, (i) power to afford 
locomotion ; an old two-wheeled ca't would do as well : 
(2) freedom from jolting and protection from sun and rain; 

§ 77] Increments of Wealth. 187 

a top-buggy would do this : (3) size ; a plain coach would 
possess this : (4) elegance of finish ; a fine equipage would have 
this : (5 ) speed and exhilaration ; only a motor car will give that. 
In such a vehicle there would be, so to speak, at the same time a 
cart, a buggy, a coach, an equipage, a self-propeller. The most 
important or primary utility is the power to afford locomotion. 
Without this it would be of no use at all. The next quality in 
importance is comfort ; if it has ho springs, the vehicle will not 
be used for pleasure driving. And so on with the other quali- 
ties; each has a diminishing importance. Yet the value of 
the vehicle is not the reflex of its marginal utility as a whole. 
For the primary quality of locomotion alone the rich man 
would, if necessary, pay an immense sum. The mere fact of 
riding, which might be a luxury to a poor man, may be a 
necessity to him. The second utility — comfort — would be 
less important than the first, but might still be prized im- 
measurably by him. And so on with the other qualities. So 
that, if need be, he would pay a fabulous amount for the 

As a matter of fact, however, what he values in the partic- 
ular automobile is the fifth or final utility, that of self-pro- 
pulsion. He probably has buggies, coaches and, equipages 
galore. The fourth, third and preceding utilities represent 
less value because each utility is marginal in turn to a class 
of smaller spending power. If automobiles rose in price, there 
would be fewer of them, but more equipages, because the 
particular quality which differentiates an equipage from an 
ordinary coach would be a marginal utility within the reach of 
a larger but less wealthy class. If equipages advanced in 
price, more plain coaches would be built; if the price of 
coaches rose, more buggies would be built. In each case the 
vehicle is desired by a particular class for a new utility, which 
is to that class marginal. Each successive class, however, is 
poorer than its predecessor, and the gradations themselves 
become less. There is more divergence between a multi- 
millionaire and a man of moderate wealth than between the 

1 88 Meaning of Value. [§77 

latter and a man of simply comfortable means. Thus there 
will be a greater difference in price between automobiles and 
equipages than between these and coaches, more between a 
coach and a buggy than between a buggy and a cart. In each 
case the special utility for which the vehicle is bought is a 
marginal utility to a poorer class. When a rich man buys an 
automobile, he does not pay the immense sum which he would, 
if necessary, give for the mere privilege of locomotion. He 
pays the small price which a poor man would pay for a cart, 
plus the somewhat larger addition that a slightly less poor 
man would pay for the difference between a cart and a buggy 
(comfort), plus the still greater increment that a man of 
moderate means would pay for the difference between a buggy 
and a coach (size), plus the yet larger increment that a fairly 
wealthy man would pay for the difference between a .coach 
and an equipage (elegance), plus the final and largest incre- 
ment that he and his class are willing to give for the marginal 
utility to them of the automatic attachment. All these 
increments added together are far less than what he would, 
if necessary, pay for the privilege of locomotion, — the cart 
element in the automobile. 

When, therefore, we say that value or purchasing power is 
the expression of social marginal utility, it is clear that what 
we mean is that value is the expression of the social marginal 
increments of utility which are bundled together or united in 
anything, and each of which is marginal to a different class. 


78. References. 

W. Smart, Introduction to the Theory of Value (1891), chs. ix-xiv; J. R 
Clark, Philosophy of Wealth (1886), ch. xxiv ; A. Marshall, Principles 
(1898), bk. V, ch. xiv; N. G. Pierson, Principles (1902), part i, ch. i, 
§4; W. S. Jevons, Theory (1888), ch. iv ; E. v. Bohm-Bawerk, Positive 
Theory of Capital {1891), bk. iii, ch. x ; F. v. Wieser, Natural Value 
(1903), bk. v; A. W. Flux, Economic Principles (1904), ch. iv ; C. M. 
Walsh, Measurement of Exchange Value (1901), ch. i ; J. A. Hobson, 
Economics of Distribution (1900), ch. ii ; S. N. Patten, Dynamic Economics 
(1892), chs. ix, x; D, I. Green, Pain Cost and Opportunity Cost (Quart, 
jour. Econ., VIII, 1895) '■> A. C. Whitaker, History and Criticism of the 
Labor Theory of Value in English Political Economy (Columbia Studies, 
XIX, 1904); J. B. Clark, Essentials of Economic Theory (1907), chs. iii 
and vi. 

79. Meaning of Cost. 

Value, as we have seen, has a meaning only when attached 
to a definite quantity of an article. The value of iron means 
nothing; the value of a ton of iron means something. In 
order to ascertain why anything has value, we must therefore 
inquire not only why we attach any importance to it as com- 
pared with other things in general, but also why a definite 
quantity of that article satisfies more or less of our wants than 
an equal quantity of something else. We must regard not 
only our desire in the abstract, but our desire for a particu- 
lar amount. That is, in analyzing value we must take into 
consideration not only the demand, but the supply ; for the 
efifective demand for an article which lies at the root of 
value is itself influenced by the supply. Of two equally useful 
articles we shall be more concerned in securing the one the 


1 9© Measure of Value. [§ 79 

supply of which is limited than the one the supply of which is 

What regulates supply? In the last resort it is the forces of 
nature as utilized by the energy of man. In some cases nature 
gives so abundantly that man need do nothing; in other 
cases nature is so niggardly that his utmost effort fails to 
augment the scanty stock. Between these two extremes lie 
the great mass of commodities the supply of which can be 
increased through human action. The more readily nature 
discloses her secrets to man, the less is the difficulty of secur- 
ing a supply. The greater the stubbornness of nature, the more 
determined do our efforts become. It is in this sense that 
value may be considered to be the measure of the difficulty of 
attainment, — that is, of the cost involved in securing a supply. 
Value, then, would be the expression of costliness. 

What, more precisely, is cost? The word is used in a 
variety of senses. To the consumer cost means price ; if a thing 
costs a dollar, he means that the price is a dollar. To the 
employer cost means total cash outlay expended in production. 
Here the cost usually is less than the price, the difference 
between cost and price being the profit : a machine may cost 
the builder ten dollars; he may sell it for twelve. To the 
workman cost means irksomeness of labor ; the harder the 
work, the more does his labor " cost " him. Underlying all 
these meanings is the idea of sacrifice, the giving up of some- 
thing in return for the object to be attained. All sacrifice 
involves a pain, — a pain of doing something distasteful or 
of refraining from doing something pleasurable. The one is 
present physical sacrifice, the other present mental sacrifice 
depending upon a future physical sacrifice. 

Just as the word utility brings to our mind the pleasure 
we get from a thing, so the term disutility is used to signify 
its ability to inflict pain. We know that the marginal utility 
of a commodity diminishes with the increase of the amount 
at our disposal, and under certain conditions shrinks to zero. 
We have so much of it that it becomes indifferent to us. It 

§ 79] Meaning of Cost. 1 9 1 

possesses what Jevons calls " inutility," that is, no (marginal) 
utility. Its value, as in the ordinary case of air and water, is 
nothing. Under other conditions of supply a commodity which 
usually possesses utility may actually inflict a pain.^ Wood ordi- 
narily satisfies a want ; but when the prospective farmer tries to 
make a clearing, the wood is something to be got rid of. Its 
presence is a discomfort. It possesses not a positive, but a 
negative, utility. It has gone through the stages of utility and 
inutility, and has reached that of disutility. Instead of being 
a commodity it might now be called a " discommodity." So, 
in the same way, water in parts of England is something to 
be removed by draining the fens; water in arid America is 
so necessary for irrigation purposes that it attains a high 

Not only things external to a man run through this scale 
from utility to disutility. Physical activity itself is subject to 
the same law. When a man begins to work, the exercise of 
his muscles is a pleasure. A certain amount of it is even a 
necessity. With the increase in the amount beyond a certain 
point, the pleasure diminishes, until further activity becomes a 
matter of indifference. A still further increase means dis- 
comfort, until, finally, any more work involves positive agony. 
Labor or toil, therefore, means painful exertion. But just as 
the same commodity may, according to circumstances, possess 
utility or disutility, so the same activity may or may not in- 
volve toil. Singing is generally a pleasure ; to the chorus girl 
it is toil. Golf playing is a diversion ; to the golf teacher it is 

Cost, therefore, is at bottom equivalent to pain. We un- 
dergo pain in order to secure utility or to remove disutility. 
Cost is always the antithesis of remuneration. We give up 
something in order to get something in return. The ordinary 
man tries to secure the greatest result with the least effort. 
He will toil only up to that point where the cost, or pain, 

1 Some commodities which seem to give us pain really afford a surplus 
of pleasure. A distasteful medicine is none the less prized by us. 

192 Measure of Value. [§ 80 

begins to exceed the pleasure of what he gets in return. 
There are grades in disutihty or pain, just as there are grades 
in utiHty or pleasure. As the marginal utility of a commodity 
depends on the supply, so the marginal disutility or pain of 
labor depends on the amount. The more fish I have, the less 
the utility of each ; the more hours I must work to catch them, 
the greater the disutility of each hour's work. Up to a certain 
point the pain of the work does not equal or exceed the 
pleasure I get from the fish. Beyond that point I shall not 
work, because the result will be a surplus of pain. At that 
marginal point the utility of the fish equals the pain or cost of 
the labor. There will be a balance between the pleasure and 
the pain ; or, in other words, the pleasure and the pain will be 
in equilibrium. In the case of the individual economy — that 
is, of man living apart from society — the marginal degrees of 
utility and of pain, or cost, therefore tend to be equal. 
Marginal cost equals marginal utility. The value of the fish 
may be estimated in either the one or the other. 

80. Individual and Social Cost. 

In dealing with the problems of actual life, however, we 
treat not of a Crusoe living on fish, but of men living in soci- 
ety and making exchanges with each other. The individual 
economy is profoundly modified by the social economy. This 
is the point that has often been overlooked. Our study is 
social economics. 

We have seen that the marginal utility to an individual is, 
in effect, a reflex of the social marginal utility. In the same 
way the marginal " disutility " to an individual may be con- 
verted through social causes into a utility. What gives one 
man pleasure may give another pain. I may enjoy a horse ; but 
if you do not ride or drive, the horse will put you to the use- 
less expense of keeping him. Yet, since there is a social de- 
mand for horses, you can get rid of him to advantage ; and 
you will therefore not give him away, but keep him until you 
can sell him with profit. Although the horse had a positive 

§ 8o] Individual and Social Cost. 


disutility for you, he now acquires an indirect utility because 
of social reasons. So if the farmer, mentioned above, who 
wanted to make a clearing, lived by chance near a large com- 
munity, he would not burn the wood, but sell it, because it 
would now have a social utility. Its disutility to him would be 
converted into a utility. It is only when anything produces 
a surplus of pain to the community as a whole — as a plague 
of grasshoppers, or an inundation, or the sewage of a city 
of which there is no intelligent disposition — that it possesses 
social disutility. In such a case it can have no indirect utility 
for the individual. 

Not only may cost thus change into utility, but the real cost 
of importance in affecting value is social cost, not individual 
cost. We stated above that value is the measure of sacrifice. 
In what sense, however, is value the measure of sacrifice? 
Evidently, not of individual sacrifice. A street-sweeper may 
work harder than a skilled factory hand, and yet the value of 
his services will be less. Value is a social conception ; society 
puts its appraisal upon commodities. If value is a measure of 
sacrifice and if value is a social estimate, value must be the 
measure of social sacrifice or cost. Social sacrifice means the 
sacrifice which members of society as a whole are willing to 
make. The exertion of one man is estimated in relation to 
the exertion of another, and the sacrifice of each is compared 
with the needs of society as a whole. The standard is social, 
not individual. It is far easier to be a street-sweeper than a 
skilled factory hand. Society is more willing to spare the 
former than the latter ; for, to replace the one, society must 
give up more of its energy than to replace the other. Con- 
sequently, although the street-sweeper may work the harder, 
the sacrifice or cost to society is less than in the case of the 
factory hand. The latter saves society more effort. When 
one commodity is exchanged for another, or when both cost 
the same, it means that the additional sacrifice that would be 
imposed upon society to replace either of them is the same. 
The marginal social cost is identical. 



Measure of Value. [§ ^^ 

81. Cost and Surplus. 

Since economic activity consists in securing as much enjoy- 
ment as possible with the least effort or cost, it follows that 
under conditions of progress the individual will endeavor to 
secure a surplus utility. If game is plentiful in one section 
and so scarce in another that the hunter must work to the 
point of exhaustion, his needs will be satisfied by far less ex- 
ertion in the first case than in the second. The extra utility 
which he enjoys is called residual utility, or surplus utility, or, in 
short, surplus. Looked at from the point of view of produc- 
tion, it is a producer's surplus : the labor of hunting is the 
cost of securing or producing the game. From the point of 
view of consumption, it is a consumer's surplus : the pleasure 
of eating the game is its utility. The excess of the utility 
over the cost is the surplus. Whether we call it consumer's 
surplus or producer's surplus is immaterial. 

The conception of surplus, however, is sometimes used in a 
second way. In the case of the surplus just referred to we 
compare enjoyment with exertions, and we call it either pro- 
ducer's or consumer's surplus according as we look at it from 
the point of view of cost or of enjoyment. This conception 
of surplus is universal : it applies to every man who is at once 
a producer and a consumer, to the man living in society as 
well as to the solitary huntsman. The term " surplus " may, 
however, be used in another sense, which leaves out of account 
the idea of exertion, and which regards every man only as a 
consumer. It assumes that there has been no cost of acquir- 
ing the articles, or that the subjective cost or toil of acquisition 
is precisely the same to all. Here the surplus satisfaction that 
an individual secures is entirely a consumer's surplus,^ depend- 
ing on the relative urgency of his different wants. If I agree 
to give up a book for my neighbor's knife, I do so because 
I expect his knife to afford me more satisfaction than my 

1 The term '* consumer's rent," first suggested by Marshall, is not so 
good because of the equivocal meaning of " rent." 

§ 8i] , Cost and Surplus. 195 

book. The utility to me of the knife is greater than the pain 
of parting with the book. As a consumer, I consider the 
pain of parting with the book as the exact equivalent of 
the utility I lose; but since the utility to be afforded to me 
by the knife is greater than the utility I lose through the book, 
there will be a balance to my credit. As a consumer, I expect 
a surplus enjoyment. 

This specific consumer's surplus, however, is of no prac- 
tical significance. For in actual life we cannot enjoy anything 
without procuring it, — that is, without its costing us something. 
But just as enjoyments or utilities differ from individual to 
individual, so do costs or sacrifices differ. Both the knives 
and the books can be obtained only on the condition of some 
exertion. The cost, or pain, of parting with the book depends 
on the cost, or pain, of acquiring the knife. Hence the only 
real surplus which is of importance is the surplus of enjoyment 
over cost, whether we call it producer's surplus or consumer's 
surplus. If we take the possession of knives or books for 
granted, we can indeed speak of consumer's surplus ; but if 
we reflect that knives and books must be procured before they 
can be parted with, the surplus becomes a real surplus, which 
can equally well be called a producer's surplus. It is a sur- 
plus of utility over cost. 

Individual surplus, however, is essentially subjective, and 
never affects prices. For value is a social conception. This 
statement is true of surplus in general, as well as of the abstract 
consumer's surplus just referred to. I secure a surplus utility 
from my comrade's knife, but he secures a surplus utility from 
my book. He would otherwise not have given up the knife. 
The exchange is therefore mutually beneficial. The old belief 
that what one man (or one country) gains in an exchange 
another necessarily loses, is incorrect. Each may get a surplus 
utihty. But while there is a surplus utiHty to each, the value 
does not necessarily change. The value of the book and the 
value of the knife remain the same. The marginal utility of one 
book would still be equal to that of one knife . If for some reason 

196 Measure of Value. [§ 81 

the book-owners found that knives were twice as useful to them 
as before, and if for a similar reason the knife-owners thought 
that books were twice as useful to them as before, the surplus 
utility of the exchange to each owner would be double what it 
was before ; but the book would still exchange for the knife : 
their value would be unaltered. Value may thus remain the 
same, even when the benefits of exchange to both parties 
grow. The more varied the wants of a community, the greater 
the benefits of exchange. 

On the other hand, values may change and the surplus 
utility remain the same. If the book-owners prized knives 
twice as much as before, while the importance of books to 
knife-ownerS was unaltered, this very fact would increase the 
aggregate social demand for knives, and therefore the sacrifice 
that the book-owners must make to get a knife. The knife- 
owners would make the book-owners give two books for a 
knife. The price of books would fall, and that of knives rise. 
The marginal utility of one knife would equal the marginal 
utility of two books. The surplus utility to the book-owners 
would remain the same, because, although the utility would 
increase, the cost would increase in the same proportion. In 
every exchange the cost, or sacrifice, depends on the reciprocal 
demand for the commodities. 

i(sThe surplus utility that any one individual gets from an eco- 
nomic action, therefore, has no influence on value, however 
much it may affect his own happiness. It is a result, not a 
cause. Surplus is the excess of total utility over total cost. 
Value is an expression of marginal utility or marginal cost. 
Surplus in the case of any one person is the result of an indi- 
vidual subjective estimate which differs from man to man ; 
value is the result of a social estimate in which the individual 
preferences lose their significance. 

We must therefore be careful to interpret correctly the 
statement above, that marginal utility equals marginal disutil- 
ity, or cost. In an isolated economy, where there is only 
one person battling with nature, this tends to be true of the 

§ Si] Cost and Surplus. I9'7 

individual. In society, on the other hand, whatever the rate of 
exchange, it is only the social utility and social cost of which 
the marginal degrees are equal. If a knife exchanges for a 
book, it is because the demand in the community as a whole 
is such that the marginal sacrifice to a social group in parting 
with a book tends to equal its marginal pleasure in getting 
a knife. To put it more accurately, a knife will exchange for 
a book only because the sacrifice to society in making the 
knife, for which it receives in turn the pleasure of books, tends 
to equal the sacrifice of making the book, for which it receives 
in return the pleasure of knives. To any individual the sacri- 
fice may be less than the pleasure, but there will always be a 
marginal individual to whom pleasure and sacrifice are equal. 
The marginal pleasure in the aggregate tends to equal the 
marginal pain in the aggregate. The balance or equilibrium 
is between the pains and the pleasures of the sum of individuals. 
Where an exchange economy exists, the real equilibrium is a 
social equilibrium. 

This shows clearly that the real cost to any member of 
society which influences value is not the subjective cost to him. 
The sacrifice imposed upon society to secure anything is, as 
we have seen, the exertion needed to replace it. To replace 
an article, however, from the social point of view, is to produce 
it. For, although an individual may replace an article by pur- 
chasing it from the producer, society as a whole can replace 
an article only by producing it. Thus, when we speak of 
social cost, we really mean cost of production ; and when we 
say that value is influenced by cost, we mean that value is influ- 
enced by cost of production. What may be to the individual 
a subjective cost becomes, when translated into terms of 
society — that is, of value — an objective cost to him. We 
think no longer of the sacrifice imposed upon any one indi- 
vidual, but only of the social sacrifice, or cost, embodied 
in the commodity; or, rather, the sacrifice, or cost, to the 
individual is the result and reflex of the sacrifice to the com- 
munity. Just as we saw above that the individual utility which 

198 Measure of Value. [§ 82 

affects value is the reflex of the social utility, so the individual 
cost which affects value is, as we shall see more fully in a 
moment, the reflex of the social cost. If an individual desires 
to sell a commodity, he will normally get for it not what he 
chooses, but what society as a whole fixes as the proper figure. 
He may personally be able to raise a particular horse for less 
than a particular cow ; but that will not enable him to sell a 
cow for more than the usual price of a horse. His own indi- 
vidual estimate is of importance only as affecting the aggre- 
gate social estimate. Every individual gauges his economic 
well-being from the point of view of surplus, — of getting as 
much satisfaction as possible above the cost ; but the cost, or 
sacrifice, which he must incur is fixed not by himself, but by 
society as a whole. A farmer wiU not permanently raise cows 
if his cost exceeds the social level as reflected in the price. 

82. Cost and Utility. ^ 

The failure to realize that value is a social conception has 
led to much pointless controversy. Thus Ricardo and his 
followers maintain that the value of a commodity is fixed by 
its cost of production ; while Jevons and those that agree with 
him contend that value is fixed by its marginal utility. Both 
are right, but neither is right in the sense in which he under- 
stood the terms. Cost of production is the measure of value ; 
but it is not, as Ricardo thought, individual cost. Marginal 
utility determines value ; but it is not, as Jevons thought, indi- 
vidual utility. Both cost and utility measure value, because, 
as we have seen, marginal social cost is always equal to mar- 
ginal social utility. In the way they frame the statement, the 
followers of both Ricardo and Jevons are correct in denying 
the others' statement, and yet err in their own. Rightly inter- 
preted, they are correct in their own statement, and yet err 
in denying the truth of the others'. Let us make this clear. 

Utility, as we know, is the fundamental quality of everything 
used by man. But utility is not sufficient to give value. For 
anything to have value its supply must be limited. The utility 

§ 82] Cost and Utility. 1 99 

which gives it value is the marginal utility. If the supply is 
unlimited, the marginal utility is zero. Positive marginal utility, 
therefore, depends upon limitation of supply. But if the sup- 
ply is limited, it will cost some sacrifice to secure or to repro- 
duce it. Therefore, when we measure the marginal utility of a 
commodity, we measure the cost of securing it. Hence either 
utility or cost may be declared the measure of value. Thus, 
while marginal utility is the fundamental cause of Value in the 
sense that nothing could have any value if it had no utility, 
cost may be declared to be not indeed the cause, but an 
equally good measure, of value. Regarded from this point of 
view, the discussion as to which is the real measure of value is 
as futile as to ask how to measure the sound or quality of a 
hammer's blow on a bell. Without that particular kind of bell 
there would be a different quality of sound ; without that par- 
ticular kind of hammer there would likewise be a different 
quality of sound. So in economic life we deal with the de- 
mand for anything as compared with its supply. When we 
speak of utihty, we think of the person who wants it, — that is, 
of the demand. When we speak of cost, we think of the per- 
son who parts with it, — that is, of the supply. But these 
interact mutually; for the demand, although reflecting the 
utility, would change if the cost were different ; and the supply, 
although conditioned by the cost, would change if the utility 
were altered. To affirm that either utility or cost exclusively 
measures value is as incomplete as to say that either demand 
or supply exclusively fixes value. Value is the expression of 
the relation between demand and supply. We cannot speak 
of marginal utility without implying cost ; we cannot speak of 
marginal cost without implying utility. 

All this is true, however, as we have seen, only of social 
cost and of social utihty. The utility of anything to an indi- 
vidual figures in the determination of value only to the extent 
(in most cases infinitesimal) that the individual choice goes 
to determine or change the choice of the community. If I 
have a potato field at home, that will not obviate the necessity 

200 Measure of Value. [§ 82 

of my paying the market price for potatoes. If I am directed 
by my physician to live on potatoes exclusively, that will not 
lead the dealer to charge more than the market price. The 
demand that tells is the aggregate social demand, depending 
on the social utility. 

Conversely, the cost that influences value is not the cost of 
production of that particular commodity to the individual pro- 
t^cer. It may take me two days to make with old tools a 
lable which fully equipped carpenters can turn out in a few 
hours. I can get for my table no more than the carpenters 
for theirs. The carpenters can get this price for their table, 
not because it has cost them so much work, but because they 
save the members of society as a whole the sacrifice, or cost, 
of making the table for themselves. If there were no carpen- 
ter, society would have to set to work, abandon some of the 
things it does now, and give up some of its time to make 
tables. Instead of each member of society devoting a part of 
his Cray to making a part of a table, society as a whole sets 
aside a certain class to make nothing but tables. But what 
society is willing to pay for the table is always the marginal 
cost tu it, and this marginal cost is the final sacrifice which 
society is willing to incur for tables as compared with other 
things. What the carpenter can get for the table will adjust 
itself to this amount of social sacrifice, and thus the value of a 
commodity gets to he the equivalent of the (individual) cost 
of producing it. We may thus roughly say that individual 
labor or cost of production fixes value ; but what it really does 
is not to fix value, but to express the value that is fixed by 
social forces as a vt-hole. The value is due not to the labor of 
the individual who has made it, but to the social service which 
it is going to render, — that is, to the social sacrifice which it 
is going to save. If it does not render that service, it will not 
possess that value, no matter how much individual labor has 
been spent on it. On the other hand, if less individual labor 
be spent on it, it will have less value, not because less indi- 
vidual labor has been spent, but because the marginal sacrifice 

§' Ss'] Surplus and Progress. 201 

of society is now less. Utility, and not cost, is the ultimate 
cause of value. 

We see, then, that value may be defined either as the ex^ 
pression of marginal social utility or as the expression of the 
marginal social sacrifice incurred to secure utility. Value may 
be estimated in terms of either social utility or social cost, be- 
cause the marginal degree of the one is equal to that of the 
other. Individual cost, however, affects value only in the sense 
that it adjusts itself to the social utility, which is tlje supreme 
test. Utility is the positive factor, cost is a result. The exact 
relation of individual cost of production to value, however, 
still remains to be studied, and will be discussed later. 

83. Social Surplus and Progress. 

Since all progress consists in getting more results with less 
efforts, the problem of social cost and social surplus becomes 
one of basic importance. All surplus or residual utility is the 
balance of satisfaction over sacrifice. It may therefore be 
augmented in two ways : the sacrifice may remain the same, 
while the satisfaction increases ; or the satisfaction may remain 
the same, while the sacrifice decreases. In the one case we 
deal with problems of consumption, in the other with problems 
of production. In the one case we approach the subject from 
the point of view of utility, in the other from that of cost. 

The social surplus may be enlarged by changes in consump- 
tion. The stcrifice incurred by the individuals that compose 
society may remain the same, and yet they may use so much in- 
telligence in the rearrangement of their choices of satisfaction 
that they may procure a greater net result. It need not cost 
more effort to cook a good dinner than an unpalatable one, 
and yet the surplus of satisfaction over sacrifice is greater. 
When the social choices are improved on a large scale, there 
will be a great increase in the social surplus. 

While it is possible to have in this way a larger satisfaction 
with the same effort, it happens just as frequently, however, 
that we can procure the same satisfaction with a smaller effort. 

202 Measure of Value. [§ 83 

The emphasis is here laid not upon consumption, but upon 
production. Whatever diminishes the cost of production en- 
Rirges to that extent the surplus of society. If the dinner 
which originally cost one dollar can now be supplied for fifty 
cents, we shall have to work less to get that dinner ; or if we 
work as hard, we shall have the remaining half-dollar to spend 
on something new. All civilization depends on the increase of 
our wants. In most cases, however, the appearance of a new 
want requires additional effort on the part of individuals for 
its satisfaction. If the additional sacrifice keeps pace with the 
additional want, we are no better off than before, — there is 
no increase of the social surplus. But as soon as we can satisfy 
the old want with a smaller total effort, the surplus is increased 
because some of the efforts previously devoted to the satisfac- 
tion of the old want are now set free for the attainment of the 
new object. With the same output of energy we secure greater 
results. Diminution of social cost is the great creator of social 

While changes in consumption are of significance in them- 
selves, they become of great importance chiefly as engendering 
changes in production. Whether we call the social surplus, 
however, a consumer's surplus or a producer's surplus, is, as 
we know, immaterial. It is equally immaterial whether we say 
that the progress is due to lower cost or to greater utility. So- 
cial surplus is the result of man's struggle with nature. It is 
the margin between result and effort. The way to increase the 
surplus is to maximize the results and to minimize the efforts, — 
that is, to increase utilities and to decrease costs. 

The mere increase of the social surplus is, however, not all 
that is necessary to progress. Without such a surplus, indeed, 
there can be no highly developed civilization ; for where the 
energy of society is entirely occupied with procuring the bare 
means of subsistence, there can be no opportunity for the 
higher life. A frontier community differs from a developed 
one chiefly in the fact that in the former there is little social 
surplus available. But the mere production of wealth and 

§ Ss^ Surplus and Progress. 203 

prosperity does not suffice. Unless attention be paid to the 
problem of distribution as well, the social surplus may remain 
in the hands of a favored few — the "remnant" of whom 
Matthew Arnold sings — while the mass of the community 
may be largely shut out from participation in its benefits. 
The real democracy of industry, like the true democracy of 
politics, does not mean that every man is the equal of every 
one else, but that all should have an equal opportunity to de- 
velop what is in them for good. The problem of social progress 
is to reconcile the greatest possible social production with the 
best possible social distribution ; to create a continually grow- 
ing social surplus and to provide for its equable division. ' 
Without the latter we are apt to have plutocracy ; without the 
former we can scarcely rise above savagery. 


84. References. 

J. B. Clark, Distribution of Wealth (1899), ch. ix ; F. A. Fetter, Prin- 
^ciples (1904), part i, div. C; T. Veblen, Theory of Business Enter- 
prise (1904), chs. v-vi ; M, Pantaleoni, Pure Economics (1898), part 3, 
ch. iii, § 5 ; E. v. Bohm-Bawerk, Positive Theory of Capital (1891), bk. 
V, chs. i, ii; F. v. Wieser, Natural Value (1893), bk. iv, ch. vii ; H. 
Sidgwick, Principles (1883), II, ch. vi; J. A. Hobson, Economics of Dis- 
tribution (1900), ch. iv ; Irving Fisher, Capital and Income (1906) ; C. A. 
Tuttle, Real Capital Concept (Quart. Jour. Econ., XVIII, 1903) ; W. Z. 
Ripley, Capitalization of Public Service Corporations {Ibid., XV, 1901) ; 
E. S. Meade, Trust Finance (1903), ch. xvi; R. M. Hard, Principles of 
City Land Values (1903), ch. ix. 

85. Value and Rent. 

We have learned that the value of anything is derived ulti- 
mately from the satisfactions or uses which it affords, and that 
the price is the money equivalent of its uses. Some things 
afford only a single use j the use of an ordinary article of food 
consists in its consumption. Other things are somewhat more 
durable ; a suit of clothes can be used for a season or two be- 
fore it is worn out ; a machine will last for years ; a house for 
decades. Finally, some things permit of perpetual use. A 
city lot will serve as a building site as long as the city exists ; 
the privilege granted to a street railway to occupy the public 
highways remains the same from decade to decade, although 
the recipient of the privilege may change. 

Things can be sold either by parting with their uses one by 
one or by disposing of all their uses for a lump sum. When I 
ask, what is the price of a carriage ? the owner will answer, ten 


§ 85] Value and Rent. 205 

dollars a day ii he means the price of the use for that period, 01 
a thousand dollars if he refers to its use as long as it lasts. 
When we part with the use of a thing for a limited period, the 
payment is called a rent. We may rent a horse for an hour, or a 
dress-suit for an evening, or a typewriter for a month, or a house 
for a term of years. Strictly speaking, the word rent regards 
the transaction from the standpoint of the one who lends the 
use and secures a periodic return {i-edditus) ; while the word 
hire designates the transaction from the point of view of the 
one who enjoys the temporary use. Commonly, however, 
this distinction is disregarded, and we speak indiscriminately 
of a man hiring or renting a yacht or a house for his own use. 
The fundamental conception is the income, in the sense of 
pleasure or benefit income, to the user. Through the opera- 
tion of the social forces which bring about exchanges based on 
money, the income value of anything becomes its money rent, 
— the amount of money received by the owner or paid by the 
hirer. The income of anything is the rent paid or received 
for its use. 

Sometimes the word rent is limited to particular kinds of 
rents. In England, for example, where land formed the chief 
form of investment even as late as the eighteenth century, 
rents came to be synonymous with land rents, and when a man 
spoke of his rent roll, he meant the rentals which he received 
from his estate. As a consequence, the theory of rent elabo- 
rated by the English economists came to have a peculiar 
meaning. On the other hand, France, in the century before 
the revolution, had made greater progress in general financial 
enterprises, and rentes came to mean the income of the fund- 
holder. A rentier to-day still denotes one who is living on the 
income of his capital. As a general economic conception, 
then, rent is the periodic return (nowadays calculated in 
money) from the use of a thing for a definite period, whether 
that thing consists of land, or public funds, or anything else. 
Rent has a threefold aspect, (i) From the point of view of 
the economic good, rent is the product : the use that a thing 

2o6 Capitalization of Value. [§ 86 

affords is its product or rent. (2) From the point of view 
of the owner, rent is the income from the use or product. 
(3) From the point of view of the hirer, rent is the cost or 
payment for the use. People pay rents because they receive 
in return an income in the shape of the use afforded by the 
thing for which they pay. Rent therefore is at once product, 
income and cost. 

When we part with anything permanently, instead of with 
some of its uses for a time, we often speak of its selling or 
market or cash value, as opposed to its rental value. Strictly 
speaking, this contrast is inaccurate. When we rent anything, 
we are also dealing with selling value ; but what we sell is a 
single use, or several uses, rather than all its uses. Sometimes 
again we speak of property value as opposed to rental value. 
The advantage of this nomenclature is that as long as we con- 
trol the property we control all possible present and future 
uses ; the disadvantage is that property is a legal conception, 
while rent is an economic conception. A man also has prop- 
erty in his rents. The real contrast, as was pointed out above 
(§ 6), is between rental value, in its strict meaning of income 
value, and capital value. When a man sells one or more uses 
of a thing, he estimates its capital value. Roughly speaking, 
he rents in one case and sells in another; strictly speaking, 
he sells in both cases, but the price represents a limited use 
in one case and an unlimited use in the other. 

The question now arises, what is the relation of rental value 

to capital value, and how do we come to estimate capital 

values ? 

86. The Law of Depreciation. 

The durability of economic goods is essentially relative. At 
the one end, as we have seen, are the merely ephemeral acts 
or the things which are consumed by a single use, like a paper 
napkin or an apple. At the other end is a building site, which 
can support a structure to the end of time. Between these 
extremes lie the great mass of commodities. They all wear 
out sooner or later, and as they wear out they become incapable 

§ 86] Law of Depreciation. 207 

of affording as many or as effective uses. Sometimes the de- 
preciation is rapid, as with a flimsy silk dress ; sometimes the 
commodity lasts longer, as in the case of an ordinary machine ; 
sometimes it is very substantial, as in the case of a modern sky- 
scraper. In every instance, however, if it is intended to be 
used permanently, repairs are needed. Nothing is indestruc- 
tible except land, and even that is so, as we shall see later 
(§ 132), only in the peculiar sense that its extension remains. 
It is obvious that the capital value of anything depends in the 
first instance on the number of rental values, allowance being 
made for wear and tear. Where the good is ephemeral in the 
sense that it affords only a single use, the rental value and the 
capital value coalesce. The rental value is the capital value. 
We cannot buy the privilege of using the coal or ice even once, 
without buying the coal or ice itself. The wear and tear here 
equal the entire value, the single use is the consumption. 
When, however, we may expect a moderate succession of uses, 
there is a difference between the rental value and the capital 
value. Where the depreciation is rapid the difference is not 
great. A row-boat is quickly worn out, and even a single use 
may injure it severely. A boat which sells for sixty dollars 
will often rent for half that amount for a single summer, and 
the capital value i-s then only double the annual rental value. 
The boat may last for several years, but the older it grows, the 
greater the need of repairs and the smaller the net uses which 
it is capable of yielding, until finally the. expense of repair 
exceeds the income, and the boat is thrown aside as worthless, 
possessing no capital value because it no longer has a single 
rental value. Where a larger number of uses can be enjoyed 
with comparatively little depreciation, as in a well-built house, 
the selling value is frequently ten or twenty times the annual 
rental value. It may be four or five years before any repairs 
are needed, but with each ensuing year the decay progresses 
and the cost of repairs augments, until here also the time ar- 
rives when there is no longer any surplus of income over outgo, 
of enjoyment over exertion. In practical life business men 

2o8 Capitalization of Value. [§ 86 

guard against the results of depreciation by instituting a sinking 
fund. Instead of spending all the earnings, they set aside an 
annual sum which will counterbalance the depreciation, so that 
at the end of a period the accumulated fund will sink or offset 
the outlay incurred to replace the commodity. The repairs, 
in other words, may be made from year to year, or may be 
allowed to accumulate, and made all at once at a subsequent 
period. Where no repairs are possible, as in a mine, the an- 
nual rent must still exceed that of ordinary land which osten- 
sibly yields the same annual returns, because the mine will 
ultimately be exhausted and a part of the rent must be put to 
the sinking fund or depreciation account, or goes to satisfy the 
expectation that the rental value will cease. 

The fundamental explanation, therefore, of the relation of 
•capital value to rental value is durability, or the degree of 
succession of rental values. Capital value depends on net 
rent, not on gross rent ; that is, it depends on the succession 
of gross returns, less repairs. Capital value is reached by 
adding together the gross rentals and deducting the sinking 
fund. The ratio of capital to rental value depends in the first 
instance on the number of rental values. 

This does not mean that more permanent commodities have 
a greater capital value than less durable goods. Iron has less 
value than silk, although it is far more durable. The statement 
means that when the gross rental of two commodities is the 
same — that is, wKen the price paid for the use of each for a 
definite period is identical — the difference in their capital 
values is to be explained by the relative number of such uses 
which each can afford. The rent of a house, as well as that of 
a horse, may be twenty dollars a month, yet the house will sell 
for far more than the horse. Neither would have any capital 
value if it had no rental value. The rental value of both is the 
same, because the marginal utility of a month's use of each is 
identical ; that is, the individuals forming that economic group 
get on the whole as much satisfaction out of a horse as they 
do out of a house. The capital value of the horse, however. 

§ 87] Law of Future Estimates. 209 

is less than that of the house, because he will be more quickly 
worn out, — that is, because he cannot furnish an equally long 
succession of uses. 

Capital is capitalized income. Capital value is a stock or 
fund of rental values ; the larger the number of such rental 
values which flow in from a commodity, the greater will be 
its capital value in proportion to its rental value. The rela- 
tion of capital to rental value depends in first instance upon 

87. The Law of Future Estimates. 

The uncivilized individual lives only in the present. His 
wants are spasmodic, and as soon as he has gratified these 
pressing needs he has no thought for the morrow. With every 
advance in culture he displays more prudence and foresight. 
Even some of the more highly developed animals, like ants, 
bees and squirrels, have an eye to the future, and in the time 
of plenty lay in a stock for the days to come. The philoso- 
phers tell us that the real pleasures of life are those of antici- 
pation and retrospection. But this is true only of the most 
highly organized natures, and true only in part even of them. 
To the mass of individuals present needs and present satisfac- 
tions are the all- engrossing ones. 

The result of this psychological fact is that we lay more 
stress on present enjoyments than on future enjoyments. To 
the average man a bird in the hand is worth two in the 
bush, even though he thinks that he will secure the two. 
Our estimate of the future is more or less uncertain, because 
w® can never be absolutely sure of anything but the actual. 
The future may have in store for us either some change in the 
intensity of our wants or in the capacity of the particular ser- 
vice to satisfy our wants. Present wants and satisfactions are 
definitely measurable, because the degree of the one and the 
quantity of the other are fixed. Future wants and satisfactions 
are less definitely measurable, because of the concurrent or 
opposite changes that may take place before the future ripens 


2IO Capitalization of Value. [§87 

into the present. Hence the underestimate of the future as 
compared to the present. That is what we mean when we 
speak of discounting the future ; we " count off" a part of the 
enjoyment to come. 

The law of lower future estimates is a part of a larger law, 
with one aspect of which we have already become familiar. 
All sense impressions may be reduced to those of space and 
of time. When we deal with space impressions and apply 
them to economic life, we are in presence of the law of dimin- 
ishing space utility ; every additional increment in the supply 
of an actual commodity existing in space has, as we know, 
(§ 73) a decreasing importance. When we deal with time im- 
pressions, we are in presence of the law of diminishing time 
utility ; every additional postponement in the enjoyment of a 
commodity causes it to have a decreasing importance for us. 
Nothing has utility unless it exists in space and time. In- 
crease the space relation, that is, augment the supply, and you 
decrease the marginal utility ; increase the time relation, that is, 
postpone the gratification, and you again decrease the mar- 
ginal utility. In one case we deal with a margin of space ; in 
the other with a margin of time. The effect is the same. 
Increase the supply to a certain point, and the marginal utility 
or value will disappear ; augment the postponement of the sat- 
isfaction to a certain point, and the marginal utihty or value 
will likewise disappear. 

The present estimate of a future satisfaction is therefore 
ordinarily less than that of a present satisfaction ; the present 
value of a future enjoyment is less than that of an immediate 
enjoyment. The present estimate of future uses becomes 
fainter as the use recedes into the future, until the value of 
a very distant use vanishes. Therefore, while a commodity 
with a present rental value may hold out the prospect of 
many successive rental values, the present worth of each of 
those future rental values becomes progressively smaller. Since 
the capital value of anything is the present worth of all the 
successive future rental values, it is clear that the dispro- 

§ S8^ Law of Diminishing Returns. 2 1 1 

portion between the rental and the capital value will not grow 
simply with the durability of the commodity ; for the more 
durable the commodity, the fainter will be the present estimate 
of the distant use, until finally a further increase in durability 
will add nothing to the value. A building site may rent for a 
fixed sum, and may reasonably be expected to yield that rent 
for an indefinite period. Yet when it is sold it will bring as 
capital value a sum equivalent to only about twenty or twenty- 
five times the rental value. There is no depreciation of the 
land, there is no wear and tear, and no necessity for a sinking 
fund, and yet the land is worth, as it is called, only twenty 
years' purchase; that is, it can be purchased for a sum twenty 
times the annual rent, even though in all human probability it 
will go on yielding an annual rent for an indefinite future. 

The relation between rental and capital value, therefore, is 
a resultant of two forces, — the law of depreciation and the 
law of future estimates. From one point of view, the more 
durable the commodity and the larger the number of successive 
uses, the greater will be the disproportion between rental and 
capital value ; from another point of view, the more durable 
the commodity and the more remote the succession of future 
uses, the less will the disproportion be. Both of these state- 
ments may be summed up in the assertion that the capital 
value of anything is the result of adding together the present 
worth of each of the successive rental values. If the com- 
modity lasts long enough to furnish two equal annual rental 
values, the capital value will be slightly less than twice the first 
rental value ; if we may expect three rental values, the capital 
value will be somewhat less than three times the first rental 
value. Each increment which goes to form the capital value 
decreases, until finally there is no further increment at all. 

88. The Law of Diminishing Returns. 

We have thus far dealt with consumers' goods — that is, 
articles of immediate consumption — and have seen that their 
value is derived from the uses or enjoyments which they afford. 

2 1 2 Capitalization of Value. [§ 88 

Some goods, however, do not afford a direct enjoyment, but 
are used as instruments to produce things that afford enjoy- 
ments. These are hence called indirect, or instrumental, or 
production goods. It is obvious, however, that just as the 
capital value of consumption goods is derived from their rental 
values or uses, so the value of production goods is derived 
from the value of their products, — the consumption goods. 
The value of the raw material is due to the value of the finished 
commodity. The value of pig iron depends upon the value of 
the nails, billets and other iron products into which it enters. 
The value of labor depends on the value of what the labor 
produces. Value starts with direct human satisfactions, and 
is reflected back and back until it attaches to the original 
agent, act or thing which is ultimately responsible for the 
immediate income or inflow of satisfaction. 

The fundamental law of value is the law of diminishing 
utility. The satisfaction derived from successive increments 
of a consumption good diminishes as the supply increases. 
When, in the same way, we compare the utility of different 
increments of production goods or productive agents with one 
another, we are in the presence of the law of diminishing 
returns. Instead of the diminishing utility of direct services 
afforded by something consumed, we think of the diminishing 
return or service afforded by something in producing the 
economic good which we consume. If a man tends one loom, 
he will turn out a certain quantity of cloth. Double the looms 
and he will do double, or perhaps more than double, the work ; 
give him four looms and the output will be fourfold. After a 
certain limit is reached, however, the care of each additional 
loom will dissipate his energy and cause more mistakes. The 
total output may be larger, but the output of each loom will 
be less, until finally new looms will not augment the output 
at all. If we enlarge the supply of labor instead of tools, the 
same holds good. More effort means, after a given point, 
relatively smaller results. A rower may increase his speed 
by putting forth more exertion, but after a certain point more 

^ 88'] Law of Diminishing Returns. 2 1 3 

efforts do not mean greater speed. An increase of rowers 
will not change the law. Two men will not row a boat twice 
as fast as one, four men will not row it twice as fast as two. 
A large omnibus will hold more people than a small one, but 
when a certain size has been reached, it will pay better to buy 
another omnibus than to enlarge the old one. On a piece of 
land it may be profitable to employ more men as well as to 
use more manure and better machinery; but after a given 
point, additional " doses " of labor and capital will begin to 
give relatively smaller results. The law of diminishing retura> 
is universal. It is another aspect of the law of diminishing 
utility. The latter springs from the finite nature of man, the 
former from the finite nature in the elements of his environ- 
ment. The income or return from a production good or 
productive agent is like the income or utility of a consumption 
good. The test of each is its relative contribution to the 
satisfaction of wants. 

Just as the law of decreasing utility results in the conception 
of marginal utility — the foundation of all value — so the law 
of diminishing returns results in the conception of marginal 
utilization. This margin is the point beyond which an addi- 
tional effort will not give a sufficient return. The margin 
may be either intensive or extensive. If we crowd more 
people into the same omnibus, or run more trains over the 
same track, or make the laborer tend more looms, or put more 
manure into the same field, we have a more intensive utiliza- 
tion, until finally the intensive margin is reached where the 
additional returns will not compensate the additional effort 
or outlay. On the other hand, the crowding of the omnibus 
may drive passengers to another line, the multiplication of 
trains may cause accidents, the added looms may mean more 
breakage, the increase of manure may be unduly costly. In 
such cases the owner will find it profitable to purchase new 
vehicles, build a double track, hire more v^^orkmen, or secure 
additional plots of fresher land. This would be an extensive 
utilization, carried on until the extensive margin is reached, 

214 Capitalization of Value. [§ 89 

when it will not pay to add another vehicle, track, laborer or 
plot. The margin, whether intensive or extensive, is reached 
through the operation of the law of diminishing returns. Just 
as the value of every consumption good depends upon its 
marginal utility, so the value of every production good or 
productive agent (which is derived from the consumption 
goods which it produces) depends upon its marginal product, 
that is, its product at the margin of utilization. 

89. Forms of Value. 

If we analyze the things that are bought and sold in the 
market we find that they may be divided into four classes : 
first, human services, from those of the day laborer to those 
of the highest professions; second, concrete goods, or com- 
modities, whether production goods or consumption goods; 
third, relations and privileges of all kinds; fourth, a fund of 

In the first class obviously only the single use can be 
sold. A service is a use, it is not a fund of stored up uses. 
Here, then, the selling price of the economic good (the 
service) is the rental price. We speak of hiring a man, just 
as of hiring a piano. When we hire him for a definite task, 
we rent his service ; if we engage him by the day or month or 
year, we rent a limited succession of services. The only way 
in which all the services of the man can be sold at once is 
when he is a slave, and thus acquires a definite money value 
as a piece of property. In a state of freedom a man never 
parts with all his future services for a lump sum. The price 
paid for human services is not commonly called rent, although 
we do speak of an Italian padrone in America renting 
out his immigrant compatriots, or of the Southern prison 
officials renting out their convicts. Ordinarily the income 
derived from human services is called wages (or, in the case > 
of the professional classes, salaries or fees). Wages, then, are 
always income; they are. never capital, nor can they be 
capitalized except in the case of slavery. It is only then 

§ 89] Forms of Value. 


that we can properly speak of human capital, or of capital 
invested in human beings. 

The next two categories, which, as we shall see later, differ 
in important ways, may be classed together in this respect, that 
they both possess a rental or income value as well as a capital 
value. A piece of land, a ship and a patent right may either 
be rented out from year to year or parted with entirely for a 
lump sum. Their product is always a rent, although the rent 
may be capitalized. 

Finally, as opposed to individual economic goods which 
have a capital value, there is the general fund of capital. Just 
as we speak of wealth in general as consisting of pieces of 
wealth, or of labor in general as composed of the individual 
laborers, so we speak of capital in general as the assemblage 
of individual pieces of capital. Capital as a general concep- 
tion stands in the same relation to the individual pieces of 
capital as a flock does to the sheep or a forest to the trees ; 
the sheep and trees are constantly disappearing and being 
replaced by new accessions ; the flock or forest persists, 
although the constituent elements are perpetually changing. 
Capital as a fund of wealth is the embodiment of value or 
purchasing power, and money is everywhere the measure 
of general purchasing power. Capital, therefore, as a fund 
of value can be estimated or transferred in the shape of the 
money which represents this value. We cannot buy the flock 
of sheep without buying the individual sheep, but through 
the interposition of money and credit we can acquire capital 
in the shape of general purchasing power, and then devote it 
to any use we desire. We can use it in production and build 
a factory, or we can use it for consumption and buy a yacht. 
We can put the fund of capital into concrete goods like 
machines or land, or into privileges like franchises or patents. 
When we buy capital in general, therefore, we buy the right of 
enjoying any future uses that we may elect ; we are not restricted 
to the particular uses afforded by the individual good in which 
our capital is temporarily embodied. The use of the sheep is 

2 1 6 Capitalization of Value. [§ 89 

limited ; the use of the capital invested in the sheep is poten- 
tially unlimited, because it can be changed at will to any other 

When we purchase the temporary use of an individual 
economic good, therefore, we pay a rent ; but when we pur- 
chase the temporary use of a fund of capital in general, the 
payment is called interest. Interest, hence, is nothing but 
commuted rent, just as capital is nothing but capitalized 
income. Instead of hiring a particular piece of capital and 
paying rent, we hire a fund of capital in general and pay 
interest. Interest, then, is not paid for money, but for the 
capital which the money represents. It is really not paid for 
the capital, but for the uses afforded by the capital when 
transmuted into the individual things which afford services. 
Interest of capital is based upon the rents of individual pieces 
of capital. The single thing yields a rent because it affords a 
return or product. If we add together all the net rents of 
existing goods or pieces of capital, we get the entire amount of 
interest. Total net rent at any given time is equal to total 
interest. Each consists of the whole of the product or income 
from all existing wealth which is or can be capitalized, — that 
is, of the aggregate of the return from all existing pieces of 
capital. The only difference is that interest is the calculation 
form of rent. Rent is figured in dollars and cents ; interest 
as commuted rent is figured as a part of the whole or as a 
percentage of a principal. The rent of a house is so many 
dollars a year, the interest of the capital invested in the house 
is so much per cent a year. 

Wages, rent and interest, therefore, are analogous phenom- 
ena. They are all prices, even though prices in the language 
of the street are ordinarily restricted to the selling values of. 
concrete objects. When we contrast wages and prices, we 
really contrast prices of human services with prices of things ; 
when we contrast rents and prices, we really contrast rental 
values of things with capital values of things. Wages are the 
price of the services of man ; rent is the price of the services 

§ 9o] Value as a Differential. 217 

of particular things and relations, that is, particular pieces of 
capital j interest is the price of services of the general fund of 
capital. At the one end is labor, which can never be capital- 
ized ; at the other end is the fund of capital, which is always 
capitalized; in between are the individual economic goods, 
whose services may or may not be capitalized, and for which 
people will pay either rents or so-called prices. 

90. Value as a Differential. 

All value may be considered as a differential. In each 
variety of goods there will be different grades corresponding 
to different uses.' A good boat will rent for more than a poor 
one ; and if it is " no good " at all, it will not rent for any- 
thing. Rent therefore may be measured as a differential from 
a margin or base line of no-rent, and the rent of anything may 
equally well be defined to be the differential return or surplus 
over the no-rent or marginal articles of the class. 

It must, however, not be forgotten that almost everything 
is susceptible either of more than a single kind of use or of 
different uses to different people. The boat may be useless for 
sailing, but good for rowing ; it may be useless for rowing, but 
excellent for firewood. A piece of land may be of no use for 
wheat-raising, but good for alfalfa ; it may be useless for alfalfa, 
but admirably adapted to pasture. The margin or base, there- 
fore, from which rents are calculated may be only a relative 
and not an absolute no-rent margin. The rent of a particular 
plot of good wheat land may be calculated as the surplus 
produce over the worst plot at the margin ; but that no-wheat- 
rent plot may yield a substantial rent as perhaps the best 
of pasture plots. It is only when a given object is of no 
use for any purpose that we can speak of an absolute no-rent 

Since therefore the uses of things shade into each other, we 
can take any use as a margin or base from which to measure a 
higher use. The rent of anything may be regarded as a differ- 
ential surplus over a \0w2r use, or as a margin from which to 

2 1 8 Capitalization of Value. [§ 90 

measure a higher use. All value is the expression of marginal 
utility ; each margin is relative as compared to some other 
margin. Rent as the quantitative expression of this marginal 
utility may be estimated either as a whole or as a surplus over 
something else. 

In precisely the same way capitalized rent, or selling value, 
may be regarded as a surplus. If a fine sail-boat sells for one 
hundred dollars, we can regard twenty dollars as a surplus 
value of a fine boat over a poorer one ; another twenty dollars 
as a surplus of a poor sail-boat over a good row-boat ; and so 
on until finally the last of the hundred dollars will represent 
a surplus of the worst boat over a boat which is not even good 
enough to use as firewood. Again, what is true of rent is true 
of wages. Rent is the income from things, wages the income 
from acts ; both are the income from services. The wages of 
a particular man or class may be regarded as a surplus over 
the wages of a lower grade class, until finally we get to the 
individual who receives no wages at all because he is of no 
use, and who, if he survives, must be supported by the com- 
munity. The law of wages must be the same as the law of 
rent, because wages are really rents of a certain kind, rents of 
acts instead of rents of things. When therefore the traditional 
discourses of economics speak of the rent principle, or of 
"quasi-rents," in the sense of temporary instead of permanent 
or normal surpluses, they are correct as far as they go, but do 
not go far enough. What they really mean is the differential 
principle, which is true of all incomes, whether land rents or 
other rents, whether rents in general or other selling values, 
whether the income of things or that of services. 

When we deal with the fund of value known as capital in- 
stead of with individual pieces of capital, we are also in the 
presence of a differential, but in another sense. Individual 
commodities differ in grade of utility, and therefore their rents 
(and capital values) differ. Capital as a fund, on the other 
hand, is the money value of all existing commodities lumped 
together. Individual commodities are heterogeneous; the 

J 9i] Rental and Capital Values. 219 

fund of capital is homogeneous. There is no general rate of 
rents; there is a general rate of interest. Hence interest 
cannot be a differential in 4;he same sense as rent. Yet the 
word " interest " itself means difference. Interesse in Latin was 
the sum that lay between {inter) the original loan and its 
return. Although the- mediaeval writers confused money and 
capital, thinking that interest was paid for the use of the 
money itself, they nevertheless justified interest, so far as it was 
a recompense for the delay in repayment. We who now know 
that interest is a method of calculating rent realize that it is 
not simply a question of delaying repayment, but of postpon- 
ing enjoyment, and that interest may be measured not only 
positively, but as a differential or surplus of present over future 

Interest, in other words, is a discount, or difference between 
the present and future. When a banker discounts a bill, he 
deducts from the face value a sum equivalent to the interest 
for the period the bill has to run. Both rent and interest, 
therefore, as forms of value, express an estimate of marginal 
uses. Rent regarded as a differential deals with the marginal 
uses in space ; interest regarded as a differential deals with the 
marginal uses in time. Rent is the difference in the value of 
one present enjoyment over another ; interest is the difference 
in the value of a present over a future enjoyment. How the 
estimate of this difference, or the rate of interest, is arrived at 
in actual life is a matter for later consideration (§ 168). 

91. Relation of Rental and Capital Values. 

Since interest is commuted rent and capital is capitalized 
rent, it might be assumed that rental values and capital values 
of the same things would always vary together. If a house 
rents for the same amount in New York as in Yukon, or if a 
house to-day rents for as much as it did ten years ago, ought 
not the capital value to be the same? In point of fact, how- 
ever, there is no such exact correspondence between rental 
and capital values. This is due to several causes. 

220 Capitalization of Value. [§ 91 

In the first place, the rate of capitalization is only another 
way of describing the rate of interest. The rate of interest, 
however, or the degree of discounting of the future, differs from 
place to place and from age to age. The rental value, that 
is, the income, of a given railway bond not so long ago was six 
dollars a year, and its capital value one hundred dollars. In 
1905, with no changes of importance in the character or the 
earnings of the railroad itself, the same bond, with the same 
income, was worth half as much again. This increase of fifty 
per cent in the proportion of capital value to rental value was due 
to the fall in the general rate of interest on all similar capital 
from six to three or four per cent. The discount on future en- 
joyments had appreciably diminished. What is true of the part 
of a fund of capital represented by bonds, is true of the indi- 
vidual pieces of capital like a house. Two houses that rent for 
the same amount in New York and Yukon will sell for very dif- 
ferent sums, because the rate of interest is low in New York 
and high in Yukon. The cause of changes in interest will be 
studied later. 

Secondly, since capital value depends on an estimate of 
the future, it is often much more uncertain than rental value. 
It is affected by all sorts of hopes and fears. It is subject 
to the play of speculation. Rental value deals with the 
present moment or the immediate future ; we are reasonably 
certain, so far as anything mundane is certain, of the exact 
quantum of enjoyment. Capital value as a summation of 
more or less distant enjoyments is exposed to all the muta- 
tions of human experience. The same rental values may 
mean now relatively high, and now relatively low, capital 
values. A comparison in 190 1 of 47 industrial corporations 
with 37 railroads showed earnings of 13.6 per cent on the 
market value of the industrial stocks, and 4.85 on that of 
railroad stock. The same income or rental value, in other 
words, represented a difference of almost 300 per cent in 
capital value. Rental values, no matter how they fluctuate, 
are more stable than capital values. That this is true of the 

§90 Rental and Capital Values. 221 

fund of capital is obvious to any one who watches the transac- 
tions on the stock exchange. That it is equally true of indi- 
vidual pieces of capital can be seen when we remember that 
in the anie-bellmn days of the South, when negroes were 
simply a part of capital, the rental price of slaves in 1820 and 
i860 remained at about the same figure, ^iio, while the 
capital value of slaves increased from a few hundred dollars to 
$1500 or $2000. This growing disproportion between capital 
and rental value was indeed due in part to the fall in the rate 
of interest, but in far greater measure to the over-capitalization 
of slaves resulting from the peculiar economic conditions of 
the time. 

finally, in the third place, where there are special advan- 
tages in the permanent as opposed to the temporary possession 
of certain things, capital values will be relatively higher than 
the rental values. In England a country estate is prized for 
the social and political advantages it brings, — and these ad- 
vantages accrue not to the annual tenant but to the owner. 
It is not surprising, therefore, to find that at the end of the 
eighteenth century land in England was worth from twenty- 
eight to thirty years' purchase, while funded property was worth 
only from sixteen to eighteen years' purchase. The dispro- 
portion is less to-day, but still appreciable. 

Capital value is therefore always based on rental value, but 
their relation is not constant. It becomes necessary, there- 
fore, to go a step further and to study the causes which fix 
values in general and which, in explaining relative variations, 
will throw more light on the relation itself. 


92. References. 

M. Pantaleoni, Pure Economics (1898), part 2, chs. i-iii; A. MarshalL 
Principles (1907), bk. v, chs. i-ii; J. S. Nicholson, Principles (1901), bk. 
iii, chs. iii, iv; E. v. Bohm-Hawerk, /V^j/V/z/*? Theory (1891), bk. iv, chs. 
i-vi; F. V. Wieser, A'atural Value (1893), ^k. ii; A. T. Hadley, Eco- 
nomics (1896), ch. iii ; H. Sidgwick, Principles (1883), bk. ii, ch. ii; A. W. 
Flux, Principles (1904), ch. iii; H. R. Seager, Introduction (1904), ch. v; 
J. E. Cairnes, Leading Principles (1874), part I, chs. ii, iv ; J. A. Hobson, 
Economics of Distribution (1900), ch. i, and Economics of Bargaining 
(Econ. Rev., IX, 1899) ; F. A. Walker, Political Economy (i888),'part 3, 
ch. i. 

93. Demand and Supply. 

All value, as we know, is the reflex of social marginal utility. 
We have now to study the nature of the social forces which 
operate to translate into actual prices on the market the feel- 
ings of the individuals that comprise the group. 

For the purposes of our immediate study it makes no differ- 
ence whether we are dealing with rental or capital values, or 
again with values of services or values of things. The general 
principle of value must be true of all kinds of value. It will 
suffice in this chapter to take as a type the capital or selling 
value of ordinary consumption goods, remembering that every- 
thing here said is equally applicable to all other forms of value. 

It is a truism to affirm that value depends on demand and 
supply. Strictly speaking, demand denotes desire. Since 
one's desire for anything diminishes with additional incre- 
ments, demand is, strictly speaking, the scale of the degree of 
utility. A given scale affords the law of demand. If one's 


§ 94] Market and Normal Price. 223 

desire for anything for some reason increases, so that he is 
wilHng to give more for the same amount, we might in this 
sense speak of a rise in the demand, that is, a change in the 
scale of demand. On the other hand, if there are several 
people who prize the commodity differently, a fall in the price 
would enable more individuals to satisfy their desire, even 
though the scale of demand of each remained unaltered. 
There would really be an extension of the consumption, but 
not of the demand. 

Yet in the ordinary language of economic life demand means 
not simply desire, but effective desire, — a desire which will 
have some effect in the transactions of the market. Demand 
has therefore come to mean elliptically the quantity demanded 
at a given price ; and when we speak of a change in the demand, 
we refer not to any alteration in the subjective scale of desire, 
but to a change in the amount asked for. 

In the same way supply has come to mean the quantity 
offered at a given price in the market. It no longer denotes 
the total amount in existence. That part of the total stock 
which is not offered for sale at a definite price is not an effective 
supply. The grain or cotton that is allowed to rot in the barn 
or on the fields has no influence on the price. 

94. Market and Normal Price. 

By a market was originally meant a place in which individuals 
met for the exchange of commodities and services. Nowadays 
a market means a coming together of offers and demands for 
economic goods, irrespective of the physical presence of the 
contracting parties. The market may be local, national or 
international ; wherever definite quantities of goods are bought 
and sold, there is a market, and the price at which the exchange 
is effected is the market price. 

From the nature of the case this price is subject to tempo- 
rary variations, — the higgling of the market, as Adam Smith 
called it. The point about which the market price oscillates 
is called the normal price, and sometimes, although less 

224 Market Value. [§ 94 

happily, the natural price, as being the point to which the 
price would naturally gravitate if there were no oscillations. 
Market price is like the surface of the water agitated by the 
winds, — the waves are now above, now below the surface, 
yet as long as the winds persist we never see the glassy surface. 
The alternate activity of buyers and sellers is the wind of 
commerce, which prevents the normal price from becoming 

Normal price itself may be regarded from two points of view. 
If the conditions of production and consumption are perfectly 
stationary — that is, if there are no changes in population, amount 
of capital, methods of production or social demand — we speak 
of static conditions. Such a state is largely hypothetical, 
because in all progressive society conditions are continually 
changing or dynamic. The law is one of movement, not of 
rest. Yet the study of static conditions is important. Static 
"normal value is like the level of a pond ; we can study it only 
on the assumption that there is no motion of any kind. 
Dynamic normal value is like the level of an ocean bay, where 
the tide ebbs and flows and the level is slowly changing ; mar- 
ket value is like the surface when agitated by the wind. To 
ascertain the laws of value we must not only study the forces 
that produce the higgling of the market, — that is, the winds 
that disturb the surface ; we must also study the forces which 
change the level of prices, — that is, the strength of the tidal 
current and the conformation of the shores; we must finally 
study the causes of the original level itself, — that is, the source 
of the supply, the volume of the water and the depth of the 
bed. For instance, wages in America oscillate from season to 
season, they have changed from century to century, and at all 
times they have been on a different level from European 

We begin, therefore, with the study of market value. We 
must, however, first understand the conditions that make ex- 
change itself possible. 

§ 95] Conditions of Exchange. 225 

95. The Conditions of Exchange — The Law of Comparative 
Utilities and Comparative Costs. 

Let us suppose that A possesses salt and B tea, and that each 
is willing to trade. All that is necessary to an exchange is that 
A's liking for tea as compared to salt should be different from 
B's. It is not necessary that A's preference should be the 
opposite of B's. Both A and B may like tea more than salt, 
but if A likes a pound of tea four times as much as a pound of 
salt, and B only twice as much, they will be willing to exchange. 
If three pounds of salt are given for one of tea, A will be 
satisfied, for he would have been willing if necessary to give 
another pound of salt for the tea; and B will be satisfied 
because instead of the two pounds of salt, which he considers 
the equivalent of a pound of tea, he gets three pounds. Nor 
does the fact of an exchange tell us anything about the abso- 
lute preferences of the two parties. If A and B are willing to 
trade tea and salt, pound for pound, it does not follow that A 
likes tea more than B, or that B likes salt more than A. A may 
like salt more than B and yet give it up, provided he likes the 
tea much more than salt, and at the same time likes both tea 
and salt much more than B does. Suppose A gets ten units of 
satisfaction from a pound of tea and five from a pound of salt, 
while B gets one unit of satisfaction from a pound of tea and 
two from a pound of salt. B will then give up the tea because 
he saves one unit, and A, although he likes salt more than 
B does, will give it up because he saves five units. 

The fact of exchange thus tells us only that A's liking for 
salt as compared with tea is different from B's ; it tells us 
nothing as to whether A likes salt more than tea, or whether 
A hkes either salt or tea more than B. In technical language, 
an exchange tells us only that there is a disparity in the mar- 
ginal utilities of the articles for the two parties, or that there is 
a difference in the reciprocal demand ; it tells us nothing as to 
the marginal utiUty of either commodity for either party. The 
rate of exchange depends on the degree of this disparity, and 


2 26 Market Value. [§ 96 

the law of exchange may be stated as the law of comparative 
marginal utilities, or the law of reciprocal demand. 

A and B, however, had to secure their salt and tea. It cost 
them something. A difference in reciprocal demand means a 
difference in the demand as compared to the supply. This is 
the same as saying that it is a difference in the supply as com- 
pared to the demand. When we speak of supply we think of 
marginal cost, just as when we speak of demand we think of 
marginal utility. Exchange may therefore be explained in 
terms of cost as well as in terms of utility ; and the law of 
exchange may equally well be stated as the law of comparative 
costs. I may be so much more intelligent than my furnace 
man that I could save much coal by tending the furnace 
myself; yet I prefer to look after my business, and let him 
tend the furnace, because it pays each of us better to do so. 
The law of comparative costs and of reciprocal demand is the 
foundation, not only of international trade as the older econo- 
mists explained, but of all exchanges, that is, of all economic 

96. The Rate of Exchange — Barter. 

Having ascertained the fundamental condition of exchange, 
let us now turn to the rate of exchange. Suppose that A and 
B both like tea more than salt. A begins by offering ten 
pounds of salt for one of tea, but really wants it so badly 
that he would if necessary go as high as sixty for one. B, 
on the other hand, is willing to give up some tea, but only 
at the rate of one pound of tea for twenty of salt. At the 
same time he thinks that A needs tea far more than he (B) 
cares for the salt, and therefore begins by saying that he will 
take not less than seventy pounds of salt for one of tea. 

It is plain that an exchange can take place only between 
the limits of twenty and sixty pounds of salt for one of tea. 
At anything under twenty, B will not exchange ; at anything 
over sixty, A will not exchange. The lower and higher offers 
originally made by each are excluded by the desire of each 

§ 96] Rate of Exchange. 227 

to come to terms. Only between the limits of twenty and 
sixty will an exchange be profitable to both. 

The question still remains : what will be the exact rate be- 
tween these limits? In pure theory there must be a point 
between twenty and sixty where the gain of both in surplus 
enjoyment is at a maximum. The location of that point de- 
pends on the comparative desire of each for both commodities. 
If A prefers tea to salt much more than B does, the exchange 
will be made at a figure close to sixty ; for even though A 
offers only twenty or thirty for one, his anxiety to get more tea 
will be greater than B's desire to get the salt at that rate, and 
will lead him to increase the offer. With every increase in 
the rate, A's desire for more tea will fall, and B's desire for 
more salt will rise ; but as A's original desire is much greater 
than B's, the point at which the relative desires become equal 
must be one comparatively favorable to B, that is, near sixty. 
If, on the other hand, A prefers tea to salt only slightly more 
than B does, the rate will be nearer twenty. Whatever the 
relative preference, there is a point which gives both a total 
maximum benefit. 

This is strictly true, however, only of divisible commodities 
or articles sold in stocks, where any unit possesses a propor- 
tionate value of the whole. Where there is no stock, or where 
the commodity cannot be divided without some loss of value, 
such an exact point between the hmits may not be found. 
The relative desires of A and B changed because of the 
minute alterations in the supply of each commodity. But if 
the tea and salt were in ten-pound bags, or if A and B were 
exchanging hens and pigs, the units could not be divided, and 
it might happen that at least one party would get either a little 
more or a litde less than he anticipated. 

Even with divisible commodities, however, the theory as- 
sumes that equal knowledge, equal opportunity and equal 
capacity are found on both sides. When these conditions are 
lacking, as is usually the case in such an isolated transaction, 
the actual rate of exchange will depend largely on the superior 

228 Market Value. [§ 97 

shrewdness or good fortune of the one party in gauging the 

strength of the other. If A can conceal his intentions better, 

the rate will be favorable to him; if B can " bluff" better, it 

will be the reverse. The keener and more adroit trader will 

make the greater gain. In practice, therefore, the rate of 

exchange will usually be at almost any point between twenty 

and sixty. 

97. One Seller and One Buyer. 

Let us now go a step further and suppose that both parties 
are acquainted with the use of money, and that A has money 
instead of salt, while B is willing to give up his tea for cash 
instead of salt. In other words, A wants to buy tea and B to 
sell it. Instead of barter we now have purchase and sale. 
Substituting a cent of money for a pound of salt, A offers as 
before ten cents (instead of ten pounds of salt) for a pound of 
tea, and B says that he will take not less than seventy cents. 

If the desire of A and B for money is as different as was their 
desire in the preceding case for salt, the problem will be pre- 
cisely the same. This is sometimes trae in actual life. A dollar 
is worth more to a poor man than to a rich man, — its marginal 
utility is greater. A physician will charge a wealthy patient for 
an operation far more than a man in modest circumstances. 
The price of an old master or a mediaeval missal will often 
depend largely on the wealth of the purchaser. But in the 
ordinary transactions of life, where we deal in masses of com- 
modities, and where the sum devoted to the purchase is only 
a fraction of the purchaser's wealth, this difference in the 
worth of money may be neglected. Prices on the produce 
exchanges for cotton or wheat are rarely affected by the fact 
that some of the dealers are richer than others. The great 
advantage of the use of money is that in ordinary transactions 
its marginal utility to both parties may be deemed the same. 

The problem is therefore simplified. The rate of exchange 
was so arbitrary, because as A and B got more or less of salt 
as compared with tea, the marginal utilities of each commod- 
ity varied. But now since A and B desire to buy or to sell 

§ 97] One Seller and One Buyer. 229 

tea only, and as we assume that the value of money remains 
constant, the price that each is willing to pay depends only on 
their relative demand for tea. In technical language, the 
rate of exchange is, as before, conditioned by the disparity in 
the marginal utilities of the two commodities ; but since the 
disparity due to the changes in the utility of money to each 
is now negligible, the total disparity is less than before. If, as 
is possible, this relative demand of A and B for salt in the 
original illustration was responsible for a variation of ten points 
in each case, the limits within which a pound of tea will now 
change hands are reduced from the original figures of twenty 
and sixty (pounds of salt) for one of tea, to thirty and fifty 
(cents) for one pound of tea. That is, if we neglect the va- 
riations due to difference in the marginal utility of money, the 
price of a pound of tea will be somewhere between thirty and 
fifty cents. Within these limits it will still be arbitrary, where 
A and B are the only buyer and seller. 

The cases thus far discussed are not typical of ordinary busi- 
ness transactions. People no longer barter with each other, 
nor does it often happen that there is only a single buyer and 
a single seller. An example would be the agent of a collector 
of curios meeting a farmer who is persuaded into selling an 
old piece of furniture. Ordinarily, however, there will be 
either a number of buyers or a number of sellers, — and often 
of both buyers and sellers. In such cases we speak of compe- 
tition, because sellers and buyers compete with each other to 
secure the most favorable terms for themselves. When we 
use the term competition we usually mean mutual competition, 
/. e. competition on both sides. In the case of one seller and 
several buyers, we speak of monopoly ; we neglect the com- 
petition because it is only one-sided, — between the buyers. 
There may also be the reverse kind of one-sided competition, 
as when several sellers deal with only one buyer. This is some- 
times called " buyer's monopoly," — an expression which is clear 
enough, although etymologically not quite exact, as the term 
monopoly literally implies " one-seller " and not " one-buyer." 

230 Market Value. [§ 98 

98. One Seller and Several Buyers, or One Buyer and 
Several Sellers — Monopoly. 

Let us now take the case where several A's desire to pur- 
chase tea from the monopolist tea-dealer. A, as we. have seen, 
will not give at the outside more than 50 cents; suppose that 
the limit of A^ is 48 cents, of A^ 45 cents, and of A^ 7,8 
cents. If A* were the only buyer, the price could not rise 
above 38 cents, and might be much below it. But now 
appears A^, who is willing to go as high as 45 cents. If each 
buyer is ready to take B's whole stock, it is plain that com- 
petition between A^ and A** will drive the price above 38 cents, 
whereupon A* will fall out. The rate of exchange can there- 
fore fluctuate only between 38 cents and 45 cents. If A^ now 
steps in and is ready to buy the whole stock, A^ will be shut 
out and the price will fluctuate between 45 cents and 48 cents. 
Finally, if A appears, A^ will be excluded and the price will 
fluctuate between 48 cents and 50 cents. In other words, 
when we have competition between the buyers, the rate of 
exchange is limited above by the highest offer made by the 
buyer to whom the rate is most unfavorable (the 50-cent rate 
of A), and below by the highest offer of the buyer next on the 
scale (the 48-cent rate of A^). Thus the arbitrariness of the 
rate of exchange is limited. 

There are two methods by which this result can be reached. 
In an ordinary auction sale, the monopolist seller asks for the 
lowest offer for the whole supply ; but even here there is often 
an upset price, that is, a price below which the seller will en- 
tertain no bids at all. That represents the 30-cent limit of B. 
With each increase in the bid, some of the would-be buyers 
fall out, until finally A^ stops at 48 cents. At an auction A 
will then get the tea at just above 48 cents; if it were an 
open sale, and if B were not willing to sell at that figure, A 
might go as high as 50 cents. On the other hand, when a 
municipal government offers to sell bonds, each of the would- 
be purchasers, all of whom must submit their bids at the same 

§ 9^] One Seller and Several Buyers. 231 

time in writing, naturally offers the highest price at which he 
thinks he can distance his competitors and yet make a profit 
for himself. Here buyers who offer to take the entire issue 
are often given the preference, and each is driven to his maxi- 
mum limit, not by the actual rising bids of his predecessors, 
but by his fear of their competition. This is sometimes called 
the Dutch-auction system, but it occurs in certain transactions 
in the United States and other countries as well. 

What has been said is equally true, mutatis mutandis y of the 
case of one buyer and several sellers. Suppose that several 
tea-planters, B's, desired to sell their crop to a wholesale mer- 
chant, A, who has in some way monopolized the business of 
supplying the retail dealers. A, as before, will not pay more 
than 50 cents, but B^ is willing to sell at 38 cents. Now 
comes B^, who says he will accept an offer of 34 cents ; B' is 
evidently shut out and the price will fluctuate between 34 and 
38 cents. If B^ is ready to sell at 31 cents, B'* will be shut 
out and the rate will fluctuate between 34 and 31 cents; if B 
finally enters the market, B^ is excluded, and the limits of 
sale will be between 30 and 31 cents. 

Such cases are much rarer than the preceding. For it is 
more difficult in practice to monopolize the demand for an 
article than it is to monopolize the supply. Yet instances 
will readily occur, as where tenders are invited from several 
persons to supply a definite demand, either of a government 
office for articles like clothing or armor-plates, or of a private 
individual for the construction of a house or the making of re- 
pairs of any kind. The person inviting the tender is in this 
transaction a monopolist buyer, and each of the rival bidders 
now hastens to make his lowest offer at the very beginning in 
order to forestall his competitor. The contract goes to the 
lowest bidder for the whole amount. 

In what has preceded we have assumed for the sake of sim- 
plicity, that each of the buyers is ready to take the whole 
amount offered, or vice versd, that each of the sellers is in a 
position to offer the whole amount demanded. Oftentimes, 

232 Market Value. [§ 98 

however, this is not true. In the ordinary case of monopoly 
sales, competing buyers are usually ready to take only a part of 
the stock. It is instructive to study what the results are under 
such conditions. 

Suppose that the four A's desire different quantities of 
tea. A, let us say, desires 400 lbs. and is willing to pay up to 
50 cents a pound for the first hundred pounds if he cannot 
get any more, 48 cents for the second hundred, 45 cents for 
the third and 38 cents for the fourth ; A^ desires 300 lbs. and 
is ready to pay not more than 48 cents for the first hundred, 
45 cents for the second and 38 for the third ; A^ wishes 200 
lbs. and will go to 45 cents for the first hundred and 38 cents 
for the second; finally, A' wants 100 lbs. and will give 38 
cents a pound. Now, if B has only 100 lbs., /. e. if each of the 
buyers bids for the whole stock, we have seen that A will force 
the price up to 48 cents, and may even go up to 50 cents. A 
will thus secure the entire supply. If. however, B has more 
than 100 lbs. to sell, some of the buyers (A^) will not bid 
for the total amount. As a consequence both the price and 
the quantities which each purchaser secures will vary. Sup- 
pose that B has 300 lbs. A and A^ between them will bid 
the price up to 45 cents in order to exclude A^ and the price 
will vary from 45 cents to 48 cents. At any such price A will 
not get more than 200 lbs., for although he is willing to pay up 
to 48 cents for his second hundred, he finds that A^ is ready to 
pay just as much for what is his first hundred ; and while A is 
willing to give up to 45 cents for his third hundred, A^ is ready 
to pay as much for his second hundred. A cannot escape the 
competition of A^ except as to 100 lbs. The result is that the 
price for the whole 300 lbs. must be the same to both, that is, 
at some point between 45 cents and 48 cents, and that A will 
get 200 lbs. and A^ 100 lbs. at that price. 

If B has 600 lbs., it can be shown by the same reasoning 
that the price must be between 38 cents and 45 cents, and 
that A will get 300, A\ 200, and A^ 100 lbs. The price can- 
not fall below 38 cents, for otherwise A* would get some tea, 

§ 99] Several Sellers and Buyers. 233 

— a condition which all the others are interested in pre- 
venting, a^ they know that there is not enough to go around. 
But although A^ is shut out, A^ cannot get more than 100 lbs., 
because if there were any danger of his doing so, A^ and A 
would fear to lose some of their share and bid the price up 
above 45 cents, which A^ cannot afford. For the same reason 
A^ cannot get more than 200 lbs., for A would then bid the price 
above 45 cents, which A^ cannot afford for his second hundred ; 
and, finally, A cannot get more than 300 lbs., for he would 
have to exclude A^ by offering more than 45 cents, which A 
cannot afford for his third hundred. 

Thus in all such cases the rate of exchange will vary be- 
tween 38 cents and 50 cents, according to the relative demand 
of each of the buyers. By the same reasoning it might be 
shown that where we have one buyer and several sellers the 
rate would vary from 30 cents to 38 cents. In each case of 
such one-sided competition the arbitrariness of the rate will be 
less than where there is no competition at all. 

99. Several Sellers and Several Buyers — Competition. 

We now come to the final case, so generally found in actual 
life, where there are at the same time several buyers and 
several sellers, that is, where there is competition on both sides. 
They all meet, either in person or through agents, on the tea, 
exchange. Each buyer desires to purchase a certain quantity 
of tea, but all the buyers together are ready to take more than 
is offered, provided they can get a satisfactory price; each 
seller wishes to dispose of a certain quantity, but all the sellers 
together would be ready to sell more than there is a demand 
for, provided they can get a satisfactory price. In other words, 
each desires to do as much business as he possibly can with 
profit. Under such conditions the market price of the tea 
must be 38 cents, not more and not less. There will be no 
variation at all. 

For if the price fell to 3 7 cents Some of the sellers (repre- 
sented by B'') could not afford to sell, and with the shortage 

234 Market Value. [§ loo 

in the supply all the buyers together could not get as much as 
they want; they would therefore bid against each other, in the 
fear of not getting enough, and the price would rise. It could, 
however, not go above 38 cents, for if it were driven say to 39 
cents, some of the buyers (those represented by A*) could not 
afford to buy. With the falling off in the demand, each of the 
sellers would fear to be the unlucky one who failed to dispose 
of his stock ; the sellers (B's) would therefore vie with each 
other in reducing the price until it fell to 38 cents. 

Thus we see that while in the case of one buyer and one 
seller the rate of exchange is arbitrary (between 30 cents and 
50 cents), in the case of competition on either side the lim- 
its of variation are reduced (between 30 cents and 38 cents, 
or 38 cents and 50 cents respectively), and in the case of 
competition on both sides, the limits meet, that is, the arbi- 
trariness disappears and the rate of exchange is fixed (at 38 

100. Conclusions. 

From the above analysis follow certain important conclusions : 
(i) Under free competition there can be at a given time 
and place only a single price for the same commodity. The 
price of tea must be ^S cents to all ; if it were less or more, 
the pressure of the competing buyers or sellers would at once 
operate to bring it back to that point. The exceptions to the 
rule are only seeming. It may happen, for example, that on 
an exciting day on the stock exchange, when there are violent 
fluctuations in the market, the same securities may be sold at 
the same time in two different groups at different prices. Here, 
however, there is no perfect competition ; there are really two 
separate markets, the members of which have no direct con- 
nection with each other. As soon as the excitement dies away 
and the groups of buyers and sellers coalesce, the market be- 
comes a unit, competition is again perfect and the price is the 
same throughout. In the same way a firm may do both a retail 
and a wholesale business, and sell the same article for different 

§ loo] Conclusions. 235 

prices; but plainly there are two separate markets. Again, 
some purchasers have to pay more because their credit is not 
good ; but there is no perfect competition, because the buyers 
are really offering different things in exchange. Finally, some 
sellers may ask less because they are ignorant of the market 
conditions, or may grant lower rates to large purchasers be- 
cause the transactions are secret. In no instance where there 
is a perfect competition can there be more than one price for 
the same thing at the same time. 

When competition is absent on one side, that is, in the case of 
monopoly, this principle does not apply. Since the object of 
the monopolist is to make the greatest possible net profits, it is 
to his interest to sell each increment of his supply at the highest 
possible price. If we refer to the example above (p. 232), it 
will always be to the interest of the monopolist tea-dealer who 
has a stock of 300 lbs. to sell 100 lbs. to A at a price over 48 
cents, and the other 200 lbs. to A and A^ at a price be- 
tween 45 cents and 48 cents, rather than to sell the 300 lbs. 
at the lower price. The monopolist will not generally be able 
to do this, for he may be selling in a market where he must 
seek to dispose of his whole stock without perfect knowledge 
as to the conditions of the consumers. Wherever he can, how- 
ever, he will make different prices to different persons, and if 
possible will even sell different increments of the supply at 
different prices to the same person. Thus not only does the 
Standard Oil Company find it profitable to charge different 
prices for its oil, but the makers of particular brands of soap 
or chocolate, which give them to that extent a monopoly, are 
in the habit of putting the same soap or chocolate into differ- 
ent packages and selling them at different prices, in the ex- 
pectation that different grades of purchasers will be attracted. 
Under competition this would be impossible. 

(2) In the case of competition the market price is always 
the one at which the greatest number of exchanges can be 
effected. If the price fell below $8 cents, some of the sellers 
could not dispose of their tea ; if the price rose above 38 cents. 

236 Market Value. [§ 100 

some of the buyers would be unable to secure tea. In either 
case some would go unsatisfied. When the determination 
of the market price is left to a superior authority, as on 
the Berlin stock exchange, we have a good illustration of 
the principle. There the bids and offers, in writing, are so 
adjusted by a committee that although no one pays more 
or receives less than he intended, some may pay less or 
receive a higher price for such quantities as are needed to 
balance the transaction, with the result that some bids or 
offers which would otherwise have been excluded are finally 

In the case of monopoly the principle does not apply. 
Since the monopolist controls the supply, he may secure a 
greater net return by selling a smaller quantity at higher prices 
rather than a larger quantity at lower prices. The exact point 
at which he can sell the largest quantity at the greatest profit 
depends on the rapidity with which the scale of demand in- 
creases as the supply falls off. If the monopolist is in posses- 
sion of 600 lbs. of tea, the entire stock in the market, whether 
he sells 600 lbs. for 50 cents or 500 lbs. for 60 cents, will 
be immaterial to him. But if he finds that by his offering only 
500 lbs. the price will rise to 65 cents, he will naturally offer 
only this quantity, and destroy the other 100 lbs. In the case 
of competition he would not dare to do this, because his com- 
petitors would continue to supply the market at approximately 
the old price ; and he would be compelled to accept this price 
for his reduced quantity. Had the Dutch East India Com- 
pany not possessed a monopoly, it would not have destroyed a 
part of its stock of spices in order to secure greater profits 
from the sale of what remained. When some of the misguided 
Alabama planters burned a part of the cotton crop in 1904 in 
order to raise the price of the remainder, it was on the assump- 
tion that every other planter would burn his proportionate 
share, — an assumption as rash as it proved to be unfounded. 

(3) If by demand price we denote the price offered by the 
buyers, and by supply price the price asked by the sellers, the 

§ loo] Conclusions. 237 

marginal demand price is the lowest, as the marginal supply 
price is the highest, price that is actually accepted. The 
market price must always be the price where the marginal 
demand and marginal supply prices meet. The market price 
is therefore in cases of competition always the marginal price. 
In the example given above the marginal purchaser is A*; the 
marginal seller is B'. A* 's marginal offer to purchase, ;. e, 
his demand price, is 38 cents ; B' 's marginal offer to sell, 
/. e, his supply price, is 38 cents. If A* was originally will- 
ing to go as high as 39 cents, while B' was ready to sell at 38 
cents, these would not be final marginal figures; for either 
there would be an A* not willing to go quite so high and a B* 
demanding a little higher price ; or A'^ would not give as much 
as 39 cents for a further increment, and B* would not be willing 
to let a further increment go for as little as 38 cents. There 
would inevitably be some point between 38 cents and 39 cents 
where the mutual competition of the A's and B's would meet, 
and which would mark the marginal offers of A* and B* 

The difference between the actual market price and the non- 
marginal offers represents the surplus. In the case of the sellers 
who get the money, the surplus is called a profit ; in the case 
of the buyers who get the tea, the surplus is a consumer's sur- 
plus if they drink the tea, or a profit if they sell the tea. B*, 
who sells the tea for 38 cents, makes no profit. His offer to 
sell for T^Z cents is the marginal offer, because at that point he 
ceases to have any inducement to exchange. But B^ would 
have been willing to take 34 cents, and therefore makes 4 cents 
a pound profit ; B\ whose limit was 3 1 cents, gains 7 cents ; 
and B with a limit of 30 cents gains 8 cents, On the other 
hand. A, who buys the tea for 38 cents, would have been willing 
to go to 50 cents. If he drinks the tea, this difference of 12 
cents represents a surplus satisfaction to him ; if he was willing 
to give 50 cents because he knew he could sell it for that, the 
1 2 cents represent his profit. A^ whose limit was 48 cents, 
secures 10 cents surplus, A* with a hmit of 45 cents gets 7 


Market Value. [§ 100 

cents surplus, while A^ whose limit, 38 cents, is equal to the 
price, enjoys no surplus at all. 

The marginal buyers and sellers (those who fix the price) 
thus neither make nor lose ; there will be nobody beyond the 
margin because he would lose ; while all those within the mar- 
gin — the intramarginal buyers and sellers — make a gain, 
measured either in money or in enjoyment. The gain — 
whether profit or consumer's surplus — has, however, no effect 
on the price. 

In the case of monopoly there is generally no marginal 
price, because there is only one seller or one buyer respec- 
tively. In the ordinary case of one seller there are indeed 
many buyers, one of whom makes a marginal offer or demand 
price, while the intramarginal buyers gain. But as the seller 
has control of the supply, there is only one supply price, — 
no higher or lower supply prices, and therefore no marginal 
supply price. It is barely conceivable that the relative state 
of demand and supply is such that the seller is compelled, in 
order to dispose of anything at all, to reduce his price to a 
figure so low that even the least anxious purchaser can get 
what he wants at his own valuation. In such a case the 
monopoUst makes no gain ; his supply price would be the 
marginal demand price. But, except in this almost impossible 
case, the monopolist will be able to charge more, and the 
market price will not be the marginal price. Market price is 
always the price at which the demand price and the supply 
price meet each other; in all but the most exceptional cases 
monopoly market price is not a marginal price. 


101. References. 

N. G. Pierson, Principles (1902), part i, chs. i, vii; A. Marshall, Prin- 
ciples (1907), bk. iv, ch. iii, and bk. v, chs. iv-vii ; E. v. Bohm Bawerk, 
Positive Theory (1891), bk. iv, ch. vii, and Karl Marx and the Close of his 
System (trans, by MacDonald, 1898) ; F. v. Wieser, Natural Value (1893), 
bk. V ; M. Pantaleoni, Pure Economics (1898), part 2, ch. iii ; J. S. Nichol- 
son, Principles (1901), bk. iii, ch. v ; J. E. Caimes, Leading Principles 
(1874), part I, ch. iii; T. N. Carver, Distribution (1904), ch. ii ; F. A. 
Fetter, Principles (1904), ch. viii ; A. W. Flux, Principles (1904), chs. iv, 
v; A. T. Hadley, Economics (1896), ch. iii; H. Sidgwick, Principles 
{1883), bk. ii, ch. ii; J. R. Commons, Distribution of Wealth {1893), 
ch. iii ; H. G. Kittredge, Utilization of Wastes and By-Products in Twelfth 
Census, X, 725-748; A. C. Whitaker, History and Criticism of the Labor 
Theory of Value in English Political Economy in Columbia Studies, XIX 
(1904) ; J. B. Clark, Essentials 0/ Economic Theory (1907), ch. vii. 

102. Normal Demand — Elasticity of Demand. 

In the discussion of market value we studied the process by 
which the temporary demand and supply balance each other. 
In the discussion of normal value we must consider the influ- 
ences which affect the more permanent demand and supply. 
In our example it was assumed that the temporary demand 
and supply were such that tea sold for 38 cents. The question 
now arises, why did tea sell for 38 cents rather than for 3 
cents? The study of normal value is the study of normal 
demand and of normal supply. 

Since the demand for a commodity means the quantity 
desired at a given price, a change in the demand may take 
place without being caused by any change in the price. When 


240 Normal Value. [§ 102 

ostrich feathers went out of fashion a few years ago, the de- 
mand fell off to such an extent that prices went down and 
production was curtailed. The supply adjusted itself to the 
smaller demand at the lower price. The change in demand 
was, in last analysis, the cause of the change in price. 

Ordinarily, however, demand is affected by the price. We 
speak of demand being elastic when a change of price pro- 
duces a marked alteration of demand, demand falling or rising 
as the price goes up or down. Every commodity has its own 
law of demand. There are as many degrees of elasticity of 
demand as there are variations in human wants and the ability 
of men to satisfy these wants. Demand may be relatively 
inelastic or stiff, either in the sense of being constant or in the 
sense that it will be completely destroyed by any increase of 

(i) The best example of inelastic demand in the first sense 
is salt. A fall in price will not induce us to eat more ; an in- 
crease of price will result in almost no falling off in demand. 
Nevertheless the demand is not completely inelastic, because 
if the price rises enough the poor may be compelled to curtail 
its use, even if it involves disease and decimation. Somewhat 
analogous in this respect to necessities are high-priced luxu- 
ries. The purchasers of pearls are not quite so likely to be 
held back by a moderate increase of price as would be the 
less well-to-do consumers of cheaper commodities. Yet the 
demand for pearls is relatively inelastic only at one end of 
the scale ; even a slight decrease of price might augment the 
demand considerably. 

(2) The other case of inelastic demand may be illustrated 
by oleomargarine. If the price were to rise beyond a certain 
point, the demand would be completely destroyed, and it 
would be replaced by butter. Even here, however, the de- 
mand is inelastic only beyond that limit ; within it, a decrease 
of price means an increase of demand. With well-nigh every 
commodity the demand will be annihilated if the price is 
forced high enough. , 

§ I02] Elasticity of Demand. 241 

The proper statement, then, is not that demand is quite 
inelastic, but that every commodity has its own relative degree 
of elasticity of demand. The demand for some things is far 
more expansible than for others ; a fall in the price of cotton 
will mean a greater increase in demand than a proportionate 
fall in the price of books. 

While utility lies at the foundation of value, some commod- 
ities can be utilized only in combination with others. A bow 
is of no use without an arrow ; a pen is worthless without ink. 
The demand for such complementary goods is a composite or 
joint demand : we want the pen and the ink together, we 
want neither of them separately ; but when we know that we 
can get the one, we want the other. The demand for either 
of two complementary goods is thus an indirect or derived de- 
mand, aiid the elasticity of a derived demand often differs 
from that of a direct demand. 

If the price of both complementary goods rises, the demand 
for each will normally fall. But if the price of only one of the 
complementary goods rises, the demand for it will not fall to 
the same extent. If both ink and pens rise in price, more 
people will use pencils. But if the price of ink remains the 
same, the price of pens must rise far higher before the pur- 
chaser will be driven to accept a substitute. The demand for 
one of two complementary goods is more inelastic than the 
demand for a commodity which possesses independent utility. 
Direct demand is more elastic than the derived demand which 
flows from the existence of joint demand. 

In modern life the sphere of joint demand is continually 
growing. Production is becoming more complex, and the 
demand for most goods used in production depends more and 
more on the possibility of combining them with others. Con- 
sider the numberless things that go to make up a steamship. 
Some of them possess a direct utility for other purposes ; but 
to the extent that their value largely depends on the demand 
of shipbuilders, most of them may be considered complemen- 
tary goods. The more complex our productive processes and 


242 Normal Value. [§ 103 

the more refined our methods of consumption, the greater is the 
sphere of joint demand. The more striking also are the effects 
which changes in demand for one commodity produce on the 
demand for others. The demand for bicycles affected the 
demand for horses; the introduction of the railway revolu- 
tionized the demand for coaches and for country inns. The 
demand for any commodity is in one sense dependent upon, 
or derived from, the demand for other commodities. 

Whatever the nature of the demand, however, whether 
direct or complementary, whether stiff or inelastic, as long 
as there is any permanent demand at all, there will be an 
effort on the part of society to fill the demand. Inasmuch as 
all value depends on the relations between demand and supply, 
it becomes necessary to study the forces which influence the 
permanent supply. 

103. Normal Supply — Cost of Production. 

We have learned above (§89) that valuable things may 
be divided into four classes, namely, human services, concrete 
commodities, relations and privileges, and a fund of capital in 
general. It must be noted, furthermore, that economic goods 
are also divisible into goods of which the supply cannot be 
increased, like favored sites of land, waterfalls, old pictures 
and coins, or unique examples of anything; and, secondly, 
into reproducible goods. 

The discussion of market value and the preceding remarks 
on normal demand apply to all the above classes. In treating 
of normal supply, however, it is advisable to study first those 
concrete things which can be duplicated. The great mass of 
commodities can be increased in quantity, and the progress of 
society depends ultimately on this increase. We shall there- 
fore restrict the discussion in this chapter to those reprodu- 
cible commodities, and reserve for the next chapter the study 
not only of those concrete goods whose quantity is fixed, but 
also of the other embodiments of value. 

Sometimes a commodity is picked up by chance, as when 

§ I03] Cost of Production. 243 

we stumble across a gem or an unexpected deposit of gold. 
Clearly, however, we cannot depend on such accidental finds 
for a permanent supply ; as soon as we search for them we are 
purposely spending time and labor on their acquisition. Since 
therefore all goods whose quantity is susceptible of increase 
are acquired (or, in technical language, produced) by efforts, 
they cost something to produce. In a society which uses 
money this subjective pain cost is translated into a money 
cost, or what is ordinarily called the expenses of production. 
Hence it is usually stated that the normal supply price of 
commodities — that is, the price at which producers in the 
long run are willing to sell their supply — depends on cost of 

In making this statement, however, we must be careful to 
define both branches of the term cost of production. By 
production we do not mean particular production ; by cost we 
do not mean individual cost. 

( 1 ) Cost of production does not necessarily mean the cost 
of producing the particular commodity in question. The labor 
expended on a commodity has no necessary influence on its 
price. A yard of cotton cloth may have cost twenty cents to 
produce ; if through some new invention the same cloth can 
now be produced for ten cents, the price of the old supply will 
no longer be twenty cents. It is evident, then, that when we 
speak of cost of production we mean the cost of continuous 
production or cost of reproduction. If cotton cloth can be 
duplicated or continuously produced (z. e. reproduced) for ten 
cents a yard, the supply price will remain ten cents. It is only 
where the cost is a constant cost, that is, where cost of produc- 
tion is equivalent to cost of continuous production or repro- 
duction, that the supply price depends on the cost of production. 
When cost of production and cost of reproduction diverge, it 
is only the latter that affects value. 

(2) Secondly, cost of production does not mean individual 
cost. Value, as we know, is a social conception ; the real cost 
of production which affects value is the socially necessary cost 

244 Normal Value. [§ 103 

The important point is not that a commodity costs the producer 
something, but that it saves the consumer something. It may 
save one consumer more than another, but its value depends 
on what it saves the social group as a whole. This saving of 
social cost is what is meant by socially necessary cost. I may 
spend much time on something which will have no sale because 
it does not suit the social demand. The commodity will then 
of course not be duplicated ; there will be no cost of repro- 
duction. The markets are full of such examples of misdirected 
labor, which involve the producer in loss. A new shirting, for 
instance, fails to strike the popular fancy; a new brand of 
tobacco attracts no notice. If, on the other hand, the product 
fills a social demand, the producers will adjust their output and 
their exertions to this demand. The cost to the individual 
producer will adjust itself to the socially necessary cost, that is, 
the amount which the purchasers as a group are willing to give 
rather than make the article themselves. If the individuals 
cannot reduce their cost, they will stop producing; if they 
reduce their cost below this point, the point itself will move. 
Society will not be willing to give more, because what the pro- 
ducers can do, the rest of society can, if necessary, do. It is 
in this way that an equivalence is brought about between indi- 
vidual and social cost ; and it is only because of this equivalence 
that cost of production may be said to influence value. 

When therefore we affirm that the normal supply price 
depends on cost of production, we must remember that we 
are speaking only of reproducible goods, and that the state- 
ment is true only in the sense, first, that production means re- 
production, and, secondly, that cost means socially necessary 
cost, — not pains (or their money equivalent) taken, but pains 
saved. When, individual and social cost diverge, value does 
not depend on individual cost of production ; when they meet, 
value may be expressed in terms of either. It is only because 
individual cost tends to adjust itself to the socially necessary 
cost that we can roughly speak of the price of anything de- 
pending on its cost of production. 

§ I04] Law of Marginal Cost. 245 

104. Law of Marginal or Maximum Cost. 

The term cost of production must be further defined. 
Whenever there is more than one producer, there will be dif- 
ferent costs of production. Producers differ in ability or in 
opportunity. While all similar units in the supply sell under 
competitive conditions at the same price, the superior skill of 
some employers or the more fortuitous combination of other 
causes enables some to produce more cheaply than others. If 
the cheaper producer could supply the whole market, he would 
secure a monopoly. But while all producers seek to sell as 
much as they can, it only rarely happens that any one can 
furnish the entire supply. Whenever there is competition, there 
are different costs of production. 

It may conceivably happen, indeed, that all the producers at a 
particular moment are men of precisely the same abilities and 
subject to the same conditions. In this possible case — which 
is apt to be true only of newly started industries — there would 
indeed be only one identical cost for all units of the supply. 
There could then, however, not be any permanent profits to all 
the producers, because prices could not permanently remain 
above the mere cost of production. If there were profits to all 
the producers, competition would surely induce one of them to 
lower the price in the hope of securing larger profits through 
greater sales ; or if he did not do this, some new producer 
would enter the field and cut prices. The only way in which 
prices could be permanently kept at the old level would be 
through some control of the supply. We should, however, then 
no longer have free competition, but should be in the presence 
of some form of monopoly. Permanent production at the same 
cost for all units of the supply almost always involves some 
form of monopoly. 

Since, therefore, there is in case of competition no uniform 
cost, the question arises, when we speak of prices depending on 
cost of production, which cost ? It can manifestly not be the 
lowest cost. If at any moment there are five firms supplying 

246 Normal Value. [§ 104 

the entire market for cotton goods, at a cost to each of six, 
seven, eight, nine and ten cents a yard respectively, it is clear 
that the price will not be six cents, for all except the six-cent 
producer would then lose money and stop. Nor can the price 
be fixed by the average cost of production, as is often carelessly 
stated. For if the price were the average cost, that is, eight 
cents, the nine and ten cent producers would lose and withdraw 
their capital. As long as the demand is large enough to keep 
all the producers in business, the price must be ten cents, — 
corresponding to the greatest or maximum cost. It cannot be 
lower than ten cents, for otherwise the ten-cent producer would 
step out; it cannot be higher than ten cents, because in their 
mutual endeavor to capture more of the market the price will 
be kept down to the lowest point consistent with continuous 

This maximum cost may also be called the marginal cost of 
production, because the ten-cent producer is just on the margin 
of withdrawing. He neither makes nor loses. All the other 
producers — the intramarginal producers — earn a profit rep- 
resented by the difference between the cost to them and the 
selling price. The six-cent producer makes four cents on each 
yard, the seven-cent producer three cents, and so on. But the 
ten-cent producer only covers expenses. 

If we could conceive of society at a given moment, with no 
changes in population or fashion or supply of capital or tech- 
nique, this condition would be permanent. The marginal 
producer would just barely make both ends meet, but would 
earn nothing above his cost. But although society is never 
permanently in such a state, the condition may at any given 
period be said to be realized. At every season when goods 
are thrown on the market the seasonal supply may be deemed 
fixed. The cotton prints that are sold this year were made 
months ago. According to variations of demand from day to 
day the market price will change, but the oscillations during 
this particular season will move about a central point of normal 
price which, so far as the supply for this season is concerned, 

§ I05] Law of Minimum Cost. 247 

depends upon the maximum cost, that is, the cost of producing 
the most expensive increment in the actual supply. Whatever 
the daily fluctuations of market price may be, the normal price 
for this season will be ten cents a yard. At any given period, 
cost of production means maximum or most expensive cost. 

105. Law of Minimum Cost. 

The normal supply price just discussed is, however, not the 
permanent price for longer periods. Actual business condi- 
tions are dynamic. There is a continual movement going on 
in the forces that affect supply. The cotton prints may sell 
one season at ten cents, but next season the more efficient 
producer, or perhaps some new-comer with more capital or with 
better machines or with the chance of securing cheaper labor 
or with improved facilities for marketing the product, will 
endeavor to put out an increased supply at a lower cost. This 
increase of supply will tend to depress the price, and although 
the manufacturer's percentage of profit may be smaller than it 
would have been at the old price, his aggregate profits will be 
enhanced through the greater volume of sales. 

On the other hand, his gains will be at the expense of the 
less efficient producer at the margin. In every business there 
are always some who are able just to make both ends meet. 
Their machinery is antiquated, their capital has been depleted, 
their business activity and knowledge are no longer what they 
should be, and their former profits, if there ever were any, have 
now vanished. They may continue for a time to struggle 
along, hoping against hope, and may live on their capital, being 
content to bridge over the next few years without profit ; or if 
they have invested heavily in unsalable buildings and machin- 
ery, they may deceive themselves by a fallacious system of 
bookkeeping, and through a neglect to charge up the item 
of depreciation of stock or machinery, may figure out a nomi- 
nal profit. In any case, however, the day of reckoning is sure 
to come. Sooner or later the producer will find that he is 
not making money.* He will cease producing that particular 

248 Normal Value. [§ 105 

commodity, and his place will be taken by some more efficient 

All industrial progress consists of a perpetual change at the 
top and at the bottom of the line of producers. Fresh capital 
is continually coming in, the discouraged are continually step- 
ping out. 

It is plain, then, that if by normal value we mean the value 
to which prices tend in the long run to conform, normal value 
under conditions of progress moves in the direction of cost of 
production under the most favorable, not under the least favor- 
able, conditions. It tends toward lowest cost, not highest cost. 
In the cotton industry, for instance, a new man enters the field 
who can produce prints somewhat more cheaply. While not 
able to supply the entire market, he can turn out such large 
quantities that the price will fall, let us say, to nine cents. He 
is willing to sell at that figure, because he expects to dispose 
not only of his share of the greater sales due to lower prices, 
but also of a proportion of the goods previously sold by the 
ten-cent producer, who now drops out. Even if he could sup- 
ply the whole demand, he will not reduce the price to eight 
cents, because, although this would again increase his sales, his 
competitors — the six and seven cent producers — will also 
sell more, and he will not be able to sell enough more to com- 
pensate him for the lower price. Under such conditions the 
price will be nine cents, and, the ten-cent producer having 
fallen out, the nine-cent producer becomes the marginal man. 

On the other hand, if the new producer finds that he can 
produce his goods at a lower price and market them more 
successfully than his competitors, the price will gradually fall. 
With every decrease in price the old marginal producer dis- 
appears, and he who formerly made a profit now becomes the 
marginal producer. When a five-cent or a four-cent producer 
makes his appearance, the price may fall to six cents, and the 
nine-cent, eight-cent and seven-cent producers successively 
abandon the struggle, until the six-cent producer now becomes 
the marginal producer. 

§ io6] Law of Varying Cost. 249 

Thus it is that while the cost of production on which sea- 
sonal or short-time normal supply price depends is greatest 
or maximum cost, the cost of production which influences 
permanent normal value is lowest or minimum cost. In con- 
ditions of change the marginal or maximum cost does not fix 
the price, but is fixed by the price ; the price does not fall to 
nine cents because the nine-cent man becomes the marginal 
producer, but the nine-cent man becomes the marginal pro- 
ducer because the price falls to nine cents. Hence, while 
normal value is at any given moment at the point of maximum 
cost, it is under conditions of progress continually moving in 
the direction of minimum cost. 

106. Elasticity of Supply — The Law of Varying Cost. 

Corresponding to the elasticity of demand, there is an elas- 
ticity of supply. In some cases where no additional quantity 
can be secured on any terms the supply may be said to be 
completely inelastic. But in most cases the supply is suscep- 
tible of increase. According to the difficulties involved in 
procuring this new supply we speak of the relative elasticity of 
the supply. When an additional amount of exertion will result 
in a proportionate increase of output, that is, when double 
the labor will double the supply, we speak of the cost being 

Constant cost, then, is not the same as uniform cost. When 
we say that a commodity is produced at uniform cost, we mean 
that all parts of the supply produced at a given time cost the 
same. This implies that there is only one producer. For, as 
we have seen, as soon as there are difi"erent producers we have 
a maximum and a minimum cost. Uniform cost implies 
monopoly. On the other hand, when we say that a commodity 
is produced at constant cost, we mean that additional quanti- 
ties will cost the same. This applies to competition and to 
monopoly alike. If it costs the monopolist ten cents to pro- 
duce every yard of cotton, no matter how large the output, the 
cost is both uniform and constant. If the ten- cent producer 

250 Normal Value. [§ 106 

competes with the six and eight cent producers, and if each can 
double his output by the appHcation of double the amount of 
capital, the cost is not uniform, but it is constant. 

In many cases the cost of production is not constant, be- 
cause the supply is less expansible or elastic. When each 
additional increment of the supply costs more than the pre- 
ceding, we speak of increasing cost or, since the returns from 
each additional application of energy grow smaller, we can 
equally well speak of diminishing returns. 

In one sense everything, as we know (§ 88), is subject to the 
law of diminishing returns. While, however, the law of dimin- 
ishing returns or increasing cost is universal in the sense that 
it applies to all economic goods after a certain point, it does 
not necessarily apply before that point has been reached. The 
"certain point" is the point of full utilization. It frequently 
happens that this point has not been reached. If we recur to 
the examples on page 213, the omnibus may run only half full ; 
there may be only two trains a day when there might equally 
well be a dozen ; a farmer with a twenty-five- acre tract may 
have a family so large that he would more than double his 
produce if he had a fifty-acre farm. In the case of the omnibus 
an increase of business will not increase the expense at all ; in 
the case of the railroad more rolhng stock aiid employees may 
be needed, but new bridges, new roadbed, new stations and new 
general offices may not be required ; in the case of the farmer 
more seed and perhaps more implements will be used, but these 
may constitute only a minor element of cost. In all these 
cases a doubling of receipts may not be attended by a doubling 
of expense ; the expenses will increase, but not so fast as the 

Whenever the supply is more elastic, that is, whenever 
double the amount of exertion yields more than double the 
output, we are in the presence of the law of increasing returns 
or decreasing cost. When double the exertion just doubles the 
output, we have the law of constant returns or constant cost. 
Up to the point of full utilization the returns may at first grow 

§ loy] Law of Joint Cost. 251 

faster than the cost or exertion, and may then keep pace with it. 
In every business enterprise some expenses grow with every 
increase of business, but others remain the same up to a given 
point. Such expenses are called constant as opposed to varia- 
ble expenses. Wherever the investment of capital is consider- 
able, the proportion of constant to variable expenses is apt for 
a time to be large. But the time will ultimately expire. When 
the railroad traffic becomes very dense, new tracks, heavier 
bridges, larger stations must be provided, and the law of 
increasing returns loses its efficacy. Sooner or later the law of 
increasing returns will be supplanted by that of constant re- 
turns, only itself finally to give way to the fundamental law of 
diminishing returns. 

At any given period, however, an industry may be subject 
to any one of the three laws. The question whether a business 
follows the law of diminishing, constant or increasing cost is a 
question of fact depending upon the possibility of profitably 
employing more labor or capital, that is, of successfully extend- 
ing the point of intensive or extensive utilization. 

107. Jjovr of Joint Cost. 

Just as we have seen that there is a joint demand, so there 
is a joint supply. To the extent that supply depends on cost, 
we have the law of joint cost. In many cases different parts 
of the same commodity serve different uses and therefore sell 
at different prices : the staterooms in a steamer, the seats in a 
theatre, the various portions of an animal used for food, appeal 
to different classes, and thus sell at varying prices. The nor- 
mal price does not adjust itself to the cost of the particular 
part, because there is no such separate cost. It is the whole, 
not the parts, to which we. can assign a cost ; and this cost is 
the joint cost. The normal price of all the parts together 
adjusts itself to the joint cost, but the price of any particular 
part may be above or below this level. 

A more important class of cases is represented by industries 
devoted primarily to the production of some one commodity, 

252 Normal Value. [§ 107 

but which have as an incidental result the creation of a by- 
product. Sometimes this by-product is only the refuse, as 
in the case of the mash sold by the whisky distillers or the 
coke sold by the gas companies. Occasionally the by-product 
even develops into the chief product. The refuse of to-day 
becomes the principal source of profit of to-morrow. There is 
nothing more fascinating in the annals of science or more im- 
portant in the progress of wealth than the story of the modem 
utilization of wastes and by-products. This story, in its appli- 
cation to the United States during the decade 1890- 1900, has 
been told by Mr. Kittredge in the twelfth census. 

Whenever a business produces more than one kind of com- 
modity, we have something analogous to by-products. One of 
the greatest difficulties in modern enterprise is for the pro- 
ducer to assign to each unit or class of his output its propor- 
tionate share in the joint cost. In the case of railway charges 
this difficulty is at its maximum. In such cases the price of 
the individual product may bear little relation to its own cost, 
although the price of all the products together is fixed by 
joint cost. The railway charges more for the transport of a 
given value of silk than for that of an equal value of coal, 
although the cost is far less. Price here is fixed not by cost 
of production or cost of service, but by value of service. The 
silk is so much more expensive than coal that it can afford to 
pay a higher charge. If the same price were charged for coal 
as for silk, coal could not be transported at all, as the price 
would be prohibitive ; and as long as the charge for coal is 
higher than the mere hauling expenses, the charge for silk is 
lower than it would otherwise be (see § 237). The principle 
of value of service is only another way of stating the law of 
marginal utility, and it shows clearly that cost of production in 
itself is not the ultimate regulator of value. In the same way, 
when domestic manufacturers regularly dispose of a portion of 
their surplus output by "dumping" it abroad at prices far 
lower than at home, it does not always follow that the lower 
foreign prices make the domestic price exorbitant. For the 

§ io8] Normal Demand and Supply. 253 

continuous foreign sales at the lower price may be the chief 
means of keeping the factory going, and may thus make the 
domestic price lower than it would be if the producer had to 
charge up to his domestic goods the total expenses of a pro- 
< Miction which would otherwise be unremunerative. Cost of 
I reduction is coming more and more to mean joint cost ; the 
price of a given product may bear only a remote relation to 
its individual cost of production. 

108. Equilibrium of Normal Demand and Normal 

In the preceding sections we have several times spoken of 
normal value depending on cost of production. In reality it 
is only normal supply price that is directly related to cost 
of production, while normal demand price depends on the 
strength of the effective demand. It remains, then, to con- 
sider the mutual influence of normal demand and normal 

While the existence of a demand is the fundamental cause 
of value, the influence of supply shows itself in the fact that 
the tendency of normal value is to adjust itself to the cost of 
production, as we have explained the term. A change in the 
normal demand for reproducible goods means a change in the 
normal supply; but whether it means a change in normal 
value depends on the law of cost. If the demand for a com- 
modity increases greatly, the permanent output will be larger. 
If the industry is subject to the law of constant return, the price 
will not change, because the larger supply and the. larger de- 
mand will still balance each other at the old price. But if the 
industry is subject to the law of increasing return, where a larger 
output involves a relatively smaller cost, the result will be that 
the producers will be able to throw on the market more than 
is needed, and the influence of this augmented supply will 
reduce the price, until there is now a new and permanent equi- 
librium of demand and supply at the lower price. 

Since diminution of cost of production is attended by lower 

2 54 Normal Value. [§ 109 

prices and larger output, the influence which seems to affect 
normal value is the change in cost of production. 

In truth, however, demand is a factor of at least equal im- 
portance in fixing normal as well as market value. Unless the 
producers can dispose of their enlarged output, they will 
have no inducement to continue. If the demand cannot be 
changed, the price cannot. But if the demand can be stimu- 
lated by the lower price, the supply will be increased until 
there is a permanent supply at a fixed cost to satisfy the per- 
manent demand. If the supply changes owing to an altera- 
tion in cost, there can be a permanent supply at this new cost 
only if there is a new permanent demand. In every case 
there can be a normal price only if there is an equilibrium 
between the normal demand and the normal supply. So 
that when we say that normal price is fixed by the cost of 
production, we really mean that it is fixed at the cost of 
production. Only in this sense can we speak of normal value 
depending at any given moment on maximum cost, or tending 
in the long run toward minimum cost, or being influenced in 
particular cases by joint cost. 

109. Influence of Normal Price upon Market Price. 

It is therefore inexact to say that market price depends on 
demand and supply, while normal price depends on cost of 
production, if we mean by this that the two statements are 
opposites. All price depends on demand and supply, but in 
the case of reproducible goods the permanent equilibrium 
between demand and supply tends to adjust itself to the 
cost of production. The rapidity with which this adjust- 
ment takes place depends on the relative changes that oc- 
cur in demand and supply. If the stock of cotton prints 
produced at a cost of twenty cents a yard is large, and if the 
introduction of the newer ten-cent prints of the same quality 
is slow, the price will not at once fall to ten cents. There 
will be a tendency for the price to adjust itself to the new 

§ no] Normal and Market Price. 255 

cost, and the greater the relative supply of the new cloth, the 
more quickly will the price fall. As soon as purchasers know 
that they can get the same goods cheaper by waiting a short 
time, only those who cannot afford to wait will be willing to 
pay more ; and it is their demand which for the time prevents 
the subsidence of the price to the new cost level. When 
the new level is reached no further change takes place, the 
conditions will be static and the normal price permanent. 

If, on the other hand, the cost of cloth continuously falls 
owing to the introduction of successive improvements, the 
normal price will itself be changing. The market price will 
move in the direction of the new cost or normal price, but the 
fall in cost may be so rapid, and the influence of the old 
stocks so great, that the actual market price may not at any 
moment quite reach the normal price. There will be a per- 
petual chase, but no reaching of the goal of equivalence 
between the market and the normal price. There will be no 
permanent equilibrium, because there will be a continual 
change in the forces affecting the supply and the demand. 
Under dynamic conditions the normal price of commodi- 
ties may never emerge, but its influence is none the less 

110. Normal Monopoly Value. 

The foregoing discussion has proceeded on the assumption 
of competitive conditions. If by monopoly we mean the usual 
case of sellers' monopoly, the difference between monopoly 
and competition lies entirely on the side of supply. Unless 
there is a change in price, permanent demand will not ordi- 
narily change simply because competitors are supplanted by 
a monopolist. But the conditions affecting permanent supply 
are at once altered by such a transition. 

In the first place, monopoly supply price is not necessarily 
a unitary or single price. The monopolist may make great 
profits by selling different parts of the supply of the same 
commodity at different prices. The principle here, however, 

256 Normal Value. [§ no 

is precisely the same as in the case of monopoly market price, 
which has been mentioned above (p. 235). There may not 
be one normal price, but several. 

Secondly, marginal cost has no influence on price. It may 
indeed happen that the monopolist controls several factories 
which work under different advantages so that technically there 
may be differences in their expense of production. The point, 
however, is that no force exists tending to fix the price at the 
point of greatest cost. One cotton factory in the trust may 
produce prints at five cents, another at ten ; in the absence of 
competition there is no reason why the trust should sell all the 
goods at ten cents. 

If monopoly price is not influenced by marginal cost, is it 
affected by cost at all? Assuredly, but in a more indirect 
way than competitive price. Monopoly price is always at 
the point of maximum monopoly revenue. The monopolist, 
like every one else, wants to sell the greatest amount at the 
highest price ; the monopolist, however, controls the supply. 
Since increased supply ordinarily means lower price, he will 
experiment until he finds the point of greatest net returns. 
The influence of demand over which he has no control is as 
potent as in competition ; the law of substitution works here 
as there. If by reducing prices one-half he doubles his sales, 
the gross receipts will be the same as before ; if he cannot 
double his sales, the gross receipts will fall off; if he more 
than doubles them, his gross receipts will increase. Thus the 
elasticity of demand is of paramount importance. 

Since the supply, however, costs something to produce, his 
net profits will depend on the surplus of gross receipts over 
cost. This surplus will vsLvy not only with the elasticity of de- 
mand, but also with the elasticity of supply. In other words, 
•if the industry is subject to the law of constant cost, the 
maximum monopoly revenue will be reached at an easily ascer- 
tained price. If he charged less, he would sell more, but not 
enough more, to compensate him at the lower price for the 
total cost of the increased output ; his gross receipts would not 

§ no] Normal Monopoly Value. 


rise as fast as his aggregate cost. On the other hand, if he 
charged more, the sales would fall off so quickly that the 
decrease in his gross receipts would not be offset by the lower 
aggregate cost of the entire output. 

If, however, the industry is subject to the law of increasing 
cost (diminishing returns), the maximum monopoly revenue 
will be reached at a higher price ; if it is subject to the law of 
decreasing cost (increasing returns), it will be reached at a 
lower price. Suppose that the demand is such that the 
price falls off regularly with the increase of output. Then 
according to the law of constant cost we should have a table 
like this : 

Units Sold. 

Price per 


Cost per 

Total Cost. 

































Thus the monopolist will make the largest profits by putting 
the price at 20 cents and by selling 2,000 units. But if the 
law of increasing cost applies, according to the figures in the 
fourth column, it will pay him to put the price at 25 cents and 
to sell only 1,000 units. For: 

Units Sold. 

Price per 



Cost per 

Total Cost. 
































720 • 




Normal Value. 

[§ no 

On the other hand, if the law of decreasing cost applies, he 
will find it to his interest to charge only 15 cents and to sell 
3,000 units. For : 

Units Sold. 

Price per 



Cost per 

Total Cost. 


































In every case, as we see, there is a definite maximum mo- 
nopoly revenue. 

Monopoly price is therefore influenced by cost of produc- 
tion, but in a different way from competitive price. Whether 
it is higher than competitive price depends again on cost. 
Ordinarily it will be higher, because competitive price is cost 
price (/. e. marginal cost price), while monopoly price is above 
cost price. Where a monopoly, however, is created by former 
competitors to avoid some of the wastes of competition, the 
cost may be reduced so materially that it will be profitable for 
the monopolist to sell a largely increased supply at a lower 
price. In such a case monopoly price may be lower than 
competitive price. 

In some cases, again, monopoly price may be only very 
slightly above competitive price. It frequently happens that 
what seems to be monopoly is really subject to potential com- 
petition. As long as the monopolist is content to charge a 
price low enough to give only moderate profits, he may retain 
control of the output. But if he raises the price to an exces- 
sive point he may either tempt other producers into the field 
or lead the consumer to choose some substitute. This latent 
or potential competition is a factor to be reckoned with in all 
cases where the monopolist is not safely intrenched by some 
legal or permanent economic advantage. 

§ no] Normal Monopoly Value. 259 

Since monopoly profits depend partly on cost, the intelligent 
monopolist will strive to avail himself of the newest processes 
to reduce cost. Provided that demand is expansible he will 
seek to reduce price as long as gross receipts increase faster 
than aggregate cost ; the greater the reduction of cost per 
unit, the more probable will this result be. Thus under favor- 
able conditions monopoly price tends to fall, even though at 
any time it may be above competitive price. The price of 
oil charged by the Standard Oil Company, for instance, has on 
the whole fallen, even though the fall in price has not kept 
pace with the still greater fall in the price of the crude petro- 
leum. But where the demand is not so expansible as in the 
case of municipal street railways or the gas supply, or where 
the monopolist pursues a short-sighted policy, the gap between 
monopoly and competitive price widens. 


111. References. 

J. B. Clark, Distribution of Wealth (1899), c^s- ^cvii, xxv, xxvi ; F. A. 
Fetter, Principles (1904), ch. xliii; A. Marshall, Principles (1898), bk. v, 
ch. xiv; F. v. Wieser, Natural Value (1893), bk. iii, ch. viii; H. R. 
Seager, Introductton (1904), chs. xv, xvi; E. S. Meade, Trust Finance 
(1903), chs. xvi, xvii; E. R. A. Seligman, Shifting and Incidence of Tax- 
ation, (1889), bk. ii, ch. iv, part 2, ch. viii, and Social Aspects of Economic 
Laru, Presidential Address in Am. Econ. Assoc. Publications, 3d series, 
no. I (1904) ; H. J. Davenport, Value aiid Distribution (1908), ch. xxvii. 

112. Value and Cost of Production. 

In the preceding chapter we have dealt with the value of 
reproducible goods. Value, however, attaches also to non- 
reproducible concrete goods as well as to relations and privi- 
leges, to human services and to a fund of capital. How far is 
the value of these related to the cost of production ? 

It is clear that in the case of concrete non-reproducible 
goods value stands in no assignable relation to cost of produc- 
tion. The most prominent example is land. Land is not the 
result of production. To be sure, if a piece of virgin land lies 
idle and a town springs up around it, it will soon acquire an 
increased value ; yet neither the land nor any of its qualities 
has been produced by human agency. Efforts may indeed be 
expended on the soil, and in that sense some of its qualities 
might be deemed to be in part the result of production, but 
even here its value stands in no relation to the efforts of the 
individual. Again, take a piece of old sculpture or furniture. 
It cannot be reproduced ; it may sell for a thousand times the 
original cost. Finally, consider two equally good pictures by a 


^112] Cost of Production. 261 

great painter but finished, the one before and the other after 
his attainment of renown. The difference in their value can- 
not be explained by any difference in cost of production. In 
short, the value of concrete non-reproducible goods is neither 
fixed nor measured by cost of production, either because they 
have never been produced at all by human agency, or because 
they cannot be reproduced, or because there is no assignable 
relation between the effort of the producer and the present 
price of the product. Whether these goods be rented or sold, 
their rental as well as their capital value does not depend on 
cost of production. 

The value of that class of economic goods known as rela- 
tions and privileges likewise stands in no direct relation to 
cost of production. Privileges and relations vary as much in 
character and value as any other kind of economic goods. 
They may represent only a single use, like a put or call on 
the stock exchange, or a continuous series of uses, like a per- 
petual franchise of a corporation. When they are capitalized, 
their value, like that of all other goods, is affected by the dura- 
bility and certainty of enjoyment. A permanent franchise of 
a railway differs from the limited privilege of a patent ; but in 
the one case as in the other the durability and certainty of the 
use are independent of the personality of the possessor. With 
the good-will of a business, however, the continuance of profit- 
able relations is often so largely conditioned by the business 
capacity of the temporary possessor that there is less difference 
between capital and rental value than in the case of a more 
permanent or a perpetual privilege. In some instances the 
trade-mark is the chief asset of a business. The president of 
the American Chicle Company recently testified that the con- 
sumers of chewing gum had become so accustomed to certain 
well-advertised brands that the company was able to pay divi- 
dends on a capitalization nine times the amount of tangible 
assets. Over eighty-eight per cent of the value of the property 
was due to the trade- mark.^ 

1 U. S. Industrial Commission, Final Report, § 612. 

262 General Law of Value. [§113 

Whether privileges are durable or ephemeral, it is clear that 
their value — whether rental or capital value — does not de- 
pend upon any cost of production. The good-will of a 
business may indeed in one sense be deemed the result of 
laborious exertion, but the value of the good-will does not 
stand in any assignable relation to the exertion. It may exist 
to-day and disappear to-morrow, without any visible change 
in the proprietor. Most franchises and privileges, moreover, 
are not the result of any one's exertion ; they are the conse- 
quences of intricate social relations, and consist of the opportu- 
nity of turning these relations to profit. Take even so simple a 
case as that of a news-stand in a city. The owner often rents 
out the privilege of serving newspapers to a list of customers, 
and when the stand is sold outright the chief constituent in 
the price is the value of the " route," — the capitalization of 
the income from the privilege of serving customers. Yet this 
route may have cost the original owner nothing to acquire ; 
as the street was built up, the route increased in value, as it 
were automatically. So also the franchise of a railway, the 
circulation of a country newspaper, the selling value of a gas 
or water company grows with the mere process of time and the 
increase of population. The social relations which form the 
basis of their activity are not produced by any individual; 
the privileges of utilizing these relations have no cost of pro- 
duction. Yet they have a very decided value. 

It is not necessary to illustrate further. All these things — 
relations, privileges and non-reproducible concrete goods — 
are daily bought and sold in the market-place, and yet their 
value does not directly depend on their cost of production and 
cannot be measured by it. Since cost of production cannot be 
the general law of value, what is that ultimate law? 

113. Value and Efficiency. 

We have learne?! that value is at bottom the expression of 
marginal utility. It follows that all prices must be studied 
from the point of view of marginal utility, that is, of the power 

§ 113] Value and Efficiency. 263 

of marginal increments of supply to satisfy the marginal in- 
crements of demand. This is only another way of stating 
that the fundamental explanation of value is marginal effi- 
ciency, or the capacity of marginal units to satisfy marginal 

(i) In the case of concrete non-reproducible goods this is 
patent. When a farmer hires a piece of land, the rent which 
he pays depends on the produce of that special grade of land 
as compared with others. When a speculative builder secures 
a site, the price of the lot is fixed by its capacity, from the 
point of view of eligibility, .to satisfy the wants of a particular 
class of tenants. Whether he pays a capitalized purchase 
price or an annual rent, as in England and some parts of 
America, is immaterial. Again, the value of a painting, old 
or new, is regulated by its capacity to appeal to the taste of a 
particular class of amateurs, that is, by its marginal efficiency 
in contributing to the satisfaction of certain wants. Cost of 
production, as we have learned, plays no direct role in the 
determination of value of this entire class of cases. Not cost, 
but efficiency, is the explanation. 

(2) With that class of economic goods that we. have called 
relations or privileges the situation is analogous. The rental 
of the news-stand, the franchise of the gas company, a patent 
or copyright, a new brand of goods or a trade-mark, — the 
value of all such intangible relations depends on the extent to 
which they contribute to the earnings of the business. Their 
value is conditioned by the marginal efficiency of the services 
which they render. The cost may have been zero ; — not 
cost, but efficiency, affords the clue. 

(3) The great mass of concrete reproducible goods has 
been discussed in the preceding chapter. Here indeed cost 
of production seems to be of commanding importance. As 
we have learned, however, it is not so much that prices of 
such goods are fixed by the cost of production as that they 
are fixed at the cost of production. The value of all produc- 
tion goods is derived from the value of their products, — the 

264 General Law of Value. [§ 113 

consumption goods ; the value of the raw material is derived 
from the value of the finished product. The price of pig iron 
depends on the price of the nails, billets and all other iron 
products into which pig iron enters as a constituent. If the 
demand for these products should diminish, the price of pig 
iron would fall, those who produced at a higher cost would 
stop producing, and the new (marginal) cost of production 
would adjust itself to the new price. There is an abundance 
of silver below the surface that is not mined because it will 
not pay ; if the marginal efficiency or value of silver should 
rise, these more expensive grades would at once be marketed 
and the new marginal cost of production would adjust itself to 
the price. The price would not rise because the cost in- 
creased ; but the higher price would be fixed at the higher 
cost because that would now be the new point of marginal 

(4) We come, finally, to the value of human services and of 
the fund of capital. Wages and interest are of such signal 
importance in the distribution of the social income that their 
fuller discussion will be reserved until later. It may, however, 
be said provisionally that they, like everything else, derive 
their value from the marginal increments of the services which 
they render, that is, from their marginal efficiency. To the 
extent that labor is productively employed the rate of wages in 
each grade of labor must in general tend to equal the mar- 
ginal efficiency of the labor, that is, its contribution to the 
product at the margin of employment. In the same way the 
rate of interest will tend to equal the marginal efficiency of 
capital, that is, the actual contribution of the marginal incre- 
ment of capital employed. How these marginal contributions 
of both labor and capital are to be measured, and how the 
changes of actual hfe move the margin of this efficiency up or 
down, remain to be considered later. 

Labor and capital, however, are susceptible of increase. 
Will they then not increase up to the point of continuous cost 
of reproduction, and can it not be said that their value is fixed 

§ 113] Value and Efficiency. 265 

by the cost of production ? In the case of labor, if by cost of 
production we mean the cost of the physical reproduction of 
the laborers, we encounter the difficulty that human beings are 
not reproduced for economic reasons. But even if we restrict 
our attention to the economic causes of the growth of popula- 
tion, and aver that the future supply of laborers depends on the 
cost of reproduction, that is, of bringing them into the world 
and nourishing them until they become self-supporting, the 
obvious rejoinder is that this expense is a result rather than a 
cause, and that what the laborer can afford to spend on his 
family will depend upon the wages which he receives. It is 
as in the case of reprpducible commodities, where value is 
fixed at the cost of production, but not by the cost of produc- 
tion. The contribution or efficiency is the positive cause ; the 
cost of production adjusts itself to this. 

In the same way, to speak of the cost of production of the 
mass of capital is ambiguous. Capital as a fund or embodi- 
ment of value has in one sense no assignable cost. To ask 
what is the cost of production of a thousand dollars is un- 
meaning. The thousand dollars may represent the present 
value of no longer fashionable dress-goods which originally 
cost fifty thousand dollars, or it may represent the value of a 
newly discovered petroleum well which cost the finder nothing. 
In another sense, however, capital has a cost. The mass of 
capital consists of individual pieces of capital, and the increase 
of capital depends ultimately, as we shall see, on the readiness 
to forego present gratifications for future satisfactions. This 
readiness involves a delay and generally therefore a cost ; and 
interest, as we shall learn, may be explained in terms of this 
marginal cost. But here again the cost would not be under- 
gone if it were not for the services to be enjoyed. So that in 
the end it is the efficiency of the service which is the positive 
factor. The cost adjusts itself to the service. 

Thus the great law of value is marginal efficiency. When 
the economic good is used for productive purposes, marginal 
efficiency becomes marginal productivity ; but when it is used 

266 General Law of Value. [§ 114 

for purposes of consumption, we cannot well speak of pro- 
ductivity. Not only in the case of wages and interest, but in 
the case of economic relations and of concrete commodities, 
reproducible as well as non-reproducible, prices depend on 
marginal efficiency. In all economic goods except labor, we 
have to deal with capital values ; in all economic goods except 
the fund of capital we have to deal with rental values : the 
rental as well as the capital values of all classes of goods de- 
pend on their marginal efficiency. In some cases marginal 
efficiency means marginal productivity ; within this class again 
marginal productivity is in some cases equivalent to the cost 
of production. Cost of production is thus only a partial, and 
even then a proximate, explanation of value ; marginal effi- 
ciency is the universal and the ultimate explanation. 

114. Efficiency and Capitalization. 

Because of this frequent lack of correspondence between 
value and cost, the problem of the valuation of complex goods 
often becomes one of extreme difficulty. Where such a good 
regularly changes hands on the competitive market, the diffi- 
culty is obviated by the automatic action of the forces of 
demand and supply ; its earning capacity or marginal service- 
ableness can be gauged with almost unerring accuracy, and 
there will be a fixed rate of capitalization depending, as we 
have learned, on the durability and certainty of income. A 
good example of this equilibration between income and capital 
value is seen on the stock exchange, where the slightest alter- 
ation in present or prospective earnings is at once reflected in 
a fluctuation of the quotations. Even here, however, we must 
remember that the stock exchange quotes only market values ; 
and that these market values are liable to be aff'ected by all 
kinds of speculative influences not connected with real earn- 
ing capacity. 

In actual life we have to deal with all possible combinations 
of economic goods. The value of a simple reproducible com- 
modity may indeed be explained by or referred to the cost of 

§ 115] Efficiency and Capitalization. 267 

production, because at any given time this cost is adjusted to 
the price ; but the value of a complex product or business may 
bear only a slight relation to cost. The value of a livery 
stable differs somewhat from the value of reproducing the 
horses, carriages, harnesses and buildings ; the value of a huge 
steel plant differs considerably from the cost of the land, the 
buildings and the machinery ; the value of a railroad has still 
less relation to its cost of production or of reproduction. In 
such cases we have to do not only with reproducible products, 
like the concrete articles of steel or the acts of transportation, 
but with non-reproducible commodities and relations, like the 
good-will of the firm, the favorable location of the railroad, 
the ability of the managers, and all the other factors which 
cannot be duplicated, but which enhance the profitableness 
and therefore the value of the business. Their selling value is 
a capitalization of their estimated future uses. 

The problem of capitalization in its relation to efficiency 
has become important in three fields, — that of taxation, that 
of regulation and that of investment. To each of these we 
must now turn our attention. 

115. Valuation and Taxation. 

In taxation the problem presents itself in two forms. The 
first arises in those countries which still retain the property 
tax. The difficulty can be illustrated by the taxation of cor- 
porations. In Europe corporations are assessed on their 
income, which is ascertained according to fixed rules. In 
America corporations are, for reasons already mentioned 
(p. 15), usually assessed on their capital value. How, now, is 
this to be measured? The corporate securities are often not 
dealt in on the stock exchange, and even when there are such 
dealings, the daily prices may be affected by speculative causes. 
The cost of production is of slight assistance, because it can 
manifestly apply only to the concrete tangible property, and is 
even there inadequate. It is for this reason that the valuation 
of the corporate franchise, as the chief intangible element, has 

268 General Law of Value. [§115 

become such a burning question in the United States. It is 
plain, however, from the foregoing discussion, that no final 
solution of the problem is possible until property assessments 
are brought into a definite relation with earning capacity. 
When commodities frequently change hands, as is the case 
to-day with the mass of concrete goods, real or personal, 
property is a simpler basis of assessment than income, because 
the market influences automatically capitalize the income. 
But when sales are infrequent, as with so many modern cor- 
porations, income or rental value is the better basis, and the 
so-called property assessments must ultimately adjust them- 
selves to the earning capacity. The practical difficulty con- 
nected with the ascertainment of net earnings has led many 
States to adopt the system of gross earnings taxation. This is, 
however, a rough device, which fails to secure justice as among 
the members of each class ; corporate gross earnings tell us as 
little about relative net earnings as the mere size of a man's 
business about his profits. It is significant that in the newest 
attempts to fix the property valuations of railroads, as in Michi- 
gan, the assessors after computing the selling value of the tangible 
property estimate the value of the intangible property by 
capitalizing a certain portion of the income at a given rate. 
Taxable value is made to depend ultimately on earning capacity, 
— that is, on marginal efficiency. 

The other phase of the problem is of broader application. 
The well-nigh universal source of state and local revenue in 
America is the general property tax. AbiUty to pay is deemed 
to be the fundamental canon of taxation, and a man's ability 
is measured by his property. Owing, however, to the growing 
difficulty of ascertaining all the items of property, certain classes 
are reached with less accuracy than others, and the tax be- 
comes virtually a partial property tax. From this inequality 
of taxation flow two important consequences. In the first 
place we have the phenomenon of diffusion of taxation. Where 
a particular class of property is singled out, the tax will often 
be shifted from the producer to the consumer, or from the 

§ 115] Valuation and Taxation. 269 

vendor to the purchaser. If a special tax, for instance, is levied 
on leather, and the conditions of the trade are such that the 
marginal leather dealer can still remain in business, the tax 
will be added to the price that the shoemaker has to pay ; and 
under similar conditions the shoemaker will increase the price 
of shoes to the consumer. The tax is shifted from one class to 
another until it is diffused throughout the community. If a 
special tax is levied on houses, and population nevertheless 
continues to increase, the tax will be shifted from the owner 
to the tenant, and if the tenant happen to employ the premises 
for business purposes, the tax will be added- to the price of 
the goods displayed for sale. Furthermore, if these goods 
are utilized as the materials of some new production, the pro- 
cess will repeat itself, until the final consumer is reached. 
If a tax is levied on real estate mortgages, the rate of interest 
will rise by at least the amount of the tax, and the burden will 
be borne, not, as is often assumed, by the one who lends, but 
by the one who borrows ; and if the borrower happens to be 
a housebuilder, it will be further shifted to the purchaser and 
again to the tenant, with ulterior consequences analogous to 
those just described. Through the process of shifting, taxation 
of the property often turns out to be different from taxation of 
the property owner. 

On the other hand, when, instead of dealing with perish- 
able things like leather or houses, or with a mere right to a 
sum of money like a mortgage, we deal with more permanent 
things, like a piece of land or the fund of capital itself, the 
influence of capitalization makes itself apparent. If a tax of 
one per cent is imposed on a five per cent hundred-dollar 
bond selling at par, the net proceeds to the new purchaser will 
be only four dollars, and the price of the bond will fall to 
eighty dollars, — four dollars bearing the same proportion to 
eighty dollars as five to a hundred dollars. There is no reason 
why people should content themselves with four per cent 
earnings when the general rate of interest in the untaxed field 
is five per cent. In the same way, when a special tax is levied 

270 General Law of Value. [§ 115 

on land, its value will be reduced by the capitalization of the 
tax. The important consideration in each case is the net 
income, or net rental; and when this is curtailed by the 
imposition of a tax, the selling value will be reduced in pro- 
portion. Since the selling value is the capitalization of the 
rental value, the dimniution in the selling price is equivalent 
to a capitalization of the tax. When a new purchaser buys 
the bond or the land, he discounts future taxes of the same 
rate by paying so much less for the property ; in other words, 
he buys himself free of the tax. Just as the tax in the pre- 
ceding case was .shifted, so now the tax is absorbed, — absorbed 
into a lower selling price. 

The far-reaching consequence is this : when classes of prop- 
erty are taxed, the processes of diffusion and of absorption 
often result in what may be termed the elision or final disap- 
pearance of the tax. Under the conditions of modern busi- 
ness enterprise, when people part with their property the tax 
tends finally to disappear as a permanent burden on the class 
upon which it is sought to be imposed. It is not necessary, 
therefore, in order to secure justice in taxation, that all individ- 
uals or every item of property be taxed. Within each class of 
property holders every one indeed must be assessed ; but as 
between the classes of property economic forces will bring 
about a readjustment. The process is often a painful one, 
and in order to injure the present owners as little as possible 
great care must be observed in altering existing methods. 
But the ideal of imposing taxes on property, rather than upon 
individual property owners, must be constantly kept in mind. 
The attempt in the United States to assess every person upon 
all his property creates gross injustice, because by our hit-or- 
miss system some individuals in a given class are assessed and 
some escape. Those that escape are generally the wealthy; 
those that are reached are for the most part the ones who 
cannot afford to pay. The general property tax practically 
results in a travesty of justice. When we abandon the imprac- 
ticable attempt to tax all property owners alike, and when, 

§ ii6] Valuation and Regulation. 271 

realizing that taxation like value itself is a social phenomenon, 
we learn to tax some kinds of property rather than all kinds 
of individuals, we shall have made a great stride forward in 
practical as well as theoretical justice. It is a process which 
is now slowly going on in the more advanced industrial com- 
munities of America. Consciously or unconsciously, it rests 
upon the conviction that capital or property values depend in 
last instance on marginal efficiency or net earnings. 

116. Valuation and Regulation. 

Another phase of the problem is seen in the difficulty con- 
nected with the official regulation of rates charged by railroad, 
gas or water companies. Where such businesses tend to be- 
come monopolies the legislator seeks to protect the consumer 
from exorbitant charges by fixing maximum rates. In justice, 
however, the criterion of what is fair to the consumer must be 
affected by what is fair to the producer, for the producer is 
also entitled to a fair return on his capital. The whole prob- 
lem thus hinges on the question : what is the relation of the 
actual capital value of the business to the invested capital? 
Is the actual value the par value of the securities? Manifestly 
not, because the stock may have been watered to such an ex- 
tent that its actual value is only a fraction of the par value. Is 
it the market value of the securities? Not always. For the 
market value of the bonds depends not only on the rate of 
interest, but also on the period for which they have to run. If 
a four per cent bond sells at par, a six per cent bond of the 
same corporation and of the same security would normally sell 
around 150. But if the four per cent security is a long-time 
bond, and the six per cent a short-time bond, the difference 
will be far less. Furthermore, even if they are both fifty 
year bonds but emitted at different periods, and if the six per 
cent bond matures in a few years, the premium will rapidly de- 
cUne with each ensuing year until it finally disappears. The 
market value of the bonds hence depends largely upon the 
conditions of repayment, and is to this extent divorced from 

272 General Law of Value. [§ 116 

the value of the corporate property as such. Moreover, if we 
take stocks instead of bonds, we find that the value of the cor- 
porate property cannot be strictly measured by the market 
value of the shares, because this market value is subject to 
violent oscillations on the stock exchange. The market value 
of the shares of the Third Avenue Street Railway Company in 
New York fluctuated a few years ago over one hundred per 
cent in the same year. On what basis could, the real value 
have been computed? 

Finally it may be asked : is the actual capital value of the 
corporation to be measured by the cost of production or of re- 
production (or, as it is sometimes termed, the cost of replace- 
ment) ? Here, again, the answer is, not entirely. For this 
method would take no account of the franchises, acquired re- 
lations and general business conditions which have developed, 
and for the creation of which the corporation may or may not 
be responsible. A railway running through a frontier com- 
munity may cost in stretches as little as fifteen thousand dol- 
lars a mile to build ; after the lapse of twenty years, the cost 
of reproduction as measured by double tracking, better road- 
bed, new stations, bridges, equipment and increased value of 
the land may be perhaps thirty thousand dollars a mile. Yet 
a capitalization of the actual earning capacity might result in 
at least double that sum. To declare the entire difference to 
be "water," and to adjust rates so that the old stockholder 
should not profit by the building up of the country, or so that the 
new purchaser who has invested in good faith should have his 
income cut in half, would manifestly be unjust. A corporation, 
like an individual, is entitled to participate in the advantages of 
general prosperity. 

The Supreme Court of the United States has recognized the 
truth that not one, but all of these factors must be taken into 
consideration.^ The ultimate test of fair capital value depends 

1 Smythe v. Ames, 169 U. S. 466 (1898). ** In estimating the value of a 
railroad, the following points must be considered : The original cost of 
construction, the amount expended in permanent improvement, the 

§117] Valuation and Investment. 273 

on a comparison of the earnings of the enterprise in question 
with those of well-managed and reputedly not overcapitalized 
undertakings of a similar character. 

117. Valuation and Investment. 

The third difficulty connected with valuation and capitaliza- 
tion is seen in the flotation of securities at the time of the organi- 
zation or reorganization of great business enterprises. In former 
years the chief example was that of railroads. While the early, 
small railroads were largely built on the proceeds of money 
actually invested by the shareholders, it was not long before 
the doubtful success of the more elaborate enterprises in newer 
sections led to the issue of mortgage bonds, often below par, 
while the stock was sold at an insignificant price or even pre- 
sented to the shareholders, in order to make a better market 
for the bonds. In the same way, when railways were amalga- 
mated or reorganized, the issue of new stock often exceeded the 
aggregate of the old, the excess representing the capitalization 
of the increased earnings which it was expected would result 
from the combination. In these two cases the issue of stock 
might be economically justifiable either as the sole practicable 
method of securing capital for a new and doubtful enterprise, 
or as the best means of reducing prospective earnings to a 
present basis. In the one case the stock presented or sold at 
a discount represents the present worth of an insecure and 
speculative future ; in the other case the stock is the capitaliza- 
tion of a future income, just as the issue of securities for doub- 
ling the track is legitimate only when the traffic is expected 
to be so heavy as to increase the income at least to the point 
of earning a return on the new capital. In all such cases we 
cannot properly speak of overcapitalization or stock-watering. 

Unfortunately, however, there is always the danger that the 
anticipations may be mistaken, or that the calculations may 

amount and market value of the bonds and stock, the present as com- 
pared with the original cost of construction, the probable earning capa- 
city of the property, and the sum required to meet operating expenses." 


274 General Law of Value. [§117 

be designedly falsified in order to enable the manipulators to 
dispose of stock whose worthlessness they suspect or know. 
Finally, when it seems desirable, for the purpose of evading 
legislative restrictions or of placating public opinion, to keep 
down the dividend rate, the amount of stock may be augmented 
by the device of scrip dividends or an increase of the nominal 
amount of the securities in the hands of the shareholders. In 
all such cases we have to deal with stock-watering pure and 
simple, — that is, the creation of additional securities which do 
not represent additional earning capacity. 

Since the formation of the modern industrial combinations 
known as trusts, this aspect of capitalization has assumed still 
greater importance. The chief danger of the situation con- 
sists in the facility afforded to unscrupulous promoters to 
finance the organization of the combination in such a way as 
to deceive the investors and to reserve the greatest profit for 
themselves, by selling the inflated securities at prices wholly 
unjustified by prospective earnings. The mere fact that the 
united capital of a combination exceeds the aggregate capital 
of the constituent companies does not prove the existence of 
overcapitalization ; for if the new enterprise is honestly financed 
and well managed, the very fact of union may so enhance the 
earning capacity of the whole as to justify this capitalized antici- 
pation of estimated profits. The distinction between economic 
and uneconomic finance or between actual value and water in 
the investment of capital is not only the distinction between 
honesty and dishonesty but between intelligence and stupidity. 
While stupidity will always avenge itself on the stupid, the 
burden of dishonesty is likely to be borne by the innocent 
victim. When the loophole of competition is left open, the 
victim is not the consumer but the unwary investor ; when 
competition is stifled, the loss may fall on either or both. 
The modern demand that government should at least insure 
publicity of accounts and a reasonable correspondence between 
the prospectus and the actual facts in organizing vast enter- 
prises is a natural result of the dangers of overcapitalization. 

Book II. 

Value and Production. 


118. References. 

A. Marshall, Principles (1907), bk. iv, ch. i; W. Smart, Distribution of 
Income {i8gg), bk. i, ch. v ; F. A. Fetter, Principles (1904), ch. xxviii ; J. S. 
Nicholson, Principles (1893-1901), bk. i, ch. ii; J. A. Hobson, Economics 
of Distribution (1900), ch. vi ; H. Sidgwick, Principles (1883), bk. i, 
chs. i, iv; F. A. Walker, Political Economy (1888), part 2, ch. iv. 

119. Production : Its Meaning and Relation to Consumption. 

All wealth may be regarded from the point of view of the 
producer or of the consumer. Commodities in the hands of 
the consumer and destined to immediate consumption are 
sometimes called consumers* goods, while those forms of 
wealth reserved for the purpose of increasing the stock of 
consumable commodities are called producers' goods. Be- 
cause the latter serve as instruments of production, they are 
sometimes called instrumental goods. 

Production and consumption clearly refer only to utilities. 
Man can create nothing material ; he can only impart motion 
to particles of matter and so rearrange them that in their new 
form they will gratify some desire. So also he can destroy 
nothing material, for matter is indestructible ; he can only so 
rearrange the position of the particles as to put an end to 


276 Production. [§ 119 

their utility in that particular form. Production and consump- 
tion thus mean the creation and destruction, not of matter, 
but of utilities through the movement of matter. 

From a certain point of view production and consumption 
are two sides of the same thing. All wealth is sooner or later 
destroyed in the sense that the utilities embodied in the 
particular commodity finally come to an end. Every new 
arrangement of matter by man ultimately involves an act of 
consumption, partial or complete. We cannot produce any- 
thing without consuming something, — either commodities or 
energy, which is itself in last resort maintained by commodi- 
ties. We can make steam only by using coal ; we can produce 
goods only by wearing out the tool or machine. Not only 
does production involve consumption, but consumption might 
be said to involve production. Production is the creation of 
utilities. Commodities are consumed because they satisfy 
some want, and in satisfying this want they impart utility. So 
that all consumption short of wanton or accidental destruction 
would seem to imply production, because it indirectly yields 
utilities. Consumption would then involve production, just as 
production involves consumption. 

The distinction, however, is none the less real, even though 
difficult to draw in special cases. The criterion of production 
is not the imparting of a utiHty, but the creation of a new 
utility. It is only when an action brings about an addition to 
the existing sum of utilities, when, in other words, there is a 
resulting surplus of utility, that we have an act of production. 
When a railroad company buys coal and converts it into loco- 
motive power, there is an act of production, because, notwith- 
standing the consumption of the coal, the utilities afforded by 
the steam replace those afforded by the coal together with an 
addition. There is more wealth than before. On the other 
hand, the food which a man consumes, although it serves to 
keep up his strength, imparts to him certain personal quali- 
ties which, as we know, are not wealth. They may help him 
to produce wealth in the future, but do not in themselves 

§ 119] Relation to Consumption. 277 

constitute wealth. The consumption of coal by an engine 
and of food by a laborer are therefore not on a par ; the one 
is an act of production, the other an act of consumption. In 
the one man produces wealth ; in the other wealth produces 
man. Production and consumption are as opposed as wealth 
and man. 

Since wealth and man are mutually interdependent, produc- 
tion and consumption are closely related. In a well-ordered 
community the object of consumption is more production of 
wealth and ultimate welfare. Consumption, however, does 
not necessarily lead to this result. A glutton who wastes his 
life in riotous living decreases his power of serving others. 
Thus, while consumption may be productive in the sense that 
it creates the conditions of a future production, consumption 
differs from production. Wise consumption indeed leads to 
more production : only in this sense are they two aspects of 
the same thing. The whole economic process is a flow of 
utilities from nature to man, and back from man to nature. 

It is important to remember, moreover, that the utilities 
which constitute wealth are not necessarily embodied in tan- 
gible objects. Production is not limited to the creation of 
physical commodities. The older economists maintained that 
the labor of servants, actors and the professional classes in 
general was unproductive, because not incorporated in visible 
objects. So other writers, like Carey, have urged that the 
trader is unproductive ; and still others, like the Physiocrats, 
have contended that only the farmer is really productive. To 
those who understand that human wants are satisfied by utili- 
ties, irrespective of the source whence they flow, it is clear 
that all labor which engenders such utilities is productive. 
Labor is unproductive only when its efforts are wasted. If I 
write a book which is read, or make a table which is used, my 
labor is productive ; if the book is a failure, or the table use- 
less, my labor is unproductive. The trader, the lawyer, the 
doctor, the artist, are no less productive than the workman, 
the farmer or the manufacturer, provided they accomplish 


Production. [§ 120 

something that society wants. The test is the creation of 
new utiUties or values. 

The UtiUties of which we speak are, again, not necessarily 
direct utilities. The making of electric lights is the creation of 
direct utilities ; the erection of a successful school devoted to 
the study of electricity is the creation of indirect utilities, 
because it will ultimately result in better and cheaper lights. 
In the one case we are producing commodities, in the other 
productive forces; in both cases we are contributing to the 
production of wealth. In the same way the sums expended by 
a government for its army and navy may be productive in the 
highest sense if, as sometimes happens, they really contribute 
toward the protection or furtherance of the national industry 
or of the national existence which makes industry possible. If 
they do not do this, they are unproductive, but only in the 
sense that any unnecessary or wasted effort is unproductive. 
Intangible products, like culture and taste, are often extremely 
important to individual and state alike, and when they rest on 
a broad basis of tangible wealth they are the distinguishing 
mark of a high civilization. 

120. Kinds of Production. 

Production of wealth thus means the creation of new utili- 
ties. The utilities that can be added to things are of three 
kinds, — material, place and time utilities. A material utility ^ 
can be created by an alteration in any property of matter ; a 
change in the form, shape, weight, color, taste, smell or any 
other quality of a thing which increases its capacity to satisfy 
human wants is the creation of a new material utiUty. Utility 
can, however, also be enhanced by a change of place. A thing 
in one place may be worth more than in another. If the wheat 
were allowed to remain on the Western plains, its utility would 
be greatly circumscribed ; instead of satisfying the wants of 
millions, it would be consumed only by thousands. Finally, 

1 Some writers speak of this as a form utility. It is dear, however, 
that form is not the only quality susceptible of change. 

§ T2o] Kinds of Production. 279 

utilities can be augmented by a mere change in time. The 
alteration may take place in the supply : certain kinds of wine, 
musical instruments and similar products improve in quality 
through the mere lapse of time ; forests, flocks and the like 
increase in quantity. More frequently, however, the alteration 
occurs in the demand : things may be more useful at one period 
than at another. The efforts expended in holding the com- 
modity until it can be of the most effective service involve the 
creation of time utilities. 

All wants are satisfied, if at all, at a given time and place. 
The creation of time and place utilities is as truly productive 
of wealth as the creation of elementary material utilities. In each 
case we enhance the capacity to gratify desires. Trade and 
transportation, which deal with place utilities, as well as specula- 
tion and insurance, which deal with time utilities, are no less pro- 
ductive than the activity expended in creating material utilities. 
It is for this reason that the subject of exchange is properly to 
be regarded as a part of production. It is for the same reason 
that it is impossible to classify different kinds of activity as in 
themselves more or less productive or non-productive. The 
causes which condition the law of comparative costs vary from 
time to time and from place to place. Where land is cheap, 
agriculture may be more productive than industry ; where geo- 
graphical conditions are favorable, commerce may be more 
productive than either. To raise oranges in the Arizona desert 
would be as unproductive as to put a steel plant in the wheat- 
fields of Kansas ; yet when the Arizona desert is made to 
bloom by irrigation, or when Kansas becomes the home of a 
teeming population, oranges and steel may become the most 
productive of enterprises. The same considerations apply to 
the productivity of efforts embodied in immaterial wealth. For 
Oklahoma to build a magnificent art gallery would be clearly 
wasteful ; for New York to spend large sums on music and art 
may be highly productive, even regarded from the narrow point 
of view of increasing the capacity of the artisan to create more 
artistic and therefore more valuable products. A high-priced 

28o Production. [§ 121 

school-teacher would be as unproductive at the country cross- 
roads as a piano factory in Alaska. Productivity depends on 
the ratio of efforts to needs ; with changing needs the same 
efforts will mean an altered productivity. 

121. Factors of Production. 

Since the foundations of economic life are nature and man, 
the primary factors of production must be natural forces and 
human effort. Sometimes natural forces alone suffice, — as in 
the case of the spontaneous increase of a herd of cattle ; 
sometimes human effort suffices, as in the case of the rendering 
of a personal service ; ordinarily production involves the co- 
operation of the two. This is sometimes expressed by the 
statement that the factors of production are labor and land, — 
a not entirely accurate statement, because land is only one of 
the natural elements that come into consideration. Water, 
light, heat, electricity, moisture and the like also play a role in 
production, and frequently constitute economic goods with a 
definite exchange value. Again, since the application of labor 
to natural elements results in material objects, which are then 
further utilized in production, these are often spoken of as 
capital, and the factors of production are declared to be land, 
labor and capital. Capital would then be differentiated from 
land in that capital is itself an artificial product, while land in 
the wider sense is a gift of nature. 

The question whether land should be sharply separated from 
capital maybe left for later consideration (§ 132). It may, 
however, be stated here that the controversy is largely one 
of words, depending on the sense in which capital is used. If 
by capital we mean a concrete commodity, the joint product 
of labor and nature, land is to be differentiated from capital. 
If, on the other hand, by capital we mean wealth as a fund, 
land is a part of capital, since it has a capital value. Even, 
however, if we consider land as a part of capital, it is so im- 
portant a part that it may for many purposes be put in a 
category by itself. 

§ i2i] Factors of Production. 281 

Again, since the labor of directing or managing enterprises 
has become so significant, we might distinguish between labor 
in general and the skill or ability to conduct a business. The 
factors of production would then be land, labor, capital and 
management or enterprise. This classification, however, is not 
entirely free from objection. If a shoemaker works for another, 
his activity would be called labor ; if he works for himself, it 
would be called enterprise. If a factory owner manages his 
own plant, it would be enterprise ; if he sells it to a trust and 
assumes the management as a paid official, the same activity 
is called labor. Manifestly this overlooks the fact that there 
are all kinds or gradations of labor, from ordinary unskilled 
work to the exercise of the highest business talent. It is clear, 
from the examples just given, that the distinction is impor- 
tant rather from the point of view of distribution than from 
that of production. If the income from labor is a stipu- 
lated one, it is wages, whether it applies to a day laborer or 
a railway president; if the income is a contingent one, it is 
profits. If a man uses his own unaided labor, he can earn 
wages ; if he combines his labor with capital in a business en- 
terprise or if he employs other people's labor, he undergoes 
risks and his income is uncertain. The hired or salaried man 
always gets a part of the product, the independent entrepreneur 
may lose money instead of making it. The law of profits is 
different, as we shall see, from the law of wages. From the 
point of view of production, however, enterprise is a species 
of labor. 

Finally, it must not be forgotten that in civilized society 
production is carried on amid an environment moulded by 
legal, political and social relations. All these may in a sense 
be declared necessary to production ; but as they are in theory 
at least applicable to all alike, they are not to be included 
among the economic factors of production any more than is 
the air which is free to all. Even where these relations in the 
shape of special laws or privileges favor some producers or 
classes, they are properly to be put under the head of oppor- 

282 Production. [§122 

tunity to utilize labor and capital rather than under that of 
the primary factors of production. 

Summing up, we may say that the factors of production are 
in one sense labor and capital ; in another sense land, labor 
and capital, and in still a third sense land, labor, capital and 
enterprise. In any sense the factors of production are human 
energy and natural forces, together with their joint product, 
capital, which may again be embodied in land or other ele- 
ments of nature. 

122. Production and the Producer. 

Whatever classification of the agents of production may be 
adopted, one vital distinction must be observed. In the case 
of the non-human factors of production, whether they consist 
of natural forces or the results of the application of labor to 
nature, we have to deal with inanimate objects and phenomena. 
The laws of their increase can be considered without refer- 
ence to any but the technical consequences to the things 
themselves. Where changes, for instance, take place in the 
productivity of concrete things, the social results — that is, the 
influence on classes of human beings — may indeed be pro- 
found, but the objects in* themselves still remain inert masses, 
and the laws which control their earnings are irrespective of the 
particular individuals that happen to own them. When the 
machine is useless, we throw it aside ; when the land is worn 
out, we leave it. 

On the other hand, when we deal with human energy, we 
cannot dissociate it from the individual who exerts the energy. 
This does not mean that the laws of production are less verifiable 
here than in the case of inanimate objects. For the personal 
equation or difference between individuals presents no more 
difficulties in analysis than do the differences between things. 
The distinction is to be sought rather in the fact that in 
the one case we deal only with the means and in the other 
with both the means and the end. Human energy, like in- 
animate objects and forces, forms the tools by which wealth 

§ 122] Production and Producer. 283 

is secured; man alone represents the end for which wealth 
is secured. Hence in dealing with the problems of production 
through human agencies we cannot eliminate the consideration 
of the producer as at the same time a consumer. This has a 
double aspect. 

In the first place it admonishes us that the process of pro- 
duction is social, and that all production ultimately involves 
consumption. Any system of production, therefore, which 
systematically neglects the consuming powers of the producer 
must in the end defeat itself. The methods of production may 
conform to all the approved technical rules, and each industry 
may seem to be flourishing from the point of view of output, 
yet none the less the general condition of business may be far 
from satisfactory owing to the lack of an adequate demand. In 
former times, where production was relatively slight, as in the 
middle ages, or where it was largely based upon unpaid human 
labor, as in antiquity, it was the luxuries of the few rather than 
the wants of the many that constituted the bulk of the demand. 
In modern times, on the other hand, where human energy is 
untrammelled and the play of competition tends to become 
ever more free, the effective demand comes from the wants of 
the many. If we stunt this demand, we withdraw the chief 
stimulus to wealth creation. The human beings may be mag- 
nificent productive instruments, but if there is no market for 
their products their potential energy is not converted into 
actual results. The more democratic the people, the more 
intimate is the dependence of the productive power of the 
community upon the consuming capacity of the masses. 

Secondly, we must be careful to take the broad view of 
the economic process. As we have seen, the real concern of 
economic inquiry is not wealth in itself, but wealth in its rela- 
tion to man, or, still better, man in relation to wealth. A 
system of production which, however successful in other re- 
spects, relegates the human factor to the same level as the 
external object, is uneconomic in the broad sense, because, 
instead of subordinating wealth to man, it sacrifices man to 

284 Production. [§ 122 

wealth. A production of wealth which is based upon disre- 
gard of the human rights of the producer is no more truly 
economic than is the defrauding of one party to a bargain 
by the other. There are certain kinds of so-called produc- 
tion which in the highest economic sense no civihzed country 
can afford to retain. Slavery at one time nominally enriched 
antiquity, but it brutalized the slave and enervated the slave- 
holder, until it dried up the sources of production itself. 
Child labor at the beginning of the nineteenth century helped 
to swell the profits of the English factory owner, but was fast 
incapacitating the population, physically as well as mentally 
and morally. If the Devil must be a partner in our cotton 
factories, said Carlyle, we cannot afford to have the cotton 
factories. And in saying this he uttered a truth which was 
no less important in its economic than in its moral aspects. 


123. References. 

F. A. Walker, The Wages Question (1876), chs. ii-iv and Political Econ- 
omy (1888), part 2, ch. ii; A. Philip, The Function of Labor in the Pro- 
duction of Wealth (1890) ; A. Marshall, Principles (1907), bk. iv, chs. v, 
vi; J. S. Nicholson, Principles (1893), bk. i, chs. v, vii; F. A. Fetter, 
Principles { 1904), ch. xx ; R. Mayo-Smith, Statistics and Economics (1899), 
ch. iii; K. Marx, Capital (trans, by Aveling, 1887), chs. xiii-xiv; W. S. 
Jevons, Theory (1888). ch. v; J. A. Hobson, Evolution of Modern Capi- 
talism (1906), ch. x; S. and B. Webb, Industrial Democracy (1904), part 
2, ch. vi ; S. Webb and H. Cox, The Eight Hours Day (1891) ; L. Bren- 
tano (trans, by Arnold), Hours and Wages in Relation to Production (1894) ; 
J. Schoenhof, The Economy of High Wages (1892); E..S. Meade, Trust 
Finance (1903), ch. iv; Thirteenth Annual Report of the Commissioner of 
Labor on Hand and Machine Labor (1899) ; U. S. Twelfth Census ^ VII, 
Manufactures y part i. 

124. Meaning of Labor. 

By labor is meant the putting forth of human exertion. The 
attempt to divide it into the categories of physical and mental 
labor is not strictly accurate. The labor of even the most un- 
skilled workman calls for the exercise of certain mental quali- 
ties, like attention, memory and prudence ; while on the other 
hand the intellectual effort of the great captain of industry is 
associated with the expenditure of a certain amount of waste 
of tissue. From the lowest to the highest is a difference in de- 
gree. Ordinary day laborers disclose almost endless varieties of 
ability, skill and technical efficiency, the result of the education 
of hand and brain ; among the employers the differences in 
capacity and energy are no less marked. Labor runs through 


286 Labor. 


the whole gamut, from worthlessness to highest efficiency, from 
the mere mechanical repetition of the simplest act to the 
planning of the most subtle and elaborate business scheme 
or intellectual result. 

Under present social conditions we distinguish between 
laborers and capitalists, between workmen and employers. As 
a rough classification available for many practical purposes, 
this is defensible. From the point of view of production, how- 
ever, it is not wholly adequate. Labor is undoubtedly different 
from capital, but the owner of capital may also labor. The 
employer is not the same as the employee, but he may work as 
hard and his contribution to the value of the product may 
be even more important. It is hence a fateful error to con- 
fine the term labor, as virtually do the socialists, to manual 
labor, and to maintain that all wealth is created by labor, with 
the implication that all other shares in distribution are a de- 
falcation from wages and therefore a robbery of the workman. 
Entirely apart from the fact that there are other factors of pro- 
duction, the contention overlooks the labor of organization and 
enterprise, of correlating the scattered elements of produc- 
tion and of adjusting the supply to the varied demands of a 
complex market. Such labor has become under prevalent 
conditions of even greater value to society than the mere 
manipulation of the tools. A modern railway president or 
head of a great industrial trust often receives a salary equal to 
that of several hundred of his workmen, and larger than that of 
the President of the United States. The work may not be so 
irksome as that of the day laborer, but it may be worth far 
more to society, because its contribution to the product is so 
much greater. The real value of labor depends not upon the 
conditions of employment but upon the results of activity. 

125. Cost of Labor. 

Economic production implies the turning out of the greatest 
product with the least cost. So far as the wages of labor form 
an element of cost, it would seem to follow that low wages or 

§ 125] Cost of Labor. 287 

cheap labor is a necessary condition of low cost. Before ac- 
cepting this ostensibly self-evident proposition, however, it is 
necessary to pursue the analysis further. 

In the first place, we must draw a distinction between the 
individual and the social point of view. Even if it were true 
that in a particular industry low wages denoted low cost, it 
would not follow that it is also true from the point of view of 
society. Since production is conditioned by consumption, 
there can be no permanent increase in output without an in- 
crease in demand. The effective demand, however, depends 
upon the income of the consumers. In any community the 
great mass of the consumers consists of the laborers. The 
lower the level of wages, therefore, the more restricted will be 
the total demand for the national products in general and the 
slighter the chance of reducing cost by expanding the market. 
Low wages which mean low cost in some industries may thus 
indirectly prevent a reduction of cost in other industries. 
Where a particular set of industries is manufacturing almost 
wholly for the foreign market, the effect may not be so obvious ; 
but since, as in all international trade, imports must ultimately 
pay for exports, the volume of the foreign trade finally depends 
on the capacity of the domestic consumer to utilize what is 
brought in. Thus even the prosperity of the export industries 
may be purchased at the expense of the other branches of pro- 
duction. Irrespective of the general question of the social 
desirability of high wages for the laborer himself, it is clear 
therefore that when we regard public wealth in general, low 
wages do not necessarily mean low cost. The low cost in 
some industries may be outweighed by the higher cost due 
to the lack of consumption or restricted market in other 

In the second place, in any single industry low wages do not 
necessarily mean low cost. The real cost of labor is to be 
measured by its productive efficiency. Just as the hundred- 
thousand-dollar railway president is cheap because an inferior 
and low-priced substitute would botch matters and increase 

288 Labor. [§ 125 

expenses, so in the case of the ordinary wage-earner the real 
cost is to be measured by the ratio of wages to the product of 
labor. In the Philippines the contractors find it in the end 
cheaper to hire the Chinamen in preference to the natives, al- 
though the former command larger wages; in the Southern 
cotton factories the white laborer is found more advantageous 
than the negro factory hand, who can be hired at a materially 
lower wage. Furthermore, in the same industry and with the 
same workmen neither an increase of wages nor a curtailment 
of labor time necessarily augments cost. Where a reduction of 
hours or an increase of wages succeeds in enhancing energy, 
care and sobriety, the output may be greater than before. Es- 
pecially where fine machinery is used and a high grade of 
intelligence is required to secure the best results, we often find 
a true economy in high wages and a lower cost in shorter 
hours. The relatively cheapest goods which are produced in 
the United States and which successfully compete in foreign 
markets with the products of low-priced labor are certain iron 
and steel manufactures, boots and shoes, clocks and the like, 
where the wage-scale is notoriously the highest. 

Of course it does not follow that every increase of wages 
or reduction of hours will lower cost. There is at every 
period and in every industry a limit beyond which the in- 
crease of efficienqy will be overtaken by the greater outlay, 
and it is quite possible that there may be no increased 
efficiency at all. In such cases higher wages do indeed mean 
greater cost. The mere fact, however, that goods sell at low 
prices tells us nothing as to the comparative rate of wages in 
that industry. The cheapness of so-called white goods in a 
department store may be due to the low-priced labor in the 
sweat-shops; the cheapness of a Waltham watch may be 
compatible with the very highest wage-scale. So far as labor 
is a factor of production, cost depends not merely upon wages, 
but upon wages as compared with output. Under certain con- 
ditions there is a true economy in high wages; the more a 
workman is paid, the less he may cost. 

§ 126] Efficiency of Labor. 289 

126. EfBciency of Labor. 

Since the ultimate factor in the relation between labor and 
cost is productive efficiency, the problem of increasing the 
efficiency of labor is of paramount importance. The older 
economists were fond of emphasizing the dependence of the 
demand for labor upon capital. While their analysis was in 
many respects valuable, they overlooked the independent power 
of labor to contribute to its own uplifting through an increase 
of efficiency. It is precisely here that the economic effects of 
education and leisure as well as of social and political progress 
mean so much to the community. In the commercial warfare 
that is being waged between nations to-day, education is recog- 
nized as a potent weapon. In the United States the old-time 
prejudice against the college-trained business man has given 
way to the recognition of his superiority ; technical and com- 
mercial schools of all grades are being multiplied, and even 
the primary and secondary institutions are adapting their 
curricula more successfully to the needs of the ordinary man. 
The gist of the negro problem in the South is seen by all 
careful thinkers to consist in the increase of productive effi- 
ciency through an appropriate education of the negro. The 
hope for the Filipino is to be found in the possibility of train- 
ing him to habits of orderly and consecutive work. With 
him, as with the laborer at home, the significance of a higher 
standard of life — which is only another way of stating the 
basis of greater productivity — is to be found not only in the 
domain of distribution and consumption but in that of pro- 
duction. The finer the tool, the greater will be the product ; 
when the tool consists of human energy, we have not only a 
greater product, but a greater capacity in the human being 
to utilize the product. The short-sighted employer to-day is 
concerned only in securing the ostensibly cheapest workman 
and in driving him to the utmost ; the long-sighted employer 
finds it profitable not only to pay fair wages for moderate 
hours, but to surround his workmen by an environment of 


290 Labor. [§127 

cleanliness, comfort and attractiveness, with provision for rest, 
recreation and education. No one who attended the St. Louis 
Exposition in 1904 could have failed to be struck by the ex- 
hibits of the Westinghouse Company of Pittsburg and of the 
National Cash Register Company of Dayton, with the remark- 
able arrangements for the welfare of their workpeople. Yet it 
can scarcely be doubted that it is " good business " on the 
part of the employers, and that all these seemingly needless 
and sentimental expenditures really involve a lowering of cost 
of production through enhanced efficiency of labor. 

We thus see the close interrelation between production and 
civilization. Not only is a lowering of cost the basic condition 
of increasing wealth and progress, but the physical, moral and 
intellectual advance of society inevitably reacts upon the indi- 
vidual and renders him a more capable and efficient agent of 
production. State and church, science and art, have their 
deep economic significance. Progress is at once a result and 
a cause. The true reduction of labor cost of permanent im- 
portance is that caused by increased efficiency. The more of 
a man a laborer is, the better tool he becomes. Whatever 
society does to improve the individual will be more than 
repaid by an augmented production of wealth. 

127. Nature and Advantages of Division of Labor. 

In the progress of efficiency perhaps the greatest factor has 
been the principle of specialization or division of labor. In 
its deepest aspects it is one side of the biological law dis- 
covered by von Baer and elaborated by Herbert Spencer, — 
the growth of all life from uniformity to multiformity, from an 
incoherent homogeneity to a coherent heterogeneity. From 
the economic point of view division of labor may be put into 
four categories, — the social, the industrial, the technical and 
the territorial division of labor. 

(i) The earhest illustration of the social division of labor 
is the differentiation of economic function between man and 
woman. In aboriginal society certain kinds of work were 

§ 127] Advantages of Division. 291 

assigned exclusively to the female. We have seen the influ- 
ence of women's work upon the evolution of the later economic 
stages. Even to-day, when all careers are open to women, 
there is a natural tendency for female labor to concentrate 
itself in those groups where women possess a peculiar efficiency 
and where there is the least possible competition with men. 

Apart from sex cleavage the earliest example of differentia- 
tion of function was through the formation of social classes. 
At first every one had to fight to secure his food and fight to 
retain what he had secured. The separation of a permanent 
military class from the industrial group was a great step in the 
efficiency of each ; it is not yet found in even so comparatively 
developed a society as that of the American Indian. The 
development of a priestly class, again, although of chief impor- 
tance from the social and religious point of view, had a note- 
worthy economic effect in that it permitted the industrial 
class to devote itself more unremittingly to the daily tasks of 
production without giving so much of its time to the inde- 
pendent propitiation of the malevolent spirits. The priests 
were in truth a labor-saving device. 

It took ages for the originally homogeneous industrial group 
to split up into great classes. Even after centuries of prog- 
ress the husbandman's family not only worked up the raw 
material into roughly finished products, but exchanged super- 
fluities with their neighbors. The cultivator was a handicrafts- 
man and a trader, as he is still in part to-day on the American 
frontier. An independent class of traders was slowly differ- 
entiated, and with the originally greater importance of extra- 
tribal commerce the traders were usually the aristocrats. It 
is only where economic conditions were inimical to commerce 
and engendered the predominance of a land-owning aristoc- 
racy as in some of the feudal states of mediaeval Europe and 
Japan, that we find a contemptuous attitude toward trade, and 
especially toward the small trader, who was often at the same 
time a petty craftsman. Finally, the artisans are separated 
from both farmers and traders, and we notice the development 

292 Labor. [§ 127 

of the industrial class in the narrower sense of the term, as 
distinguished from the agricultural and commercial classes. 
With every step in the progress of society we have a further 
division of labor within each class until we reach the modern 
bewildering complexity of occupations and professions. 

(2) Just as the social division of labor has denoted in- 
creased efficiency of each group, so within the sub-groups we 
find the second form of division of labor, which may be called 
industrial specialization. In the textile industry, for instance, 
certain mills manufacture only yarns ; others do nothing but 
weave yams into cloth ; and still others merely dye and finish 
the product of yarn-spinning and weaving mills. In New 
England there are shoe factories which make only " uppers " 
and others which produce nothing but " findings " (counters, 
shanks and heel-stiffeners) . In the glass industry large estab- 
lishments turn out only one kind of bottle. Some branches 
have even become so completely specialized that there are 
factories, as in the bicycle and electrical supply industries, where 
nothing is done but assemble the parts of a machine or in- 
strument that are made in other establishments. The advan- 
tages of this kind of specialization are numerous and obvious. 

(3) Thirdly, we find within each particular business enter- 
prise an increasing separation of industrial functions known as 
the technical division of labor. This is a specialization of 
process within the same establishment rather than a specializa- 
tion in different establishments. It may also be declared to 
be a specialization among workmen in contrast to the indus- 
trial division of labor which is a specialization among employ- 
ers. It is clear that specialization of the workman saves time 
both in preparation for the trade and in execution of the task, 
while the greater familiarity with a single process vastly aug- 
ments his dexterity. It is no less obvious that the greater the 
specialization the greater will be the chance of the right mah 
falling into the right place, thus faciltating the adaptation 
of means to end. A trip through any modern factory will 
disclose tens — nay, even hundreds — of separate processes 

§12 7] Advantages of Division. 293 

designed to turn out a product which in former times was 
entirely made by a single individual. A good example of such 
a subdivision of labor, resting still upon human labor force 
alone, is to be found in the manufacture of ready-made coats, 
which is now in New York divided into no less than thirty-nine 
distinct processes.^ 

It is, however, in cases where ample technical auxiliaries 
are used that we find the most minute subdivision of labor. 
Human energy can then be reduced to the repetition of a 
single act like a thrust, a pull, a stroke or some other simple 
manipulation of a machine. The reduction of cost often 
progresses in a far greater ratio than the increase in the number 
of processes, for we have here to deal not only with the en- 
hanced dexterity of the workman but with the almost endless 
succession of labor-saving devices. To make a shoe in some 
New England factories requires 173 different operations, each 
conducted by a class of laborers with a special name. The 
manufacture of a fine watch calls for no less than 1,088 dif- 
ferent sets of workmen (not including the operations of fur- 
nishing the power), each using a different kind of machine. 
The saving in cost due to the introduction of machinery can 
be illustrated in the jewelry and iron business; under the 
machine method 1,020 gold fihgree shells for cuff buttons 
can be completed in the same time as one by the hand 
method ; in the production of screws where one man can oper- 
ate from six to twelve machines the ratio of machine to hand 

1 These thirty-nine classes of workmen are : i. Fitter ; 2, Pocket-maker; 
3. Canvas-baster ; 4. Lapel-padder ; 5. Bar-tacker ; 6. Seam-presser ; 7. 
Lining-maker ; 8. Lining-operator ; 9. Sleeve-maker ; 10. Lining-presser ; 
II. Sleeve-presser; 12. Collar-padder ; 13. Shaper; 14. Tape-fuller; 15. 
Lining-baster ; 16. Operator; 17. Presser ; 18. Edge-cutter; 19. Edge- 
baster ; 20. Shoulder-lining baster ; 21. Shoulder-operator ; 22. Edge sleeve- 
baster ; 23. Collar-baster ; 24. Sleeve-presser ; 25. Joiner of collar to lapel ; 
26. Armhole-baster ; 27. Sleeve-sewing operator ; 28. Garment-examiner ; 
29. Collar-finisher; 30. Armhole-lining finisher; 31. Basting-puller; 32. 
Edge-presser ; 33. Buttonhole-cutter ; 34. Buttonhole-maker ; 35. Hanger- 
sewer ; 36. Presser of entire coat ; 37. Button-marker ; 38. Button-sewer ; 
39. Busheller. 

294 Labor. [§ 128 

product is 4,491 to i. In the historic example of pin-making, 
where a single workman unaided could originally turn out only 
a few pins a day, but where in Adam Smith's time his prod- 
uct was five thousand pins a day, the daily product per work- 
man is now about fifteen millions of pins, complete and stuck 
in the paper. The tables opposite pages 294 and 295 will 
illustrate the contrast between hand and machine labor in 
various occupations in the United States. It is obvious that 
the technical division of labor is dependent on the existence 
of a vast market. The mass production, which results from 
the improvement of technique through division of labor, and 
the substitution of machine for hand methods, is profitable only 
when the demand for a cheap product is so elastic as to be 
susceptible of great increase. Division of labor and increase 
of output are thus correlated. Each is in turn the result of 
the other. 

(4) Fourthly, the principle may assume the form of local- 
ization or territorial division of labor. In large cities we find 
the most important wholesale houses in any line of business 
assembled in districts by themselves. In nations we find 
various industries congregated to a large extent in localities 
which possess some peculiar advantages, such as proximity to 
raw materials, water power or markets, favorable climate, cheap 
labor, and supply of capital or credit facilities. In the world 
at large the principle of the territorial or geographical division 
of labor is the chief foundation for the free trade argument. 
By allowing each section to produce that for which it is best 
fitted, we shall manifestly secure the greatest and the cheapest 
production. In all cases, whether we have social, industrial, 
technical or territorial division of labor, the result is an 
enhanced efficiency of labor and a proportionate increase of 

128. Defects of Division of Labor. 

While the principle of the division of labor is undoubtedly 
salutary, there are certain dangers which must not be over- 





OF HOURS WORKED. \ • ^ • } 


oi AMi/Rnnuc 12 CROWN ledgers, 8'^X uJ^inches, 


BOOKBINDING f^i_l\*torH°°^^'^^° ''*°^^' 








BARRELS 100 flour barrels, patent hoops. 











MAGAZINES copies-96-page magazine, 6^ x sX inches 
NEWSPAPERS printing-And folding 3.6, ooo .pages. 

I r-ruorOADUV printing 1,000 SHEETS artwork. 

LITHOGRAPHY ,9 x 28 inches, e colors. 
TYPESETTING 100,000 ems-, newspaper work. 


ELECTROTYPING g;^ x iXi inches. 

CMr-DA\/iM^ ■• WOODCUT. 7'4 X. 9 INCHES, SAME 

ENGRAVING pattern under each method. 
ENVELOPES 50,000 no. e^ pumn white envelopes. 
BUTTER 600 pounds, in tubs. 



, , . „^,_ - - 1 SET DOUBLE COACH HARNESS, 

HARNESS TRACES io stitches per inch. 
GRANITE dressing 150 square feet. 






^' m j^'J' 


















i;9J»^ 1 |>fl ^ JJ:^^J:^V^-^V^ ' >'-^ 'j;.^: V ;^ 



X!>..-»t "f 












From U.S. L»^r Bulletin 54 





NUMBER OF HOURS WORKED, t '. . 1 "*'*'' 


BARLEY 100 bushels. 


rnRN 5° BUSHELS, shelled; stalks, husks, 

l^ursiN AND blades CUT INTO FODDER. 

CORN 50 BUSHELS, husked; stalks left in field. 








STRAWBERRIES 500 quarts. 
SWEET POTATOES so bushels. 
TOMATOES 100 bushels. 
WHEAT 50 bushels. 

COAL 50 TONS bituminous. 

DRILLING GRANITE ^^^^ r^^J^r/'^^ 


LIMESTONE quarrying lOO tons. 



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LOADING GRAIN WHEAT from storage bins or 


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transferring 200 tons from 
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From U.S. Labor Bulletin 54 

§128] Defects of Division. 295 

looked. These are the risks involved in specialization of any 
kind. A great scientist has been described as one who knows 
something about everything and everything about something. 
Specialization in such cases is illuminating. Many specialists, 
however, know a great deal about some one thing and nothing 
about anything else. Specialization here is narrowing and 
even dangerous, because it tends to prevent a broad power of 
successful generalization. In the economic domain the risk is 
the same. In the social division of labor a particular sub- 
group may pursue its own interests so closely as to subordinate 
to them the pubHc interest, thus preventing an even and well- 
rounded economic development. In the territorial division of 
labor the dependence of a section or country upon one par- 
ticular product may be perilous in time of some suddenly 
enforced cessation of production, as in the case of the potato 
famine in Ireland in the forties, or it may check progress, as in 
the case of the one-crop system or the sole reliance of a 
country upon agriculture. In the technical division of labor 
the confining of the individual workman to the mechanical 
repetition of a simple act may tend to make him a machine 
rather than a man, and to stifle and repress all the powers of 
initiative. This is in fact the one great indictment brought 
against the modern industrial system. 

The danger, however, can be averted. In the social division 
of labor a developed sense of social solidarity, of business ethics 
and of political responsibility will insure a continually growing 
adaptation of the parts to the whole. In the geographical 
division of labor a sound industrial and commercial programme 
will, as we shall see, strive for a diversification of industry by 
supplementing, and within certain limits altering, nature. In 
the technical division of labor the qualities which lie dormant 
during the hours of work may be awakened by a judicious ad- 
mixture of leisure, and by a different attitude toward the work 
itself, which can be brought about in large measure by techni- 
cal and industrial education. If machine industry and division 
of labor simply brought to the workman greater intensity of 

296 Labor. [§ 129 

work, as the socialists contend, the result would be disastrous. 
But if, as is often the case, the increased productivity brings 
with it higher wages and shorter hours, the workman's whole 
standard of life may be elevated, and his daily task need no 
longer engross the whole of his physical and mental energy. 
Under proper leadership within his own ranks and in those of 
the employers, he may be a part of the machine, and yet not 
only remain a man but become more of a man than before. 
The highest grade of American labor to-day is not the cobbler 
who makes the whole shoe, but the specialist heel-finisher in 
the New England shoe factory. Under such conditions, as 
they are disclosed by progress in the most advanced nations, 
division of labor may be a blessing instead of a curse, and re- 
main an aid to production without becoming a menace to 
individuality. This result, however, cannot be reached without 
a struggle to retain the use, while overcoming the misuse, of 
what is an essentially beneficent principle. 

129. Combination of Labor. 

Division of labor does not describe the whole of the process. 
To be effective it must be supplemented by the combination 
of labor. This also assumes several forms. 

(i) First, we have the combination or co-operation of labor 
with another agent of production, like capital. We have seen 
that the advantages of the technical division of labor are most 
signal when machinery is employed. Obviously the larger the 
quantity of labor that is saved through the aid of capital, the 
higher will be the productivity of each remaining unit of 
labor ; the more complex the entire process, the simpler will 
be each single portion. Without the co-operation of the two 
factors, the division would be less minute and the output less 
abundant. Modern division of labor is largely the result of 
the application of capital. 

(2) Secondly, we have the technical combination of units 
of labor with each other. This combination may be successive 
or simultaneous. In the so-called team system in the clothing 

§ 129] Combination of Labor. 297 

industry, for example, although each set of workmen does its 
allotted share, it is most important that they all proceed in 
unison, so that no set completes more or less than can be 
handled by the next. Here we have successive combination. 
In a great steel foundry or rolling mill, on the other hand, each 
detail of the work may be apportioned to a separate class, but 
unless they all co-operate exactly at the critical moment the 
product will be worthless. Here we have simultaneous com- 
bination. In both cases the combination is effective because 
of the division of labor ; or, better stated, the result is due to 
the joint influence of combination and division. 

(3) Thirdly, we have the combination due to the fullest 
utilization, from the outside, of the result of each contribution 
to the product. In social division of labor this is brought 
about by the principle of competition or of societary control ; 
in territorial division of labor it is produced by the natural 
forces of location ; in technical division of labor it is effected 
by the organization of industry. Herein lies the great role of 
the manager and employer of labor, — the entrepreneur in the 
technical sense. The head of a great department store or of 
a vast factory is akin to a general. He must be at once bold 
and prudent, and must look with one eye to the ranks and 
with the other to the enemy, his competitor. He must be full 
of resources and of foresight. Above all, he must not only 
have an army well disciplined down to the smallest detail, but 
must possess the capacity to take a large view, massing his 
forces at just the time and in just the manner to be most 
effective. In short, thorough organization and co-operation 
are the secrets of industrial as of military success. The 
great leader is as indispensable in the one career as in the 

Combination of labor is thus the complement of division of 
labor. The most efficient use of the one involves the employ- 
ment of the other. Specialization and co-operation are the 
obverse and the reverse of the same medal ; they are as neces- 
sary to a developed economic life as are the individual and 

298 Labor. [§ 130 

social elements to human life, or the centripetal and centrifugal 
forces to all life. 

130. Supply of Labor. 

Since labor is a productive agent that is susceptible of in- 
crease, it might seem that the supply of labor will in the long 
run respond to the demand, so that there will never be a de- 
ficiency or a surplus. The situation, however, is by no means 
so simple, even if we confine our attention to ordinary labor, 
and abstract from that for which special education or remark- 
able natural gifts are required. 

In the first place, there may be climatic or racial reasons 
which restrict the supply. In the tropics it is sometimes diffi- 
cult to induce the natives to work for any consideration. 
Again, under conditions of forced labor, the source of supply 
may dry up ; the downfall of the Roman empire and the 
decHne of prosperity in the South before the war were due 
to the fact that cessation of conquests in the one case and 
the stoppage of the African trade in the other finally made the 
slave too expensive, by limiting the supply. Even under the 
modern system of free labor there may be both artificial and 
natural obstacles. We prohibit Chinese immigration, although 
by so doing we retard the exploitation of the natural resources 
of the Pacific slope. We prefer a more equable, even if slow, 
development to the rapid tempo associated with diminished 
opportunities to the American workman. A less defensible 
restriction of supply is seen in the short-sighted policy of some 
trade-unions which, following the example of the mediaeval 
guilds, seek to secure monopoly returns by interposing all 
manner of obstacles to membership. Such methods, however, 
involve a restriction in the supply of special kinds of labor 
rather than of the general labor force, and invariably react 
upon the workmen outside of the particular unions. Finally, a 
natural obstacle to the free adjustment of the supply is seen in 
the case of the so-called seasonal demand. There are occu- 
pations where labor is needed only at stated intervals, as for 

§ 130] Supply of Labor. 299 

instance in farming at harvest or vintage time. Yet the laborer 
must Hve during the whole year. Whenever economic con- 
ditions do not permit a scale of wages sufficiently high to sup- 
port the workman during the intervals of non-employment, we 
find these periodical complaints of scarcity of labor. 

On the other hand, a striking example of the relative over- 
supply of labor is afforded by the substitution of machine for 
hand labor. The introduction of machinery, however, does 
not mean a diminution in ultimate demand. For the decrease 
in cost and price due to machine methods leads to such an 
enhancement of output that even with a relative falling off 
in the number of laborers there will ultimately be an increase 
in the total aggregate of laborers employed. The replacing of 
the stage-coach by the railway finally led to a vast increase of 
laborers at higher wages, coupled with a service at lower cost. 
This result will of course ensue only when the increased profits 
due to the new machinery are saved and invested in new cap- 
ital which gives employment to more laborers. If the profits 
are wasted instead of being saved, new machinery will be of 
no advantage to the laborer. In point of fact, however, the 
profits are normally saved. The immediate result is often a 
temporary oversupply in the particular trade and the discharge 
of workmen who for the time being, and until they finally 
drift to the new openings, swell the ranks of the unemployed. 
One of the most serious problems of the modern industrial 
system is how to mitigate the evils of this transition period. 

In the long run, however, under modern conditions of the 
free play of economic forces the supply of labor will adjust 
itself to the demand through changes in the growth of popu- 
lation. The fundamental point here, however, is the rate of 
remuneration or scale of wages, — a discussion of which must 
be left to the next book. 


131. References. 

J, B. C\2LrV., Distribution {1899), ^h. xiii ; R. Mayo-Smith, Statistics and 
Economics (1899), ch. iv ; A. Marshall, Principles (1898), bk. iv, chs. ii, 
iii ; H. R. Seager, Introduction (1904), ch. vi ; A. S. Johnson, Rent 
in Modern Economic Theory (Am. Econ. Assoc. Publications, 1902), 
ch. ii ; R. M. Hurd, Principles of City Land Values (1903) ; M. B. Ham- 
mond, The Cotton hidustry, part i, The Cotton Culture (Am. Econ. Assoc. 
Publications, new series, no. i, 1897) ; E. J, Payne, History of America, I 
(1892), 342, 366-384; U. S. Industrial Commission, Report (1902), X, and 
XIX, 46-123; J. B. Clark, Essentials of Economic Theory (1907), ch. xi. 

132. Land as a Separate Factor of Production. 

Land is generally distinguished from capital as a separate 
factor of production. The distinction, however, is sometimes 
made on insufficient grounds. 

(i) It is claim.ed, for instance, that land is a gift of nature, 
while capital is a product of labor. It must be remembered, 
however, that economics has to deal with value, and that from 
the point of view of value it is difficult to draw so sharp a line. 
Into many tracts of land there has been put as much labor as 
into equally valuable concrete products. Without the dykes of 
Holland and the irrigation works of arid America the land 
would be worthless. In some garden plots on the European 
continent the tenant on leaving is permitted to take with him 
several inches of soil, — the value of the land is as much or 
as little a product of labor as in the case of other things. It 
may be contended, however, that the value of urban land at 
least is not a product of labor. But how about the value of a 
newspaper, or a banking business ? As the country town be- 


§ 132] Land and Production. 301 

comes a prosperous city, the newspaper, like the comer plot, 
becomes more valuable, even though the editor works no harder 
than before. The circulation increases through the operation 
of the same social forces which raise the value of the land. 
There may indeed be more newspapers, but there will also be 
more corner plots. Even if we attempt to reduce values to the 
quantities of labor, it is hazardous to distinguish between land 
and capital on this ground : in a diamond drill, which is as- 
suredly a piece of capital, the overwhelming share of the value 
may be ascribable to the raw material or gift of nature, and 
only a small part to labor ; in a truck-farm, three-quarters of 
the value of the land may be found in labor and only a quar- 
ter in the gift of nature. In other words, in the value of 
some land, labor plays a large role ; and in the value of some 
capital, nature plays a large role. This distinction is hence 

(2) Again, it is contended that land is indestructible, while 
capital is perishable. Here, again, the rejoinder may be made 
that the qualities which give value to the land are not indestruc- 
tible. It is a commonplace that the chemical ingredients of the 
soil need to be constantly renewed. The best agricultural land 
may become the worst, and the worst the best, after a few 
generations of exploitation or thrift, as the case may be. But 
surely, it will be said, the qualities of extension or location are 
indestructible. Even here, however, it must be observed that 
the two things are not identical. The mere extension of land 
is indeed indestructible, but it gives no value. All land is 
alike in extension, — the worthless and the valuable. Location 
is extension plus situation, just as fertility is extension plus 
chemical ingredients. Location gives value to land, but loca- 
tion is not indestructible as an economic factor. The land 
may remain, but the value may change because of an alteration 
in its contiguity to a market. The land is still there, but the 
market may disappear, and thus to all intents the economic 
location of the land suffers a change. Any falling off in 
demand such as a decrease or shifting of population, a change 

302 Land. [§ 132 

in commerce, an alteration in the conditions of transportation, 
may reduce or wipe out land values. In the deserted mining- 
towns of the West the value of the land has vanished, perhaps 
never to return. Value is a product of human relations: 
nothing human is indestructible. 

(3) It is often said that land is fixed in quantity and not 
reproducible. To this the double answer may be made : some 
other things are non-reproducible as well, and in the true 
economic sense land itself is really not fixed in quantity. 
Reproducibility is a relative term : some things can be easily 
reproduced ; some with difficulty ; some, like old coins or 
works of art, not at all.^ Furthermore the supply of land can 
be increased both actually and relatively. There have always 
been, and still are, vast stretches of unused and worthless land 
in every country and of comparatively worthless land near 
every city; whenever it becomes profitable, new areas are put 
under cultivation or covered with residences. The striking 
fact of the past century has been the increase in the supply of 
arable land and the growth of urban areas. Even, however, if 
all the land in a given county or city is occupied, its economic 
utilization can be increased, and that is equivalent to a relative 
growth of supply. More intensive farming in the country or 
better or higher structures in the city have the same effects as 
an increase in supply. The limit here, as in all economic 
goods, is the margin of utilization. 

While the differences between land and other things that 
constitute capital are thus differences in degree rather than in 
kind, it remains none the less true that land may usefully be 
put into a separate category. This is due to the fact that an 
increased supply of other things in general involves a dupli- 
cation of the thing itself, while the increased supply of land 
involves a difference in location or fertility. To call this the 
law of diminishing returns is in one sense inexact, since the 
law of diminishing returns is applicable to everything that 
possesses value. The law of diminishing returns, however, has 
peculiar consequences when applied to land. If an employer 

§ 133] Fertility. 303 

needs more laborers, he can ordinarily secure an increased 
supply at the same wages, even though there is a certain point 
beyond which it does not pay him to employ more. If a 
manufacturer needs additional machines, he can ordinarily buy / 
them at the same price, even though he will buy only up to a 
certain limit. In fact the progress of society means more 
machines or more capital and lower cost. But if more land is 
needed, recourse must be had to less fertile or less well-situ- 
ated land, which normally means a higher cost. The more 
intensive farming or the higher structures referred to in the 
last paragraph amount indeed to an increase in the supply of 
land, but they also involve an increase of cost. 

Economic progress, then, may have different effects on land 
as compared, not indeed with all other things, but with the great 
mass of other production goods. The advance of invention 
and civilization is apt gradually to reduce the prices of manu- 
factured articles, but the increase of output and of civilization 
may lead to a greater demand for given tracts of land, and thercv 
fore to an increase in their price. A moderate tax on ordi* 
nary commodities, reproducible at pleasure, tends to decrease 
their number and thus to increase their price ; a similar tax on 
the value of land is apt to exert no influence on its existence, 
and therefore none in increasing its price. 

While land thus is a part of capital from the point of view 
of the laws which explain the nature of rental value in gen- 
eral, and the relation of rental to capital value, land is usefully 
contrasted with capital if we compare changes in land rents 
and values with changes in the great mass of other things, the 
increased production and accumulation of which constitute 
progress. Because of the social significance of such relative 
changes, it is legitimate to put land into a separate category. 

133. Fertility of Land. 
Land has value as a factor in production either because it 
yields some concrete produce or because it affords a service as 
the physical support of man. The productivity of land, that 

304 Land. [§ 133 

is, the value of its contribution to wealth, depends in either 
case on two facts, — its fertility and its situation. The fertility 
is a result of the constituents of the soil combined with its 
extension ; situation is not simply extension, but geographical 
location. According to the uses to which land is put, we 
divide it into the categories of pasture, agricultural, forest, 
mineral and urban land. Each of these is again divisible : 
pasture land, for instance, into sheep, goat, hog and cattle 
pasture ; agricultural land into meadow and plough (or arable) 
land with as many sub-classes as there are varieties of crops; 
forest and mineral lands according to the character of the 
timber or mineral (including under this designation such non- 
metallic products as coal and oil) ; urban land into business, 
residential, apartment or tenement land. 

So far as the element of fertility is concerned, land, like all 
other forms of wealth, is subject to the law of diminishing 
returns. In agricultural land there is at every moment a max- 
imum return from the application of a given amount of labor 
or capital. As we have seen above (§ 88), the margin beyond 
which the returns begin to diminish may be an intensive or an 
extensive margin. When this margin has been passed, we 
must, in order to secure the same yield, either renew the fer- 
tility of the old plot or select a fresh plot. But the marginal 
point is always definitely ascertainable. In a small and lonely 
New England farm the best results may come from employing 
a laborer for every few acres and not utilizing expensive imple- 
ments ; in the far West it may be more profitable to use the 
costliest machines and to economize in human labor ; in a 
truck farm the application of rich manures may yield the 
greatest profits. In all cases there is a point beyond which 
any additional ** dose " of capital or labor will give propor- 
tionally smaller returns. Under normal conditions of progress 
the self-interest of the individual farmer may be relied upon to 
ascertain this point. Under a system of free competition each 
farmer will seek to secure the largest produce from his land, 
and the greater the output, the lower will be the price. The 

§ 133] Fertility. 305 

private interest of the producer will thus tend to coincide with 
the general interest of the community. This is at once the 
basis and the justification of private property in agricultural 

In the case of timber land this coincidence between private 
and public interests is by no means so unqualified. In grazing 
land the pasture replenishes itself from season to season ; in 
agricultural land the crop follows within a few months, or, as in 
the case of fruit lands, within a few years of the application of 
labor or capital. But in forest land the reproduction of the 
grove takes decades or even centuries. A wise forest policy 
which endeavors to insure a continuous supply to the public will 
therefore content itself with felling only the ripe timber. Private 
interest, on the other hand, which looks to immediate gains may 
derive more profit from the complete clearing of the forest. 
When the woods are practically inexhaustible, as in the early 
period of American civilization, it makes but Httle difference. 
But when the forests are destroyed to such an extent as not 
only to cut off the supply of useful woods but seriously to en- 
danger the equable flow of the streams and to threaten, as in 
Spain, an alternation of complete drouth with devastating inun- 
dations, the situation becomes serious. Timber land here can 
best accomplish the social ends of production through a policy 
which combines the cutting of the mature trees with the pres- 
ervation of the forest itself. It is partly for this reason that 
governments are everywhere retaining or adding to their forest 
lands, as in the United States with its numerous national forest 
reserves and occasional state parks ; while some countries even 
seek to control the action of private forest owners, in the 
effort to prevent denudation or to secure reforestation. 

In mineral lands the possibility of reproduction is excluded 
by the very nature of the case. The law of diminishing returns, 
however, is equally operative, even though its working is apt to 
be obscured. In some mines it becomes necessary to go deeper 
for an increased supply, with a resulting rise of cost which 
finally becomes prohibitive and leads to a complete cessation 


Land. [§ 134 

of operations. Even where, as in the oil or diamond fields or 
in some coal or iron mines, the returns seem to be constant 
from year to year, we are in the presence of diminishing 
returns, for the source of the returns is itself being slowly 
consumed. At the end of a given period, be it short or long, 
not only will the returns abruptly stop, but the possibility of 
securing any further yield in the future will also have disap- 
peared. As was explained above, we must therefore abstract 
from each recurring return a sum which when capitalized at the 
rate of production will ultimately amount to the total original 
capital and replace the value of the initial stock. Translated 
into ordinary business language, we must allow for depreciation, 
— a depreciation which, when continued long enough, will 
entirely absorb the original capital. The life of the anthra- 
cite coal fields in Pennsylvania, for instance, is estimated, 
on the basis of the present rate of production, at between 
one and two hundred years; and of the English coal fields 
at somewhat less. In the case of agricultural land, then, ad- 
ditional doses of capital or labor will yield a relatively smaller 
produce ; in the case of mines or badly managed forests the 
ostensible produce may be the same, but the real net return 
on the original unimpaired investment becomes constantly 

Even in the case of urban land the same law applies. The 
fertility, that is, the productive service, of certain lands con- 
sists in yielding support to buildings. It may indeed be 
profitable to replace a tent by a wooden shanty, a shanty by a 
stone house, and perhaps even a stone house by a steel sky- 
scraper. Obviously, however, at a given moment there will be 
a point beyond which a more expensive structure will not yield 
proportionate returns. 

134. Situation or Geographical Location of Land. 

The value of all production goods is derived, as we know, from 
that of the products or consumption goods. Oranges do not sell 
at higher prices than potatoes because the owner must pay 

§ 134] Location. 307 

more for orange lands than for potato lands ; on the contrary, 
orange lands cost more than potato lands because the oranges 
that can be grown on an acre sell for a larger sum than the 
potatoes that can be raised on the same area. Whether the land 
can be used for oranges rather than potatoes often depends as 
much on location as on fertility. The most fertile land may 
be so far removed from the market that, notwithstanding the 
great potential supply of the produce, the land will be value- 
less because there is no effective demand for its product. The 
mutations in value due to changes in situation are in modern 
times far greater than those due to changes in fertility. The 
fruitfulness of land is subject to the alternations of weather or 
chances of nature, but it may on the whole be kept fairly 
unimpaired with reasonable care, and may be increased up to 
a certain point by unremitting attention. The economic 
changes in situation, on the other hand, are often sudden, long- 
continued and unpredictable. The orange lands in Southern 
Italy have recently been ruined by the rapid introduction of 
California fruit into the Eastern market ; the wheat lands of 
England have suffered greatly during the last half-century by 
the opening up of vast stretches in the New World. Per 
contra^ when the Erie Canal was completed the sections near 
the terminals appreciated enormously, and we have daily 
examples of the sudden rise of value in districts newly served 
by a railroad. 

These considerations apply to urban land as well. In the 
main, and especially when long periods are taken, the value of 
urban lands grows with the development of the city. Mere 
agglomeration of population does not involve an increase of 
land values, if, as in Naples to-day, the growth of population 
is accompanied by a lessening of business prosperity and there- 
fore by a diminution in the income of the consumer and 
tenant. But where numbers increase with prosperity, land 
values naturally rise. The mutations of situation, however, do 
not always result in an advance. Certain sections in Greater 
New York are to-day worth less than a few decades ago, 

3o8 Land. [§ 134 

because the tide of business or fashion has ebbed rather than 
flowed. The introduction of new trolleys or subways has 
advanced some sites but depreciated others. 

It is largely due to the element of situation that different 
classes of land are within certain limits capable of being 
transformed into each other. A diamond field can of course 
not yield a good rice crop, nor can rubber forest land ever be 
profitably utilized for oats. But pasture land may become 
wheat land, wheat may be supplanted by garden produce, and 
truck farms in turn may change into cheap suburban sections 
and finally into expensive business sites. From this point of 
view land possesses great mobility. In a certain physical sense 
land is fixed, while everything else is movable, — and this is 
the basis of the legal distinction between movables and im- 
movables. But in the economic sense land is mobile, and 
capital as opposed to land is immobile. A machine can best 
be used for a particular purpose, and is only rarely serviceable 
for anything else ; a piece of land can often serve any one of 
a large number of different uses. Any economic fact which 
brings about a relative change in situation confers mobility 
upon land. 

Since situation is such an important element in productivity, 
all changes which tend to diminish distance by bringing the 
producer and consumer together are a mark of progress. The 
previously existing sources of supply may fall in value, as in 
the case of the New England farms or the Italian orange groves, 
but the existing stock of wealth as a whole is increased by the 
reduction of cost. It is, however, important to remember that 
so far as the productivity of land is ascribable to situation, its 
rise in value is more and more due to its increasing contri- 
bution to the production of other things than the mere agri- 
cultural produce. An industrial enterprise is located in a city 
for the same reason as a workman or a lawyer : the greater 
expense of the land for the factory or the home is more than 
offset by the lower costs in other respects or by the expectation 
of higher returns. With the growth of industry and population 

§ 135] Cultivation. 309 

the productivity of land depends more and more on situation 
and relatively less on mere fertility. 

135. Cultivation of Land. 

So far as situation is concerned, the increase of productivity 
is solely a result of the progressive elimination of the costs of 
transportation. So far as fertility is concerned, a far larger 
field of activity is open to human ingenuity. The application 
of labor to land is its cultivation. Agricultural products are 
commonly divided into fruits, roots, cereals and leguminous 
plants. Food-roots and cereal grasses are found in a state of 
nature, and their cultivation and improvement play somewhat 
the same role in progress as does the domestication of wild 
animals. There have been several important stages in agri- 
cultural development. 

(i) The first is the system of migratory agriculture or the 
shifting of the arable area. This is found at the outset in all 
countries where land is abundant and where the community 
is on the point of abandoning the hunting or the pastoral life. 
A particular plot is tilled for a season or two in the roughest 
manner, and when the soil begins to show evidences of 
deterioration the cultivators abandon the land and pass on to 
a fresh tract, perhaps to return to the first after a long time 
has intervened and restored its primitive fertility. Where the 
land is covered with forests, a clearing is made by fire, the 
ashes fertilizing the ground and the stumps being allowed to 
remain and rot. Because of this burning process, the system 
is also called essartage. Where the land is near the seashore 
seaweed, as in the American colonies, is frequently employed 
as fertilizer. 

Migratory agriculture was applied to both roots and cereals. 
Root culture generally precedes that of cereals, and no real 
civilization was ever based on root culture alone. In America, 
for instance, before the advent of the white man, the potato 
and the manioc gave way to maize, and where, as in Hayti, this 
was not the case, there was but slight progress. As Payne has 

3IO Land. [§ 135 | 

pointed out, cereal agriculture alone, among the forms of 
food- production, taxes, recompenses and stimulates labor and 
ingenuity in an equal degree. 

(2) The second stage is that of surface tillage or stationary 
agriculture. As the forests disappear or the supply of free 
land diminishes, the essartage or migratory system gives way 
to the more permanent occupation of a given area, and its 
periodical reduction to a state of tilth. Much of course 
depends on conditions of climate. In the Old World were 
found wild culminiferous grasses which made possible the 
cultivation of wheat, barley, oats, rye, millet and rice. In the 
New World, although other indigenous grains existed, the wild 
corn or maize soon became practically the only cultivated 
cereal. This, together with the fact that no important beasts 
of burden like the ox or the horse are found in historic times, 
goes far, as was remarked above, to explain the lower level 
of civilization reached by the Indians in Mexico or Peru, com- 
pared with the natives of Asia and Europe. Where the soil 
is composed of alluvial deposits or possesses great fertility for 
other reasons, the natural surface affords so abundant a yield 
that only very slight manuring is needed to furnish a practically 
continuous crop. Surface tillage may therefore also be called 
the one-crop system. When the land retains its fertility with 
little labor, and where there is a constant demand for the 
particular product, this one-crop system may persist for a long 

(3) Usually, however, some form of rest is found to im- 
prove the fertility of the land. We thus reach the third 
stage of what is best called alternating agriculture. That is, 
there is an alternation of crop and fallow, the same piece of 
land being cultivated one year, serving as a rough pasture 
the following year. At any given time, therefore, there are 
two fields, — one for the crop, one lying fallow. This is hence 
also called the two-field system. It was soon ascertained, 
however, that still better results could be attained by extend- 
ing the alternation to the crops as well, and we thus reach the 

§135] Cultivation. 311 

three-field system, the same field being devoted the first year 
to wheat, the second to oats, and lying fallow the third year. 
This system, which is found throughout mediaeval Europe, is 
also called the open-field or intermixed system, because the 
land was cultivated in narrow strips, each cultivator possessing 
one or more strips in different parts of the field, separated 
from the other strips not by any fence or hedge but only by 
small ridges or balks. 

(4) The fourth stage is reached when a substitute is found 
for the recurrent fallow or waste. This consists in so increas- 
ing the number and variety of the crops, and in such a skilful 
use of animal and mineral manures, that the fertility of the soil 
is kept practically constant without any fallow at all. This 
system is known as that of convertible husbandry, or in its still 
more developed stages as that of the rotation of crops or 
diversified farming. It involves the use in turn of cereal and 
root crops, and especially the application of artificial grasses 
like clover. In England, where the transition took place in 
the eighteenth century, it was also called the system of en- 
closures, because the method of separate strips was abolished, 
and the whole field was now cultivated in the same way, 
separated from the adjoining fields by a hedge or fence. 

The earlier systems of agriculture involve the use of much 
land and of comparatively little labor. They are hence called 
extensive systems. The greater the effort made to secure 
larger crops by economizing land rather than labor, the 
nearer we approach the system of intensive farming. When it 
is found profitable to economize in labor rather than in land 
through the use of capital in the shape of farm machinery, we 
reach the most modern form of large-scale agriculture, which is 
usually termed capitalistic farming, and which will be discussed 
later. At any given period, however, extensive farming may 
be more economical than intensive farming. 

In the United States we find most of these phases. The 
period of essartage or forest clearing was soon followed by 
the surface tillage or one-crop system, which still prevails over 

312 Land. [§ 135 

a large part of the South. The open-field system, however, 
flourished only in very small sections of the East, because the 
rapid increase in wealth in the North and West rendered' 
profitable the transition on the one hand to large-scale farming 
and on the other to the more intensive system of crop rota- 
tion. With the advance of prosperity the most effective use of 
the land leads to continual changes. In large sections of the 
East, for instance, the cultivation of cereals, with the possible 
exception of corn, has become unprofitable. The less fertile 
lands have been converted into permanent pasture, and the 
increase in the average fertility of plough and meadow lands 
coupled with the growth of forage crops and the use of 
the silo tends to diminish the relative amount of cultivated 
land. The process of transition culminates in the dairies and 
market-gardening farms of the thickly populated communities. 
Given liberty and intelligence, the farmer may be relied on to 
choose that form of tillage which is most profitable to him and 
most productive to the community. 



136. References. 

J. B. Clark, Distribution (1899), chs. ix-xii; F. A. Fetter, Principles 
(1904), ch. xviii; E. v. Bohm-Bawerk, /'^.r/Z/z/^ Theory of Capital (1891), 
bk. ii, ch. ii; W. S. Jevons, Theory (1888), ch. vii; T. N. Carver, Distri- 
bution (1904), ch. vi; R. Mayo-Smith, Statistics and Economics (1895), 
ch. v; F. A. Walker, Political Economy (1888), part 2, ch. iii ; T. Veblen, 
Theory of Busitiess Enterprise (1904), chs. ii, ix; A. Marshall, Principles 
{1898), bk. iv, ch. vii; A. T. Hadley, Economics (1896), ch. v; J. S. 
Nicholson, Principles (1893), bk. i, ch. vi, and Machinery and Wages 
(1892), chs. iv, v; H. Sidgwick, Principles (1883), bk. i, ch. v; H. R. 
Seager, Introduction (1904), ch. vii; R. Giffen, Economic Inquiries (1904), 
part 2 ; W. P. Trowbridge, Report on Power and Machijtery Employed in 
Manufactures (U.S. Tenth Census, Extra Volume, 1888) ; U. S. Twelfth 
Census, VII; United States Industrial Commission, Report, XIX (1902), 
514-544 ; J. B. Clark, Essentials 0/ Economic Theory (1907), chs. xviii, xx. 

137. Kinds of Capital. 

We have seen that capital in its broadest sense includes 
everything that has a capital value. The totality of capital 
is equivalent to the totality of wealth. Capital would then 
comprise three great categories : ( i ) consumption capital, or 
wealth which affords a benefit income, like food, jewels, books 
in the hand of the consumer; (2) lucrative or acquisitive 
capital, that is, any form of wealth including relations like the 
franchise of a corporation or the good-will of a business which 
gives a money income ; (3) production capital, or concrete 
goods which are utilized to produce more goods. In treating 
of capital as an agent of production it is with this third aspect 
that we have to deal. From the point of view of progress, 
moreover, this is the important aspect, since the first condition 


jH Capital. [§137 

of progress is the increase of the concrete goods that consti- 
tute wealth. 

Capital in this sense can be further classified into land and 
other capital. If capital be regarded as either consumption 
or lucrative capital, there is no need for such a distinction. 
Whether a man enjoys an estate or a painting is immaterial, — 
neither can perhaps be duplicated as consumption capital. 
Whether he applies a fund of a given amount to the purchase 
of a farm or a share of stock is again immaterial, so far as each 
represents so much lucrative capital. But as an agent of pro- 
duction, land, as we have seen, stands in a relation socially so 
peculiar to the producer, and is moreover of such paramount 
importance when compared to any other single category of 
concrete goods, that it is best discussed by itself. 

Capital as an agent of production is sometimes classified as 
fixed and circulating capital. The original distinction of Adam 
Smith was that circulating capital comprised goods from which 
profits could be derived only by their circulating from hand to 
hand, like finished products, while fixed capital was that which, 
like a house, yielded a revenue without changing hands or cir- 
culating any further. As a matter of fact, however, the only 
kind of capital which circulates indefinitely is money ; in other 
cases, as when a product goes direct to the consumer, there 
may be only one change of hands. The great aim of modern 
enterprise, in fact, is to reduce the circulation to the narrow- 
est limits. 

Another way of explaining the distinction is to say that fixed 
capital comprises such things as can be used repeatedly for 
productive purposes without suffering much change ; and that 
circulating capital consists of things the single use of which 
would convert them from the category of production goods 
into that of consumption goods. A machine would be fixed 
capital ; the leather just before being converted into the shoe 
would be circulating capital. This is virtually the distinction 
between durable and perishable wealth. It is also sometimes 
expressed as a distinction between active and passive forms 

§ 137] Kinds of Capital. 315 

of capital, the active capital being the fixed capital which, like 
the machine, makes the impression, the passive capital being 
the circulating capital, which, like the leather, receives the 
impression. This nomenclature is less happy in that it ob- 
scures the fact that all forms of productive capital co-operate 
with each other, and in this sense are really active. 

Another classification of capital is that according to the 
uses to which it can be put, as agricultural, commercial, indus- 
trial and financial capital. 

( 1 ) By agricultural capital, strictly speaking, is meant some- 
thing different from land or landed capital. Agricultural 
capital is not land, but the things applied to the land ; land or 
landed capital is the ground itself. When we speak of a man 
putting his capital into land, we mean that he invests in a 
piece of land ; when we say that he applies capital to land, 
we mean that he spends his money on better farming tools or 
machines, manures, drains or beasts of burden. In the former 
case we would have land or landed capital ; in the latter we 
have agricultural capital. This distinction, however, is fre- 
quently not observed. 

(2) When the concrete pieces of capital take the form of 
ships, docks, warehouses or media of internal commerce, we 
speak of commercial capital. When capital is applied to the 
prpcesses of industry in the narrower sense, we speak of indus- 
trial capital. From one point of view the same object may be 
regarded in turn as industrial, commercial or agricultural cap- 
ital. A cart may be constructed in a factory and then used in 
the industrial operations of another factory; it may be em- 
ployed by a merchant, and may finally be sold to a farmer for 
use on the farm, serving in turn as industrial, commercial and 
agricultural capital. The characteristic feature of modern life 
is the increasing importance of industrial capital. 

(3) By financial capital is meant not so much the concrete 
objects as the fund or money embodiment of the agents used 
in financing or rendering possible economic enterprises. The 
surplus from any economic activity may be stored up in the 

3i6 Capital. [§ 133 

shape of jewelry or of coins ; and this surplus wealth is the 
financial capital which may at any moment be devoted to pro- 
ductive enterprise. In modern times the surplus is put not 
only into money, but into all kinds of paper and credit repre- 
sentatives. Financial capital on a large scale has been in turn 
a handmaid to each form of economic activity. In the later 
days of classic Rome financial capital was closely connected 
with land, the slaves being the important form of capital. In 
the developed economy of the Orient, as well as in the later 
middle ages, financial capital was intimately related to com- 
merce ; the bankers were the merchant princes. In modern 
times financial capital is more and more associated with in- 
dustry : the " industrials " are fast gaining even on the rail- 
way or banking securities. Modem capital is predominantly 
industrial capital. 

138. Function of Capital. 

The aim of all economic activity is to secure a surplus by 
augmenting utilities and diminishing costs. Production affects 
surplus in both ways, — it increases the stock of economic 
goods, or decreases the cost. Sometimes it accomplishes 
both results. Capital as an agent of production is an efficient 
help in this process. 

The productivity of capital consists in the aid which it ren- 
ders in securing the same results with less effort. It is an 
adjunct to human labor, and to that extent lessens labor by 
interposing something between labor and its result. The 
function of capital might therefore be called the roundabout 
method of production. If we need water, we can go to the 
stream each time and bring the water in our hand, or we can 
devote some of our labor to constructing a pump. While we 
are making the pump we are losing time and energy, but when 
it is finished there will soon be an appreciable net saving or 
surplus of utihty over cost. Instead of applying our labor 
directly to the stream we interpose the piece of capital known 
as a pump. The pump not only pays for itself, but leaves a 

§ 138] Function of Capital. 317 

surplus, which can now be transmuted into further wealth. 
Capital, then, is productive in the same sense as labor. It is 
not indeed the cause of value any more than labor is the 
cause of value. But when labor brings about an increased 
net surplus of utility, we call it productive ; and when capital 
does the same, it also is productive. If the pump does not 
work, that is, does not increase the surplus, it will have no 
value, neither rental value nor capital value ; and since it has no 
capital value it will not form a part of the aggregate of things 
which are represented by the fund of capital. But if it does 
work, that is, if it is really capital, it is productive because it 
produces a net surplus over and above what would have been 
produced by unaided labor. 

The statement that capital works through the roundabout 
method of production is, however, liable to misunderstanding. 
In one sense indeed the interposition of capital lengthens the 
period of production. In former days the cobbler made the 
shoe or the blacksmith the chain, and turned it over almost at 
once to the consumer ; nowadays a long period intervenes be- 
tween starting the manufacture of a particular shoe or chain 
and its final delivery to the consumer. The process of the 
successive combination and division of labor has been brought 
to its highest efficiency by the employment of capital. Capital 
is needed for securing the raw material in large quantities, for 
providing the factory or mill and the machinery, for the pay- 
ment of the various classes of laborers, for the warehousing of 
the product and for its distribution to the retailer. The greater 
the participation of capital, the more roundabout is the process. 

On the other hand, a single process or a definite part of 
a process can obviously be finished far more rapidly by a 
machine. The substitution of capital for labor, that is, the 
replacement of a hand by a machine, means the cutting down 
of the time of technical production. We thus seem to face 
the dilemma that capital saves time and loses time, that it 
shortens the period of the particular process and yet lengthens 
the period of the entire process. 

3i8 Capital. [§ 138 

The reconciliation is simple. The individual machine saves 
time, but to create the machine takes time, so that the whole 
process, counting from the beginning is lengthened. The 
machine is productive because it turns out so much more in 
quantity that the value of the entire product soon yields a 
surplus over the expenditure of energy put into the machine. 
That is, from the point of view of aggregate mass production 
there is a saving of time, measured in terms of cost ; from the 
point of view of the single product there is a sacrifice of time, 
which is more than offset by the fact that the single product is 
now only an insigiUficant unit in the mass. The value of the 
unit is a proportionate part of the mass. 

In another sense, finally, the ascription of the roundabout 
process to capital may be reversed. If we regard not the 
particular piece of capital, but the fund of capital in general, 
we may, on the contrary, say that capital brings labor and con- 
sumption together. In a large shoe factory, for instance, it 
takes time to make each shoe ; but at any given moment the 
raw material is coming in at one end and the shoe is finished 
at the other end. Formerly the cobbler made one shoe and 
then began on another; now at the same instant shoes are 
begun and shoes are finished. The function of capital as a 
productive fund is therefore really to synchronize labor and 
consumption. The individual pieces of capital separate labor 
and consumption ; the fund of capital brings them together. 
They are two aspects of the same thing, just as division of 
labor and combination of labor, seemingly the opposites, are, 
as we know, really two sides of the same process. To give a 
familiar illustration, it is like the reservoir of water used to run 
a mill ; the individual drops come in at one end and go out 
at the other, but the water remains at the same level and 
exerts its force as a mass of united drops. The individual 
pieces of capital form the final enjoyment ; capital as a whole 
permanently invested unites them. In one sense capital in- 
volves a roundabout or individual process ; in another sense 
it implies the most direct of processes. 

§ 139] Creation and Growth of Capital. 319 

139. Creation and Growth of Capital. 

The root idea in the conception of capital is that of a 
surplus. In order for anything to have a capital value there 
must be a surplus of inchoate uses. If the fibre in an electric 
light bulb wears out, the bulb possesses no further resen^e uses 
and loses its capital value. Again, if we labor simply to pro- 
vide for our fleeting wants and consume all that we produce, 
there remains at the close of each production period no 
surplus. The surplus energy which is transmuted into pieces 
of capital therefore comes ultimately from the decision of the 
individual to postpone present gratifications. If instead of 
taking the water directly from the stream we elect to spend 
our time in constructing a pump, we are creating a piece of 
capital. The only way in which capital can be formed is at 
bottom by saving, by waiting, by forbearing. 

The creation of new capital is therefore the result of pru- 
dence and forethought. The habit of saving, that is, of subor- 
dinating the present to the future, is an essential characteristic 
of progress. Primitive peoples are spendthrift, — they have 
no thought of the morrow and lay by nothing. There is no 
accumulation of capital. Where the provision of immediate 
needs occupies the whole of one's time, there is no opportunity 
of developing those higher qualities that make for civilization. 
The formation of a continually growing surplus involves the 
saving of energy and the liberation of human efforts from the 
pressing needs of mere material existence. The growth of 
capital means the advance of civilization, because it implies 
more efficient labor, the growth of leisure and the freedom 
to turn attention to the scientific, aesthetic and ethical aims of 
life. The destruction of capital, as in the later days of the 
Roman empire, spells a decay of civilization, because with the 
weakening of the economic foundation the whole superstruc- 
ture is bound to fall. The growth of capital is in itself indeed 
not sufficient to engender the highest form of civilization, but 
it is a fundamental prerequisite. Not all wealthy communities 

320 Capital. [§ 139 

have been civilized in the best sense, but there has never been 
great art, great literature, or great science except when there 
has been an abundance of capital. 

To say that capital is the result of saving or forbearance does 
not necessarily imply any moral approbation of the owner of 
capital. It is for this reason that it is unwise to speak, as many 
do, of abstinence or sacrifice as the cause of capital growth. 
A man who already possesses an income large enough to satisfy 
his daily wants, be they great or small, cannot do anything else 
with his surplus except to save it, and thus lead to the forma- 
tion of fresh capital. If he is a maniac, he can of course 
physically destroy it or the money represented by it ; and if he 
is a fool, he can put the capital to such stupid and unproductive 
uses that it will soon become worthless and disappear as an 
embodiment of value. But unless he wastes capital in these 
crude ways, he cannot help saving. He does not abstain from 
any present gratification, because this capital is a surplus above 
all present gratifications. Abstinence here means abstinence 
from senseless waste ; it is a negative, not a positive, merit. 
Nor does he sacrifice anything. As we shall see later in dis- 
cussing the question of interest, the problem is one of marginal 
forbearance, that is, of sacrifice at the margin where he must 
choose between consumption and saving. The richer a man 
is, the more remote is the margin where he will have to decide. 
The saving of one dollar means something very different to a 
millionaire and to a day laborer. The essential point to re- 
member is that capital is a surplus, and that the stock of capital 
can be augmented only by an excess of production over con- 
sumption. The excess can be formed only by forbearance 
or postponement, but the forbearance is based on the expecta- 
tion of increased income. There is no ethical merit attach- 
ing to the individual, although the social consequences are 

It might be objected, finally, that if we buy a railway share or 
a piece of land which doubles in value during the year, there 
is an increase of capital without any waiting. In reality, how- 

§ i4o] Nature and Influence. 321 

ever, the share rises in value because it represents an increased 
earning capacity, owing to the fact that the railway is now 
doing more business, that is, adding more value to the com- 
modities it transports, or, in other words, creating surplus 
wealth. If the corporation elected to waste the surplus by 
squandering it in extravagant salaries or palatial private 
cars there would be no excess available . for dividends, and no 
rise in the price of the security. In the same way the in- 
crease in the value of the land means that there are more 
individuals who have accumulated capital and who either need 
the land themselves or employ the other human beings that 
are thus enabled to pay for the use of the land. In every case 
the increase of capital, that is, the creation of fresh capital 
or capital value, implies an increased productivity, or a sur- 
plus somewhere. Whether the individual owner of capital is 
always entitled to the particular surplus is quite another 

Capital, then, is the available stock of existing wealth. If a 
part of this stock is consumed and not replaced, capital is 
diminished ; if it is not only replaced, but so used as to bring 
about an increase, this surplus is the new capital. The only 
way to increase capital is to refrain from the waste or immedi- 
ate consumption of product. The greater the existing stock of 
capital, the easier is it for the individual or the community to 
make this election. The increase of capital is therefore in last 
resort due to the growth of intelligence. Where science gives 
an increasing mastery over nature, the problem of production 
through the growth of capital resolves itself into the intelligent 
selection of such things as are wanted by society, that is, to the 
formation of a constantly growing surplus of wealth. 

140. Nature and Influence of Capital. 

Capital, as a socially important factor, is to-day, as we have 
seen, industrial capital. Ours is called the capitalist age, not 
because capital was unknown before, but because industry is 
permeated through and through with capitalist qualities. Capi- 


322 Capital. [§ 140 

tal on a small scale, consisting of a little surplus, was devoted 
to production almost from the beginning of civilization. Cap- 
ital on a large scale was amassed in the agricultural and 
commercial enterprises of antiquity. Under the economic 
conditions which made for slavery and handicrafts, however, 
there was no opportunity to employ capital on a large scale in 
industry ; and with the decreasing profitableness of slavery and 
the gradual restriction of the commercial frontier, as in later 
Rome, capital itself began to dwindle until the whole economic 
and political structure collapsed. 

After many centuries, capital was again accumulated, first 
out of the surplus of mediaeval agriculture, and then at a more 
rapid rate out of the profits of the new commerce. The open- 
ing up of the world market in the eighteenth century made 
possible the application of this surplus to industry. From that 
time begins the prodigious increase of capital which charac- 
terizes modern life. Now for the first time the real productive 
force of capital is realized. The surface of the earth is a fixed 
quantity ; a commerce based on agriculture and the products 
of hand labor can never transcend certain well-defined bounds. 
But the multiplication of commodities into the value of which 
the raw materials enter as a minor factor is limited only by our 
failure to unlock the mysteries of nature. Modern science, 
modern technique, modern capital, are enabling us to explore 
the innermost recesses of this unknown world and to convert 
it to industrial uses. 

Modern capital is therefore primarily industrial capital, and 
since the factory is the type of modern industry, the capitahst 
system may be called the factory system. There is indeed 
also a capitalist agriculture, but the characteristic features of 
this are borrowed from capitalist industry. Industrial capital 
may be taken as the type. 

The factory system is sometimes called the machine system. 
This is not strictly correct. In a modern chemical factory, for 
instance, there may be few or no machines at all. What must 
always be present, however, in a factory is some form of auto- 

§ i4o] Nature and Influence. 323 

matic action, replacing liand labor, whether that action is due 
to forces of nature operating directly upon raw materials, or 
indirectly through the medium of a machine. For all practi- 
cal purposes, however, the machine may be regarded as the 

Industrial capital in this sense discloses three characteris- 
tics, — mass production, uniformity and interchangeability. 

(i) Capital becomes profitable only when there is a mass 
production. The supersession of hand by machine labor 
involves such an enormous multiplication of output that the 
product must now be sold en masse. The cotton print will 
ultimately go to the individual consumer, but the factory 
owner must count upon the wholesaler taking his entire prod- 
uct of a day, a week or a season. Even if the factory owner 
retails the goods, as for instance with the Tobacco Trust or 
certain shoe-dealers, he must control enough shops to take his 
whole output. 

(2) Industrial capital impHes uniformity of production. 
Hand labor gives free rein to the individuality of the pro- 
ducer ; each pair of shoes the cobbler turns out may differ in 
some respect from its predecessor, and may be prized on that 
account. A machine turns out the same thing day after day, 
and the advantages of specialization and co-operation are de- 
rived chiefly from this continual repetition. Things are made 
according to fixed types, forms or standards. Hence there is 
sometimes used the term standardization of industry. What is 
meant is the uniformity, — the uniform repetition and pro- 
duction of the same type. Great as has been the ingenuity 
expended in differentiating machinery, the result has been only 
a moderate multiplication of types, but little differentiation of 
the individual products within each type. There are indeed 
different kinds of hats and keys, but one Knox hat is almost 
like another, and one Yale key almost like its thousands of 

(3) Industrial capital also denotes interchangeability. Capi- 
talist division of labor means that all complex products are 

324 Capital. [§ 141 

made in minute portions. Through the very fact of uniformity, 
one unit is as good as another of the same class, and may be 
used interchangeably. If some particular thing breaks in a 
bicycle or a locomotive, it can be duplicated at once and at a 
minimum of cost. The system of interchangeable parts is 
applied to-day even to such products as vast bridges and co- 
lossal steamers. Interchangeability is a corollary of uniformity 
and of mass production.^ 

The deeper social influence of capital is visible in these 
characteristics. Modern life means greater uniformity. We 
dress alike, we eat alike, we speak alike, we think alike. 
Through capital we are becoming citizens of the world. 
Old prejudices are destroyed at every turn, religious and 
racial antipathies diminish, local and even national boundaries 
are overstepped. Side by side with these advantages appear 
the dangers. The levelling is undoubted, but if not carefully 
guarded against it may become a levelling down instead of 
up. Uniformity is preferable to eccentricity and vagaries, 
but a uniformity of mediocrity is to be deprecated. The real 
hope and strength of the factory system are that industrial 
capital will so reduce cost and increase the surplus of the in- 
dividual as to enable him to devote it to the higher ends 
which make for progress. 

141. Investment of Capital 

When we speak of the investment or application of capital, 
we mean in last resort the utilization of the concrete things 
that constitute capital. These concrete things will be used by 
the alert entrepreneur only as long as they yield the maximum 
returns ; whenever something new promises better results, it will 
be forthwith substituted. Perhaps the most striking fact in the 
incipient lawsuit of a few years ago between the great iron- 

1 This is explained in all its details in the Tenth Census Report on 
Power and Machinery by Professor Trowbridge, who classifies machine 
tools into those acting by compression, shearing, paring, milling, abrad- 
ing, grinding and sawing. 

§ i4i] Investment of Capital. 325 

masters, Carnegie and Frick, was the revelation of the readi 
ness with which the former threw into the scrap heap machinery 
almost new, costing millions, as soon as a notable improvement 
had been perfected. This seeming destruction of capital on an 
immense scale was in reality an increase, profitable alike to the 
producer and the public. All physical investment of capital is 
the application of new commodities to replace the old. The old 
need not be actually worn out ; it is sufficient that it should 
have lost its relative productivity. 

Under modern business conditions the investment of capital 
is put back a stage, and becomes the financial investment, 
which renders possible the ultimate physical utilization. Cap- 
ital is invested as a fund, to be later transmuted into concrete 
things. Herein lies the significance of the modern corpora- 
tion. Through the medium of corporate securities a fund of 
capital is made mobile and active. The purchase by the 
public of a new industrial security means, if the enterprise is 
honestly and ably financed, that the proceeds will ultimately 
take the shape of plant or working capital, that is, of realized 
earning capacity. The function of the promoter, the banker 
and the underwriting syndicate is at bottom legitimate and 
productive. If the physical investment of capital is desirable, 
the financial machinery through which this end is attained is 
similarly productive. It often requires far more ability to raise 
the necessary funds at the lowest rate than to turn out the 
finished product at the lowest cost. Both investor and con- 
sumer may in the end derive more benefit from the successful 
financial " deal " than from the best technical operation of the 
industry. The control of modern finance over vast masses of 
capital indeed makes possible its manipulation for illegitimate 
ends on a gigantic scale. But these abuses must not blind us 
to the essentially productive character of the services of the 
financiers as the intermediaries between financial and indus- 
trial capital. 

Since the ownership of the concrete pieces of capital is 
coming more and more to be represented by these corporate 

326 Capital. [§ 141 

securities, their character becomes of considerable importance. 
Technically they are divisible into stocks and bonds. The 
share of stock represents legally the proportionate part of the 
corporation which owns the corporate assets. When there 
are no bonds, the stock is entitled to all the profits. Fre- 
quently the stock is divided into preferred and common shares, 
the former sometimes being a cumulative stock, so called 
because if dividends are passed they accumulate and must be 
paid subsequently before the common stock receives anything. 
Opposed to the stock is the bond ; the property of the corpora- 
tion is mortgaged to the bondholders, who receive interest on 
the bond until the expiration of the mortgage. If there is any 
default in the interest, the property covered by the mortgage 
can be sold to satisfy the debt. In England, where mortgage 
bonds are unknown, their place is taken by the debenture 
stock, the difference being that the holder has the right, in 
case of default, to reimburse himself by levying upon some 
item of the company's property. Bonds are first, second, 
third or further mortgage bonds according to the priority of 
the lien. Where a rate of interest is contingent upon earnings, 
the bond is an income bond. Sometimes the bonds are 
convertible into stock, and hence called convertible bonds. 
When smaller corporations are merged into a larger one or 
when a corporation seeks to avoid mortgaging its own prop- 
erty, the original bonds are put in trust as collateral, and 
a new issue is made under the name of collateral trust 
bonds or simply trust bonds. Although such an issue is 
not technically a mortgage on the real estate, it is so prac- 
tically, since recourse can always be had through foreclosure 
to the underlying mortgage securities. 

In legal theory the stock represents the ownership, and the 
bond a limited interest in the enterprise. In actual fact, under 
recent financial development, where the original cost or outlay 
is often defrayed out of the proceeds of the mortgage indebt- 
edness, the stock has come to represent the speculative interest 
in the venture, while the bond represents the actual proprietor- 

§ i4i] Investment of Capital. 327 

ship. This economic reversal of the legal situation is most 
clearly marked in the railways, but is also visible in ordinary 
industrial enterprises. As a consequence there has frequently 
developed an antagonism of interest, not only between bond- 
holder and stockholder, but also between the main body of 
investors and the directorate. In some States the issue of 
bonds is restricted to a proportion of the stock or of the prop- 
erty, or otherwise limited ; in other cases the bondholders are 
given voting power; in still other instances the principle of 
minority representation is introduced to safeguard the interests 
of the stockholders. The English law of 1900 and the recent 
Massachusetts law are perhaps the most advanced examples 
of Anglo-Saxon legislation to protect the varying interests of 
different classes of investors. 

The proper method of managing the investment in vast cor- 
porate enterprises has assumed such importance that it has well- 
nigh become a separate discipline, under the name of corporate 
finance. It includes such topics as accounting, the issue and 
marketing of securities, the funding policy, the accumulation of 
surplus and reserves, and many more. In a comprehensive 
treatise on economics these would all need explanation. They 
must here be passed over with a mere mention. The influence 
of the proper investment of capital is by no means confined to 
the investor. Primarily indeed he seems to be affected. He 
must, however, be regarded as the channel through which 
society as a whole increases its fund of capital and its resulting 
control of nature. The investor, as opposed to the reckless 
speculator, is as effectively an agent of society as any individ- 
ual producer. The one, like the other, may think that he is 
pursuing his own interest, but he will generally also be sub- 
serving the common interest. If the producer turns out some- 
thing that the community really wants, he will benefit society 
as well as himself; if the investor exercises sagacity in the ap- 
plication and control of his investment, he will tend to save 
the community the risk of misdirected energy and the wastes 
of failure. 

328 Capital. [§ 141 

The proper financial control of the fund of capital is no less 
important than the proper application of the concrete pieces 
of capital to industry, trade or agriculture. Upon the econo- 
mic investment of capital, in the broadest sense, depends in 
large measure the prosperity of all classes. 


142. References. 

W. Z. Ripley (ed.), Trusts, Pools and Corporations (1905) ; J. W. Jenks, 
The Trust Problem (iQCX)); R. T. Ely, Monopolies and Trusts (1900); 
H. W. Macrosty, Trusts and the State (1901), and The Trust Movement 
in British Industry ( 1907) ; J. Moody, The Truth about the Trusts (1904) ; 
J. E. Le Rossignol, Monopolies , Past and Present (1901); J. B. Clark, 
Control of Trusts (1901); A. Marshall, Principles of Economics (1898), 
bk. iv, chs. X, xi; E. S. Meade, Trust Finance (1903), ch. iii; National 
Conference on Trusts (1908); United States Twelfth Census, VII Sum- 
mary and Attalysis of Results (\()<x>)\ United States Industrial Commis- 
sion, Report, I, II, XVIII, XIX, 595-722; Ida Tarbell, History of the 
Standard Oil Company (2 vols., 1904) ; H. R. Mussey, Combination in 
the Minincr Industry (Columbia Studies, XXIII, 1905); M. Jacobstein, 
The Tobacco Industry in the United States (Ibid., XXVI, 1907); A. Ber- 
glund, The United States Steel Corporation (Ibid., XXVII, 1907); G. H. 
Montague, The Rise and Progress of the Standard Oil Company (1903); 
H. W. Quaintance, Influence of Farm Machinery on- Production and Labor 
(Am. Econ. Assoc. Publications, 2,d series, V, 1904) ; Trusts and Trade Com- 
binations in Europe (United States Consular Reports, 1900); F. Walker, 
The Law concerning Monopolistic Co7nbinations in Continental Europe (Pol. 
Sci. Quart., XX, 1905) ; Bureau of Corporation Reports on the Beef Petro- 
leum and Tobacco Industries (1905-1910). 

143. The Meaning of Concentration. 

Enterprise is in one sense, as we have seen (§ 121), a spe- 
cies of labor. In reality, however, it has come to mean that 
kind of labor which is carried on independently instead of for 
a stipulated reward. Strictly speaking, it is not identical with 
management, for the manager of a business may be hired at a 
definite salary. Enterprise is management plus risk ; that is, 
it involves the independent conduct of a business, with all the 


330 Enterprise. [§ 143 

chances of profit or loss. We have already discussed the his- 
torical forms of enterprise (Chap. VI). In modern times the 
pre-eminent fact of business enterprise is the tendency to 
concentration. A study of modern business enterprise thus 
becomes virtually a study of concentration. 

In approaching the problem of concentration, we must 
distinguish between the concentration of wealth, the concen- 
tration of production and the monopoly of production. Con- 
centration of wealth is essentially an individual phenomenon 
in the sense that any one may acquire wealth from indepen- 
dent and relatively insignificant sources. A rich landlord may 
own a large number of small tracts ; a wealthy capitalist may 
secure his returns from many investments in minor enterprises. 
Concentration of production, on the other hand, means either 
that the units themselves are increasing in size as in the case 
of larger farms or factories, or that they are combined with 
other units under more or less centralized management, as in 
the case of enterprises technically separate, but subject to the 
same financial control. Where an individual owns the produc- 
tive factors, concentrated production involves concentrated 
wealth ; where the business enterprise assumes a corporate 
form, concentrated production is compatible with a diffusion 
of wealth among the security holders. 

Concentration of production, again, is not necessarily a mo- 
nopoly of production. The size of the units may increase, but 
there may still be rivalry between them. Bonanza farms, 
department stores and great corporations, each representing an 
undoubted concentration of production, may yet suffer keen 
competition from their rivals. It is only when concentration 
has reached the stage where a single business enterprise per- 
manently supplies so large a percentage of the entire output 
as to control the price that we can speak of a virtual monopoly. 
In such a case indeed there may be technical competitors, but 
the competition is practically inoperative. 

Concentration of production may be predicated of each of 
the three factors, — labor, land and capital. 

§ 144] Large-Scale Production. 331 

(i) The concentration of labor as an independent phe- 
nomenon is not important. After a certain low limit of co- 
operation has been reached the profitableness of an increased 
force of laborers depends on the acquisition of more land or 
the utilization of more capital. Not only must wages be ad- 
vanced, but the output must be disposed of. For these and 
similar purposes capital is required. Concentration of labor 
is thus dependent upon concentration of land or of capital. 

(2) Concentration of land varies with the kind of land. In 
grazing and agricultural land, modern economic forces, as we 
shall see (§ 145) are opposed to concentration ; so far as it exists, 
it rests upon the application of capital to land. In mineral and 
forest lands, when we observe a tendency toward concentration 
it will often be found that as in the case of iron, coal and cop- 
per, the product forms an important raw material for closely 
related industries, and that the land concentration is a result of 
the industrial concentration. Finally, in urban lands, whether 
the sites are owned in large or in small plots has no bearing 
on the price. Thus, while the concentration of land may be 
important in distribution, it is as a factor in production either 
non-existent, insignificant or dependent on that of capital. 

(3) Concentration of production hence resolves itself into 

concentration of capital as the dominating force. Of this, 

again, there are two categories, — large-scale production in the 

narrower sense and capitalist consolidation and integration in 

the wider sense. Large-scale production is the result of the 

change in the normal business unit brought about directly by 

modern machinery. Capitalist consoHdation and integration 

are the result of the more important changes effected by the 

application of great masses of financial capital to industry and 

commerce in general. Each of these must be considered in 


144. Large-Scale Production. 

Large-scale production might also be called the concentra- 
tion of employment. It means that the business unit, whether a 
manufacturing establishment, a commercial enterprise or a farm, 

332 Enterprise. [§144 

employs a large amount of capital, and as a consequence in some 
cases also a large amount of labor or land. The ordinary ex 
ample is that of the modern factory contrasted with the shop or 
handicraft system of former times. We find isolated instances 
of large-scale industrial production in earlier ages, but with the 
advent of machinery it has become the type instead of the 
exception. Beginning in the textile industries in England at 
the close of the eighteenth century, it soon spread to the most 
important trades, although there still exist to-day industries in 
which an unequal contest is being waged between the domes- 
tic and the factory systems. On the European continent the 
transition came somewhat later, and in Germany to-day the 
so-called petty industry (Kleinbetrieb) still makes a respectable 
showing. In the United States, although we find a beginning 
of large-scale industry in the textiles after the war of 1812, it 
was not until after 1850 that the transition from the hand 
trades assumed any importance, and not until after the civil 
war that the tendency toward concentration into large estab- 
lishments became very marked. 

The distinction between small-scale and large-scale produc- 
tion is not precisely equivalent to that between hand trades 
and manufactures. The building trades are generally put in 
the former category, and yet they are often conducted on a 
large scale. On the other hand the factory may be a small 
one. Out of 512,254 establishments reported in the Twelfth 
Census, 215,814 represented hand trades. In 32,382 of these 
from 5 to 20 persons and in 7,773 over 20 persons were em- 
ployed. On the other hand, out of 296,440 establishments, 
in about one-seventh (41,687) the proprietor was the only 
workman, and in about one-half of the remainder (125,890) 
the number of employees was under 5. Nevertheless large- 
scale production may be declared to be virtually the result of 
the factory system with its use of machinery, its mass produc- 
tion and its standardization. In most of the hand trades, like 
carpentry, plumbing, custom tailoring and custom boot- making, 
we have a small-scale production ; while the building trades 

§ 144] Large-Scale Production. 


which form the chief exception are nowadays, through the use 
of machinery, the purchase en masse of raw materials, and the 
employment of large capitals and great numbers of workmen, 
in reality more akin to the factory system. While many small 
factories are still being continually started, the tide is setting 
strongly toward an increase in the size of the unit. 

In the United States the maximum number of manufactur- 
ing establishments in many branches was reached in 1870; 
since that time the number has been in some cases actually 
diminished, while in all cases the average capital invested, the 
number of employees and the value of the product per unit 
have steadily risen. The following table illustrates the great 
increase of large-scale production : 


Number of 


Average per Establishment. 

Number of 

Value of Product. 









Iron and Steel . . 
Agricultural Im- 
plements . . . 
Carpets and Kugs 
Woollen Goods . 





























This method of presentation of averages fails to show the real 
significance of the change, as it includes the small as well as the 
large factories. If, however, the number of workmen is taken 
as an evidence of concentration, it appears that a little over 
eight per cent of all the factories reporting employ about 
seventy-five per cent of the total number of workmen. In a 
single iron and steel mill in Ohio there were 7,477 employees; 
in a cotton mill in New Hampshire, 7,268 ; in an agricultural 
implement factory in Illinois, 6,728 ; in an electrical supply 
factory in Pennsylvania, 6,318 workmen. Moreover, as ap- 
pears from the preceding table, the investment of capital and 
the value of the output increase far more rapidly than the 
number of workmen. The head of a steel company in Pitts- 

334 Enterprise. [§ 145 

burg recently testified that in order to construct, equip and 
manage a steel plant there is needed an investment of from 
twenty to thirty millions of dollars. 

145. Large-Scale Agriculture. 

Where agriculture depends chiefly on the labor of the farmer, 
aided by comparatively primitive implements, the size limit of 
profitable farming is soon reached. In the middle ages, even 
with co-operative or communal farming, the prevalence of the 
three-field system restricted the size of individual strips. In 
more modern times we find either the small plots of the 
European peasant proprietor or the somewhat larger tracts of 
fresher land of the early American farmer. 

Farming on a large scale becomes possible only when capi- 
talist methods are employed. In former times these methods 
were supplied by slavery, as in the latifundia of later repub- 
lican Rome and in the ante-bellii77i plantation in the South. 
The slave, however, was to all intents and purposes a species 
of capital or machinery — even though a human machine. 
When slavery disappeared, a new era of small farms was 
ushered in, and whatever tendency to large-scale farming is 
found to-day is due in great measure to the application of 
industrial capital in the shape of farm machinery and capital- 
ist methods of transportation. 

The home of farm machinery is in the United States. Its 
coming was somewhat later than in the case of the other more 
important productive enterprises. Whitney's cotton gin and 
Newbold's cast-iron plough were invented at the close of the 
eighteenth century, but it is only since the civil war that farm 
machinery has been used on a large scale. The increase in 
the production of agricultural implements in the United States 
is illustrated by the following figures : 1850, $6,842,611 ; i860, 
$20,831,904; 1890, $81,271,651 ; 1900, $101,207,428. 

In the large farms of the far West fifty-horse-power traction 
engines are now used to pull at one season a train of great 
ploughs, harrows and press drills for planting, and at another 

§ 145] Large-Scale Agriculture. 


immense harvesting- machines, automatic rakers and threshers. 
In the Central states we find check-row planters, riding-ploughs, 
steam corn huskers and shellers, mowing-machines, potato 
planters and diggers, manure-spreaders, feed-choppers and 
grinders and ditch-digging machines — to mention only a few 
of the newer implements. The saving of labor, the prodigious 
increase of output and the lessening of cost go far to explain 
the competition of American farm products in the European 
markets, despite the great obstacle of distance. 

The influence of machinery in increasing wages, shortening 
hours of work, lightening the tasks of women and children and 
raising the general standard of life of the farmer as well as of 
his hands is so universally recognized that it needs no statisti- 
cal proof or explanation. What interests us here is its effect 
upon the size of farms. 

It is obvious that considered by itself expensive machinery 
becomes profitable only when appHed to large stretches of land. 
This is evident from the following table giving the average 
number of acres of improved land per farm : 







United States .... 







North Atlantic Division 







South Atlantic Division 







North Central Division 







South Central Division 







Western Division . . 






1 1 1.8 

In the North Central division, the chief home of farm 
machinery, the increase is marked. The average for the whole 
country, however, is kept down by two facts. First, in the 
Southern states machines outside of the cotton gin have 
hitherto been found well-nigh inapplicable, and the old slave 
plantations have been gradually broken up. Secondly and more 
important, land values tend to rise with growing prosperity. 




A given capital thus represents a constantly diminishing acre- 
age, and it becomes increasingly profitable to apply more 
labor and minor machines to small areas rather than large 
capital and vast machines to great areas. That is, we have a 
tendency to more intensive rather than large-scale farming. 
The final consequence is a resultant between the two forces of 
growing productivity of machinery and the increase of land 

The following table gives the average size of the entire farm 
in acres : 







United States .... 







North Atlantic Division 

1 1 2.6 






South Atlantic Division 



241. 1 




North Central Division 







South Central Division 







Western Division . . 







It will be observed that up to 1880 there was a movement 
toward smaller farms. Since 1880, the era of the introduction 
of machinery on a large scale, the forces have about balanced 
each other in the North Atlantic and South Central divisions, 
while in the South Atlantic division the tendency just referred 
to has been progressing, even though during the past few years 
there seems to be a new and shght movement toward the so- 
called plantation system, or large farm with white owner and 
extensive gangs of negro farm hands. In both the North 
Central and Western divisions not only has the use of machin- 
ery increased, but the opening up of vast stretches of graz- 
ing land has contributed to increase the average size of the 
farms. With the growing importance of land values the trend 
in the West may be expected soon to conform to that in the 
East. In 1900 over 82 per cent of all the farms were under 
175 acres. The tendency for the small farms to increase is 
shown by the following table of percentage in acres : 

§ 146] Consolidation and Integration. 337 

Under lo. 






1000 and 

























The same movement is discernible even in the Western and 
North Central divisions, where, notwithstanding a slight increase 
in the largest farms, there has been a considerably greater 
increase in the smaller farms. The conclusion is that large- 
scale production is, even in the United States, far less appli- 
cable to agriculture than to industry, chiefly because the lower 
cost resulting everywhere from machinery is in the case of 
agriculture partly counterbalanced by the increase in land 
values and the consequent changes in cultivation. 

146. Consolidation and Integration of Production. 

Side by side with the immediate effects of machinery in 
enlarging the size of the individual business unit, we have the 
broader phenomenon of the capitalistic combination of produc- 
tion. This is of two kinds : first, the consoHdation of like units 
into a larger whole, as in the union of separate shipping lines 
into the International Marine Company ; and second, the inte- 
gration of unlike units, as the union of such originally different 
enterprises as mines, transportation companies, factories and 
mills into the United States Steel Corporation. 

Combinations of capital have gone through several phases 
known respectively as agreements, pools and trusts, each being 
further divisible into two or more classes. 

(i) The earliest form is the agreement of independent 
concerns to fix prices. This is the first natural effort to in- 
crease profits by restricting competition. It is found almost 
from the beginning of business enterprise. Its obvious weak- 
nesses are the lack of any adequate penalty to prevent under- 
cutting by any one of the parties to the agreement ; and the 

338 Enterprise. [§ 146 

inducement which the ensuing high profits hold out to new 
competitors. In the American railway business this plan, 
whether in the form of the earlier traffic arrangements or in 
that of the more recent presidents' agreements, never proved 
effectual. In general industry its efficacy is limited and 

(2) The next step is the agreement to divide the field, 
each enterprise contracting to limit its activity to a particular 
section. This plan also is subject to difficulties except in cases 
where the first comer possesses undoubted advantages through 
the mere fact of priority. The most familiar examples are the 
American express companies and the French railways, although 
even here there is some competition on the fringe of each 
field. Division of the field, however, is in most cases only a 
stage in the formation of a closer union, as in the so-called 
rival gas or electric light companies. 

(3) The third phase is the pool, or the attempt to restrict 
the output rather than the price or the field. The pool is so 
named because the receipts are put into a common fund or 
pool, each member of the combination having an allotted per- 
centage of production.^ Ordinarily this takes the form of a 
money pool, the excess or deficiency in each case being paid 
in cash. Occasionally, as in some of the railway traffic-pools, 
the output itself is diverted from one member to another. 
When this apportionment is accomplished by secret favors to 
individuals, like the cattle, hog and oil " eveners," the abuses 
become notorious. Frequently the equilibrium is brought 
about by a fine on the excess production, instead of a technical 
pooling of the output or the proceeds. Here, again, the 
temptations covertly or openly to exceed the allotment in 
order to secure greater immediate profits or to furnish an argu- 
ment for a larger percentage at the next distribution is fre- 
quently too strong to be resisted. To this danger the whisky 
pool, the beam pool and many others succumbed. 

1 The industrial pool must not be confused with the financial pool, 
used for speculative purposes in the stock exchange. 

§ 146] Consolidation and Integration. 339 

(4) Sometimes the pool combines both features, the fix- 
ing of price as well as of output. Occasionally it goes still 
further and under the name of selling bureau or agency 
constitutes a fourth phase. The selling bureau not only fixes 
prices and output, but often manages the entire business of 
selling, taking all orders and distributing the respective allot- 
ments to each member. Many of the German Cartells are of 
this nature, although in some cases they are nothing but ordi- 
nary pools. Of the same character was the Michigan Salt 
Association, and many of the French comptoirs or syndicats. 
The weakness of the pooling arrangements is not only their 
instability, but also the fact that in Anglo-Saxon countries at 
least their provisions are unenforceable because repugnant to 
the common law. 

(5) The fifth stage was reached in 1882 by the formation 
of the Standard Oil Trust, so called because the constituent 
enterprises turned over their business to a board of central 
trustees, receiving in return trust certificates and abandoning to 
the "trust" the entire operation of the business.^ Although 
the whisky, the sugar and other trusts rapidly followed, the 
scheme was soon found to conflict with the law, the original 
trusts were dissolved, and the constituent enterprises were now 
combined in a new and still more effective way. 

(6) The sixth form may be called the holding corporation. 
The original members of the combination are first organized 
as corporations, each maintaining its separate existence. A 
new central corporation is then formed to buy up or hold the 
stock, or at least a majority interest, of the individual corpora- 
tions. On the basis of the income received from the constit- 
uent companies, the parent corporation issues its securities, and 
while each plant or business is operated as a separate unit, its 
capacity is virtually controlled by the directory of the parent 
company. It is the trust in a new and more effective form, 
preserving the unity of the old, but adding a certain flexibility 

1 The industrial trust must not be confused with the trust company, 
any more than the industrial pool with the stock exchange pool. 

340 Enterprise. [§14: 

and responsibility. In its original form something like the 
holding corporation is found in isolated instances in an earlier 
period, as in the case of the Pennsylvania Company in 1870, 
the Bell Telephone Company in 1 8S0 and the Southern Pacific 
Company in 1884. All these, however, were organized under 
special laws; the general legality of one corporation holding 
the stock of another was first made possible by the New 
Jersey Corporation Act of 1889. This led to a sudden out- 
burst of activity in the formation of holding companies. Of 
this character are the United States Steel Corporation of 1901, 
the American Tobacco Company of 1904 and most of the 
newer combinations. The attempt to apply the same method 
to railways in the case of the Northern Securities Company 
failed because of special prohibitive legislation ; but even here 
the same result is likely to be brought about through the so- 
called system of community of interests whereby the identical 
directors virtually possess a controlling voice in the man- 
agement of each constituent company. This system of com- 
munity of interests, as it is already found in some of our great 
financial institutions, where separate companies are controlled 
by the same individuals, may well prove to be the next step in 
a still greater combination of capitalist production. 

147. Grow^th of Combination. 

Combination of capital, as is obvious from the illustrations 
of the last section, has made itself manifest in four business 
groups: (i) the railroads; (2) the franchise or public service 
enterprises, including the telegraph, the telephone and the 
so-called municipal monopolies like water, gas and electric 
light, street railway, heating and conduit companies; (3) 
the trust companies in the narrower sense, the banks and the 
insurance companies ; (4) the industrial combinations. The 
first three groups are so important in themselves and so clearly 
marked off from the others that they will be more appropri- 
ately discussed below. We shall confine our attention here 
to the industrial combinations. 

§ 147] Growth of Combination. 341 

The advantages of such combinations from the point of 
view of the producers are obvious. Large savings are possible 
in advertising and in traveUing agents. The avoidance of cross 
freights by locating the establishments at different places is 
often of importance, especially in the case of heavy or bulky 
articles. The benefits of division of labor and large-scale pro- 
duction may be multiplied by concentrating departments and 
facilitating standardization by devoting each factory or mill to 
one particular product. The larger the concentration, the bet- 
ter are likely to be the knowledge and control of credit rela- 
tions, so as to reduce the loss from bad debts. Again, more 
ample means are afforded to secure capacity of the highest order 
in the management of the enterprise. Finally, the wider view 
which comes from an interchange of ideas and a comparison of 
experimental methods in the separate plants is frequently of 
value. The president of the American Tobacco Company a few 
years ago declared this to be the chief benefit of combination. 

The immediate causes of consolidation are various. It may, 
as in the railways or the sugar trust, be due to a realization of 
the folly of " cut-throat " competition ; it may, as in the iron 
mines, be owing to the lower prices which render necessary the 
application of better methods to insure lower cost ; it may be 
the result of a long period of depression which has almost 
eliminated profits. But at bottom combination is due to the 
economy of production that comes from concentrated capital. 
The immense profits often secured by the promoters may 
indeed be responsible for premature or dishonest consolida- 
tions, but such mere speculative projects are obviously short- 
lived. Unless there are some real advantages in the combi- 
nation it cannot endure ; the mere fact of its continued and 
prosperous existence justifies its formation. 

The concentration of production is so generaPand world- 
wide a tendency that the attempt to trace it to any minor 
cause is useless. Combinations are sometimes ascribed to the 
tariff or to discriminations in railway charges. That these 
exert some influence in particular cases is more than probable, 

342 Emerprise. [§147 

but that they serve in themselves to explain the facts of com- 
bination is unlikely. Trusts and pools abound in the European 
countries where the tariffs are low or even non-existent. 
Freight discriminations are found in America, but are un- 
known in Germany ; yet industrial combinations are well-nigh 
as common there as here. Whatever may be the contributing 
causes, the fundamental reason is clearly the economy of 
concentrated production. It is only in recent years that in- 
dustrial capital has become so abundant as to disclose the real 
advantages of concentration. 

According to the census of 1900 there were 185 combi- 
nations, representing 2,040 plants and turning out products to 
the value of ^1,667,350, a little over 14 per cent of the total 
industrial output of the United States. But since 1900 the 
movement has progressed rapidly. In 1900 there were 16 
combinations each with a capital of over ^50,000,000 and 
with an aggregate capital of ^1,231,000,000. In 1909, as 
appears from the table opposite, not only were there 30 such 
combinations with an aggregate capital three times as great 
($4,020,000,000), but a single combination now had a larger 
capital than the 16 combinations, and about one-half as large 
as all the 185 combinations in 1900. 

The United States Steel Corporation is such a striking 
example not only of the consolidation, but of the integration 
of production, that the following figures are appended. The 
assets of this corporation in 1902 were, according to the 
testimony of its president in a recent lawsuit,^ as follows : 

Iron and Bessemer ore properties $700,cxx},ocx) 

Plants, mills, machinery, etc 300,000,000 

Coal and coke fields 100,000,000 

Railroads, ships, etc 80,000,000 

Blast furnaces 48,000,000 

Natural gas fields 20,000,000 

Limestone properties 4,000,000 

Cash and cash assets 148,281,000 

1 Hodge gt a/, vs. U. S. Steel Corporation, 

§ H7] 

Growth of Combination. 


In the seventh annual report of Dec. 31, 1908, the assets had 
grown to $1,746,017,532. Contrasted with this integration of 
unlike industries, we have the consolidation of like industries 
shown below. The ten (in 1909 thirteen) subsidiary com- 

United States Steel Corporation . . 
American Tobacco Company . . . 
American Smelting & Refining Co, 
International Mercantile Marine Co, 

Amalgamated Copper Co 

International Harvester Co. . . . 

Central Leather Co 

Lackawanna Steel Co 

Pullman Co 

Standard Oil Co 

United States Rubber Co 

Mackay Companies 

American Sugar Refining Co. . . . 
Corn Products Refining Co. . . . 

American Can Co 

Colorado Fuel and Iron Co. . . . 

Pittsburgh Coal Co 

Westinghouse Electric Co 

American Woolen Co 

Swift & Co 

Commonwealth Edison Co. . . . 
American Car & Foundry Co. . . 
Virginia-Carolina Chemical Co. . . 
Republic Iron and Steel Co. . . . 
Distillers Securities Corporation . . 
Dupont de Nemours Powder Co. . 

International Paper Co 

National Biscuit Co 

American Locomotive Co 

United Copper Co 



or Reor- 

Stock and 


Bonds, 1909. 

1 901 



230. 569, 500 

























































panics (the Carnegie, the Illinois, and the Lorain Steel Com- 
panies, the American Steel and Wire Company, the National 
and the Shelby Steel Tube Companies, the American Sheet 
Steel, American Tin Plate, American Bridge and Union Steel 
Companies), themselves the results of many consolidations, 

344 Enterprise. [§ 148 

represented in 1903 86 blast furnaces, 31 Bessemer and open- 
hearth steel works, 57 blooming, slabbing, billet and sheet 
bar mills, 20 rail and plate mills, 251 puddling furnaces, 39 
skelp mills, 59 bar, hoop and cotton tie mills, 11 structural 
shape works, 24 rod mills, 22 wire mills, 447 sheet, black 
plate and tin plate mills, 5 tube mills, 26 bridge and structural 
plants, 24 foundries and 16 miscellaneous works. 

148. Effects of Combination. 

The effects of combination may be regarded from the five- 
fold standpoint of the owner, the wage-earner, the independent 
producer, the purveyor of the raw material and the consumer. 

(i) The owner in modern times is the corporate investor. 
So far as the problem is one of general corporate profits 
depending on the ordinary mutations of business, it will be 
discussed in the next book. So far as the profits are affected 
by the capitalization of the enterprise, it has already been 
touched upon. The surest protection of the innocent investor 
is to be sought, as we have seen, through the avenue of pub- 
licity and responsibility. 

(2) The influence of industrial combination upon the wage- 
earner is to accentuate the general effect of capital upon wages, 
to be studied hereafter. So far as the prosperity of the laborers 
is bound up with the general productivity of the enterprise, the 
industrial combination which tends toward greater stability and 
enlarged productivity may work toward an improvement in 
their condition. To this may be opposed the consideration 
that the mere fact of concentration may enable the enterprise 
to present a more solid and effectual front to the demands of 
the trades-unions. On the other hand, the dangers of a strike 
are multiplied when it extends through all the ramifications of 
a vast trust. Finally, the far-sighted heads of a great combi- 
nation are apt to take a broader view of the labor problem, 
and to seek industrial peace by wise concessions and a policy 

§ 148] Effects of Combination. 345 

of making the worker realize that his interests are in a large 
sense bound up with those of the combination. The American 
Federation of Labor has declared unequivocally that as a body 
of workmen it has no objection to the trusts. Yet when the 
combination becomes a monopoly, there is, as we shall see, 
a real and insidious lurking danger in its ultimate effects upon 

(3) The independent producer is undoubtedly assailed by 
the combination. We must, however, distinguish between the 
legitimate and illegitimate, the natural and unnatural effects of 
combination. Where the combination wins its way by better 
service to the public, the disappearance of the inefficient small 
competitor may be as advantageous to the community as was 
the substitution of the factory for the sweat-shop or the railway 
for the coach. Even for the individual himself, as long as he 
is not pre-eminently capable, it may often be better to be an 
official of a huge enterprise on a fairly secure salary and with 
prospect of advance than an independent producer continually 
on the fringe of defeat, in much the same way as the " in- 
dependent " hand-loom weavers in England and America were 
glad to join the ranks of the factory operatives. To rid the 
community of the inefficient producer and to convert hira into 
a useful agent may be the beneficial result of combination. 

This, however, presupposes that the way is kept open for 
the efficient. In other words, combination ought not to be 
permitted to assume the form of monopoly, except in those 
quasi-public enterprises where competition is itself undesirable. 
The *' unfair " means through which it is attempted to shut 
off rivalry are factor's agreements, so-called predatory compe- 
tition and freight discrimination. The factor's agreements are 
arrangements whereby retailers are induced through various 
favors not to handle competitive goods. Predatory competi- 
tion is the temporary cut in prices only at those points and at 
those periods when competition is threatened. Both these 
practices, however, are a part of ordinary competitive business 
usage. In competition, indeed, the benefit of the lower price 

346 Enterprise. [§ 148 

ultimately inures to the consumer ; in monopoly it accrues to 
the producer. Yet since the practices themselves are irrespec- 
tive of the nature of the business, it is perhaps open to question 
whether any effective means of successfully checking them can 
be devised. On the other hand, the secret rebates granted 
by the railroads are undoubtedly as remediable as they are un- 
justifiable. Combination turns into monopoly largely through 
railway discrimination. How far monopoly actually ensues 
will be discussed below. 

(4) So far as the purveyor of raw material is concerned, 
much is supposed to depend upon the percentage of the 
output taken by the combination. Where the business is only 
one degree removed from the raw material of nature, and 
especially where the supply of this material is restricted, the 
tendency to concentrate the ownership of the raw material 
becomes very strong. It is significant that most of the largest 
combinations on the list in page 343 have grown out of an 
ownership of raw material which is not annually reproducible, 
like iron ore, copper and lead. In several cases, however, 
like oil, tobacco, sugar and beef, the combination does not 
own the raw material, because it is the result of annual pro- 
duction at once too minute and too widespread for concen- 
tration. In these and similar cases the complaint is often 
heard that the trust keeps down the price of the raw material 
by reducing its offer to the lowest limit. While there un- 
doubtedly is some foundation for this charge, as especially in 
the recent history of the Beef Trust and of the Standard Oil 
Trust in Kansas, it is probable that the statements are fre- 
quently exaggerated. For in some cases, as in tobacco and 
sugar, the market is an international one, and even if the 
combination forms so large a part of the international demand 
as to control the price, the restriction of the offer below the 
cost of the marginal producer would have the effect of reducing 
the supply and thus ultimately leading to an increased price. 
As long as the total demand for the raw material suffers no 
appreciable change, it is questionable whether the concentra- 

§ 149] Limits of Combination. 347 

tion of demand into a few hands is apt to have a permanent 
effect on the producer of the raw material. Nevertheless the 
temporary consequences may be burdensome and injurious. 

(5) Finally, the influence of the combination upon the 
consumer shows itself chiefly in the selling price. The advan- 
tage of combination is lower cost, but the object of combination 
is higher profits. It does not necessarily follow that higher 
profits mean, as is usually supposed, actually higher prices. 
If the demand can be stimulated by a reduction of price, 
higher profits are compatible with greater sales at lower prices. 
There is in every industry, competitive or monopolistic, an 
obvious limit to high price, caused by the possible substitution 
of some lower-priced equivalent. This commodity competition 
is omnipresent. The real problem, however, is whether in 
those combinations which produce so large a share of the 
output as effectually to control the market, the " trust " price 
is higher than would be the competitive price. A careful 
investigation into some of the leading combinations by the 
Industrial Commission disclosed the fact that during selected 
periods when the combinations were actually in control, the 
*' differential " or margin between the price of the raw material 
and of the finished product had risen, even though the actual 
selling price might have declined. The problem thus resolves 
itself into the question : does the combination tend to become 
a monopoly? 

149. Limits of Combination. 

It is clear that if there were no limit to combination, the 
logical result in every industry would be a monopoly of pro- 
duction. As a matter of fact, however, there are two classes 
of limits, natural and artificial. 

( I ) The natural limit of combination is the persistence of 
competition. In certain branches this limit does not exist, 
and ought not to exist. In the railroad business the objec- 
tion to competition is that it leads to discrimination. In the 
other public-service corporations competition might do more 

348 Enterprise. [§ 149 

harm than good. Competing telephones would be a source of 
lasting confusion to the patrons, competing gas and water com- 
panies a continual annoyance to the users of the streets. In 
some other branches of industry monopolistic combination is 
undesirable but none the less probable. As we have just seen, 
where the industry is concerned with, or based upon, masses 
of raw material found in a state of nature but in limited quan- 
tities and in specially favored locations, the control of the 
natural monopoly is apt to lead to a monopolistic combination 
of the business. In ordinary business, however, where the raw 
material is itself either a manufactured product or procurable 
under competitive conditions, the natural limits to combina- 
tion are more obvious. In the absence of legal or natural 
monopoly, whenever profits are high enough to tempt compe- 
tition, new-comers are likely to appear. The combination may 
swallow up the new competitor, but as long as science remains 
free, and the combination does not control the government or 
the general media of transportation, the process will repeat 
itself. The so-called " economic wastes " of competition are 
a cheap price to pay for its many advantages. Thus, while the 
United States Steel Corporation is constantly expanding, new 
competing corporations have been growing equally fast or even 
faster. Instead of a single combination, we have in each 
branch the looser concentration known as the pool, which has 
to be readjusted whenever a new competitor appears. At the 
close of 1904, after the Lackawanna Steel Corporation decided 
to make steel rails, the percentages of the Steel Rail Associa- 
tion were at once changed, and the arbitrator apportioned the 
output among the five members, — the United States, the 
Lackawanna, the Pennsylvania, the Cambria and the Maryland 
Steel companies. So in another domain of business, like the 
great department stores in our cities, there is no way of keep- 
ing out not only the large competitors, but the small competi- 
tors as well. Indeed the erection of these mammoth stores 
has not appreciably diminished the number of little shops. 
Again, there are whole fields of industry where combination 

[§ 149 Limits of Combination. 349 

is only slightly applicable. In the woollen trades, in the shoe 
factories, in the cotton and silk mills, as well as in numberless 
other industries, the combinations are apt to be short-lived or 
partial. Finally, in the immense domain of agricultural pro- 
duction the possibility of combination is almost entirely 

(2) The artificial limit of combination takes the shape of 
legislative restrictions. When this is not in harmony with the 
natural limit, its efficacy is small. It can at best only change 
the form of the combination. Thus the anti-pooling provision 
of the Interstate Commerce Law of 1887, and the Sherman 
Act of 1890, have been alike powerless to prevent the continu- 
ance in their essential features of the railroad pools and asso- 
ciations. The numberless Anti-Trust state laws have resulted 
in a change of form, not in a cessation of consolidation. We 
are only slowly awakening to the fact that what is needed is 
regulation rather than prohibition. In Europe the govern- 
ments have long since recognized the futility of rigid prohibi- 
tions, and are now concerned chiefly with attempts at moderate 

Most of the methods usually proposed to curtail combina- 
tions are ineffectual. The power of taxation may be invoked, 
but the higher tax on the great combinations can be evaded by 
reconstitution into apparently loosely united and legally sep- 
arate units. The limitation of profits has been tried, but with 
equal lack of success, owing to the facility with which profits 
may be apportioned in other ways than dividends and in 
other channels than the shares of the parent company. The 
prohibition of demanding various prices at different places is 
practically inoperative. The Hmitation of charges has hitherto 
been feasible chiefly in such public-service corporations where 
the conditions of cost remain fairly constant. The reduction 
of the tariff, while doubtless desirable in particular instances 
like the tin plate industry, where monopolies have been shel- 
tered under the tariff wall, is open to the objection that unless 
most carefully carried out it is liable to destroy the industry 

350 Enterprise. [§ 149 

as well as the combination, or, at all events, to injure the small 
producer equally with the large one. The assumption of the 
enterprise by the government is a last resort, far beyond the 
province of probable American policy. 

It appears, then, that the methods of regulation most prom- 
ising of success are the maintenance of equality in transporta- 
tion and the securing of a reasonable publicity in the formation 
and conduct of the enterprise. These objects, as well as the 
removal of factitious advantages, once accomplished, the natu- 
ural limits of combination will disclose themselves ; and com- 
bination will turn into monopoly chiefly in those industries 
where monopoly itself is desirable. Evidently, however, in 
such cases the monopoly must be controlled, or, in last resort, 
managed by government itself. Where the natural regulation 
of competition is completely shut out, it must be supplanted 
by the artificial regulation of government. But where publicity 
and equality are preserved, the community may expect, in the 
vast mass of private industry, to reap the benefits of combina- 
tion without suffering the burdens of monopoly. The practical 
policy .of the future must rest upon a detailed analysis of the 
various classes of industry, — where combination is possible 
without monopoly, and where, on the other hand, monopoly 
itself must be frankly recognized and held in check. 

Book III. 
Value and Distribution. 



150. References. 

J. B. Clark, Distribution (1899), ch. xiii; N. G. Pierson, Principles 
(1902), part I, ch. v; F. A. Walker, Political Economy (1888), part 4, ch. 
iv; and The Wages Question (1876), ch. xiv ; A. T. Wz.^^^, Economics 
(1896), chs. iv, ix; A. Marshall, Principles (1898), bk. vi, chs. vi, vii ; 
T. N. Carver, Distribution (1904), ch. vii ; F. A. Fetter, Principles (1904), 
ch. xxxi; J. S. Nicholson, Principles (1893-1901), bk. ii, ch. xiii, and bk. 
iv, ch. vi ; A. W. Flux, Principles (1904), ch. x; T. Veblen, Theory of 
Business Enterprise (1904), chs. vi, x; H. R. Seager, Introduction (1904), 
chs. X, xi ; F. B. Hawley, Enterprise and the Productive Process (1907)-, 
H. C. Emery, Speculation in the Stock and Produce Exchange of the United 
States (1896), Place of the Speculator in the Theory of Distribution (1900), 
Legislation against Futures (Pol. Sci. Quart., X, 1895), and '^^^ German 
Exchange Act (Pol. Sci. Quart., X, 1895, and XIII, 1898) ; A. C. Stevens, 
Futures in the Wheat Market (Quart. Jour. Econ., II, 1888), and The 
Utility of Speculation (Pol. Sci. Quart., VII, 1892) ; H. Stokes, Business 
in Futures (Econ. Rev., VIII, 1898); S. J. Chapman and D. Knoop, 
Anticipations in the Cotton Market (Econ. Jour., XIV, 1904) ; R. Giffen, 
Stock Exchange Securities (1877) ; A. Crump, Theory of Stock Exchange 
Speculation (2d ed., 1874). 

151. The Shares in Distribution. 

All wealth that is created in society finds its way to the 
final disposition of the individual through certain channels or 
sources of income. This process is called distribution, and 


352 Profits. [§151 

the shares in distribution differ not only in amount but in 

Distribution, like production, is a social phenomenon. If 
every one consumed what he individually produced, there would 
be no exchange, no price, no distribution. In production we 
study the creation of the social income ; in distribution we 
study its division. In the one case we regard it as the na- 
tional output, in the other as the national dividend. In produc- 
tion we deal with the cost or expense of the factors which 
co-operate to create wealth ; in distribution we deal with their 
remuneration. It is clear that the shares in distribution differ 
according to the character of production and the structure of 
economic life. Where, for instance, slavery exists, we cannot 
speak of wages ; where the same individuals own the capital 
and do the manual work, we cannot well distinguish between 
profits and wages ; where capital is not loaned, interest does 
not emerge. The modern science of economics is, as we have 
learned, due to the efforts to analyze the modern shares in 

The study of distribution is primarily a study of the remu- 
neration of the factors of production. Since each factor con- 
tributes to the common result known as the social income, 
there must be a certain part of the product traceable to each 
factor. There are hence as many shares in distribution as 
there are factors in production. The remuneration of labor is 
called wages. The remuneration of the fund of capital is 
called interest. The remuneration of the concrete things 
that possess a capital value is called rent. Rent is usually 
limited to the return from land ; but since other things as well 
as land are rented, it is better, as we shall see, to call the re- 
muneration of land land-rent or ground-rent in contradis- 
tinction to other rents. Finally, the remuneration of the 
entrepreneur, or the man who carries on the enterprise, is 
called profits. Among them, wages, interest or rent, and 
profits exhaust the entire social income. 

In modern society differentiation of function has proceeded 

§ 152] Ordinary Profits. 353 

to the extent that different classes control different agents of 
production. This separation, however, is not rigid. The same 
man may own land and factories ; he may be a workman and a 
stockholder in the same plant, as in the United States Steel 
Corporation; he may be a farm-laborer and a tenant or a 
land-owner ; he may be a money-lender and yet be actively 
engaged in industry, commerce or agriculture. In the great 
mass of cases, however, the social class corresponds to a dis- 
tinct kind of income, and in its broadest aspect the social 
shares in distribution correspond to the factors of production. 

152. Ordinary Profits. 

Profits are the income from business enterprise. They are 
not necessarily limited to capital. An employment agency or 
an Italian padrone may make profits from directing labor into 
the right channel. A real-estate operator may make profits 
out of selling land. Profits are a result of business enterprise, 
and the entrepreneur may deal in labor, in land, in capital or 
in all three. It is hence inexact to speak only of the profits 
of capital. 

The best method of gaining an insight into the nature of 
profits is to consider, first, ordinary profits. By ordinary profits 
are meant the profits of a regular business that deals in a repe- 
tition of analogous transactions in competition with others. 
The term normal profits that is sometimes employed is less 
satisfactory, because it incorrectly implies that there is such 
a thing as a normal or general rate of profits, as well as because 
it brings to mind the conception of normal value ; whereas 
profits are a result of fluctuations in market value and would 
not exist in a state of normal equilibrium. 

Profits are always a surplus. They are the difference between 
the cost of production or acquisition and the selling price. 
They form a differential, however, in a second sense. Profits 
are the surplus of the intramarginal over the marginal pro- 
ducer. At any given time, under competitive conditions, 
market price is the same (p. 234), but cost varies. The ex- 


354 Profits. [§ 152 

penses of production are manifold, but may ordinarily be 
classified into cost of raw material, wages, rent, interest on 
the capital borrowed or invested, taxes and miscellaneous out- 
lays like insurance, advertisements and transportation expenses. 
All of these obviously vary from individual to individual. Some 
will display more care in the selection and arrangement of 
their labor force ; some will choose a more advantageous situa- 
tion, with a saving in both rent and transportation ; some will 
accomplish better results with less capital and economize in 
interest as well as taxes ; some will exercise more ingenuity in 
purchasing the raw material or securing a market. At the 
bottom of the scale is the marginal producer, working under 
the least favorable circumstances, and who can nevertheless get 
no more for his goods. With him price equals cost ; with the 
others price exceeds cost. The excess of price over cost 
constitutes profits. 

It is evident that in the long run profits could not exist in a 
state of normal equilibrium. If there were no change in the 
general conditions affecting value — if, in other words, economic 
forces were in equilibrium and society quiescent in all respects 
save the existence of such a complete mobility of capital and 
labor as is implied in the idea of frictionless competition, — 
there could be no permanent profit to any producer. The 
gross earnings or gross profits would indeed include interest on 
capital invested ; for if the business man did not earn interest 
on his capital, he would go out of business and loan his capital 
at the normal rate to some one else. So also the gross earnings 
would suffice to give him a bare compensation for his services, 
for if not he would enter some other employment or become a 
wage-earner. Gross profits must include interest and wages. 
But there would be no net profits, or surplus profits, or profits 
in the real sense of the word. For as soon as a profit appeared 
the entrepreneurs in other fields who were just making ex- 
penses would at once bid against each other in their eftbrt to 
secure capital and labor, until they would capture their share 
of the market, and the profits would dissipate themselves on 

§152] Ordinary Profits. 355 

the one hand in the higher rate paid for the factors of pro- 
duction, and on the other hand in the lower price of the 
product due to the greater supply. What was added in one 
industry would be subtracted from another. In actual life, 
however, there is a continual change, — population varies, 
wants are modified, capital increases, the processes of industry 
and methods of enterprise alter. Competitive profits are due 
wholly to such changes. He who can take advantage of the 
market secures the gain. 

Profits, again, are necessarily unstable. They last only as 
long as the economic fluctuation or variation from the normal 
condition continues. A new invention is the source of profit 
because it reduces cost ; but when the patent expires and 
competition sets in, the influx of new producers will reduce 
the price to the new cost level and the profit will disappear. 
The profits may accrue for a time to individual producers or 
to the whole class of producers. When general demand aug- 
ments or, as in common parlance, when times are good and 
sales brisk, every one may make money. The increased 
profits, however, will lead to greater production, and the rela- 
tion between consumption and production will soon change, 
so as to usher in the "bad times" and a disappearance of 
profits. This rhythmic succession of inflation and depression 
will be studied later. Here it is desired to call attention to 
the fact that profits can last only as long as the economic dis- 
harmony or perturbation lasts, that is, as long as the forces are 
not in equilibrium. If the manufacturer continually introduces 
new inventions, he may retain his superiority over his compet- 
itors. If 1;he demand of the community grows by leaps and 
bounds, it may keep ahead of the new production and for a 
long period afford profits to all producers. This may be true 
of a particular commodity or of a whole group of enterprises. 
At one period in the United States the shipping trade was 
particularly remunerative, at another the railroad industry, and 
so on. In a new section the supply of capital and labor may 
be so scarce that all business is lucrative ; and the increase in 

35^ Profits. [§152 

population may cause agricultural profits to grow and land 
values hence to rise. In an old country the general political 
and commercial relations may be such as to afford a growing 
foreign market, with the possibility of large and long-continued 
profits to the domestic producer. In every case, however, as 
soon as the original force has spent itself and competition has 
set in, the profit tends to vanish. 

In this sense, and in this sense only, is it true that profits 
tend either to an equality or to a minimum. The older writers 
confused interest with profit. Interest is the return from the 
fund of capital ; profits are the return from the conduct of 
business enterprise, irrespective of whether the enterprise deals 
with capital or labor or both. Interest is a part of cost; 
profit is a surplus above cost. Interest, as we shall see, has a 
normal rate ; profits may have an average rate but no normal 
rate. The marginal producer earns no profits ; the intra- 
marginal producers make profits which vary with the discrep- 
ancy of their cost from the market-price. If in any businesses 
indeed profits are particularly high, the more efficient pro- 
ducers in other lines will transfer their capital to these occupa- 
tions ; but in these occupations, as in the others, the competitive 
profits will range from zero to large figures. If there is any 
equality, it is an equality of an average between much and 
nothing. On the other hand, while the tendency to an equal- 
ity is true of average profits — which is of importance only as 
between occupations — the tendency of profits to a minimum 
is true of each particular occupation. There is under normal 
conditions of progress a tendency in the rate of interest to fall, 
but, as we shall see, never to vanish ; there is under competi- 
tive conditions always a tendency for the rate of profits in 
each individual business to disappear. 

Thus in ordinary enterprises profit is the great lure of 
energy, and competition the great destroyer of profit. Com- 
petitive profits, the union of both, are hence the symptom of 
progress. They can exist only by being continually renewed ; 
they are not a tax on the community, but a draft on nature. 

§ 153] Aleatory Profits. 357 

Profits are a result of price, not a cause of price. Production 
at a lower cost creates profits ; competition forces price down 
to lower cost and eliminates profits. Profits can be main- 
tained only by the creation of a continually newer cost level 
lower than the new price. 

153. Aleatory Profits. 

Profits are sometimes described as the wages of superin- 
tendence. There are indeed certain occupations where the 
income partakes of the nature of wages. The commissions of 
a broker, like the fees of a professional man, are really wages, 
even though they are popularly called profits. Wages, how- 
ever, differ from profits in that wages are a stipulated income 
and profits a residual income. There is a normal rate of 
wages, there is no normal rate of profits. Wages are a part of 
cost, profits a surplus over cost. The entrepreneur may think 
that he deserves a return for his services, but whether he 
secures one depends on his competitors. There is always a 
certain level below which wages cannot fall, because no work 
would otherwise be done ; but the very continuance of com- 
petitive profits depends on the abler producer cutting down 
cost to the point where the marginal producer earns no profits. 
The reduction of some wages to zero implies the starvation of 
the laborer and the crippling of the productive force of the 
community ; the reduction of some profits to zero means the 
elimination of the inefficient and the continuance of progress. 
Above all, profits differ from wages in that profits are the direct 
result of price fluctuations. The question thus arises as to the 
dependence of profits upon chance. 

Aleatory or chance profits exist in varying degree. Some 
are essentially unique or sporadic. If I find a pocket-book on 
the street or receive a bequest, the income is wholly aleatory. 
The law of chance governing such isolated occurrences may 
be of interest to the mathematician, but is of little \importance 
to the economist. The line between aleatory and ordinary 
profits is, however, not so easy to draw. In the first place, we 


Profits. [§ 153 

have the great field of speculative profits, to be discussed in a 
moment. Secondly, there is an element of luck in all business. 
The oscillations of demand and supply are frequently influ- 
enced by accident. A flood, an invention, a war, a new whim 
in fashion, a chance occurrence of any kind, may affect the 
individual or the group, the producer or the consumer, and by 
influencing either cost or price modify business profits. In 
one sense all price fluctuations are accidental. 

A distinction is sometimes drawn between industrial and 
pecuniary profits. By industrial profits in the broad sense are 
meant profits derived from the production and sale of repro- 
ducible goods, such as compose the great mass of the annual 
output of wealth. " Industrial " in this sense would include 
agricultural and commercial profits. Pecuniary profits, on the 
other hand, comprise the results of such transactions as have 
to deal only secondarily with production and primarily with 
sale, not from producer to consumer, but from one owner to 
another. The chief example of such pecuniary profits nowa- 
days is the dealing in vast masses of vendible capital, irrespec- 
tive of its industrial uses. Many of the large fortunes of 
recent times have been derived from such sporadic or fortui- 
tous profits. When financiers trade in railway securities or 
" industrial " stocks, their profits on each isolated transaction 
may be independent of, or even opposed to, the best manage- 
ment of the corporation as reflected in higher quotations ; for 
their profits may come from buying at lower, rather than sell- 
ing at higher, prices. But even here, with all the abuses of 
which the practices are susceptible, the permanence of pecu- 
niary profits as a whole is ultimately connected with industrial 
progress. If stocks go down, the profits of some must be 
counterbalanced by the losses of others ; but if stocks go up, 
every one may participate in the gain, and even if there are 
some losses they may be more than compensated by the profits 
of others. Stocks, however, can rise permanently only if the 
enterprise earns more, that is, if it is industrially more eflicient. 
Thus, while pecuniary profits may in individual cases be the 

§ 154] Speculative Profits. 359 

result of a change in ownership, with no assignable relation to 
the production or utilization of the commodities which the 
securities represent, pecuniary profits as a whole have, in last 
instance, a real connection with the industrial profits on which 
they finally rest. 

Chance or luck, therefore, may often be the cause of sporadic 
profits, but cannot explain their persistence either for the in- 
dividual or for society. The individual who attempts to secure 
pecuniary profits can in the long run succeed only if he uses 
good judgment, foresight and practical sagacity, thus elimi- 
nating more and more the influence of blind chance. The 
financier, like the manufacturer or merchant, is really a servant 
of society ; like some servants, he may be refractory, unfaith- 
ful or treacherous, but in the main he will fare best when he 
best subserves the interests of society. The aleatory element 
is inseparable from profits, since profits are derived from 
fluctuations ; but the ultimate cause of persistent profits is the 
ability of the individual to take advantage of the fluctuation, — 
and in the long run this ability plays into the hands of society 
at large. 

154. Speculative Profits — Nature. 

By speculation is meant the purchase or sale of anything in 
the hope of profit from an anticipated change in its price. It 
differs from ordinary trade only in degree, for all profit, as we 
have seen, has an aleatory element. The difference, however, 
consists in the fact that speculation concentrates and intensi- 
fies the forces which affect demand and supply. 

Speculation was in former times chiefly place speculation. 
The practice of buying in one market and selling at almost 
the same time in another has been lessened by the modern 
means of transportation and communication, whereby price 
fluctuations between places have been minimized. It exists 
to-day chiefly in the form of " arbitrage " of stock or com- 
mission brokers, and its success depends on the rapidity with 
which their telegraphic facilities may enable them to anticipate 

360 Profits. [§ 154 

the published quotations on the exchanges. The more im- 
portant form at present is time speculation based on price 
fluctuations after the lapse of an interval of time. 

Speculation, again, may be sporadic or regular. Sporadic 
speculation is almost as old as business itself. It is the result 
either of a popular frenzy or of a deliberate scheme to take 
advantage of a temporary occurrence. An example of the 
first kind is the tulip mania in seventeenth-century Holland, 
when the most fabulous profits were made by those who had 
anticipated the short-lived demand for bulbs. So also the 
occasional speculative " booms " in real estate at present are 
the cause of enormous profits, followed by corresponding 
losses when the bubble is pricked. In such cases speculation 
is due to changes in demand, which it is almost impossible for 
individuals to foresee or to control. Supply, on the other 
hand, lends itself more readily to manipulation, and deliberate 
attempts are not infrequently made to accomplish this end. 
From the efforts of Joseph to buy up the corn crop in Egypt, 
and from the decision of the Greek philosopher to show his 
practical wisdom by purchasing in advance of the vintage all 
the winepresses, down to the modern pools and rings, attempts 
to corner the market are occasionally found. While sometimes 
successful in minor cases, they commonly fail when on a large 
scale. The failure is due (a) to the immensity of the capi- 
tal required, (^) to the difficulty of procuring and retaining 
trusty confederates whose selfish interests may often be best 
subserved by selling when their principal is buying, (^) to 
the fact that rising prices will bring to the market all the 
reserved stock, and (d) to the danger of the substitution by 
the consumer of some cheaper commodity. Thus, while the 
successful corner in Harlem stock in 1863 laid the foundation 
of the Vanderbilt fortunes, the three most picturesque and 
gigantic attempts of the last two decades — the Chicago Leiter 
corner in wheat, the Paris S^cretan comer in copper and the 
New York Sully corner in cotton — have all been failures, 
resulting in the ruin of the speculators. 

§ 154] Speculative Profits. 361 

Both classes of sporadic speculation are in the end socially 
disadvantageous, because the speculative price is driven far 
above or below the true value, with resulting losses in the 
process of restoring the equilibrium. The inordinately high 
cotton prices, due to the speculative attempts of 1904, well- 
nigh' produced a crisis in the cotton industry in England and 
New England, and while the Southern planters temporarily 
benefited, the high profits led to such an increased acreage 
during the next season that the price fell below the cost of 
production. A moderately remunerative price would have 
been preferable to these sudden alternations of large profits 
and extreme losses. 

It would, however, be a mistake to assume that all speculation 
is of this character. Speculation could never have become a 
part of the normal business life of modern times if it had sim- 
ply these defects and anti-social characteristics. The modern 
stock and produce exchanges have a definite economic func- 
tion to perform. 

Speculation occurs in securities or commodities. The qual- 
ities which render a commodity peculiarly fit for regular specu- 
lative dealings are three in number : {a) it must be a staple, 
with a large and regular production; {b) it must be homo- 
geneous in quality, so that any unit will be as acceptable as 
another; (c) it must be capable of ready definition and 
measurement. Accordingly we find exchanges devoted to 
cereals, like wheat, rye, barley, corn and oats, to coffee and 
sugar, to cotton and tobacco, to iron and tin. In the case 
of securities all those qualities are obviously present. The 
chief transactions on both the stock and produce exchanges 
may be summarized as follows. 

If prices in the estimation of the speculator are high but 
tend downward, he will " sell short," that is, engage to deliver 
at a future time goods not yet in his possession. If, when the 
time arrives, he can purchase at the anticipated lower price, 
the difference constitutes his profits. Or the same result can 
be reached by a " covering " contract, so called because he 

362 Profits. [§154 

covers the short sale by making a purchase at a somewhat 
lower price deliverable at the same time. On the other hand, if 
prices are low but in his estimation tend upward, he will " buy 
long," that is, buy more than he would care to take at present ; 
and when the goods are finally delivered he can sell at a profit. 
Or, as in the preceding case, he can at once make a " reahzing " 
or " liquidating " sale at a higher price, deliverable at the same 
time. Because the "shorts" speculate for a fall, they are 
called bears (who pull down) ; while the " longs," who specu- 
late for a rise, are called bulls (who toss up). When a sub- 
stantial interval of time elapses between the two parts of the 
transaction, it is called a ** future." Cotton futures, for in- 
stance, are dealt in months before the transaction is closed. 
June deliveries may be sold in January. Where the delivery 
is to take place at once, that is, on the spot or in the imme- 
diate future, we speak of " spot " cotton or wheat. 

On the stock exchange most of the deliveries take place on 
the following day, although, as in New York, the option of deliv- 
ery is sometimes three, sometimes thirty or sixty days. Apart 
from the mere gains in daily speculation through *' scalping," 
the profits on the stock exchange are realized chiefly through 
loans. If the " short," for instance, is not ready to buy in 
the stocks when delivery is due, he arranges to borrow them, 
expecting to liquidate his loan by a future purchase at lower 
prices. Vice versa, the "long" purchaser who is not ready to 
sell arranges with a broker to " carry " the stocks for him until 
such time as he can sell at a profit. The broker protects 
himself against any possible fall in price by requiring the cus- 
tomer to put up a margin in cash, which differs with the 
price fluctuations. In the produce exchange it is the practice 
to deposit with some constituted authority the margin or sum 
sufficient to secure the other party from loss in case of failure 
to fulfil the contract for future delivery. Such transactions 
are therefore called speculating on a margin. In practice it is 
impossible to distinguish between margin dealings where there 
is no delivery and those where actual delivery is made or 

§ 155] Speculative Profits. 363 

contemplated, since the difference depends on the shifting in- 
tention of the speculator, and since in every contract actual 
delivery of the stock or produce can legally be called for. 
Finally, speculation takes the form of privileges. A " put " is 
the privilege to put or deliver to the other party at a definite 
time the security or commodity at a fixed price. A " call " is 
the privilege to call or demand from the other party at a defi- 
nite time the security or commodity at a fixed price. Puts 
and calls may be bought or sold ; when a speculator acquires 
the right of electing whether to put or call the stock the 
privilege is called a " spread " or " straddle." Prices of such 
privileges depend on the nature of the market, the nature of 
the security, the length of time the privilege has to run and the 
difference of the stipulated from the present market price. 

155. Speculative Profits — Function. 

The chief economic function of regular speculation consists 
in the assumption of risk and results in the equalization of 

First, as to the assumption of risk. When, under the stress 
of modern capitalism, dealings in commodities became national 
and even international, the perturbations affecting market values 
grew to be so vast and so numerous that ordinary business was 
seriously compromised by the violent fluctuations in the price 
of the raw materials of industry. The manufacturer who 
bought his materials in the international market expected 
indeed a profit on the production of the finished article, but 
was unwilling to have this profit turned into loss by sudden 
changes in the price of the raw material. It was to secure an 
escape from the risks of such oscillations that a special class 
arose which assumed this risk and by concentrated attention 
derived a profit from the price fluctuations. 

The first way in which risk is minimized for the ordinary 
business man and assumed by a regular speculative class is 
through the provision of a continuous open market. A cotton- 
spinner^ for instance, accepts an order for goods to be delivered 

364 Profits. [§155 

in a year, and expects to begin spinning in six months. Unless 
he is able to buy now the cotton to be delivered then, he will 
be at the mercy of the chance variations in the cotton market, 
and although he may be the most capable of business men 
his entire profit may be wiped out by a rise in the price of 
cotton. The cotton future enables him to ehminate this risk. 
The same is true of futures in wheat or other commodities. 
It applies equally to the stock exchange. If a railway or 
other industry, in launching a new enterprise, had to depend 
on the chance investors at the time of the issue of the securi- 
ties, it would be seriously hampered. The mere knowledge 
that at any moment there will be a ready sale on the exchange 
greatly increases the circle of purchasers, many of whom may 
not intend to be permanent investors. The stock exchange 
aids the investment of capital, as the produce exchange aid^ 
the production of finished commodities. Business orders and 
corporate needs are intermittent, because they depend on 
temporary exigencies ; the risks at one end, at all events, are 
eliminated by the unintermittent, continuous market which 
regular speculation affords. The cotton exchange was the 
result of the disorganization of the cotton trade after the civil 
war ; speculation in all the other staples has in the same way 
been the consequence of the efforts of the manufacturer to 
avert the risks of intermittent and spasmodic fluctuations in 
the raw material. 

A natural and more recent outcome of this attempt to avoid 
risk is the practice of " hedging " or " covering " transactions. 
An English miller, for instance, needs wheat in February and 
buys his supply in California, let us say, at a price of 90 cents 
a bushel. By the time the wheat reaches his mill and the flour 
has been finally disposed of, it may be September, and the price 
of wheat may have fallen to 75 cents, with a corresponding fall 
in the price of flour. To protect himself against such a loss 
the miller sells in February at Chicago for September delivery 
the same quantity of wheat for the same price as that at which 
he bought, 90 cents. When September arrives, he again enters 

§ 155] Speculative Profits. 365 

the Chicago market and makes good his delivery contract by 
buying the wheat at the market price of 75 cents. His profits 
in this deal equal his losses in the other, and by this process of 
" hedging " contracts he eliminates all risk in price fluctuations 
due to the raw material. He is content to derive his gains 
from the profits of his legitimate milling business. Through 
the use of such wheat and cotton futures we thus have the 
paradoxical result that the business man often resorts to specu- 
lation in order to free his business from speculative influences. 

The result of regular speculation, again, is to steady prices. 
If with wheat prices at 80 cents a bushel there is a prospect 
of a large crop, the intelligent speculator will sell short (a 
future) say at 70 cents, expecting to buy in at 65 cents. All 
this selling on the part of the bears, however, tends to reduce 
present prices and thus to increase consumption, which again 
tends to keep the future price from falling so low or so* suddenly 
as it would otherwise have done. Vice versa, if a crop short- 
age is in prospect, prices tend to rise, the commodity becomes 
a "good buy" and the bulls are active. The increased pur- 
chases tend to raise present prices and to check consumption, 
while the owners in a rising market hold on for the prospec- 
tive profit. This combination of a somewhat smaller demand 
and a larger supply will prevent such a sharp rise in prices as 
would ordinarily follow a bad crop. Speculation thus tends to 
equalize demand and supply, and by concentrating in the 
present the influences of the future it intensifies the normal 
factors and minimizes the market fluctuation. Speculation 
hence exerts a directive influence on price. A good example of 
this is afforded by the Gold Law during the civil war. The 
discount on greenbacks was mistakenly ascribed to the specu- 
lation on the gold exchange, and a law was enacted to prohibit 
all such transactions. As a result, the premium on gold jumped 
at once from 195 to 285, with wild fluctuations day by day, to 
be followed, after the hasty repeal of the law fifteen days later, 
by just as sudden a, recession of the price. 

Speculation is hence so perplexing a phenomenon because 


Profits. [§156 

of its Janus-like aspect. So far as it has become the regular 
occupation of a class, differentiated from other business men 
for this particular purpose, it subserves a useful and in modern 
times an indispensable function. The expert dealer on the 
exchanges, who studies and prejudges the market, will in the 
long run secure profits by reducing risks and steadying prices. 
In this wider sense speculative profits are earned like other 
profits. On the other hand, numbers of individuals without 
experience or ability are constantly taking " flyers " on the 
exchanges, and gamble in securities or commodities as they 
would in cards. Speculation here is as demoralizing to earnest 
effort and thrift as is the lottery. Moreover, even the profes- 
sional dealer will often indulge in what we have termed spo- 
radic speculation, and by an extensive manipulation of the 
market bring about the unsteadying of prices usually connected 
with a "squeeze" or a "comer." Difficult as it is to draw 
the line in practice, the distinction between economic and 
uneconomic speculation is faintly recognized in the ordinary 
attitude toward the bucket-rhop as compared to the stock 
exchange. It will be more clearly appreciated in the future 
when the exchanges themselves exercise a more rigid scrutiny 
over the actions of their members, and when business ethics 
will be lifted to a higher plane of social responsibility. At 
present speculation has its economic abuses as well as its 
economic function. 

156. Monopoly Profits. 

In the preceding discussion profits, whether ordinary, alea- 
tory or speculative, have been assumed to be subject to 
competitive influences. The free play of competition, how- 
ever, is often obstructed by natural or artificial barriers. When 
these obstacles are only partial, we speak of economic friction ; 
when they are complete, we are in the presence of monopoly. 
In the case of friction, the fortunate possessor of the tempo- 
rary advantages secures an extra gain, which, as we know, will 
ultimately disappear. In the case of monopoly the extra 

§ 156] Monopoly Profits. 367 

gain seems to be permanent. In a deeper sense, however, 
even monopoly profits are not permanent. This is due to 
the principle of capitalization, discussed above (ch. xiv). As 
soon as the monopoly producer disposes of his business, the 
profits are capitalized into the higher selling price, and the 
new purchaser will secure only the interest on the capital 
outlay. While monopolies are not often sold, the same result 
is reached through the modern corporate form of business. 
For here the securities, which entitle each holder to a share of 
the monopoly profits, are so influenced by the forces of the 
market that large dividends are at once capitalized into higher 
market prices, with the result that the net returns to the new 
purchaser will be only the current market rate of interest. 
Thus, under modern economic conditions, even monopoly 
profits tend to dissipate themselves. They are essentially 
transitory, except in the hands of the original owners. With 
the continual shifting of ownership, so characteristic of mod- 
ern life, the original possessors soon disappear. Since, how- 
ever, the original owners at any given time are an appreciable 
body, monopoly profits often assume a great importance. 

Monopoly incomes, like competitive incomes, are not limited 
to profits. A class of workmen may be able to restrict entrance 
to their trade or to prevent competition with it. In that case 
they would secure monopoly wages. Where the investments 
by banks, savings institutions or trust estates are confined by law 
to a specific kind of bond, there is virtually an element of 
monopoly in the price of that security. Where a particu- 
lar city plot is wanted for specific purposes, the element of 
superiority in the site approaches so close to monopoly that we 
can without gross error speak of a monopoly rent. Monopoly 
profits, however, like all profits, are a result of price. As we 
have already discussed the differences between monopoly price 
and competitive price, we may pass these by in this place with 
the mere reminder that monopoly profits are by no means 
without bounds. The two natural limitations on monopoly 
price, and hence on monopoly profits, are the existence of 


Profits. [§ 157 

substitution and of potential competition. In the first place, 
as we have learned (p. 256), even where the monopolist is 
securely intrenched, there is always a point of maximum mo- 
nopoly revenue depending on the price at which the greatest 
sales can be effected. Any increase of price above that point 
will lead to the falling off of sales through the substitution of 
some analogous commodity, and thus to a decrease of profits. 
The failure of the Secr^tan corner in copper was largely due to 
the unexpected use of substitutes, caused by the forcing up of 
the price. Secondly, when, as in many cases, the monopolist 
is subject to the potential competition not of similar com- 
modities but of other possible producers of the same commod- 
ity, his tendency to raise prices will be limited by the danger 
not only of a falling off in the general demand, but of the 
capture of a part of this existing market by some new-comer 
who is tempted by the prospect of similar profits. Within 
these limits, however, there is still a large field for the extra 
gains known as monopoly profits. 

157. Begulation and Justification of Profits. 

The demand for governmental control of profits comes from 
three sources, — those who object to ordinary profits because 
they oppose private property ; those who decry aleatory and 
especially speculative profits ; and thirdly, those who desire to 
eliminate monopoly profits. Let us discuss these in inverse 

( I ) Unrestricted monopoly profits, are of course, socially un- 
desirable. Even where monopoly is not in itself objectionable, 
as in special fields like transportation and certain municipal en- 
terprises, some substitute for the automatic regulative action of 
competition must be secured. Experience, however, has re- 
peatedly shown that this cannot take the form of a regulation 
of profits. The most recent attempt, as that of Massachusetts 
with the gas companies, has, like all its predecessors, been frus- 
trated by the ease with which profits can be adroitly diverted 
into the income of subsidiary enterprises. Efforts to regulate 

§ 157] Regulation and Justification. 369 

profits always result in profits nominally within the limit. The 
only two effectual ways to deflect monopoly profits to the pub- 
lic are either to regulate prices, which will prevent the profits, 
or to tax the enterprise, which will reduce the profits. The 
surest method, however, of eliminating monopoly profits is 
to eliminate the monopoly by keeping open the door of 

(2) Speculative profits, on the other hand, cannot be reached 
in this way. Monopoly can be distinguished from competition, 
but regular speculation cannot be sharply set off from ordinary 
business. The recent anti-option laws of Germany have either 
been ineffectual or have done harm in preventing the legiti- 
mate and economic benefits of speculation. To prohibit spec- 
ulation is to prevent the good as well as the evil. Taxation, 
again, is applicable only to certain aleatory profits. The effort 
to tax speculative profits encounters the well-nigh insuperable 
difficulty of causing the tax to be actually borne by the recip- 
ient of the profits. Finally, the prohibition of speculative 
prices is virtually equivalent to the futile prohibition of spec- 
ulation itself. 

(3) The opposition to ordinary profits emanates from those 
who deprecate the entire constitution of modern industrial 
society. According to Marx, for instance, profits are a defal- 
cation from wages. Since all value, according to him, is the 
product of labor, the surplus value which is called profits is 
a surplus filched from wages. The socialist theory of surplus 
value, however, is defective in four points : (a) It identifies 
labor with manual work and neglects the wages of superintend- 
ence ; (/) it ascribes value to labor, whereas labor is not the 
cause of value ; (c) it reduces the factors of production to one, 
whereas in actual life there are almost always more than one ; 
(^) above all, it overlooks the fact of marginal value. Even 
if we roughly state that prices vary according to cost of pro- 
duction, and even if for purposes of argument we concede 
that cost of production is reducible to wages, all this would 
apply only to marginal cost. The marginal producer, however, 


370 Profits. [§157 

normally earns no profits, and the surplus which is secured 
by the intramarginal producer may come from a dozen other 
sources than wages. In point of fact it is most unlikely to 
come from wages, since wages under competitive conditions 
are apt to be the same for the identical work in all the enter- 
prises, whether marginal or intramarginal. Profits are indeed 
a surplus, but they are not a surplus of the kind imagined by 
the socialists. The only way to get rid of profits is, as the 
socialists correctly state, to abolish private property in the fac- 
tors of production. The abolition of private property, how- 
ever, would be the abolition of progress. 

This, of course, does not imply that all existing profits are 
defensible. Fraud and chicanery still stalk abroad ; illegitimate 
privileges are seized or extorted ; unfair advantage is taken of 
weakness or ignorance ; public franchises are dishonestly ac- 
quired or inadequately compensated. All this is to say that 
many individuals are still on a low plane, and that the level of 
commercial morality is not so high as it ought to be and as 
it some day will be. This, however, does not touch the legiti- 
macy of profits as an institution. Profits honestly acquired are 
in the main an inevitable concomitant of private property. 
With monopolies reduced to a minimum, with special privi- 
leges abolished or adequately compensated, with speculation 
restored to its true economic function and with competition 
conducted on the high plane of honesty and fair dealing, 
profits will be purged of their alloy and will stand forth in 
their true light as the legitimate fruit of energy and foresight. 


158. References. 

J. B. Clark, Distribution (1899), chs. xiii, xxiii; F. A. Fetter, Princi- 
ples (1904), ch. X ; A. S. Johnson, Rent in Modern Economic Theory, chs. 
iii, iv ; A. Marshall, Principles ( 1898), bk. v, chs. viii-x, and bk. vi, ch. ix ; 
N. G. Pierson,/'/-/««>!>/^j (1902), part i, ch. ii; W. S. Jevons, TAeoryiiSSS), 
ch. vi; H. Sidgwick, Principles (1883), bk. ii, ch. vii ; F. v. Wieser, 
Natural Value (1893), bk. iii, part 2; T. N. Carver, Distribution {1904), 
ch. V ; A. W. Flux, Principles (1904), ch. vii ; H. R, Seager, Introduction 
(1904), ch. xii; The Relation between Rent and Interest (A Discussion in 
Am. Econ. Assoc. Publications, New Series, V, 1904) ; M. Pantaleoni, 
Pure Economics (1898), part 3, ch. iv; J. S. Nicholson, Principles (1893- 
1901), bk. ii, ch. xiv, and bk. iv, ch. v; W. Smart, Distribution (1899), 
ch. xxvi; R. M. Hurd, Principles of City Land Values (1903); T. E. 
Cliffe Leslie, La7id Systems of Ireland, etc. (1870); A. G. L. Rogers, The 
Business Side of Aj(riculture {1904) ; W, H. Dawson, The Unearned Incre- 
ment (1890) ; H. George, Progress and Poverty (1879) ; E. R. A. Seligman- 
Essays in Taxation (1904), ch. iii ; A. H. Stone, A Plantation Experiment 
(Quart. Jour. Econ., XIX, 1905) ; J. B. Clark, Essentials (1907), ch. x. 

159. Nature of Rent. 

Rent, as we have learned, is the product of, or income from, 
the single use or succession of limited uses of a thing, and 
rental value is to be contrasted with capital value. In ordinary 
parlance, however, rent signifies the money payment to the 
owner for such a limited use. According as we regard it from 
the point of view of making or of receiving the payment, to 
rent anything is to dispose of or to pay for its use. When 
the social conditions are such that some one commodity is 
commonly rented instead of sold, its income in general is apt 
to be called rent. This was true of land during the middle 


372 Rent. [§ 159 

ages in Europe, and is still true in those countries where 
mediaeval customs survive or where modern conditions have 
brought about a relation of landlord and tenant. Since most 
of the land is rented, rent has come to mean the income from 
land, whether rented or not ; and since the chief thing that is 
usually rented is land, rent is often made synonymous with the 
income from land alone. 

It is obvious, however, that this is doubly confusing. In the 
first place, in some countries land is more commonly sold than 
rented. This is the case with agricultural land in a community 
of peasant proprietors or of individual farmers ; and with urban 
land in all those districts where the inhabitants, rich or poor, own 
their homes. When land is sold instead of rented, the pro- 
ceeds certainly do not constitute a rent. They should rather 
be called a capitalization of the rent, because iliey involve a 
payment for all future uses. Secondly, other things are often 
more commonly rented than is land. Apart from the fact that 
the rental of real estate frequently includes the rent of a house, 
which is economically distinct from the land, men may live in 
their own houses and yet rent telephones by the year, carriages 
by the month, plants by the week, and awnings or table fur- 
nishings by the day. Land rent is qualitatively only an in- 
significant part of all rent. 

Nevertheless, land is quantitatively so important as compared 
with any other single commodity, and possesses so unique a 
social significance, that the income from land merits a separate 
study. It must be remembered, however, that the utility of 
such an independent discussion emerges only when we regard 
society from the point of view of change, — that is, when we 
consider rent historically, or compare the growth of land rent 
with that of other rents. If we take a cross section of society 
at any moment, and analyze the distribution of the social 
income, the rent of land is to be explained in no different way 
from that of other things. The rent of land is its economic 
product, that is, the contribution of land over and above that 
of the labor and the capital employed on the land. The law 

§ i6o] Land Rent. 3-73 

which at any given moment governs the relation of the land to 
its product is the same as that which governs the relation of 
any economic good or factor of production to its product. 
Much confusion has resulted from the failure to observe this 

The traditional law of rent, for instance, includes three state- 
ments : rent is the result of the law of diminishing returns ; 
rent is a differential or surplus over marginal or no-rent 
land ; rent is not a part of cost of production. So far as 
these statements are true, however, they are not peculiar to 
land rent. 

160. Relation of Land Rent to Other Rents. 

The law of diminishing returns is indeed the foundation of 
the law of rent. A farmer will sometime reach a point where 
it will not pay him to add another laborer or another machine 
to his land, because beyond the margin of profitable expendi- 
ture every additional " dose " of capital or labor will mean 
a return insufficient to cover cost. In every case he will reach 
the extensive or intensive margin of the utilization of land. 
This, however, is not peculiar to the landowner. The capitalist 
will also reach a point where it will not pay him to buy more 
machines of a certain kind, or to build another factory devoted 
to some particular product ; and the laborer will reach the point 
where he cannot profitably work any longer. The law of 
diminishing returns is universal, and applies to everything that 
possesses value (§ S8). If it explains the rent of land, it will 
equally explain, as we shall see, the interest of capital and the 
wages of labor. 

Secondly, it is said that land rent is a differential or surplus. 
So, however, is every other kind of rental value. The value 
of everything is a differential or surplus as compared with the 
value of something else lower down in the scale. It may be 
claimed that land rent differs from other rents in that the land 
at the margin is no-rent land, and that land rent is therefore 
due to the differences in the productivity of good land over 

374 Rent. [§ i6o 

no-rent land. To this the obvious rejoinder may be made that 
we can equally well speak of the no-rent machine or the no- 
rent factory. The reason that we do not commonly use such 
terms is because machines and factories are not so frequently 
rented as is land. The principle, however, is identical. The 
land at the margin may be so poor that no rent will be paid 
for its use ; but the machine at the margin may also be worth- 
less in just the same sense. In fact, as we have seen in the 
last chapter, the existence of profits depends upon the surplus 
earnings of the intramarginal producers. It makes no differ- 
ence whether the marginal producer uses poor land or poorly 
situated land or poor machinery or poor buildings or poor 
workmen, he will earn no surplus. From this point of view 
rent is analogous to profit : profit is the surplus over the income 
of the no-profit producer ; rent may be said to be the surplus 
over the income from the no-rent commodity. This has led 
some writers like Walker to maintain that the laws of profit 
and rent are identical. 

It would be an error, however, to press too closely this 
analogy between rent and profit. In the first place, rent is a 
surplus only in the sense that everything positive is a surplus 
over zero, — a statement which is of little help. The rent of a 
boat is a surplus over that of a no-rent boat ; the wages of a 
laborer is a surplus over that of the convict or no-wage laborer ; 
the interest of capital is a surplus over the capital so invested 
as to earn no interest. But secondly, if we regard rent as a 
surplus, it differs from profit in that rent is a permanent, and 
profit a transitory, surplus. If a machine is used in a factory, 
a certain part of the product will be traceable to it ; that is, it 
will earn a certain return or rent for its owner. Under free 
competition the price of that machine will be, as we know, the 
capitalization of its rent, due regard being had to the number 
of machines. In a state of normal equilibrium the conditions 
of supply and demand will so adjust themselves that the mar- 
ginal producer will in the long run give for a commodity only 
what he can get out of it, and others will not give more. If 

§ i6o] Land Rent. 


all the machines are precise duplicates and are worked under 
the same conditions, their earnings or rent will in the long run 
be equivalent to the interest on the capital invested in them. 
It will be a permanent return as long as the machines work in 
unimpaired efficiency. If the machines did not earn the rent, 
no one would buy them at that capitalized price. On the other 
hand, the only way in which profits can be secured is by the 
owner working his machine under different conditions, that is, 
by giving it more care and combining it with different propor- 
tions of labor or land, taking advantage of variations in the 
market, and so on. These profits, as we know, are under com- 
petitive conditions essentially transitory, and will disappear un- 
less renewed by the use of new machines or a new shifting of the 
productive factors. If better machines, however, are used, the 
surplus gains secured by the producer are really the difference 
in the rent or product of the good machine over that of the 
poorer machines of his competitors. To the extent that his 
profits are a differential derived solely from the use of the 
better machine, he can enjoy them only as long as he guards 
the secret, that is, as long as he retains a monopolistic advan- 
tage. Even in the case of monopoly, however, the profit, as we 
know, will disappear through the process of capitalization as 
soon as the machine or the business changes hands. Thus, 
while the rent is permanent, the profit is transitory. 

Precisely the same is true of land rent. If in a certain 
section of a city, where for a long time there has been no 
change, there are a hundred equally desirable contiguous lots, 
each of them will rent for the same amount. The rent is a 
differential only as compared with less eligible sites yielding a 
lower rent, and finally with land on the outskirts, which, like 
the Hoboken flats near New York, is worthless for residential, 
business, farming or other purposes, and which therefore has 
no capital value because it yields no rent and no product. 
Competition among the hundred lots will inevitably keep the 
rent of all at a point corresponding to the interest on their 
capital value. The landowner can earn no surplus on this 

376 Rent. [§ 161 

investment as long as conditions do not change. If, however, 
a new street is opened, or for some reason one of the lots 
acquires a higher rent, the landowner will secure a surplus over 
the interest on the original purchase price. Whether this sur- 
plus is called profit or rent is often thought to be immaterial : 
in point of fact, when a man sells his land he calls it profit ; 
but until he sells he calls it rent. Strictly speaking, however, 
the annual rent is the total periodic return of the land, the 
profit only the surplus of this periodic return over the cost, 
or in this case over the interest on the invested capital. As 
soon as the plot is again sold, the price which yields the old 
owner the profit is necessarily the price at which the rent will 
yield the new owner only interest on the capital. Profits are 
thus automatically extinguished by transfers. Rent is perma- 
nent as long as the rent-bearing investment lasts ; profit disap- 
pears each time that it is capitalized into a new selling price. 
The difference between rent and profit is applicable to land 
just as to other things. 

161. Rent and Price. 

Thirdly, it is stated that land rent is not a part of cost, and 
that high rents are therefore a result, not a cause, of high 
prices. It is no doubt true that if wheat is raised on land 
which differs in fertility or situation, competition will force the 
price of all the wheat of the same grade up to the cost of 
the marginal producer, that is, the farmer on the poorest land. 
The intramarginal farmer will secure a surplus ; and if we call 
this differential surplus rent, it may be said that this differential 
does not enter into the price. Precisely the sarne, however, is 
true of every other share in distribution. Substitute for the 
plots of land sewing-machines rented out by the month or 
year. Some of the machines will turn out, let us say, more 
vests of the same quality than others. All the vests will sell 
at the same price, namely, the cost of the marginal producer 
with the poorest machine, and the difference between the 
marginal product and the output of the better machine will 

§ i6i] Rent and Price. 377 

under competitive conditions go as a surplus rent to the owner 
of the better machine. The surplus seems to be not a part 
of the price. Again, different employers may utilize different 
grades of workmen to fell trees or to build railways. One uses 
a three-dollar American, another a two-dollar French Canadian, 
another a dollar Italian. Yet, as Lord Brassey discovered in 
railway construction, the high-price workman is not really 
more expensive, because his output is greater. If he did not 
earn the higher wage, he would not in the long run get it. 
Since all the trees sell at the same price, namely that of the 
marginal producer who is using the least efficient workmen, the 
higher wage of the American represents a surplus product or 
labor rent over the low wage of the Italian. If we say that 
the higher rent of the good land does not enter into the price 
of wheat, we can equally well say that the higher wage which 
represents the surplus product of the American does not enter 
into the price of trees. The good land rents or sells for more 
because it produces more, — the rent is the product : the 
high-grade laborer secures higher wages because he produces 
more, — the wage is the product. The wages of every differ- 
ent grade of workman are a differential in the same sense as 
the rent of different grades of land or capital is a differential. 

It will be said, however, that there is a distinction, because 
even the lowest wages are beyond peradventure a part of the 
cost. So, however, is the rental paid for the worst wheat land. 
The confusion arises from supposing that the worst wheat land 
is no-rent land. It is indeed no-wheat-rent land; but this 
may still be worth a considerable sum per acre, because it can 
be used for other purposes. If the farmer cannot permanently 
earn an income from wheat, he will raise other less valuable 
cereals, or vegetables, or hay, or use the land for pasture. Every 
piece of marginal land — that is, the poorest land in use for 
some particular product — is worth something for the raising 
of a less valuable product, until we finally reach land that is 
worth nothing for any purpose. In the cost of the wheat, there- 
fore, there must always be included the rent which the marginal 

378 Rent. [§ 161 

(or no-wheat-rent) land would earn if employed for the next 
lower use. 

Furthermore, not only must the marginal rent always be in- 
cluded in cost and therefore in price, but in a higher sense 
the differential rent, as a permanent phenomenon, also affects 
the price. The rent of anything is its product ; the greater 
product of the better land forms as much an element of the 
supply as the smaller product of the poorer land, and price de- 
pends on the relation of the total supply to the total demand. 
If the better land yielded less, the total supply would be 
smaller and the price would rise, thus leading to the culti- 
vation of a new marginal land. Price in general, as we know 
(§ 112), is not fixed by the marginal or maximum cost but 
at the marginal cost, and the margin depends upon the output 
of the better grades, receding as this increases, advancing as 
it falls. Every bushel of wheat, whether it comes from good 
or poor land, affects the supply, the price and the margin. 

To say that rent does not enter into price is doubly con- 
fusing, not only because it implies that land rent differs in 
this respect from other rents, but also because the general 
statement is itself misleading. If two different instruments or 
two different grades of the same instrument are permanently 
used to produce a certain commodity, their rent or permanent 
contribution to the product will of course differ. If the owner 
of the better grade is magnanimous enough to present this 
permanent surplus to the one who rents the instrument, that is, 
if he remits the rent, it will indeed make no difference in the 
price as long as the product is finally sold on the market. In 
this sense only can it be said that rent does not enter into 
price ; for the price will be uninfluenced by the fact whether 
the owner retains or foregoes the rent. If he remits the rent, 
it will disappear so far as he is concerned, and the rent will 
in that sense not enter into price. It is clear, however, that 
what really disappears is not the rent, but its original owner- 
ship. The rent still exists, although it is now in the hands 
of the tenant. If a sewing-machine company gave certain 

§ i62] Growth of Land Rent. 379 

operators the use of the machine free of rent, and if the 
vests were sold at an unchanged price, the rent would stay in 
the hands of the operators instead of the company. The only 
way the rent can be made to disappear is to destroy the 
product. The transfer of ownership does not blot it out. The 
rent of the better instrument is the product of the better instru- 
ment. Each unit in the supply is a part of the total product 
or total rent, and must therefore affect the price. Hence 
the rent or product of any instrument of production, whether 
it be land or capital or labor, whether it be marginal or differ- 
ential rent, is really an element in the price, in the sense that 
were it not for that product the price would be different. 
Land is here in precisely the same position as other things. 

Notwithstanding these analogies of land rent to other rents, 
however, there remains one difference to which attention has 
already been called. In the case of so-called manufactured 
commodities, increase of demand and production often goes 
hand in hand with lower price ; in the case of land increase of 
demand generally means higher price. The supply does not 
respond to the demand with the same rapidity. Land is 
indeed not alone in this respect, for the same is true of many 
things that cannot be duplicated or easily reproduced. Land 
is, however, of such overwhelming importance, as compared to 
those other things, that when we consider its influence on the 
progress of value it is usefully contrasted with them. We 
shall therefore proceed to consider more specifically the rent 
of land. 

162. Growth of Land Rent. 

A distinction is sometimes drawn between land rent and 
ground rent : the former is the rent of land for securing 
some material produce, the latter the rent of ground used as a 
building site. Practically the distinction is one between agri- 
cultural and urban land. Strictly speaking, however, rural land 
can be utilized for other than agricultural purposes, while 
land within the city limits is sometimes used for agriculture. 

380 Rent. [§ 162 

According to some authors land rent arises from the fact that 
the price of agricultural products is the same while the cost 
of production differs ; ground rent, from the fact that prices 
differ while the cost of production remains the same. This, 
however, is inaccurate. Ground rents differ for precisely the 
same reason as land rents, that is, because city lots, like 
country tracts, vary in their power of affording utilities. Both 
are productive, even though they produce different kinds 
of utilities; the rural land has a value because its material 
products are wanted, the urban land because it is needed as 
the support of a house or the meeting-place of human beings. 
To assert that the value of land is due to fertility or in- 
equality or scarcity or monopoly is either half true or inade- 
quate. Situation is as important as fertility. Inequality is a 
measure of the diiference in value, not the cause of value. 
Scarcity is an ingredient in the value of every economic good. 
Monopoly may perhaps be predicated of particularly choice 
sites, but hardly of land in general, the different qualities of 
which shade into each other by imperceptible gradations, from 
the vast mass of unoccupied land upward. The rent of each 
piece of land is due to its productive efficiency, and the rental 
value of any plot is the expression of its marginal contribution 
to the product. 

In discussing the growth of rent, therefore, the location of the 
margin becomes of importance. We must remember the dis- 
tinction in § 73 between the economic and the non-economic 
margin. The margin may be at such a point that the value of 
the contribution is zero. Here we have the non-economic 
margin. This may be due to the fact that the land is either so 
abundant or so poor in situation or fertility that the value of 
the produce will only just remunerate the labor or the capital 
employed. The product must normally suffice to pay current 
wages on that grade of labor or current interest on that class of 
capital, because otherwise that labor and that capital would be 
withdrawn to other enterprises. But there will be no surplus. 
The land, in other words, will yield no rent, because its contri- 

§ i62] Growth of Land Rent. 381 

bution at the margin is zero. The value of the joint product is 
due wholly to the labor and the capital. 

If, however, population grows so that the same product now 
acquires an increased value, there will be a surplus ascribable 
to the land. If all the land were of the same grade, and if it 
remained unaltered in quantity, this surplus would be divided 
equally. Since, however, land differs in fertility and situation, 
any increase in the demand will result in the better grades 
securing the greater part of the surplus, while the land formerly 
at the margin will yield a small surplus, and land hitherto un- 
utilized will become a new margin, yielding mere wages and 
interest. If for some reason the supply of land cannot be in- 
creased beyond a given point, the intensive margin will be 
moved up, and the marginal or poorest land will now also yield 
a surplus. The intensive margin now becomes a base from 
which the surplus of all land is calculated. 

The simplest illustration is urban land. If a cross roads 
hamlet springs up in the centre of an agricultural district, the 
land previously of use only for farming purposes yields an ad- 
ditional rent as the site of cheap wooden structures. The 
margin has been extended. As population and prosperity in- 
crease, the hamlet grows into a village, a town, a city, and the 
successive tracts acquire a rent so high that the cottage gives 
way progressively to the brick building, the stone mansion and 
the steel sky-scraper. Just as we speak of pasture land or 
wheat land or truck gardening land, so we can speak of cottage 
sites, brick-building sites, stone-mansion sites and sky-scraper 
sites. Each class of land can be best utilized for certain pur- 
poses, and there are as many margins as there are classes. 
With every change each margin is pushed farther out, the dif- 
ference in the rent of all intermediate sections being finally in 
proportion to the distance of the lowest margin or suburban 
farm area from the centre. The location of the margin de- 
pends on the extent of the demand as modified by the means 
of transportation. Each addition to the demand will call forth 
an addition to the total supply, but since this addition can 

382 Rent. [§ 162 

come only at the fringe, it is an increase of less eligible land. 
Increased demand for houses can be met by building equally 
good houses ; increased demand for sites can be met only by 
less eligible sites. Under ordinary conditions of progress, there- 
fore, ground rent may be expected constantly to increase. 

The expectation may, however, be frustrated not only by the 
fact that different sections of the city may prosper unequally, 
but also by the fact that an improvement in the means of trans- 
portation may decrease the relative eligibility, and therefore the 
rent, of intermediate sections. These practical considerations 
have an important bearing on the problem of the shifting of a 
tax on ground rent as compared to house rent. 

In the case of land rent the interference with the normal 
growth is more pronounced than in the case of ground rent. 
While it is ordinarily true that the best lands will be first culti- 
vated, it has happened in many parts of the world that the less 
fertile lands on the hillsides were preferred because they were 
relatively safe from the incursions of marauders. With the ad- 
vent of peaceful conditions, recourse was had to the better 
lands in the plains or valleys, with an ensuing fall in the rent of 
the original tracts. The same result is often brought about by 
the opening of fertile lands in newer sections. The entrance 
of the middle and far West into the international market, with 
the consequent increase of supply and lower price of wheat, has 
resulted in a great fall in rents in those parts of New England 
and Europe exposed to the competition. Finally is to be 
noticed the effect of agricultural improvements. If they apply 
to all lands, they will lessen the cost, make possible the relocation 
of a new and lower margin, and reduce the price and therefore 
the rent of all lands. If the improvements remain, for a time 
at least, the exclusive possession of the more ingenious or 
capable farmers, whereby their share of the increased output 
more than outweighs the reduction in price, their rents will in- 
crease. If this advantage accrues to entire sections or coun- 
tries, the rent in them will grow at the expense of the others, 
just as in consequence of improvements in transportation the 

§ 163] Land Rent and Tenure. 383 

rents in the far West of America have increased, while those in 
New England have diminished. 

Whether land rents in general, at any given period, will in- 
crease or decrease depends thus on the relation of population 
to improvements. Growth of population or an elevation of the 
standard of hfe means increased demand; improvements in 
production or transportation mean increased supply. When 
the population keeps ahead of the improvements, rents will 
rise. When the improvements keep ahead of the population, 
rents will fall. Since, however, the demand for food is nowa- 
days of an international character, a rise of rent in those coun- 
tries or sections which possess or retain the advantage of the 
improvements will still be compatible with a general increase 
in population. In modern times the increase of population is 
more and more due to the growth of industry, which is again 
ascribable to improvements in production. At bottom, therefore, 
the growth of rent depends on the relative rapidity of improve- 
ments in industry as compared with those in agriculture or in 
industry applied to agriculture. Since there is on the whole a 
broader field for industrial improvement, it may be surmised 
that ultimately land rents will normally rise. For long periods 
in history, however, land rents may remain stationary or even 
decline, not only in particular countries, as at present, but in 
the world at large. 

163. Land Rent and Land Tenure. 

Since land rent is the permanent surplus or periodic prod- 
uct of the bare land, it is to be distinguished from what often 
seems to be the total return of the land. If a man works the 
land, a part of the product is really wages ; if he applies con- 
crete capital to the land, another part is really the rent of 
those instruments, which in the long run must be equivalent 
to the interest on the capital invested in them ; if he com- 
bines the factors, so that for the time being he can undersell 
his competitors or secure a greater output at the same price, 
still another part of the product is profits. The wages and 

384 Rent. [§ 163 

the interest are permanent ; the profits will disappear as soon 
as they are capitalized into a higher seUing value of the land 
or as soon as the methods of the more successful cultivator 
become general. 

When a farmer owns and works the land, it is difficult to 
distinguish these various shares in the product. When the 
owner supplies the land and part of the capital to the tenant 
who does the work, it is slightly easier to disentangle the 
shares. When the proprietor furnishes the land and the ten- 
ant does all the rest, we have the simplest example. In such 
a case the contract rent paid by the tenant in money or in kind 
is the economic land rent proper ; the surplus above the con- 
tract rent represents his wages as well as the interest on his 
invested capital and his profits. The wages and interest, as we 
shall soon learn, are f<xed amounts, while any excess which he 
can for the time b^Ing retain constitutes his agricultural profits. 
If, however, the profits are due to improvements the secret or 
knack of which the tenant cannot permanently retain — as, 
for instance, the use of new manures or of better crop rota- 
tion — they will disappear. According to the conditions of 
the market the surplus will either be dissipated into lower 
prices for the produce, or, on the contrary, will be converted 
into a higher rental value of the land. The only permanent 
constituents of the output or price under competitive condi- 
tions are wages, interest and rent. 

The contract rent paid in money or in kind for any plot of 
land thus tends under competitive conditions to be equal to 
that sum which will just enable the marginal or least efficient 
tenant to make normal wages and interest. From the point of 
view of profits it is a non-economic margin (§ 73) ; from 
that of interest or wages, an economic margin. That is, the 
tenant at the margin makes no profits, but if he did not get 
back his interest on capital he could not afford in the long run 
to use the capital, and if he did not earn current wages he 
would become a wage-earner. The competition for different 
plots of equally good land tends to force the rent up to the 

§ 163] Land Rent and Tenure. 385 

point where no profits are left for the least efficient competitor. 
The rent paid for land is thus the amount that is produced 
by the marginal farmer in excess of wages and interest. 
Under competitive conditions this excess goes to the owner, 
while any temporary surplus goes as profits to the tenant. 

Under actual conditions the contract rent may diverge from 
the pure economic rent. This is due to economic friction. 
Economic rent may be defined as the rent which an intel- 
ligent tenant who enjoys complete mobility of labor, who has 
an alternative investment for his capital and who is thor- 
oughly acquainted with the conditions of the market, could 
afford to pay. But where there is ignorance, lack of opportu- 
nity or lack of mobility on the part of the tenant, actual rent 
may be higher than economic rent. On the other hand, 
where for social or other reasons the owner does not exact the 
uttermost farthing, the actual rent may be lower than the eco- 
nomic or rack rent. This, however, is just as true of other 
rents as of land rents. 

While the simplest form of land rent is that for the use of 
the bare land, experience has shown the utility of a different 
method. This is known in Europe as the metayer plan and in 
America as the share system, because the.owner and tenant 
share in the factors of production and therefore in their re- 
muneration. Share tenure is thus contrasted with cash tenure, 
where the tenant pays a cash sum for the use of the land and 
keeps the rest of the product. The most complete develop- 
ment of this has taken place in the Southern states, where no 
less than three . important variations of the share system are 
found. They are known as the cropping system, the " third 
and fourth " and " standing rent " methods. In all cases the 
owner furnishes free of charge a dwelHng-house, wood and 
water, pasture for pigs and cows and a small plot for a truck 
patch. In the cropping system the tenant or cropper does all 
the work and supplies his own food ; the landlord furnishes 
seed, farming implements, animals and half the fertilizer. He 
also bears half the expense of ginning and wrapping the cot- 


386 Rent. [§ 163 

ton. The crop is then divided equally, and the system is hence 
sometimes called farming "on halves." In the "third and 
fourth " system the owner provides everything except the 
labor, the tenant getting one-fourth of the crop ; or the tenant 
furnishes in addition his own food and receives one-third of 
the crop. More commonly, however, the same name is 
applied to the system where the tenant furnishes labor, tools 
and animals, while the owner gives only the house and land, and 
therefore receives only one-third of some crops, like grain, and 
a quarter of others, like cotton That is, the landlord and not 
the tenant gets the third or the fourth part of the product. 
In such cases the " third and fourth " renter occupies a rela- 
tively higher position than the mere cropper. In the case of 
" fixed " or " standing rent " the landlord furnishes nothing 
except the minimum mentioned above as common to all share 
systems, and likewise exercises no supervision over the labor of 
the tenant. The "standing rent" system always calls for the 
production of some specific commodity, while in the money or 
cash rent system the tenant is free to do as he likes. " Standing 
rent " is thus the nearest approach of the share rent to the 
money rent, and is naturally the one suited to the better grade 
of tenants. In Europe other variations of the system are 
introduced by the apportionment of taxes between owner and 

The subject of land tenure has become so important because 
of the connection between the payment of the rent, the energy 
of the cultivator and the productivity of the land, as well as 
because of the social consequences of land ownership. Under 
the feudal system there was an almost complete divorce 
between owner and cultivator. With the growth of prosperity 
the serf gradually became a free tenant, and in some parts of 
Europe the tenant has become a peasant proprietor or inde- 
pendent farmer. In Ireland the transition is still in process, 
and has been much facilitated by the series of laws which 
began in the seventies and culminated in the Land Purchase 
Act of 1003. In the United States, which was (except in the 

§ i63] 

Land Rent and Tenure. 


South) almost from the beginning the home of independent 
farmers, there has been during the past few decades an increase 
in the proportion of farm tenants to farm owners. This is 
apparent from the following table : 

Number of Farms Operated by 

PerCeiitnf Farms 
Operated by 



1 otai 
Number of 


-, •■»■ 



. «« 





in V 



in V 






The United States. 

























North Atlantic 


























South Atlantic 
























1 1.6 


North Central 


























South Central 

























Western Division. 

























Alaska & Hawaii. 









It would, however, be a mistake to assume that the tenants 
are growing at the expense of owners. Both owners and ten- 
ants are increasing, even though the tenants are increasing 


Rent. [§ 164 

faster. In 1900 there was one farm owned for every 14 
persons outside of cities of 8,000 inhabitants and over. In 
1850 the ratio of all farms of whatever description to the pop- 
ulation outside of such cities was precisely the same — i to 14. 
It is clear, then, the number of farms cultivated by the owners 
has grown faster than the non-urban population. This means 
that the increase of tenants has come not from previous farm 
owners or their families, but from previous farm hands or hired 
men. The growth of farm tenancy, therefore, is a step forward, 
not backward, in the condition of American agriculture. The 
burning problem in the South is whether the negro farmers 
possess or can be made to attain the qualities fitting them for 
successful tenant farmers rather than for laborers on the large 
plantations, which are again beginning to develop. 

164. Justification of Land Rent. 

The question of the justification of rent is one not of its ex- 
istence, but of its disposition. Since rent is as much a part of 
the product as wages, to query the justification of rent is in 
one sense as unmeaning as to query that of wages. The rent 
which a tenant pays is fixed by economic law ; whether he 
hands it to a private individual or to the government is imma- 
terial so far as its existence is concerned. The point at issue is : 
who should get the rent, the individual or the government. 

Private property in land rents is attacked from three sides. 
The communists assail it because they condemn all private 
property. The socialists assail it because they hold that the 
private control of any factor of production, except that of 
the laborer by himself, involves a robbery of the laborer. 
The land nationalizers and single-taxers assail it because of an 
alleged distinction between land and capital. Although the 
arguments of these three assailants are mutually destructive, 
we shall confine ourselves here to the last class, inasmuch as the 
arguments of the communists and socialists are not peculiar 
to property in land. 

According to the single-taxers land rent is held to be a 

§ 164] Justification. 389 

monopoly privilege, and land value is claimed to be a social 
product. For both reasons the land would then be unsuited 
to private ownership. 

In the first place, however, we have seen that monopoly can- 
not well be predicated of land in general. Worthless land 
exists in abundance. From the worthless to the priceless 
lands, however, there is a continual gradation, and it is impos- 
sible to say where relative abundance and competition stop 
and monopoly begins. Even, however, if the fact of privilege 
is substantiated, it is not competent to single out land. Many 
other privileges are granted by modern society. Patents and 
copyrights are exceedingly valuable, even if temporary, privi- 
leges. The institution of inheritance, whereby society confers 
upon individuals the right of receiving that for which they are 
in no wise responsible, is a privilege which in importance 
almost transcends that of property in land. Certain corporate 
franchises constitute privileges, the value of which may be 
only in part referable to the land. That all such privileges 
should be paid for is indeed a legitimate demand ; but to 
claim that this payment should be extended to the point of the 
total value of the land would logically lead to the similar claim 
that the total value of all inheritances, franchises, patents and 
copyrights should be taken by the state. 

Secondly, the assertion that land value differs from other 
values in that it is a social product involves the contention that 
the value of other things is an individual product. Individual 
labor, however, has never by itself produced anything in civil- 
ized society. Take, for example, the workman fashioning a 
chair. The wood has not been produced by him ; it is a gift 
of nature. The tools that he uses are the results of the con- 
tributions of others ; the house in which he works, the clothes 
he wears, the food he eats (all of which are necessary in civil- 
ized society to the making of a chair), are the result of the 
contribution of the community. His safety from robbery and 
pillage — nay, his very existence — is dependent on the cease- 
less co-operation of the society about him. How can it be 

390 Rent. [§ 164 

said, in the face of all this, that his own individual labor wholly 
creates anything? If it be maintained that he pays for his 
tools, his clothing and his protection, it may be answered that 
the land purchaser also pays for the land. Nothing is wholly 
the result of unaided individual labor. No one has a right to 
say, " This belongs absolutely and completely to me because 
I alone have produced it." All value is a social product. 

It may be contended, indeed, that the landowner does 
nothing, while the carpenter, at all events, does something. 
This can apply, however, only to the absentee owner of agri- 
cultural land or to the holder of city land. Under the modern 
form of corporate investment, moreover, even this distinction 
is robbed of much of its importance. Suppose that I invest 
my capital in land or in the shares of a street railway, a news- 
paper or a bank. At the end of ten years I return and find 
that land values have increased, but I also find that the 
same cause — the growth of population and prosperity — has 
equally enhanced the value of my railway, newspaper and 
bank stock. It is indeed true that the growth of the corpora- 
tion calls for a continually abler manager, but the only contri- 
bution that I personally have made to the increased value 
may be a chance vote by proxy for a new board of directors. 
To all intents and purposes the increment is well-nigh as 
"unearned" in the one case as in the other. 

It may nevertheless be conceded that there is a difference 
to this extent, that ultimately the ownership of the capital con- 
trols its management and conditions its most effective social 
utilization. This difference, however, does not suffice to con- 
vert all land values into " unearned increments" and to make 
the increased values of other things " earned." At best it can 
only justify a somewhat higher rate of taxation on land. The 
single-tax movement undoubtedly has a practical validity to 
the extent that it emphasizes the advantages of exempting cer- 
tain classes of personal property from taxation for local pur- 
poses ; but so far as it endeavors to abolish every other form 
of taxation, or so far as it purports to afford a solution of a 

§164] Justification. 391 

great social problem by confiscating land rents, it is sadly in- 
adequate. Private property in agricultural land has been 
developed in the course of long centuries as the most effective 
means of spurring on the cultivator to the best methods, and 
thus uniting individual and social interests. To distinguish 
between the social and the individual causes of agricultural 
rent is impossible. The validity of agricultural rents, however, 
involves that of other land rents as well. It is only when the 
control of land by individuals becomes a distinct menace to 
social interests that its rigid regulation, or even its assumption 
by the community, becomes legitimate. 


165. References. 

T. N. Carver, Distribution (1904), ch. vi ; J. B. Clark, Distribution (1899), 
chs. xii, xiii ; F. A. Fetter, Principles (1904), ch. xvi; A. Marshall, 
Principles (1898), bk. vi, ch, vi ; G. Cassel, The Nature and Necessity oj 
Interest (1903) ; E. v. Bohm-Bawerk, Positive Theory of Capital (trans, by 
Smart, 1891), bk. vii, and Recent Literature on Interest (trans, by Scott, 
1903) ; N. G. Pierson, Principles (1902), part i, ch. iv ; F. v. Wieser, Natural 
Value (trans, by Malloch, 1893), bk. iv; W. S. Jevons, Theory (1888), ch. 
vii; H. Sidgwick, Principles (1883), bk. ii, ch. vi; A. W. ¥\\ix, Principles 
{1904), ch. vi ; M. Pantaleoni, Pure Economics (1898), part 3, ch. iii; 
J. S. Nicholson, Principles, bk. ii, ch. xiii ; J. A. Hobson, Ecojtomics (1900), 
ch. viii ; H. R. Seager, Introduction (1904), ch. xiv; G. Billeter, Ge- 
sdhichte des Zinsfusses itn Griechisch-romischen Alterthum bis auf Justinian 
(1898) ; W. J. Ashley, English Economic History (1893), II, ch. vi ; H. C. 
Lea, Ecclesiastical Treatment of Usury (Yale Rev., II, 1894); G. K. 
Holmes, Usury in Law and Practice (Pol. Sci. Quart., VII, 1892). 

166. Nature of Interest. 

To the ordinary man interest seems to be the payment for 
a loan of money, precisely as wealth seems to consist of a sum 
of money. In point of fact, however, interest is paid for the 
use of the capital which the money represents. It is the 
earnings or product of the fund of capital, just as rent is 
the earnings of the individual pieces of capital. Interest is 
commuted rent, or the calculation form of rent. Just as a 
business man must deduct the rent or royalty of some patented 
machine used by him before computing his profits, so, if he 
buys the machine outright, he must deduct the interest on 
the capital invested in the machine. Whether he uses his 


§ 1 66] Nature of Interest. 393 

own capital or borrows it is immaterial ; in the latter case it 
is loan or contract interest, in the former it is natural or 
economic interest. The distinction is the same as that 
which we have learned between contract and economic rent. 
Whether he pays the interest to another in virtue of some 
contract or keeps it makes no difference. The amount of 
interest, however, is not the same thing as what is usually 
called the rent of the particular machine. For the fund of 
capital is represented by many other concrete commodities 
besides machines. Total interest is always total net rent; 
that is, the total net product of the entire fund of capital must 
be the same as the total product of the aggregate of all the 
individual pieces of capital. But this is very different from 
saying that the interest on a thousand dollars is the same as 
the annual gross rent of a particular machine costing a thou- 
sand dollars. 

This is due to the fact that rents and capital values of single 
commodities are as different as the commodities themselves. 
They run through the whole gamut of value from zero to well- 
nigh incalculable sums. Capital, as a fund, on the other hand, 
is a unit. Pieces of capital are heterogeneous ; a fund of cap- 
ital is homogeneous. There is no rate of rents or of capital 
values ; there is a general rate of interest. Interest on a 
thousand dollars may be fifty dollars ; a machine and a horse 
may cost a thousand dollars, and yet they may rent for very 
different sums because of their unequal durability. If all 
concrete units of capital were alike in productivity and if 
there was no question of durability, rent would always be the 
same as interest. It is precisely because individual pieces of 
capital are not alike that rent differs from interest, although 
total rent must always equal total interest. 

The statement that capital as a fund is homogeneous must 
not be misunderstood. Two identical pieces of capital, let us 
say two machines, may yield very different products, because 
the one may be carefully looked after and the other badly 
neglected. In the same way equal amounts of capital may be 

94 Interest. [§ i66 

loaned to two persons, one of whom may be expected to repay 
promptly, while in the other case there may be a risk. Just 
as the two machines, although technically the same, are 
economically different, so the two individual sums of capital, 
although in one sense homogeneous because reduced to a 
fund of value, are yet economically and from the point of view 
of the lender different productive instruments or income-bear- 
ing agents. Actual interest rates on loans therefore fluctuate 
with the degree of security and the probability of repayment. 
Interest rates on land vary, for instance, with the ratio of the 
loan to the property. In New York City in 1905 a loan 
equal to one-half the assessed value of the land could be secured 
for four per cent, a somewhat larger sum for four and a half 
per cent, and about three-quarters of the value for five per 
cent. The rate of interest on bonds varies from slightly over 
two per cent on government loans to five, six or seven per 
cent on local or industrial paper of more doubtful security. 
When we speak of the fund of capital as homogeneous, we 
refer to the identity of potential use, not to the conditions of 
repayment. A study of the normal rate of interest is a study 
of natural interest, or the returns from the use of capital on 
the assumption of complete mobility, free competition and the 
presence of the economic motive. The fact that a person 
who has borrowed the capital and pocketed its earnings 
chooses not to repay all of it, will affect the rate at which that 
particular person or other persons of his class can in future secure 
a loan, but will leave untouched the normal rate of interest on 
good security. Risk causes a fluctuation from the normal rate 
of interest ; it does not affect the normal rate itself which is paid 
on capital when there is virtually no risk. So far, of course, as 
there is an element of risk in all human transactions, the cost of 
this minimal risk must be included in the rate of inter- 
est. But in ordinary " gilt-edge " loans this may be practically 

Interest rates not only fluctuate on loans to different indi- 
viduals or classes, but vary in different sections or parts of 

§ 1 66] Nature of Interest. 


the same country. This is, however, so obviously an illus- 
tration of the fact that we are dealing with different markets as 
to need no further elaboration. A study of interest rates, like 
that of all other cases of value, refers to conditions in a given 
market. If the study discloses the general principles of value 
in a market, it will be adequate to explain the relative varia- 
tions in different markets. 

Another seeming exception to the principle that interest is 
the earnings of a homogeneous fund of capital is afforded by 
interest rates on " call loans " in financial centres, — that is, on 
loans which may be called or terminated at will, as opposed 
to ordinary time loans. The general rate of interest in New 
York may be four or five per cent, but in the parlance of Wall 
Street " money may be worth " on a given day only one or two 
per cent when " it is a drug on the market," and may at another 
time " be so tight " as to command an interest rate of several 
per cent a week or several hundred per cent a year. The 
explanation is not difficult. Interest in general is paid for a 
fund of capital, because that fund ultimately represents some 
concrete pieces of capital that afford a service. The manu- 
facturer invests the capital in new machines or buildings, the 
merchant in new facilities of transfer, the farmer in more 
land or better implements. In the case of Wall Street, how- 
ever, what is wanted is not capital for technical production, 
but capital in the form of liquid assets or a disposable surplus 
of cash to meet current liabilities. The ordinary rate of inter- 
est depends upon the demand and supply of capital for pro- 
ductive purposes ; the rate of interest on call loans depends 
on the demand and supply of the fluctuating mass of loanable 
funds which are on the instant convertible into cash. The 
rate of interest on call loans may be high when the general 
rate of interest is low. In the case of call loans the payment 
is for the temporary use of the money considered as a com- 
modity in itself; in the case of ordinary loans the payment is 
for the use of an aliquot part of the social capital of the 
community. For a fuller treatment of this point see § 222. 

396 laterest. [§ 167 

167. Interest and Forbearance. 

We have learned that the real value of all things consists in 
their rents or actual uses and that the fundamental aspect of 
value is rental value. We have also learned that rental values 
are transmuted into capital values, and that capital value 
depends upon a succession of anticipated income or rental 
values. Finally, we l\ave learned that this process of capitali- 
zation, or of estimating the present worth of a succession of 
future uses, depends upon the fact that men habitually put a 
lower present estimate on future uses than on present uses. 
Interest thus involves a discounting of the future and is a nat- 
ural phenomenon because it represents a natural discount. It 
corresponds to the difference in the time utility of things, as 
actual rents or usufructs correspond to differences in material 

In the case of more or less durable articles of consumption, 
we can postpone or wait for each use or service as it recurs ; 
or we can dispose now of all its expected future uses by selling 
it outright. Obviously there is a disadvantage in waiting, 
because the present satisfactions that we could buy are more 
keenly appreciated than these future satisfactions. In paying 
us a capital sum, therefore, the purchasers or actual consumers 
will insist on a reward for their forbearance. We can invest 
the money in something that can be consumed at once ; they 
must wait for each recurring service or use of the commodity 
now in their possession. As the future changes into the pres- 
ent, each use of the commodity will afford them a definite 
satisfaction ; but at the present moment the actual value of 
each anticipated future use is somewhat smaller than will be 
the value of that use when realized. This difference or dis- 
count is the reward for forbearance, that is, for postponing 
present satisfactions. 

Articles of consumption, however, must be replaced. A 
stock of consumption goods can continue or increase only 
through the means of production goods. If things are used 

§ 167] Forbearance. 397 

for productive purposes, their capital value must be explained 
in the same way as that of consumption goods. The person 
who has created a piece of capital must be rewarded for his 
waiting. Instead of consuming everything now, he prefers to 
put a part of his energies into producing something which 
will last, and will help him in the future. He postpones his 
gratifications, he waits for the future rents or earnings of this 
thing that now has a capital value, because it capitalizes the 
anticipated rents or earnings. As these future earnings become 
with the lapse of time present earnings, they acquire a greater 
value, — greater by the amount that a present satisfaction ex- 
ceeds a future satisfaction. When a man puts his capital into 
a savings bank or into a business or into a concrete commodity, 
the aggregate of earnings or services as they mature exceed 
the present capitalized worth of those earnings. The capital, 
as it is said, will earn (in the future) a surplus over its present 
(capitalized) value. If he keeps the capital, this surplus will 
accrue to him ; if he loans it, the borrower must pay him the 
surplus which will have been earned by the time that the 
capital is repaid. If we own a boat and rent it out, it may 
bring in ^^150 before it is finally discarded after a dozen years; 
but if we sell it now it may fetch only ^80. The difference, 
or $^o, is the interest or surplus reward which accrues to us if 
we wait for the future earnings to come in. As the future uses 
or earnings ripen into present earnings, they acquire an enhanced 

To say, however, that interest is the reward of forbearance 
does not suffice. We must remember that all price depends 
on marginal utility. We are always comparing one kind of 
enjoyment with another, and the increments of satisfaction 
diminish with the supply until we reach a certain point or 
margin where the increment of satisfaction afforded by a given 
service or commodity is overtaken by that afforded by another. 
When, therefore, we compare present with future satisfactions, 
we are really comparing marginal increments of enjoyment. 
Our present estimate of each successive future use of a com- 

398 Interest. [§167 

modity diminishes as that use recedes into the future ; but the 
extent to which we are willing to refrain from present con- 
sumption depends on the relative amount at our disposal. If 
we have a large quantity of a commodity or a large sum of 
money with which to buy it, we can consume only a small 
portion now, and may be quite ready to lay by the rest because 
it does not involve any perceptible sacrifice. With every 
diminution in the amount at our disposal, however, the greater 
will be the importance which we attach to present satisfactions, 
and the more remote will appear the advantage of saving for 
the future. Finally, a point will be reached where these two 
considerations balance each other, and where we shall be on 
the margin of doubt whether to save or to spend. Beyond 
that point we shall surely not save, because we secure more 
satisfaction from present enjoyment. 

When, therefore, we say that interest is the result of forbear- 
ance, we really mean that interest is the result of marginal 
forbearance, or forbearance at the margin. The disadvantage 
of waiting, which is the essence of interest, is the disadvantage 
of waiting at the point where we get ready to substitute one 
kind of enjoyment for another. This marginal point will 
indeed be a different one for the rich and the poor, for the 
spendthrift and the miser, but this difference will affect the rate 
of interest as little as the relative wealth of the purchaser 
affects the price of wheat on the exchange. The value of 
wheat is the expression of its marginal utility to the wheat- 
using group ; the interest on capital corresponds to the difference 
in the marginal estimates of present and future uses for the 
whole capital-using group. Value in the market is social 
value (§ 74). 

Interest, then, is not simply the discount between present and 
future enjoyments in general. There would indeed be no 
capital if there were no saving, but all saving does not involve 
a sacrifice or disadvantage. People would save something 
even if there were no interest. A prudent man knows that 
he will need something for a rainy day ; a far-sighted man 

§ i68] Interest and Productivity. 399 

may even believe that the future social demand for a commod- 
ity or service will grow, and he would then save or accumulate 
the particular capital even if there was no reward in the form of 
interest. For if he is right, it will be worth more to him in the 
future than it is at present. But when a man saves or accumu- 
lates capital, he would, if there were no interest, soon reach a 
point where his gains from accumulation would be overtaken by 
his loss in foregoing present enjoyments for future satisfactions. 
This would be the margin or final point where he would stop 
saving or capitalizing. Interest therefore is the discount 
between present and future marginal increments of enjoyment ; 
that is, interest is the measure of the marginal disadvantage 
of forbearance. 

Moreover, since at this margin men are constantly compar- 
ing the service of one commodity with that of another, interest 
is the return for awaiting not simply the future service of some 
particular piece of capital, but that of any other piece of capi- 
tal which may be substituted for it. In other words, the rate 
of interest depends on the difference between the actual 
estimate of the present and that of the future services of the 
whole mass of capital at the margin, that is, of the marginal 
increments of the entirety of capital. 

168. Interest and Productivity. 

It is obvious that unless a commodity afforded some services 
or earnings there would be no use in waiting and no advantage 
in forbearance. Instead of centering our attention upon the 
forbearance we may equally well turn our consideration to the 
future services which capital will yield. In lieu of looking at 
the problem from the point of view of waiting for the service, 
we may approach it from that of the capital which affords 
the service. As soon as we do this, we face the problem of 

Particular pieces of capital are undoubtedly productive. An 
axe enables us to secure a greater result than if we used our 
hands. A machine utilized by a laborer produces more than 

400 Interest. [§ i68 

the labor alone could produce. If particular pieces of capital 
are productive, capital as a whole must be productive. If the 
commodity no longer affords a service, it will lose its value as 
a piece of capital, that is, it will no longer be capital. Con- 
versely, capital will be accumulated because of the earnings to 
be derived therefrom. When we speak of capital, we inevi- 
tably think of the earnings of capital. 

Owing to the law of diminishing returns, there is a limit to 
the profitable use of particular pieces of capital. If a given 
force of workmen had previously used only their hands, and if 
a machine is introduced, like a loom, the product will be at 
once increased. If the single loom does not occupy all the 
time of the workman, more will be introduced, until with say 
ten looms each workman is fully employed. The addition of 
an eleventh loom will still increase the product, but the addi- 
tion will not be so great as before the point of maximum utili- 
zation had been reached, because the workman cannot tend 
each loom so carefully. A twelfth and thirteenth loom will 
add continually smaller products, until finally an additional 
loom will add nothing at all. Now, since every loom is as good 
as the other, the earnings or the productivity of each is at any 
given time measured by that of the last or marginal loom em- 
ployed. If there are ten looms, the contribution of each is 
equal to that of the tenth ; if there are thirteen, the contri- 
bution of each is equal to that of the thirteenth. The 
earnings of the marginal loom, that is, its additional con- 
tribution to the product, is its rent, and if the looms are hired 
from the owner, the money rent paid to him for each loom will 
be equivalent to the marginal earnings, that is, the earnings or 
contribution to the product of the marginal loom. If the 
entire capital of the community consisted of looms, the annual 
product of the looms would be the gross return of the capital 
invested in looms ; and this product, less the cost of repairing 
and replacement, would be at once the net rent and the 

The total capital of a community, however, is composed of 

§ i68] Interest and Productivity. 401 

other things than looms. Capital as a whole includes all the 
concrete pieces of wealth. When we borrow a thousand dol- 
lars, we secure the opportunity of embodying that sum in any 
individual piece of concrete capital. That sum has a value 
because it is productive, in the sense that it can at once be 
incorporated into something that yields a product. Since indi- 
viduals are constantly competing for the privilege and are substi- 
tuting different embodiments of that fund of capital according 
to their estimate of the returns to be derived, it is clear that 
at any moment the productivity of the entire mass of capital 
in existence is measured by that of the particular piece of 
capital at the margin of employment. It may be a loom or 
anything else. Productivity of the fund or aggregate of capi- 
tal means marginal productivity. 

This margin of employment, however, is not simply the 
margin of indifference as between various pieces or increments 
of capital ; it is also a margin of indifference as between the 
various productive factors in general. Owing to the same 
principle of diminishing returns, the United States Steel Cor- 
poration must continually consider whether it pays better to 
add another machine in a given mill or to burn more coal in 
order to speed the machines faster ; whether it is more advan- 
tageous to put additional capital into that particular mill or into 
the steamers which transport the product to the market. In 
the same way they must consider whether it pays better to 
crowd more machines into the same mill or to acquire more 
land and build a new mill. Finally, they must consider whether 
it pays better to increase the labor force for the purpose of 
getting more work out of the same machines, or to increase 
the number of machines. Every practical business man realizes 
that there is such a margin of indifference, beyond which an 
additional application of capital will not yield as great returns 
as an additional application of labor, or vice versd. 

What is true of the individual is equally true of society. 
The total capital in a given market is constantly competing 
with the total supply of other productive agents. The maipn 


402 Interest. [§ i68 

of employment which tells in the determination of the nor- 
mal rate of interest is a social margin. All the individual 
pieces of capital are reduced to terms of money, and the fund 
of capital in any market is the capital value of all the single 
pieces of capital. The marginal productivity of this fund of 
capital is the earning capacity of the increment embodied in 
the particular piece of capital employed at the margin. 
That particular increment of capital will yield a certain 
return, and that return or addition to the capital constitutes 

When we have free competition and complete mobility of 
capital, any increment can earn only as much as the marginal 
increment, for, since they are interchangeable, any increment 
at a given time may be considered the last or final one. In- 
terest is the addition to itself which the capital in a given 
market earns at the point of marginal utilization. Interest, in 
other words, is the product of the marginal increment of 

It makes, therefore, really no difference whether we say 
that interest is the measure of marginal productivity or the 
measure of marginal forbearance. They are two ways of stating 
the same fact, just as we know that the value of all things may 
be expressed in terms of marginal utility or of marginal sacri- 
fice. When we speak of the productivity of capital, we think 
of utility ; when we speak of forbearance, we think of sacrifice. 
Interest, like all value, may be explained in terms of one or of 
the other, for marginal increments of utility and of sacrifice 
tend to be equal. When, however, we say that the marginal 
increment of capital employed at any given moment yields a 
certain return, we must not forget that in a deeper sense it is 
not the piece of capital which creates the product or interest, 
but that it is the product or interest which is responsible for 
the capital. Capital value is the reflex of the value of the 
anticipated services. Capital is capitalized income. 

§ 169] Course. 403 

169. Course of Interest. 

Since interest is the measure of marginal productivity and 
marginal forbearance, the actual rate of interest depends on the 
location of the margin. Like every other margin, this is a 
result of an equilibrium or balancing of economic forces. 

It is obvious that in early stages of development the margin 
is high. There is a great scarcity of capital ; and it assumes 
the form chiefly of the rudest kinds of implements which cost 
but little time and labor to create. The margin of indifference 
is a high one, and therefore the marginal productivity of cap- 
ital, that is, the rate of interest, is high. 

As capital accumulates, the margin recedes. While the 
growth of capital augments prosperity, the product ascribable 
to each individual piece of additional capital is smaller than 
before. At the new margin where men are debating whether 
to spend or to save, whether to work for current needs or to 
work harder for future needs, the same result can be secured 
only by greater labor. The marginal piece of capital, in other 
words, has a lower productivity. The rate of interest falls, 
because the capital employed at the margin produces less for 
itself, that is, adds less to itself. The addition to itself at the 
margin is the rate of interest. 

In so far, hence, as progress means the continual multipli- 
cation and improvement of capital, it implies a steady reduc- 
tion in the rate of interest. Capital develops not only in 
quantity, but in quality. We have not only more pieces of 
capital, but better ones. The clumsy tools are replaced by 
fine machines, the log house gives way to the sky-scraper, the 
wheelbarrow to the electric locomotive. The total product, 
that is, the aggregate wealth of the community, augments, and 
there is such an increase in the number of increments of capi- 
tal that at the margin, where the final increment of capital is 
employed, the selling value of its product will be less than 
before. Prosperity depends upon total product, but value 
depends upon marginal product; the marginal product of 

404 Interest. [§ 169 

capital decreases, while the total product of all the capital 
increases. The rate of interest falls because the margin of 
employment falls; but as the margin falls, the quantity of 
capital grows, its quality improves and wealth increases. 

According to the recent researches of Billeter, the normal 
rate of interest on good security during the period of greatest 
prosperity in Athens was about 1 2 per cent ; while in Rome 
at the close of the republic it had fallen to between 4 and 6 
per cent. Starting in again during the early middle ages at 
a rate of 20 per cent and 15 per cent, it gradually fell, until in 
the great financial centres of Holland toward the close of the 
eighteenth century it reached a rate of between 2 per cent 
and 3 per cent. Since then the rate has again risen, for 
reasons to be mentioned in a moment. 

It would be a mistake to assume that the margin is fixed 
simply by the alternative returns from land. It is true that 
where land is abundant, and land rent therefore low, the rate 
of interest is high. It is equally true that one of the causes 
responsible for the rise of interest has been the opening up of 
vast stretches of cheap land in the New World. As the margin 
of cultivation moved outward, the same piece of capital 
appHed to the land yielded larger results ; that is, the margin 
of the productivity of capital moved upward, and the rate of 
interest moved with it. But changes in the productivity of 
land are not the sole factor in affecting the productivity of, and 
therefore the demand for, capital. If labor should become 
less costly, the margin would also move up. Just as in the 
preceding case a unit of capital would produce more when 
applied to a given quantity of less expensive land, so now a 
unit of capital would produce more when used in conjunction 
with a given quantity of less expensive labor. The only differ- 
ence between the two cases is that the lower cost of land 
would mean a lower land rent, while the lower cost of labor 
might mean either lower wages or, when lower cost is due to 
greater efficiency, higher wages. During the past century, for 
instance, one of the reasons militating against a fall in the rate 

§ i7o] Tendency to a Minimum. 405 

of interest has been the increased productivity of capital due 
to the lower relative cost of labor, whether the new capital has 
been used in Java with the low- wage peasant, or in America 
with the high-wage factory hand. The consideration of wages, 
however, must be deferred to the next chapter. 

The location of the margin may be affected not only by 
changes in the relative productivity of other factors of pro- 
duction, but by changes affecting capital itself. Continual 
improvements in capital undoubtedly increase general produc- 
tivity, but as qualitative improvements in pieces of capital are 
subject to the law of diminishing returns, their introduction is 
normally accompanied by a decline in the rate of interest. In 
Japan as in the Canadian Northwest interest rates are rapidly 
falling, although fresh land is scarce in the former, and abun- 
dant in the latter, country. In the same way the moving force 
may come from the side of demand or forbearance rather than 
of supply or productivity. The general state of society may 
affect the readiness to postpone present for future gratifica- 
tions. When the Filipinos complain of a scarcity of capital, 
they forget that the social and political conditions have been 
such as to discourage the sense of saving. The true educa- 
tion for the Filipino, as it is for the Negro, is to inculcate such 
habits of mind as to augment the readiness to forego present 
satisfactions. Whatever does this lowers the margin and leads 
to a fall in the rate of interest. 

170. Tendency of Interest to a Minimum. 

A gradual decrease in the rate of interest is normal as well 
as beneficial to the community. It lowers cost and enhances 
prosperity. It would, however, be an error to conclude that 
this tendency is constant, and that the interest rate will dis- 
appear or even reach a bare minimum. For, as the rate 
approaches a certain low point, it sets in motion forces to pre- 
vent any further reduction. This can be approached from two 
points of view. 

The first consideration is the unlimited potential capacity of 

4o6 laterest. [§ 170 

modern society to utilize capital. A low interest rate, say 
three or four per cent, is possible only in a community amply 
supplied with capital. In such a complex society the demand 
for a greater control of the conveniences of life is virtually in- 
satiable, and individuals and government alike will be deterred 
from entering upon ever larger schemes of permanent im- 
provement and investment only by the consideration of cost. 
If the rate of interest should conceivably fall so low that the cost 
of capital might be neglected, it would lead to a well-nigh in- 
calculable multiplication of durable commodities. Every city 
would be pierced by innumerable subways, railroads would be 
more common than country paths, laborers would live in 
palaces and all other fairy flights of the imagination would be 
realized. This very statement is sufficient to show its absurd- 
ity. Capital could be costless only if the concrete pieces of 
capital cost nothing. But we know that while progress is^xon- 
stantly reducing the cost of some things, the fall in ppfce en- 
genders a production of new things, previously non-ji^xistent. 
As long as human labor involves some sacrifice a^a human 
demands are illimitable, there will always be somethings that 
cost labor. 

If individual durable things, however, cost something, capi- 
tal as a whole can never become costless, like air or water. 
The reduction in the cost of some forms of capital will at a 
certain point be balanced by the rise in the cost of new forms 
of capital which formerly did not exist and therefore had no 
cost. As long as invention keeps ahead of demand, cost will 
fall ; but with every reduction in cost demand increases, and 
when demand can no longer be satisfied by an increase in the 
supply, when, in other words, the law of diminishing returns has 
made its influence felt, any serious reduction in the aggregate 
cost of capital is impossible. Putting it in another way, we 
may say that after a certain point has been reached any addi- 
tional decline in the interest rate will mean a more than pro- 
portionate increase in the demand for capital, and this aug- 
mented demand which cannot be met by any corresponding 

§ i7o] Tendency to a Minimum. 407 

decrease in cost will prevent any further reduction in the 
rate. As capital. becomes more abundant, its marginal pro- 
ductivity in terms of value will decrease, but the decrease itself 
will be arrested at a certain point. So far as experience seems 
to show, this point means a rate of between 2 per cent and 
3 per cont. 

The same result can be reached by approaching the problem 
from the other side, that of marginal forbearance. The readi- 
ness to accumulate capital depends on the comparison between 
present and future estimates. The accumulations of a very 
rich man as well as of a very poor man are apt to be only 
slightly affected by an unduly low rate of interest, — the very 
rich man because he cannot well help accumulating, and the 
poor man because he has so narrow a margin for saving of any 
kind. In the case of the ordinary man, however, who is 
really responsible for the growth of capital, the matter is dif- 
ferent. It is not utterly arbitrary to assume that a man in 
moderate circumstances will commonly be willing to restrict 
his expenses and lay aside annually a sum about equal to that 
which he expects to enjoy as income in the future. The time 
required for accumulating a capital which will yield such an 
income will be, at 6 per cent interest, 1 2 years ; at 3 per cent, 
24 years; at 2 per cent, 35 years; at i^ per cent, 47 years; 
at I per cent, 70 years. ^ If the interest rate falls from 6 per 
cent to 3 per cent, the reward, even if smaller, will still be 
worth while, and in order to provide himself with an adequate 
income the individual may accumulate larger capitals than before. 
But if the rate falls to i ^ per cent he will seek to secure the 
future income in some other way without accumulating a cap- 
ital. Nowadays he would go to an insurance company and 
buy an annuity, and even if he wishes to purchase an annuity 
to last long enough to include the life of his children, the 
advantage of an annuity which at a high rate of interest is 
exceedingly slight becomes more and more substantial as the 
rate of interest declines. With a change in the above figures, 
1 Cassel, The Nature and Necessity of Interest y p. 146. 

4o8 Interest. [§171 

the conclusions will of course vary ; but in any event, taking 
the practice of the ordinary man, it is susceptible of a 
reasonably legitimate calculation that the rate of interest can- 
not fall much below 2 per cent, because otherwise the desire 
to accumulate would be effectually checked. While precise fig- 
ures are manifestly impossible, it seems that the margin which 
fixes the rate of interest thus stands in a close relation to the 
length of human life. If human longevity were to increase, 
the possible minimum in the rate of interest might be far lower 
than is likely to be the case under present conditions. 

171. Regulation of Interest. 

Interest therefore, like rent, is a natural phenomenon, which 
must exist wherever private property in durable quantities is 
found. Yet until recent times government has always attempted 
to restrict the rate of interest. 

At the outset, when the function of capital was not compre- 
hended, interest was considered a return for the use of money. 
Since the chief function of money was held to be its use as a 
medium of exchange, any compensation, other than the trans- 
fer of the thing exchanged, was deemed unjustifiable. The 
price of the use — the pretium usus — was usury, usura, and 
wholly indefensible. Usury and interest were synonymous, 
because the use for which a price was paid involved an in- 
terval of time " between " {interest) the loan and the repay- 
ment. Yet although seemingly unjustifiable, the exigencies of 
business life compelled the borrower to make some payment il 
he desired to induce the lender to part with his property. 
Public opinion began to recognize the legitimacy of some 
moderate return to the lender, primarily as a compensation 
for risk. The wedge was gradually pushed further in, until 
a distinction was drawn between the legitimate return, now 
called interest, and the illegitimate surplus known as usury. 
Legislation no longer prohibited all interest, but only ex- 
cessive interest. Yet the legal rate of contract interest was 
changed from time to time as the natural rate declined. 

§ i7i] Regulation of Interest. 409 

The development of modern capitalism and the recognition 
of the fact that interest is paid for the use of capital rather than 
for that of the money representing the capital, have led during 
the last half-century to the final stage, — the abolition of usury 
laws. The modern theory rests on the conviction that free- 
dom of loans enures to the interest of the borrower as well as 
of the community. To prevent the lender from securing 
the market rate is to curtail the offer of capital, to restrict 
the process of accumulation and to increase the price, 
open or secret, which the borrower must ultimately pay. With 
free competition and complete mobility of capital, which are 
the characteristic features of modern business life, the lender 
will get only what his capital actually earns ; the contract or loan 
interest will approximate the natural interest. The usury laws 
still found in some of the American states are an anachronism.^ 

It must, however, not be forgotten that this defence of free- 
dom in borrowing rests on the assumption which underlies all 
liberty, namely, relative equality in bargaining. Where the 
loans are for immediate consumption rather than for productive 
purposes, and where even in productive loans there is such a 
glaring discrepancy between the lender and the borrower that 
the former is able to take an unfair advantage of the latter, the 

1 England abolished the usury law on short-time commercial paper in 
1839, on all except real estate loans in 1850 and on all loans in 1854. 
The other European countries, except France, followed during the next 
fifteen years. In the United States usury laws are virtually unknown in 
fourteen states — in nine of the Western states they never existed, in 
four of the New England states and in Louisiana they have been sub- 
stantially repealed. In the others usury is still illegal, with various pen- 
alties. In seven states the lender is disqualified from collecting the 
illegal excess ; in nine the whole interest is forfeited ; in four both princi- 
pal and interest are forfeited ; in three double the interest is forfeited ; in 
one three times the interest is forfeited. Most remarkable of all is New 
York, where the penalty includes not only loss of principal and interest, 
but also a fine of ^1,000 and imprisonment for six months. This, how- 
ever, was so manifestly absurd, that in 1882 call loans of $5,000 and over, 
made on negotiable securities, were exempted from the law. In practice, 
of course, the penalty on all other loans is rarely enforced as to loss of 
principal and virtually never as to fine and imprisonment. Corporations, 
moreover, are inhibited from availing themselves of the usury law as a 
defence. For some consequences of this system see § 223. 

41 o Interest. [§171 

reason of the rule falls away and some degree of protection 
may be needed for the borrower. This is recognized in the 
recent laws of both England and Germany, where provision is 
made for such exceptional cases.^ In the overwhelming ma- 
jority of instances, however, modern business loans rest upon 
the equality of business opportunity and the free competition 
of capital. Under such conditions usury laws are futile and 
worse than futile, because they either tend to evasion or 
become a drag on industry. 

1 The English act of 1900 permits the courts to reduce the interest or 
other charges if satisfied that the charges are " excessive and that the 
transaction is harsh or unconscionable." The act applies only to 
" money-lenders," excepting from the definition pawn-brokers, bankers, 
friendly, loan and building societies. 



172. References. 

J. B. Clark, The Distribution of Wealth (1899), chs. vii, viii, xii, xxi, 
Sind' Essentials of Economic Theory (1907), chs. xiv, xv, xvi, xvii, and 
XXV ; F. A. Fetter, Principles (1904), ch. xxiii ; T. N. Carver, Distri- 
bution (1904), ch. iv; A. Marshall, Principles (1898), bk. vi, chs. iii-v; 
F. A. Walker, The Wages Question (1876), part i, ch. viii, and part 2; 
H, R. Seager, Introduction (1904), ch. xiii; N. G. Pierson, Principles 
(1902), part I, ch. vi ; A. T. Hadley, Economics (1896), ch. x ; J. S. Nichol- 
son, Principles\i2>^2r^go^), bk. ii, chs. x-xii, bk. iv, ch. vii ; and Machinery 
and Wages (1892), ch. i, and Summary; A. W. Flux, Principles {igo^), ch. 
viii; W. S. Jevons, Theory (1888), chs. v, viii; W. Smart, Studies in 
Economics (1895), chs. i-iv; J. A. Hobson, Economics (1900), ch. vii; 
M. Pantaleoni, Pure Economics (1898), part 3, ch. v; H. Sidgwick, Prin- 
ciples (1883), bk. i, ch. viii; F. W. Taussig, Wages and Capital (1896); 
J. Davidson, The Bargain Theory of Wages (1898); H. M. Thompson, 
Theory of Wages (1892) ; S. and B. Webb, Problems of Modern Industry 
(1898), ch. iii; T. N. Carver, Distribution of Wealth (1904), ch. iv; 
A. Marshall, Principles (1907), bk. vi, chs. iii-v. 

173. Nature of "Wages. 

Wages are the remuneration of labor. They are paid for 
the services of human beings, as rents are paid for the services 
of things. When we contrast wages with prices, we use the 
latter term in the sense of the capitalized value of commodities ; 
but if by price we mean value in the market, wages are a price 
just as rent and interest are prices. The law of wages must 
be like that of rent and interest, for the law of all price is the 

Wages, however, differ in some respects from rent and in- 
terest. Interest is the price paid for the use of an aliquot 
part of a homogeneous fund, and the small discrepancies in the 


412 Wages. [§ 173 

interest rate at any given time and place are due to the element 
of risk. Net interest is always the same in a given market. 
Wages, however, vary with the kind of labor. The wages of 
the skillfd workman are higher than those of the unskilled ; 
the wages of the foreman shade into the salary of the manager. 
Interest is homogeneous, wages are heterogeneous. On the 
other hand, wages differ from rents. Rents vary from zero to 
prodigious sums : the rent of a leased railroad may be millions 
of dollars, the rent of a worn-out row-boat may be next to 
nothing. The rents of some things may approach the vanishing 
point either because the things themselves are from the start 
of extremely little use, or because the originally valuable 
things are now fit only for the scrap heap or the junkman. 
Human beings, on the other hand, must live. The recom- 
pense of labor must be large enough to enable the workman 
at least to exist. Wages therefore cannot fall below a positive 
minimum which is absent in the case of commodities. More- 
over, while wages are paid for mental as well as for physical 
work, the socially significant problem of wages is that of the 
manual laborers, and with them the gradations in labor are 
slight compared to those in the great mass of commodities. 
Hence, while the assertion of a general rate of rents is un- 
meaning, we do speak of a general rate of wages. It is not a 
general rate in the sense of a general or single rate of interest. 
But it is general in the sense that it varies comparatively little 
as between a substantial minimum for the bottom grade and a 
not very much greater return for the higher grades of those 
laborers whose numbers are of importance. Wages therefore 
in their social significance occupy a position midway between 
homogeneous interest and heterogeneous rents. In one sense 
wages vary like rents ; in another sense there is a rate of 
wages like a rate of interest. 

There is still another sense in which we can speak of a gen- 
eral rate of wages. When values are measured in terms of 
money, we use the term general level of prices. Wages as 
well as prices may be high or low. This connection between 

§173] Nature of Wages. 413 

wages and money leads to a distinction of some importance ; 
namely, between money wages and real wages. Money wages 
are actual wages paid ^Jn ^ mo ney ; real wages are the actual 
commodities that the money wages can buy. If prices of 
food, clothing and shelter rise faster than the price of labor, 
real wages will fall although money wages rise. The em- 
ployer's interest is in money wages ; the laborer's interest is 
in real wages. The employer compares what he pays with 
the product ; the laborer compares what he receives with his 

Wages, again, although they are undoubtedly prices, may 
yet be usefully contrasted with the prices of things. Labor is a 
commodity in the sense that everything which has a price is a 
commodity. Labor, however, is a peculiar kind of commodity. 
The chief peculiarities are four in number, (i) Commodi- 
ties are produced for the sake of the services which they 
render. The increased supply of human beings is not due 
to any such consideration. Under slavery, where a man was 
a thing, human beings were kept for breeding purposes ; but 
in a state of freedom this consideration disappears. It is 
true, as stated above (§ 26), that the poor often look forward 
to their children as so many additional supports to the family. 
But he would be rash indeed iwho would assert that this is 
the motive of the increase. Commodities are produced for 
certain ends; human beings are ends in themselves. (2) A 
commodity once in existence continues to give its services 
unbidden ; a laborer may work or not, as he lists. The com- 
modity takes no holiday and does not strike. The mule and 
the slave respond to the lash ; harsh treatment of the work- 
man may diminish rather than augment output. (3) Labor 
is perishable, while many commodities are durable. After the 
lapse of a certain time the laborer must sell his labor or starve. 
Laborers and capitalists need each other, but under normal 
conditions the need of the laborer is more urgent. (4) Finally, 
labor is inseparable from the laborer, while the commodity 
may be separated from its owner. Commodities are sold 

414 Wages. [§ 174 

wherever the owner desires ; labor can be sold only where the 
laborer is. The owner of commodities may stay where he 
likes and send his commodities where he finds a market ; the 
laborer must accompany his labor to the market. The one 
is in this respect free, the other unfree. 

It is therefore not necessary to resort to obvious ethical 
considerations in order to recognize the difference between 
human beings and inanimate objects. The economic contrast 
is a result of man's personality, but it is none the less an 
economic contrast. The service of a material good is a com- 
modity, and the good itself is wealth ; the labor of man is a 
commodity, but man himself is not wealth. The things exist 
for the services which they afford, but man does not exist for 
wealth ; wealth exists for man. The price of labor, like the 
price of everything else, is the result of economic forces, and 
of economic forces alone ; but labor is such a peculiar kind 
of commodity that the economic forces are present in different 
proportions and thus affect the result differently. 

174. "Wages and Cost. 

After these preliminaries we are prepared to attack the 
problem of the law of wages. The most common statement is 
that wages depend upon supply and demand. In the sense 
that all value depends upon the equilibrium between supply 
and demand, this is true enough ; but unless we analyze the 
forces affecting normal supply and demand, the statement is of 
little use. In the way in which it is usually framed, moreover, 
the assertion leads to false implications. When the ordinary 
man speaks of demand and supply in reference to labor, he 
thinks only of the market variations rather than of the point 
about which the actual rates oscillate. Demand and supply, 
as commonly understood, afford a proximate rather than an 
ultimate explanation. As soon, however, as normal demand 
and supply are meant we are confronted by other causes. 

The earliest attempt to supply this more ultimate explana- 
tion was the cost, or cost of production, theory of wages. 

§174] Wages and Cost. 415 

Market value, it was said, depends upon demand and supply, 
but in all reproducible commodities normal value is fixed by 
cost of production. Labor is a. reproducible commodity, and 
therefore its value must be fixed by its cost of production. 
The cost of production of labor, however, is the cost of per- 
petuating a supply of laborers. Since the only restriction on 
population was supposed to be the bare possibility of support- 
ing life, it was held that the supply of laborers would increase 
up to this point of the minimum of subsistence for each. The 
rate o f _wages. therefore, always' tends to be at the bare 
minimum of subsistence, and the cost of production theory 
becomes equivalent to the minimum of subsistence theory. 
Sometimes this is also called the iron law or the brazen law of 
wages, because of the assumed rigidity of the principle. 

This theory was defective in two points. In the first place in 
its identification of labor with a simple reproducible commodity 
it neglected the possibility of such an automatic check to 
population as would in any progressive community result in a 
certain higher level below which labor will not be carried on. 
Secondly, it committed the error, common to all the early 
economists, of holding that price is fixed by cost of production, 
whereas we know that the relation is more indirect. In the 
face of the constant rise of wages during the nineteenth century 
coupled with a still greater increase of population, the mini- 
mum of subsistence theory of wages finally broke down. 

A variation of the same doctrine was the wages-fund theory. 
This rested upon the three premises, first, that wages are paid 
out of capital ; second, that the amount of capital available at 
any given time for such payment of wages is predetermined 
and fixed ; tl^ird^hat the greater the number of laborers, the 
smaller the share of each. The conclusion was that since 
laborers can influence only their own numbers and not the 
predetermined amount of capital, all independent efforts to 
improve their position by collective action are futile : the 
sole method for the laborer to increase wages is to keep 
down population. Any interference, moreover, on the part of 

4^6 Wages. [§ 175 

government with the profits of capital will diminish the wages 
fund and thus decrease wages. As one of the more popular 
writers put it : " Labor is a .commodity. If men will marry 
and bring up children to an overstocked and expiring trade, 
it is for them to take the consequences. If we stand between 
the error and its consequences, we stand between the evil and 
its cure ; if we intercept the penalty, we perpetuate the sin." 

Further reflection showed, however, that each of the three 
premises of the wages-fund doctrine was vulnerable, (i) 
Wages are not paid out of capital ; they are only advanced out 
of capital. They are paid out of the product. Labor, like 
capital, earns its own remuneration. They may co-operate to 
effect a certain result, but the wages are not paid out of the 
capital in any different sense than the interest or profits are 
paid out of the labor. Both are paid out of the joint product 
which they create. (2) There is no such rigidity in the avail- 
able amount of capital as is assumed. The capital applied to 
production is as susceptible of increase as is the labor force. 
Both are at any given moment elastic quantities. Increase 
the remuneration of either, and the supply will grow. (3) 
Finally, to affirm that the rate of wages is a quotient to be 
arrived at by dividing the dividend or wages fund by the divisor 
or number of laborers, and that wages hence rise or fall merely 
with the changes in population, rests not only on the error 
of considering the dividend as fixed, but upon the neglect to 
remember that the laborers make a contribution to the product 
and thus increase the sum to be divided. 

With the breakdown of both the minimum -of- subsistence 
and th<i wages-fund theory of wages the way was prepared for 
the modern doctrine. 

175. "Wages and Efficiency. 

In order to reach a consistent theory of wages we must 
revert to fundamental principles. All things possess value 
because of the services which they render. The value of all 
production goods depends on the value of the consumption 

§ 175] Wages and Efficiency. 417 

goods. If the price of iron products falls, the price of iron ore 
will fall. Production goods, however, are composed not only 
of concrete objects but of labor. Labor, therefore, has a value 
because its services or products have a value. If the labor is 
misspent, the product is valueless, and in the long run the 
labor will be equally so. Labor secures a remuneration because 
it produces something for which people are willing to pay. 
In other words, wages depend on productivity. 

The value of labor, however, like the value of all things, is 
affected by marginal increments. If a man applies his labor 
to land which is so abundant that it can be had for the asking, 
there will be no rent of the land, and the value of the entire 
product will consist of wages. By increasing the number of 
workmen, the product may be more than proportionately in- 
creased, because the plot may be large and several laborers in 
co-operation may accomplish so much better results that the 
share of each will be greater. After the point of maximum 
utilization has been reached, however, the law of diminishing 
returns will assert itself, and each additional laborer will add 
relatively less to the product, until if the process were con- 
tinued long enough a new laborer would make no addition at 
all. The process will never actually be carried to this point, 
since the object of activity is the attainment of some result ; 
if there is no result, the activity will cease. At any given 
time, however, there is always a final or marginal workman 
who is making some contribution to the product. If there is 
free competition and if all the laborers do their allotted task 
equally well, so that there is no choice between them, the 
share of the product ascribable to any of the workmen miust be 
equal to the additions made by the last or marginal laborer 
actually at work. Since the value of the entire product is here 
due to labor, the rate of wages is equal to the product of the 
marginal laborer. Wages depend upon marginal productivity. 

If, instead of operating with a given piece of land, the 
laborer were to utilize a given quantity of capital, the result 
would be the same. Suppose that the labor is applied to a 


41 8 Wages. [§175 

given quantity of looms. The total product here indeed is 
not wholly due to the labor, because the looms cost something, 
whereas the land was so plentiful that it cost nothing. The 
share of the product due to the looms, however, is equivalent to 
the interest on the capital invested. If the number of looms 
remains fixed and there are no changes in the demand, each 
additional workman will add an increasingly smaller increment 
to the total product ; and the share of the product at any given 
time due to the labor will, as before, be equal to the contribu- 
tion made by the workman that is employed at the margin. 
What he earns sets the standard for all the others. 

In actual life, indeed, the quantities of land and capital are 
fixed just as little as is the number of laborers. The marginal 
employment of laborers will therefore depend not alone on the 
amount of labor, but on the amount of the other productive 
factors. For these are all competing with each other. At a 
certain point in the process of increasing the number of 
workmen on a given plot of land it will be more profitable to 
use more land instead of more workmen ; and as the better 
land acquires a value, a part of the product will consist of land 
rent. In the same way at a certain point it will pay better to 
use more looms, so that an increasing part of the product will 
consist of the rent of the looms or of the interest on the capi- 
tal invested in the looms. Since the looms occupy space, the 
product will be divided into land rent, interest and wages. 
And if there are continual temporary changes going on, a part 
of the product will take the shape of profits to the entrepreneur. 
All this, however, although it may obscure, cannot prevent, the 
fact that there is always a point of marginal employment of 
labor, and that at this margin there is a certain part of the 
product ascribable to labor. The normal rate of wages, that 
is, the amount to which wages tend to conform under conditions 
of free competition and mobility of both capital and labor, 
is the amount of value which a given increment of labor 
produces at the margin. 

§ 176] Rate of Wages. 419 

176. Rate of TATages. 

It may be claimed that the productivity of anything at the 
margin depends on relative scarcity. Scarcity, however, con- 
notes supply, and the supply of labor, like that of other things, 
depends on cost of production. Are we not then, after all, 
really coming back to the cost theory of wages? 

The cost theory, however, can no longer be stated as the 
minimum of subsistence theory. The cost of living at any 
given time is affected by the standard of life. With the pro- 
gress of civilization and the alteration of human wants, the stand- 
ard changes. The standard of the Chinese coolie differs 
from that of the American workman ; the standard of the farm 
hand from that of the factory operative. When the cost theory 
of wages is couched in terms of the standard of life theory it 
loses its pessimistic connotation. For if wages vary with the 
standard of life, anything which lifts the standard will raise the 
rate of wages. 

In reality, however, the standard of life cannot accomplish 
the impossible. The highest standard will not prevent wages 
from falling in the face of a decrease in the demand for the 
product and a decline in industrial prosperity. If the em- 
ployers cannot sell their product at a given price, they must 
lower cost or abandon the business. From this point of view 
the cost of labor is like the cost of anything else ; it must 
adjust itself to the price. As was said by Longfield three- 
quarters of a century ago, the wages of the laborer depend 
upon the value of his labor and not upon his wants. 

The standard of life theory and the productivity theory may 
thus be declared complementary. They are both true in the 
sense that the cost and the utility theories of value are true. 
But while marginal utility tends to equal marginal cost, we 
know that the ultimate explanation of value is to be found on 
the side of utility and that marginal cost adjusts itself to mar- 
ginal utility. Cost seems to be the cause of value, but is in 
reality a measure rather than a cause. So, in the same way, 

420 Wages. [§ 177 

marginal productivity (that is, marginal efficiency or utility) 
is the causa causans of the rate of wages, while the standard of 
life (or marginal cost), which seems to be cause, in reality 
adjusts itself to the productivity. The rate of wages may 
be expressed in terms of either, but the positive force is 

The standard of life, however, is of exceedingly great im- 
portance. It often serves as a dyke to prevent for a time at 
least the inundation of the field. It is here that the contrast 
between men and things is apparent. With ordinary com- 
modities, a new-comer who can produce the same goods at 
lower cost will reduce the price. With labor, if the cost, that 
is, the standard of life, has become a customary one, the new- 
comer will not be so apt voluntarily to submit to a lower stand- 
ard. To the ordinary producer low cost of the product means 
high gains ; to the laborer low cost of the product, that is, low 
wages, means low gains. It is only where the new-comers are 
habituated to a lower standard and where the exigencies of the 
situation force them to accept the smallest sum the employers 
will give, that the real difficulty arises. Thus women's wages 
are frequently lower than men's, not only because in some oc- 
cupations women produce less than men, but also because, even 
where the product is the same, the woman's standard of life is 
lower, in that she is generally not the support of the family 
and is often not entirely dependent on her earnings. In the 
same way the immigrant receives lower wages than the native 
workman, not only because his contribution to the product is 
frequently less through ignorance or lack of skill, but because 
his standard of life is so much lower that he will be willing 
to work for less — at least until he becomes educated up to 
the new standard of life. 

177. Course of Wages. 

Since wages are fixed by the value of the marginal incre- 
ment of labor employed, changes in the normal rate of wages 
depend upon changes in the location of the margin. These 

§177] Course of Wages. 421 

changes may take place on the side of labor or on that of the 
other factors of production. 

Anything which tends to enhance the productivity of labor 
in itself will increase the product of the marginal unit and thus 
raise the rate of wages. Education, the development of mental 
and moral vigor, energy and application — in short, all those 
qualities which differentiate advanced from low-grade com- 
munities — tend to raise wages because they increase product. 
So far as governmental action or labor organizations succeed 
in lifting this plane of efficiency they also contribute to the 
rise of wages. From this point of view the standard of life 
acquires an additional significance, because of the reflex action 
of the standard itself upon the efficiency of the laborer. The 
better the man, the more valuable his work. On the other 
hand, the margin may be affected by changes in the other fac- 
tors of production. For instance, when land is relatively 
plentiful as compared to labor, the margin is high. In all new 
countries land rent is small, population sparse, and the return 
to labor abundant. In proportion as land becomes scarcer or 
less fertile, wages tend to fall relatively to land rent. Per 
contra, when new sections are opened by colonization or 
immigration, the tendency is for rent to fall and wages to 
rise. If land were the only other factor to be considered, 
it would be true that land rent tends to rise at the expense of 

Land, however, is not the only factor. As the supply of 
cap ital bec om es more copious, the joi nt_:Dmdu£t_Ql£apita] and 
labor r apidlyL-Lncreas^s-.— With the growth in the supply of 
capital the rate of interest tends to fall. When the rate 
becomes as low as in modern industrial communities, there is 
such a perpetual and prodigious renewal and multiplication of 
capital that the productivity of the marginal laborer will con- 
stantly augment. Instead of working, with no tools or poor 
tools, he will have at his disposal ever better implements and 
finer machinery. Yet these better tools and finer machinery 
will cost constantly less. The product will be larger, and the 

422 \Vages. [§ 178 

part of the joint product to be ascribed to capital will be rela- 
tively smaller. Wages, in other words, will tend to rise. 

Where both these forces operate simultaneously the result 
depends on their reciprocal influence. In early stages of eco- 
nomic development, as in some of our Western states, both 
wages and interest fall while land rent rises. In the older 
and industrially progressive sections, on the other hand, the 
increase of capital may overbalance the relative scarcity of 
land, and although land rent will rise, the total product will 
increase so much more rapidly that wages will rise as well. 
Wages in the great industrial establishments of New England 
have increased during the last half-century, despite the growth 
of land rents. Capital tends to raise the marginal contribution 
of the laborer, because it adds to his efficiency, that is, to his 
control of the powers of nature. 

There exist in all the important countries ample statistics to 
show the advance in real wages since the early stages of the 
capitalist system. We shall content ourselves with reproducing 
in the table on page 423 the figures for the United States since 
the civil war. These disclose the striking fact that real wages, 
that is, the amount of commodities that can be bought with the 
money wages, have risen more than 100 per cent in industry 
and more than 70 per cent in agriculture. In other words, 
notwithstanding the practical exhaustion of the free lands and 
the rise in land rents, wages have increased so that the labor- 
ers enjoy a continually greater command over the conveniences 
of Hfe. There could be no more eloquent testimony to the 
power of the modern industrial system to enhance the welfare 
of mankind. We also add (opposite page 422) a chart show- 
ing the relation of wages to hours of work in the United States 
as compared with prices of food, since 1890. 

178. VariationB in Wages. 

Actual wages differ from normal wages thus far considered 
in three respects. The variation may be due to market in- 
fluences, to the nature of the occupation, or to the conditions 

_J o 



CO 52 



























U J/) 
> UJ 

a: ^ 






























































<n ^ 










' ■ 

































































Variations in Wages, 






13 <v 


















Falkner's Index 







































25 Occupations.* 


f Labor,4 

City Wages. 

519 Occi 


























lOI 2 










91. 1 



































82 9 















103. 1 

















102. 1 
















III. 2 



1 Unweighted averages of wages in 21 industries, from Senate 
(Aldrich) Report on Wholesale Prices, Wages and Transportation, p. 180. 
All wages in this table are on the gold basis, and all real wages down to 
1889 are based upon Falkner's weighted index numbers of prices, from 
the same report, p. 100. The meaning of the terms weighted and un- 
weighted are explained below (§ 195). 

2 Unweighted averages covering 12 important cities, from Bulletin oj 
the Department of Labor, No. 18, p. 669. 

3 Weighted averages of monthly wages, reduced to gold basis, com- 
piled from Bulletin No. 26, miscellaneous series, United States Depart- 
ment of Agriculture, p. 15. 

* Weighted averages of weekly earnings from Bulletin of the Bureau 
of Labor, No. 53, pp. 721-723. All real wages from 1890 to 1903 based 
upon index numbers of retail prices given in this bulletin. 

This table is taken from Adams and Sumner, Labor Problems (1905), 
514. It is selected as, on the whole, the most accurate and conservative 
presentation of the facts. The authors give several warnings as to the 

424 Wages. [§178 

of equality as between the giver and the recipient of wages 
in the same occupation. 

(i) Market variations need not detain us long. Like all 
market prices, wages in every-day life are the result of ephem- 
eral changes. While of the utmost importance to the prac- 
tical business man, the market oscillations do not lend 
themselves to any detailed analysis. In brisk times, when the 
temporary demand increases faster than the supply, wages 
advance and vice versd. Farm hands secure higher pay at 
harvest time ; factory operatives must choose between lower 
wages or less work during a period of great temporary depres- 
sion. These facts are so obvious as to need no elaborate 

(2) The inequalities may be due to the occupations them- 
selves. We do not here indeed deal with market wages, but 
the wages are normal only within each occupation. They are 
particular normal wages, not general normal wages. Some- 
times the inequality is more ostensible than real. The sea- 
sonal demand may differ. In the wholesale clothing trade the 
two busy seasons are followed by the slack months ; the brick- 
layer can ply his vocation only in favorable weather. The 
rate of wages for permanent workmen must be such as to 
equalize these differences. The high nominal day wages of 
the bricklayer may be far lower real monthly wages ; the high 
weekly or monthly wages of the clothing " operator " during 
the busy season may be only moderate real yearly wages. 

Adam Smith attempted to reduce the inequalities in wages 

use of the table : (i) In the industrial group, the figures are the results 
of three distinct investigations. The averages are not absolutely com- 
parable. But the probable error is slight. (2) Up to 1889 the compar- 
ison is with wholesale prices, after 1890 with retail prices. The effect of 
this is probably to exaggerate the relative advance of real wages for the 
earlier period. {3) Statistics of real wages are really trustworthy only in 
periods of normal prosperity. In time of depression, prices fall more 
quickly than wages, so that real wages seem to be increasing when in 
reality there is much more unemployment and a decline in the welfare of 
the laborers as a whole. Thus in 1896 the real wages seem to be higher 
than m 1892 or 1902. 

§ 178] Variations in Wages. 425 

to five causes : the agreeableness of the occupation, the con- 
stancy of employment, the ease of learning the trade, the degree 
of trust to be reposed in the workman, and the probability of 
success. In a more general way, however, it may be said 
that inequality of pay is due to inequality of work. A watch- 
maker gets more than a street-sweeper because his contribu- 
tion to the product is greater. If all units of labor were at 
least potentially equal, and if there was complete mobihty, the 
street-sweepers would all become watch-makers and wages 
would stand at a level. Obviously, however, the higher the 
degree of required skill, the greater the relative scarcity of 
workmen. This scarcity may be due to four causes : a defi- 
ciency of natural talent, a lack of opportunity, the cost of 
mastering the trade, and the obstacles in the way of move- 
ment from employment to employment. The differences 
between occupations may thus be either natural or artificial ; 
in either case the labor force is at any given time divided into 
what are in some respects at least non-competing industrial 

(3) Finally, the discrepancy between normal and actual 
wages may be due to conditions of inequality. This may be 
ascribable to the fact that there is only one-sided competition, 
or that the conditions of the mutual competition are different. 
There may be a monopoly on the labor side. If any group of 
workmen can secure such a complete control of the trade that 
it need fear no entrance of undesired members, it can raise the 
rate of wages considerably above the normal point. In rare 
cases only is this possible on a large scale in modem times. 
When the workmen are not securely intrenched by legal priv- 
ilege, as in the later stages of the mediaeval guilds, a rise of 
wages far above the normal level in any one occupation will 
set .in motion forces which will ultimately be strong enough to 
break down the artificial barriers. If the group is unduly re- 
strictive in its membership, the pressure from the outside will 
result in the formation of analogous groups, anxious to partici- 
pate in the extra gains, and ready to take over a share of these 

426 Wages. [§ 178 

gains. Minor instances, however, of this temporary monopo- 
listic excess of wages are by no means infrequent. 

On the other hand, competition may be absent on the side of 
the employers. Capital monopolies, however, have even less 
opportunity of driving wages down below the normal level 
than labor monopolies have of raising them above the level. 
For even though there may be no competition within the par- 
ticular industry, there will always be the competition between 
different industries for a supply of workmen. The laborers 
are not compelled to enter the employ of the monopoly, and 
will not do so when the wages offered are lower than in similar 
occupations. In point of fact, capital monopolies do not pay 
lower wages. The American workmen in their official unions, 
as we have seen, are not opposed to the monopolies and trusts 
on the score of low wages. The really perilous effects of capi- 
tal monopoly on wages is of a more insidious kind. All mo- 
nopoly means a relative restriction of production, for the point 
of maximum monopoly revenue does not necessarily correspond 
to that of maximum competitive output and marginal competi- 
tive cost. Since wages stand in such a close relation to pro- 
ductivity, a diminution of product must finally diminish the 
amount available for the payment of wages. Monopoly of in- 
dustry is at bottom as prejudicial to the wage-earner as to the 

Of more importance in practical life is the divergence of 
actual from normal wages ascribable to inequality in the con- 
ditions of competition. As we learned at the outset of our 
discussion, the ability to drive a bargain varies, and a unitary 
market price can emerge only when there are complete com- 
petition and mobility on the side of both buyer and seller. In 
the labor contract the individual seller of labor is in ordinary 
cases the weaker party. The workman is both more ignorant 
and more necessitous. He is more ignorant because, while 
the employer knows both the cost of labor and the price of the 
product, the workman is unacquainted with the details of 
the business and can only guess at his real contribution to the 

§ 179] Wages and Profits. 427 

product. He is more necessitous because he cannot afford to 
wait. The machine may lie idle, and profits may cease for a 
time ; but running expenses also cease, at least in part, and 
when the machine starts up, profits will follow. The laborer 
may remain idle, but running expenses, that is, cost of living, 
do not cease. If the machine stops, it still endures ; if the 
workman stops, he starves. 

When therefore the individual laborer is left to his own de- 
vices, he may fail to secure his due share of the joint product. 
Advantage may be taken of his ignorance or of his necessity ; 
and the example that is set by the less scrupulous employer is 
not only contagious, but also often imposes itself as a competi- 
tive condition upon others who might naturally possess more 
scruples. The result is a struggle between wages and profits 
which transfers itself to the arena of both economic and politi- 
cal life, and which creates what is known as the labor problem. 

179. Wages and Profits. 

The relation of wages to profits is thus complementary as 
well as antagonistic. They are complementary in the sense that 
prosperity may mean both^high profits and high wageis. Profits, 
as we have seen, are the chief inducement to enterprise. The 
anticipated gains to be derived from fluctuations in value 
constitute the real incentive to business activity and hence to 
modern production. The hope of profits leads to the invest- 
ment and increase of capital, and to a better co-ordination of 
the factors of production, and thus under normal conditions to 
an increase of output. The increase of product is apt indeed 
to be followed by a growth of population. When the product 
increases at a faster rate than the available supply of workmen, 
that is, as long as the product keeps ahead of the population, 
wage will tend to rise. Profits are constantly exhausting 
themselves, only to be renewed in a fresh attempt to conquer 
nature. High profits are hence the best hope of high wages, 
because it is chiefly through the existence of high profits that 
mankind has any assurance of that augmented output which 

428 Wages. [§ 179 

is the chief factor in raising the marginal contribution of labor. 
Profits and wages are in this sense complementary. 

On the other hand, the immediate division of the product in 
each individual case and at any given moment is largely one 
of relative power. The more that is taken as profits by any 
single employer or group of employers, the less will be available 
as wages ; the more that is paid as wages, the less will be re- 
ceived as profits. In this sense wages and profits are antago- 
nistic. In good times wages and profits both go up, in bad 
times wages and profits both go down ; but at all times both 
employer and employees will strive to secure the greatest pos- 
sible share of the joint product for themselves. Under condi- 
tions of frictionless competition, complete mobility and effective 
equality in bargaining, the share of each will adjust itself to the 
point of relative contribution to the product ; under conditions 
of actual life each side may secure an excess at the expense 
of the other, and with incidental injury to the public. In 
the great majority of cases the excess goes to the employer. 
How this excess may be obviated, and this injury reduced to 
the lowest proportions, becomes therefore a matter of urgent 

The struggle of the laborer to improve his condition has 
assumed four principal forms. He has sought to invoke the 
protection of the law j-^Ohe has endeavored to strengthen him- 
self and his fellows by organization; he has attempted to sub- 
stitute a new principle of remuneration ; he has striven on the 
basis of existing methods to effect a working agreement with 
the employers. In other words, the four phases of the struggle 
are^ labor legislation,nabor organization^rofit sharing or co- 
operation, ^nd arbitration or conciliation. These will now 
engage our attention. 


180. References. 

In General: Adams and Sumner, Labor Problems (with excellent 
bibliographies, 1905); J. G. Brooks, The Social Unrest (1903); United 
States Industrial Commission, Report (1901), V, XVI, XVII, XIX, 723- 
956; P. de Rousiers, Labour Question in Great Britain (1896) ; G. Drage, 
Labour Problem (1896); W. H. Beveridge, Unemployment (1909); Re- 
ports and Bulletins of the National Civic Federation (1901-1910); 
Reeves, State Experiments in Australia and New Zealand (2 vols., 1903). 

Labor Legislation: Mrs. S. Webb (ed.), The Case for the Factory 
Acts (1901); S. and B. Webb, Problems of Modern Industry {1898), ch. 
iv; Hutchins and Harrison, A History of Factory Legislation (1903); 
W. S. Jevons, The State in Relation to Labor (1882); S. Whittlesey, 
Tendencies of Factory Legislation (Am. Acad, of Polit. and Social Science, 
Annals, XX, 1903) ; A. F. Weber, Labor Legislation in the United States, 
in Exhibit of Department of Labor at the . Louisiana Purchase Exposition 
(1904); Goldmark and Sikes, Child Labor Legislation (Handbook pub. 
by the National Consumers' League, 1905) ; H. R. Seager, Attitude of 
American Courts to Restrictive Labor Laws (Pol. Sci. Quart., XIX, 1904), 

Labor Organization : S. and B. Webb, History of Trade Unionism 
(1894) and Industrial Democracy (2d ed., 1904); W. Smart, Distribution 
(1899), chs. xx-xxiii; J. Mitchell, Organized Labor (1903) ; F. S. Hall, 
Sympathetic Strikes and Sympathetic Lockouts {Columbia Studies, X, 1898); 
G. G. Groat, Trade Unions and the Law in New York {Ibid., XIX, 
1905); Hollander and Barnett, Studies in American Trade- Unionism 

Profit Sharing and Co-operation : D. F. Schloss, Methods of In- 
dustrial Remuneration (3d ed., 1898) ; N. P. Oilman, Profit Sharing { 1889) 
and A Dividend to Labor (1899) \ Beatrice Potter [Mrs. Webb], The Co- 
operative Movement in Great Britain (1895); ^^- Jones, Co-operative Pro- 
duction (1894); Catherine Webb, Industrial Co-operation (1904); J. G. 
Holyoake, History of Co-operation (2 vols., 2d ed., 1906). 

Arbitration and Conciliation : H. Crompton, Industrial Concilia- 
tion (1876); L. L. Vrice, Industrial Peace (1887); G. v. Schulze-Gaver- 
nitz. Social Peace (trans, by Wallas, 1893) ; E. L. Shuey, Factory People 


43 o Labor: Problem. [§ i8i 

and their Employers (1900) ; N. P. Gilman, Methods of Industrial Peace 
(1904) ; V. S. Clark, The Labor Movement in Australia (1906) ; H. Broad- 
head, State Regulation of Labour in New Zealand (1908). 

181. Labor Legislation. 

Legislation in belialf of the laborer has assumed three prin- 
cipal forms, dealing respectively with the conditions of employ- 
ment, the conditions of remuneration and the results of 

(i) The chief abuses in the conditions of employment first 
disclosed themselves in the factories. The enactments de- 
signed to deal with these abuses are hence known as factory 
laws. It was not long, however, before the provisions of the 
law were extended to other occupations than those conducted 
in technical factories. None the less, the old name has per- 
sisted. England, as the original home of the factory system, 
led the way. The act of 1802 applied only to very young ap- 
prentices in cotton and woollen mills, that of 18 19 to all young 
children in cotton mills. In 1825 and 1831 the age limit was 
raised ; in 1833 the law was extended to other textile industries ; 
in 1 84 1 and 1844 it was applied to women in mines and tex- 
tile factories. In 1847 and 1850 the provisions were made 
more rigorous; in 1864 they were made applicable to all large 
industries, and in 1867 to smaller workshops, until in 1878 a 
general code of factory legislation was enacted. In the rest of 
Europe and America the system came somewhat later. In the 
United States the movement began in New England, spread 
subsequently to the Middle and Western states, and is now 
being actively pushed in the South. 

The earliest form of factory legislation was the prohibition of 
child labor. Children of tender age must be protected not 
only against the unprincipled employer but against the greedy 
or necessitous parent. The argument is biological and social 
as well as economic. To permit child labor is to stunt body and 
mind, to breed ignorance and immorality, to foster a progres- 
sive deterioration of the working population. The claim that 

§ i8i] Labor Legislation. 431 

the earnings of the children are needed for the family support 
is dispelled by the well-authenticated fact that when the father 
is the sole wage-earner his income tends to equal the previous 
earnings of the entire family. In advanced states like New 
York child labor is regulated by the compulsory school law 
which prohibits employment of children under 14 during the 
school term ; by the factory law which forbids child work under 
14 years, and regulates it between the ages of 14 and 16 ; by 
the mercantile law which extends substantially the same pro- 
visions to all commercial employments; and by the street 
trades law which applies to youthful newspaper vendors. The 
National Child Labor Committee formed in 1904 is bending 
its energies to securing the better enforcement of the law in the 
East and the enactment of similar measures in the rest of the 

The second form of factory legislation is the regulation of the 
hours of labor. Applied first to children, it was gradually ex- 
tended to all minors, then to women, and finally to adult males. 
At every stage in the development it was opposed as an in- 
fringement of " freedom of contract." In the United States 
at present there is still the greatest diversity in the laws and 
their interpretation; but since the decision in 1898 by the 
Supreme Court upholding the Utah law which established the 
eight- hour day in mines and smelters, and the Kansas law, 
there has been a noticeable tendency in the direction of sus- 
taining the constitutionality of similar measures.^ 

The third form of factory legislation is the protection of life, 
limb and health. After the early appalling experience of the 
ease with which operatives were maimed and killed, government 
intervened to require various elaborate precautions and safety 
appliances. These provisions are now common, although not 
uniformly enforced. From protection of life to that of health 

1 This tendency has suffered what is probably only a temporary set- 
back through the decision of the Supreme Court in 1905 asserting by a 
bare majority the unconstitutionality of the New York ten-hour bake- 
shop law. 

432 Labor, Problem. [§ i8i 

is only a step, and in the so-called " dangerous trades " sanitary 
restrictions are now by no means unusual. The most recent 
development in America is the application of the principle 
to sweat-shops or the so-called parasitic trades, where as in 
Massachusetts and New York a license is now required for the 
manufacture of clothing, a