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THE

Modern Distributive Process.

STUDIES OF COMPETITION AND ITS LIMITS, OF THE

NATURE AND AMOUNT OF PROFITS, AND OF

THE DETERMINATION OF WAGES, IN THE

INDUSTRIAL SOCIETY OF TO-DAY

JOHN B. CLARK,

AUTHOR OF THE " PHILOSOPHY OF WEALTH,'

FRANKLIN H. GIDDINGS.

BOSTON :

PUBLISHED BY GINN & COMPANY.
I8S8.

AND

FRANKLIN H. GIDDINGS.

TVPOCRAPHV DY J. S. CuSHING & Co., PrESSWORK HV GiNN & CoMPANV,

Boston. Boston.

PREFACE.

A SYSTEMATIC restatement of the facts and laws of the Distribution
of Wealth is not attempted in these studies. Nothing is said in them,
except incidentally, of interest and rent. They are studies of the
process by which the income of modern society is divided among its
principal claimants. There is presented to the student of to-day a more
highly organized industrial system, and a more complicated process of
apportioning the social income, than those that were observed by Adam
Smith, David Ricardo, and John Stuart Mill. By the operations of
trade the total product of industry is divided and subdivided among
certain naturally constituted groups and sub-groups. The income fall-
ing to each sub-group is apportioned among its component economic
classes, capitalists, laborers, etc., by the bargains that they make with
each other. In each of these dividing acts, artificial combinations, — the
pools, trusts, labor unions, etc., of recent times, — have come to play a
part so prominent that competition would seem, at the first view, to be
abolished at important points. The mode of its working has been, in
fact, so changed as to demand a new scientific treatment.

It is the aim of these studies to analyze the natural group system of
modern industry ; to determine where within it competition is possible,
and where combination is naturally invited ; to ascertain the extent to
which this movement checks individual rivalry ; and to determine the
nature and scope of that residual competition which is the controlling
principle of the new regime. They thus undertake to separate that
which is transient from that which is permanent in the Ricardian Theory
of Distribution.

They analyze into its elements the sum traditionally termed profits,
and show that an essential element, the only part of the gross sum to
which the term pure profit can be applied, has not been clearly distin-
guished by the traditional analysis, and that, as a matter of course, the
special laws that determine its amount have not been established.
They show that the tendency of modern competition is to sweep this

iv PREFACE.

pure profit out of existence, while tliat of otlier forces is to cause it con-
tinually to reappear. The view of social evolution which these conclu-
sions afford is that of a progress toward equity between men promoted
by combinations, but guaranteed by the deeper and more general in-
fluence of competition itself. Injustice is diminishing, and that by
natural law. These studies, however, take especially into accouM the
ethical consciousness of society, which not only sets up an ideal toward
which society should tend, but, by public opinion, by legislation, and in
many subtle but effective ways promotes the natural movement in that
direction.

The complementary character of these essays by two writers is not a
premeditated result of joint authorship. The joint authorship was
agreed upon, because it was discovered that, working independently, the
writers had arrived at complementary conclusions. The essays were
originally published in the Political Science Quarterly, and are now re-
published by the kind permission of the editors of that review.

TABLE OF CONTENTS.

CHAPTER I.

The Limits of Competition.

By J. B. Clark.

Current economic theories deducible from the assumption of unlimited compe-
tition. Ricardo's system originally based on actual changes in industry;
the conditions of his time transitional. The contest between weak competi-
tors and strong ones, in certain industries, now decided; the strong only
surviving, and these forming confederacies for the purpose of checking
competition. Labor doing the same. Predatory competition vaguely con-
ceived; Professor Cairnes' effort to obtain a systematic theory of it. His
conception of cost of production, and his theory of non-competing groups.
These groups now practically merged. Machinery the chief leveller. Sur-
viving groups based on intellectual and moral differences among workmen.
Entrepreneur's labor more permanently separated from other labor. Lev-
elling tendencies specially active in America; these tendencies resisted by
trades unions; the resistance in the end unavailing. Competition more
effectively resisted by producers' unions. Pools as based on a normal
principle, to be regulated, l)ut not suppressed. A typical producing group,
consisting of sub-groups or strata, each containing capitalists and laborers.
True competition confined by nature within the horizontal lines that sepa-
rate strata. Radical difference between this grouping and that of Professor
Cairnes. Abnormal competition the cause of combinations. Control of
prices their aim; the restricting of production the means employed. Resid-
ual competition still an efficient regulator of prices. Combinations limited
to natural groups; fewness of competitors a cause of union; comparative
equality among them a necessary condition. Pools impossil)le in agricul-
ture. The effect of cheap transportation. Protective tariffs aids to national
combinations, and barriers against international ones. Legal regulation of
pools desirable; the complete suppression of them neither desirable nor
possible.

VI TABLE OF CONTENTS.

CHAPTER II.
The Persistence of Competition.

By F. H. GiDDiNGS.

The principle of competition fundamental in English Political Economy.
Studies and predictions of Mr. Bagehot. The theory of Professor Cairnes.
Recent revival of non-competitive methods. Suppression of competi-
tion predicted. Combinations play an increasingly important part, but
competition not destroyed. In some form a permanent economic process.
The combination equilibrium unstable. History of combinations. Fall
of prices. The nail combinations. Trunk line railroad allotments.
Coal combinations. The wall paper pool. Conditions determining the
area within which combinations can govern market competition. The
industrial structure of society. Two kinds of non-competing groups.
Any one combination usually confined within a single group. The groups
unlike in composition and unequal in condition. Combination difficult
in some, easy in others. When combination restrictions are beneficial.
What becomes of the competitive forces. Development of new utilities.
Steel substitutes for iron. Production of Bessemer steel. The higher
forms of competition. Combinations cannot keep production below the
full supply of society's needs. Nor prices above the level that yields aver-
age returns to labor and capital. The competitive forces. Efficiency
of combinations varies with industrial prosperity. Combination Policy.
Essential principles of Ricardian Economics re-affirmed.

CHAPTER III.
Profits under Modern Conditions.

By J. B. Clark.

Danger to society from vague ideas concerning business profits. Entrepreneur's
returns not scientifically analyzed. These returns the result of two unlike
functions; an employer, first, a directive laborer, and secondly, a merchant.
A manufacturer, a purchaser of raw materials, and of certain shares of the
utilities created in the manufactory. The workmen's share paid for in
wages, and the capitalist's in interest. Pure profit the difference between
the total amount paid for the elements of the product, and the amount
received for the product. Labor and capital involved in the mercantile part
of the business; payment for them included in wages and interest. The

TABLE OF CONTENTS. vil

mere acquiring and surrendering of ownership the essence of the entre-
preneur's function. The above analysis not vitiated by the uniting of sev-
eral functions in one person. The elements in the cost of a product not
controlled by the employer; the selling price of it not controlled by him.
Pure profit determined by general and irresistible forces. This sum capable
of being reduced by bad management, but not of being increased beyond a
certain point by good management. Competition, a cause of high and com-
paratively uniform managing ability in rival establishments. The division
of the labor of management conducive to this result. Contrasts between
the law of Rent and that of Profits; the area of cultivation extending; the
range of managing ability narrowing. Tendency of wages of management
toward uniformity. Tendency of the law of increasing returns in general
business to produce a normal and permanent over-production. The pres-
ence of experimenters in the business field a disturbing influence. The
natural check upon too high wages of management. Pure mercantile profit
the only conceivable sum from which great additions to general wages can
come. This profit in reality a vanishing sum, having, in a competitive sys-
tem, only a local and temporary existence. The effect of alternations from
business activity to depression, and that of the opening of a continent to
settlement. The eR"ect of invention; the profit gained by this means a guar-
anty for civilization. The entire gain from invention transferred, in the end,
to society. The testimony of statistics to the general truth of the foregoing
principles. The tendency of industrial development to connect personal
rewards with services rendered to society.

CHAPTER IV.
The Natural Rate of Wages.

By F. H. GiDDiNGs.

Two sets of forces operating with reference to the rate of wages. Automatic
forces of competition. Self-conscious forms of human feeling and opin-
ion. Three different views among economists. The true wages problem.
Standards of just wages. Communistic and individualistic ideals. No
absolute contradiction. The natural value of work. The rule of ideal
distribution. The English doctrine of the natural rate of wages. Adam
Smith's definition. Ricardo's theorem. John Stuart Mill's criticism. The
soul of truth in the Ricardian idea. The natural rate of wages is the rate
that calls out the laborer's potential efficiency. The economical rate is
also the ethical rate. The actual rate of wages. The wages fund doctrine.
Cobden's formula. Competition of employers raises wages notwithstanding

viii TABLE OF CONTENTS.

the economy of consolidations. Analogy of rent. Improving industry
multiplies employers or compels the original number to divide their gains
with the laborers. The actual rate of wages tends to conform to the nat-
ural or ethical rate. Exceptions to the rule. The competitive process
inherently defective. Exploitation of wages. No automatic correction
that meets the case. True significance of the ratio of capital to population.
Where altruism fails. Associated self-defence of labor necessary. What
labor organizations and legislation can accomplish. The sums that can be
added to wages. Economic analysis of the strike. Principles governing
the coherence of labor organizations. Mi-.take of the Knights of Labor.
Arbitration and legislation subject to the same principles. The rate of
wages made mainly by competitive forces. Moral forces acting through
organization and public opinion correct distributive errors due to defects in
the competitive process. Carried farther, legislation and demands of organi-
zations but retard progress.

THE LIMITS OF COMPETITION.

THERE is a sense in which much of the orthodox system of
political economy is eternally true. Conclusions reached
by valid reasoning are always as true as the hypotheses from
which they are deduced. If we admit the fact of unlimited
competition, we concede in advance many doctrines which cur-
rent opinion is now disposed to reject. This refuge will always
be open to the latter-day defenders of the faith, as they are
confronted by greater and greater discrepancies between their
system and the facts of life ; it will remain forever true that if
unlimited competition existed, most of the traditional laws
would be realized in the practical world. It will also be true
that in those corners of the industrial field which still show an
approximation to Ricardian competition there will be seen as
much of correspondence between theory and fact as candid
reasoners claim. If political economy will but content itself
with this kind of truth, it need never be disturbed by industrial
revolutions. The science need not trouble itself to progress.

This hypothetical truth, or science of what would take place
if society were fashioned after an ideal pattern, is not what
Ricardo believed that he had discovered. His system was posi-
tive ; actual life suggested it by developing tendencies for which
the scientific formulas which at that time were traditional could
not account. It was a new industrial world which called for a
modernized system of economic doctrine. Ricardo was the first
to understand the situation, to trace the new tendencies to their
consummation, and to create a scientific system by insight and
foresight. He outran history in the process, and mentally
created a world more relentlessly competitive than any which
has existed ; and yet it was fact and not imagination that lay at
the basis of the whole system. Steam had been utilized, ma-
chines were supplanting hand labor, workmen were migrating
to new centres of production, guild regulations were giving way,

2 POLITICAL SCIENCE QUARTERLY.

and competition of a type unheard of before was beginning to
prevail.

A struggle for existence had commenced between parties of
unequal strength. In manufacturing industries the balance of
power had been disturbed by steam, and the little shops of for-
mer times were disappearing. The science adapted to such
conditions was an economic Darwinism ; it embodied the laws
of a struggle for existence between competitors of the new and
predatory type and those of the peaceable type which formerly
possessed the field. Though the process was savage, the out-
look which it afforded was not wholly evil. The survival of
crude strength was, in the long run, desirable. Machines and
factories meant, to every social class, cheapened goods and more
comfortable living. Efficient working establishments were de-
veloping ; the social organism was perfecting itself for its con-
test with crude nature. It was a fuller and speedier dominion
over the earth which was to result from the concentration of
human energy now termed centralization.

The error unavoidable to the theorists of the time lay in
basing a scientific system on the facts afforded by a state of
revolution. This was attempting to derive permanent princi-
ples from transient phenomena. Some of these principles must
become obsolete ; and the work demanded of modern econo-
mists consists in separating the transient from the permanent
in the Ricardian system. How much of the doctrine holds true
when the struggle between unequal competitors is over, and
when a few of the very strongest have possession of the field }
Can the old-time competition be trusted to divide the fruits of
industry between one overgrown shop and another, and between
the owners and the workmen in each } Can this same force
control railroads, as it once controlled stage-coaches and packet-
sloops } To be more accurate, are the transactions of consoli-
dated railroad lines governed by the same principles as those
of single railroads and stage-coach lines when these are com-
peting with each other } Docs the old regulating principle
at present exist, and will general well-being continue to evolve
itself under its unaided influence ,-' An economic system

THE LIMITS OF COMPETITION". 3

adapted to the modern era must begin by answering these
questions.

In most branches of manufacturing, and in other than local
transportation, the contest between the strong and the weak is
either settled or in process of rapid settlement. The survivors
are becoming so few, so powerful, and so nearly equal that if the
strife were to continue, it would bid fair to involve them all in
a common ruin. What has actually developed is not such a
battle of giants, but a system of armed neutralities and federa-
tions of giants. The new era is distinctively one of consolida-
ted forces ; rival establishments are forming combinations, and
the principle of union is extending itself to the labor and the
capital in each of them. Laborers, who once competed w-ith
each other, are now making their bargains collectively wdth
their employers. Employers, who under the old r(fgiine would
have worked independently, are merging their capital in cor-
porations, and allowing it to be managed as by a single hand.
We need Ricardo's insight and foresight if we are to attain the
economic laws that are to govern the transactions of the prac-
tical world. The changes which w'e are witnessing are as start-
ling in character as those which he witnessed, and are on a
scale of greater magnitude. There is this difference between
his scientific position and ours, namely, that he saw before
him an interval of contest that must of necessity, sooner or
later, come to an end ; while we see approaching a period
of union which gives a promise of indefinite continuance. He
studied the evolution that created a type of industrial estab-
lishment ; we have to study the functions of this surviving
type. History will aid us by furnishing a point of departure,
and by indicating the direction of social development, but not
by giving facts from which any possible induction can give the
principles which we seek. The light derivable from past facts
is negative ; that derivable from present tendencies is positive.
The materials for study lie in the present and the immediate
future ; and, to be scientific, we must be somewhat prophetic.

Predatory competition between unequal parties was the basis
of the Ricardian system. This process was vaguely conceived

4 POLITICAL SCIENCE QUARTERLY.

and never fully analyzed ; what was prominent in the thought
of men in connection with it was the single element of stru2;s:le.
Mere effort to survive, the Darwinian feature of the process,
was all that, in some uses, the term competition was made to
designate. Yet the competitive action of an organized society
is systematic ; each part of it is limited to a specific field, and
tends, within these limits, to self-annihilation.

An effort to attain a conception of competition that should
remove some of the confusion was made by Professor Cairnes.
His system of "non-competing groups" is a feature of his value
theory, which is a noteworthy contribution to economic thought.
Mr. Mill had followed Ricardo in teaching that the natural price
of commodities is governed by the cost of producing them.
Professor Cairnes accepts this statement, but attaches to it a
meaning altogether new. He says, in effect :

Commodities do indeed exchange according to their cost of produc-
tion ; but cost is something quite different from what currently passes
by that name. That is merely the outlay incurred by the capitalist-
employer, for raw materials, labor, etc. The real cost is the personal
sacrifice made by the producing parties, workmen as well as employers.
It is not a mercantile but a psychological phenomenon, a reaction upon
the men themselves occasioned by the effort of the laborer and the
abstinence of the capitalist. These personal sacrifices gauge the market
value of commodities within the fields in which, in the terms of the
theory, competition is free. The adjustment takes place through the
spontaneous movement of capital and labor from employments that yield
small returns to those that give larger ones. Capital migrates freely
from place to place and from occupation to occupation. If one indus-
try is abnormally profitable, capital seeks it, increases and cheapens its
product, and reduces its profits to the prevailing level. Profits tend to
a general uniformity.

Wages are said to tend to equality only within limits. The
transfer of labor from one employment to another is checked
by barriers.

What we find, in effect [continues Professor Cairnes], is not a whole
population competing indiscriminately for all occupations, but a series of
industrial layers, superimposed on one another, within each of which the
various candidates for employment possess a real and effective power of

THE LIMITS OF COMPETITION: 5

selection, while those occupying the several strata are, for all purposes of
effective competition, practically isolated from each other. We may
perhaps venture to arrange them in some such order as this : first, at the
bottom of the scale there would be the large group of unskilled or nearly
unskilled laborers, comprising agricultural laborers, laborers engaged in
miscellaneous occupations in towns, or acting in attendance on skilled
labor. Secondly, there would be the artisan group, comprising skilled
laborers of the secondary order, — carpenters, joiners, smiths, masons,
shoemakers, tailors, hatters, etc., etc., — with whom might be included the
very large class of small retail dealers, whose means and position place
them within the reach of the same industrial opportunities as the class
of artisans. The third layer would contain producers and dealers of a
higher order, whose work would demand qualifications only obtainable
by persons of substantial means and fair educational opportunities ; for
example, civil and mechanical engineers, chemists, opticians, watch-
makers, and others of the same industrial grade, in which might also find
a place the superior class of retail tradesmen ; while above these there
would be a fourth, comprising persons still more favorably circumstanced,
whose ampler means would give them a still wider choice. This last
group would contain members of the learned professions, as well as per-
sons engaged in the various careers of science and art, and in the higher
branches of mercantile business.

It is essential to the theory that not only workmen but their
children should be confined to a producing group. The equal-
izing process may take place even though men do not actually
abandon one occupation and enter another ; for there exists, in
the generation of young men not yet committed to any occupa-
tion, a disposable fund of labor, which will gravitate naturally
to the occupations that pay the largest wages. It is not neces-
sary that blacksmiths should ever become shoemakers, or vice
versa, but only that the children of both classes of artisans
should be free to enter the trade that is best rewarded.

Professor Cairnes does not claim that his classification is
exhaustive, nor that the demarcation is absolute :

No doubt the various ranks and classes fade into each other by imper-
ceptible gradations, and individuals from all classes are constantly pass-
ing up or dropping down ; but while this is so, it is nevertheless true
that the average workman, from whatever rank he be taken, finds his
power of competition limited for practical purposes to a certain range of

6 POLITICAL SCIENCE QUARTERLY.

occupations, so that, however high the rates of remuneration in those
which Ue beyond may rise, he is excluded from sharing them. We are
thus compelled to recognize the existence of non-competing industrial
groups as a feature of our social economy.

It will be seen that the competition which is here under dis-
cussion is of an extraordinary kind ; and the fact that the gen-
eral term is applied to it without explanation is a proof of the
vagueness of the conceptions of competition with which acute
writers have contented themselves. Actual competition con-
sists invariably in an effort to undersell a rival producer. A
carpenter competes with a carpenter because he creates a simi-
lar utility, and offers it in the market. In the theory of Pro-
fessor Cairnes the carpenter is the competitor of the blacksmith,
because his children may enter the blacksmith's calling. In
the actual practice of his own trade, the one artisan in nowise
affects the other. It is potential competition rather than actual
that is here under discussion ; and even this depends for its
effectiveness on the action of the rising generation.

Cost, in the sense of personal sacrifice, governing prices
within the fields in which potential competition exists, is the
summary of this noteworthy theory. The criticism to be made
upon it is that the application of its more fundamental princi-
ple, that which connects the prices of commodities with the
sacrifices involved in producing them, is, in modern industry,
far wider than the author of the theory supposed, and wider
than it was, in fact, in European countries at the time when he
published his work. The limitations which he imposed on the
action of this principle are no longer necessary, and the four-
fold grouping of laborers according to their personal qualities
no longer corresponds with anything in actual life.

Modern methods of production have obliterated Professor
Cairnes' dividing lines. Potential competition extends to every
part of the industrial field in which men work in organized com-
panies. Throwing out of account the professions, a few trades
of the highest sort, and the class of labor which is performed
by employers themselves and their salaried assistants, it is
practically true that labor is in a universal ebb and flow ; it

THE LIMITS OF COMPETITION. J

passes freely to occupations which arc, for the time being,
highly paid, and reduces their rewards to the general level.

This objection to the proposed grouping is not theoretical.
The question is one of fact ; it is the development of actual
industry that has invalidated the theory which, ten years ago,
expressed an important truth concerning economic relations in
England. Moreover, the author of the theory anticipated one
change which would somewhat lessen its applicability to future
conditions. He recorded his belief that education would prove
a leveller, and that it would merge to some extent the strata of
industrial society. The children of hod-carriers might become
machinists, accountants, or lawyers when they could acquire
the needed education. He admitted also that new countries
afford conditions in which the lines of demarcation are faint.
He was not in a position to appreciate the chief levelling
agency, namely, the machine method of production as now
extended and perfected. Education makes the laborer capable
of things relatively difficult, and machines render the processes
which he needs to master relatively easy. The so-called un-
skilled workmen stand on a higher personal level than those
of former times ; and the new methods of manufacturing are
reducing class after class to that level. Mechanical labor is
resolving itself into processes so simple that any one may learn
them. An old-time shoemaker could not become a watchmaker,
and even his children would have found difficulties in their way
had they attempted to master the higher trade ; but a laster in
a Lynn shoe factory can, if he will, learn one of the minute
trades that are involved in the making of a Waltham watch.
His children may do so without difficulty ; and this is all that
is necessary for maintaining the normal balance betvv^een the
trades.

The largest surviving differences between workmen are
moral. Bodily strength still counts for something, and mental
strength for more ; but the consideration which chiefly deter-
mines the value of a workman to the employer who entrusts to
him costly materials and a delicate machine is the question of
fidelity. Character is not monopolized by any social class ; it

8 POLITICAL SCIENCE QUARTERLY.

is of universal growth, aixd tends, by the prominent part which
it plays in modern industry, to reduce to their lowest terins the
class differences of the former era.

The rewards of professional life are gauged primarily by
character and native endowment, and are, to this extent, open
to the children of workmen. New barriers, however, arise
here in the ampler education which, as time advances, is
demanded of persons in these pursuits ; and these barriers give
to a part of the fourth and highest class in the scheme that
we are criticising a permanent basis of existence. Another
variety of labor retains a pre-eminence based on native adapta-
tions and special opportunities. It is the work of the employer
himself. It is an organizing and directing function, and in
large industries is performed only in part by the owners. A
portion of this work is committed to hired assistants. Strictly
speaking, the entrepreneur, or employer, of a great establishment
is not one man, but many, who work in a collective capacity,
and who receive a reward that, taken in the aggregate, con-
stitutes the "wages of superintendence." To some members
of this administrative body the returns come in the form of
salaries, while to others they come partly in the form of divi-
dends ; but if we regard their work in its entirety, and consider
their wages in a single sum, we must class it with entrepreneur s
profits rather than with ordinary wages. It is a different part
of the product from the sum distributed among day-laborers ;
and this fact separates the administrative group from the class
considered in our present inquiry. Positions of the higher sort
are usually gained either through the possession of capital, or
through relations to persons who possess it. Though clerkships
of the lower grade demand no attainments which the children
of workmen cannot gain, and though promotion to the higher
grades is still open, the tendency of the time is to make the
transition from the ranks of labor to those of administration
more and more difficult. The true laboring class is merging
its subdivisions, while it is separating more sharply from the
class whose interests, in test questions, place them on the side
of capital.

THE LIMITS OF COMPETITION: 9

If we consider individuals of the higtier group, we shall find
that the grounds for classifying them separately from wage-
workers are not always distinct. It may be doubtful whether
a particular man should be rated as a workman, or as a subor-
dinate member of the employer's staff. In the case of respon-
sible managers this uncertainty disappears. The manager of a
great manufactory does what is clearly identified as entrepreneur s
work, and receives a reward which, in the minds of those who
pay it, stands in a recognized ratio to the product which is
secured by his efificiency. Such a man is identified with em-
ployers in interest, acts with them when labor conflicts arise,
and carries with him the staff of assistants who help to execute
his plans and, in some degree, share his fortunes. Here lies
the essential distinction between salaried labor and the true
wage-labor to which our inquiry is now confined.

America affords the conditions most favorable to the levelling
process which is reducing the workman proper to a single social
stratum. To this extent our democracy has an economic basis.
Free education and native versatility elevate the lower sub-
strata, while machine processes depress the higher. High
general wages assist, by placing within the reach of the children
of the state that modicum of training which opens many callings
to their selection. The barriers that separated wage-earners
into broad non-competing strata are, to all intents and purposes,
things of the past.

Art may create barriers where nature has destroyed them.
The concerted action of men may set in motion aristocratizing
influences, where a natural evolution would lead to democracy.
Trades unions may obstruct the transfer of labor from one occu-
pation to another, and create a partial monopoly of favored
employments. Restrictions on apprenticeships like those which
prevailed among the mediaeval guilds might, if carried far
enough, erect a palisade around each of the minute trades which
the factory system has developed, and substitute for the general
strata of former times an artificial grouping far more undemo-
cratic in its practical working. Labor organization has in fact
taken this course, to an extent that produces appreciable effects

lO POLITICAL SCIENCE QUARTERLY.

on relative wages. The boy who has both time and abihty to
learn a trade is not always permitted to do so ; and hence arises
the need of trade schools, especially in self-governing countries.
It is an important question whether the principle of equality
and consequent fraternity is to prevail over the artificial tendency
to exclusiveness and antagonism. In the long run and in the
general field it must prevail ; the forces in its favor are too pow-
erful to be resisted. The education which increases men's
working ability, the change of method which makes less and
less demands on that ability, supplemented by the public senti-
ment that revolts at the policy of denying to men the oppor-
tunity to do what they can for themselves and for society, will
keep within bounds the effort to monopolize skill by reviving
guild regulations. Trades unions may, for some time, interpose
obstacles to the free transfer of labor to the points of greatest
demand, which is the potential competition of Professor Cairnes'
theory ; but, in the long run, causes beyond arbitrary control
will keep this movement nearly free.

It is not workmen but employers who have erected the chief
artificial barriers against competition. A startling recent devel-
opment is the system of combinations by which producers of
particular articles have attempted arbitrarily to control the
supply and the market value of their respective products. This
apparently wholesale abrogation of economic law was unthought
of by early economists ; and although in Professor Cairnes' time
the pooling process had begun, even he regarded capital as in
a universal ebb and flow, ready to move spontaneously to the
point where it could gain the largest returns. Toward the
close of what we have termed the century of transition, pro-
ducers' combinations appeared on a large scale ; and very lately
they have stolen a forced march upon economists. While we
slept, as it were, and dreamed of the regulation of values by
the automatic flow of capital to the points of highest profit, the
principle apparently ceased to operate within very extensive
fields. It would be easy to name a hundred staple articles,
like glass, wall-paper, cut nails, screws, files, spool silk, anthra-
cite coal, steel rails, etc., of which the supply and the market

THE LIMITS OF COMPETITION: \ \

value are fixed by agreement by strong associations of producers.
The scientific significance of this transition is a question for
immediate study. Have we come unconsciously under a regime
of arbitrary values } Is the old regulating principle, competition,
abrogated.' Is it subject to disturbances so vast and uncertain
as to baffle scientific calculation }

The practical inquiry must be guided here as elsewhere by a
study of principles. Combinations have their roots in the
nature of social industry and are normal in their origin, their
development, and their practical working. They are neither to
be deprecated by scientists nor suppressed by legislators. They
are the result of an evolution, and are the happy outcome of a
competition so abnormal that the continuance of it would have
meant wide-spread ruin. A successful attempt to suppress them
by law would involve the reversion of industrial systems to a
cast-off type, the renewal of abuses from which society has
escaped by a step in development. Combinations are to be
accepted, studied, and, probably, regulated ; they ought not to
be suppressed if such action were practicable. This action is
fortunately not practicable except in the early stages of their
growth, while their form is still crude, and while the initial dififi-
culties of the system are great. The repressive policy may
then, for a time, succeed ; but it must be at the cost of social
retrogradation and economic loss.

Modern production is not an individualistic process ; it is the
act of society as a whole, and each separate man in the ranks
finds his function narrowly limited. Parts of the productive
operation are assigned to sub-organizations, and these are sub-
jected to a discipline which limits each member to an infinites-
imal part of general industry. He may be one of a group that
collectively cuts trees, or of another that saws logs, or of another
that fashions lumber into furniture. The chair that a primitive
settler would have hewn out with an axe is the product of one
of the numerous sub-organisms of society. The relations of
these sub-organisms to each other, though intricate, are capable
of clear analysis. We select a typical one for study, and, to
avoid confusion, consider no relations that are not essential to

12 POLITICAL SCIENCE QUARTERLY.

our present purpose. Crudely represented, the furniture-making
group arranges itself as follows :

Finishing

Cabinet making

Transporting
Lumber dealing

Wood cutting

Each stratum shows a subdivision into capitalists and work-
men ; and in each case there range themselves on the side of
the capitalists a few men of managing ability, who constitute
with their employer a sort of collective entrepreneur, and whose
rewards, in the form of salaries, have more in common with
profits than they have with wages.

True competition is limited by nature to the strata here in-
dicated ; cutters compete only with cutters, lumber dealers with
lumber dealers, etc. The distinction between this grouping
and that of Professor Cairnes consists, not in the fact that the
classification here proposed follows the lines of occupation, but
in the fact that it is based on real and not on potential compe-
tition. Whether a workman can or cannot transfer himself
from one sub-group to another is a question which we do not
raise. We inquire simply with whom he competes while re-
maining in his own group and continuing to discharge his
special function. In this lies the practical fruit to be gained by
a study of the grouping. As bearing on the direct adjustment
of relative wages, the question to be considered is : Whether
wood-cutters are potential competitors of furniture makers, etc.;
whether they or their children have such a choice of occupa-
tions open to them that the rewards of all tend toward a general
uniformity .-• As bearing on the question which we are now con-
sidering, the point to be studied is : What groups of men are
brought into competition with each other by the nature of their
industrial functions, and what consequences result from this
grouping."* It is to be noted, moreover, that in the sale of com-
modities, finished or unfinished, the competition is not between

THE LIMITS OF COMPETITION: 1 3

workmen, nor between employers, separately considered, but
between industrial establishments in their entirety. One
furniture manufactory as a whole competes with another. Each
is an organism in itself ; and although the employer in each
case becomes the owner of the product, and places it in his own
name upon the market, yet his relations with his men are such
as to make them partners in the sacrifice which creates the
product, and in the rewards derived from it. It is the efficiency
of both workmen and employers, and the relations between the
two, that determine the competing ability of an industrial estab-
lishment. Competition in the sale of commodities is limited to
establishments of the same sub-class ; it is confined by nature
within horizontal lines like those which, in the case of one
representative group, we have indicated in the foregoing
diagram.

These sub-groups are now solidifying. Within many of the
pairs of parallel lines competition has exterminated the weak
producers, and becoming fiercer as the survivors become fewer
and stronger, is compelling them, in the end, to unite or perish.
" Let us have peace " has become the watchword in this part of
the field ; and the truce which has ensued has taken the form of
a system of producers' combinations.

These unions aim to fix prices and, as a means thereto, to
restrict production. The one process limits actual competition,
and the other potential. To decide upon a price list, and to
abide by it, is to allay the rivalry between similar producers ;
to restrict production is to disturb the relations between dis-
similar producers. An arbitrary restriction upon the amount
of a commodity which can be placed upon the market checks
the enlargement of the industry, and thus obstructs the transfer
of labor and capital from group to group — which is the poten-
tial competition of Professor Cairnes' theory. Could each group
solidify into a corporation that could control its members within
and suppress rivalry without, the whole industrial field would
become definitely non-competitive. The old regulator of values
would be lost, and the appeal for state intervention would ac-
quire great force. The study of the coming interval is that of

14 POLITICAL SCIENCE QUARTERLY.

the principles which make a general appeal of this kind un-
necessary. It is the study of competition in residual forms.
The process is taking on an advanced type, less simple than
that of earlier times, and more legitimate than that which has
lately developed. Residual competition of the actual kind sub-
sists between productive establishments of comparatively equal
strength in combination with each other ; and residual competi-
tion of the potential kind is maintained between the entire
combination and the remainder of society. The members of
the pool are still rivals ; and capital and labor may still transfer
themselves to and from the industry which they try to control.
Monopoly prices have not been long maintained by any of these
organizations ; and this fact is due, not to chance, but to com-
plex and interesting economic laws. Leaving the discussion of
these principles to one whose analysis derives weight from
practical observation, I close this paper with a brief reference
to the conditions which determine the transition from the era
of predatory competition to that of union.

If each industry were represented by a diagram like the one
by which we have rudely shown the relation of sub-classes in
the furniture-making group, it would be found that the horizon-
tal lines which bound the fields of competition bound also those
of combination. The combining groups are the natural compet-
ing groups of industrial society. The limitation of these fields
is important. The fewer are the competitors, the fiercer is the
strife and the greater is the need of union. The fewer are the
competitors, the easier is the pooling process. The effect of
the union is to turn the belligerent energies of society in a new
direction. Under the old system it was rival producers that
destroyed each other ; under the new system it is producers of
dissimilar articles whose interests come into overt conflict. To
limit the supply and raise the price of a commodity is to make
members of other producing groups give for it an increased
proportion of their own products ; and if this attempt is met ' by
a similar proceeding on their part, there results an industrial
war, the battles of which are fought across the horizontal lines,
instead of between them. If unions were general, the lumber-

THE LIMITS OF COMPETITION. 15

men of the foregoing diagram would cease to attack each other,
and collectively do battle with the transporters and furniture
makers. Treaties of alliance on the old battle-ground, hostility
at the point of former amity, — such are the results of the tran-
sition to the new system. The field of economic war and the
nature of the belligerent process are both changed.

Combinations are the product of a social evolution, and can
have no permanent existence until the Darwinian contest be-
tween the weak and the strong has completed its work. The
surviving competitors must be few, strong, and nearly equal.
Marked inequalities of strength among the members of the
group defer the formation of the union, or break it when it is
formed prematurely. Rivals do not combine so long as one is
conscious of the power to exterminate the other. Moreover,
strength for such a contest consists not merely in the size of a
producing establishment, although that is an element to be con-
sidered ; it consists primarily in advantages for economical pro-
duction. Location is important, but the paramount influence
is the mastery of cheap methods. Natural selection locates
industries in the most favorable localities, and brings them to
some equality in method ; and until this is done there is no
chance for an economic truce.

In agriculture the number of competitors bars the way for the
formation of unions. It is to be noted that the prices of food
products are especially sensitive to changes in supply ; and if a
combination could restrict the crops uniformly and very moder-
ately, it could force the members of other industrial departments
to pay double or quadruple prices for the means of living.
Against such a calamity the nature of the agricultural industry
interposes its bar. Anthracite coal is somewhat like a food
product in its importance, and in the variations which the price
undergoes in consequence of changes in the supply. Coal-min-
ing affords strong inducements and exceptional facilities for the
pooling process, and it is here that the effects of union are
especially harmful to society. That the injury thus far done
has not been greater than it has been is due to residual com-
petition, though it has worked under unusual disadvantages.

1 6 POLITICAL SCIENCE QUARTERLY.

The value of this regulating agent under favorable circum-
stances must be indefinitely greater.

Portability in the commodity produced is essential to the
formation of a combination on a national scale. The large estab-
lishment must be able to reach with its product the entire ter-
ritory, and that without incurring a cost for transportation which
would prevent it from underselling the small local producers.
Baskets are made with great economy in a large shop ; but their
bulk subjects them to a cost for transportation that enables the
local manufacturers, though working with less economy, to hold
their respective fields, and defeats the formation of a union in
this industry. In the silk manufacture the freight costs practi-
cally nothing, and the mill which produces cheaply has at its
command all parts of the national territory to which its agents
choose to travel. The silk industry offers, in this respect, a
favorable field for combination. Moreover, cheapness of trans-
portation depends not only on the nature of a product, but also
on the development of an efficient railroad system. The low
rates for freight now prevailing in this country have done much
to create combinations among manufacturers ; if pools among
the railroads themselves were to restore the former cost of
transportation, they would undo this work. The economic war
bet\C^een transporters and other groups of industrial society
promises to result so favorably to the other groups as to facili-
tate combinations among them.

In but few instances has the principle of union among pro-
ducers shown a capacity to cross national lines ; and in so far as
a protective tariff debars the foreigner from being an efficient
competitor within the limits of a country, it hastens the forma-
tion of pools within those limits. In any case foreign com-
petition acts as a check upon the raising of prices after a
combination has been formed.

The industrial world would seem to be dividing into two por-
tions, in one of which, embracing the most important of all
forms of production, namely, that of agriculture, the principle
of individual competition continues, and produces results so
beneficial to society as to justify the enthusiasm of the early

THE LIMITS OF COMPETITION.

economists for competition as a regulator of values and a
divider of the fruits of industry. In the other economic divis-
ion, embracing transportation and a majority of manufactures,
the principle of combination is asserting itself, and introducing
a n'ginie in which prices are regulated by competition in latent
and residual forms. Whether these surviving types of competi-
tion are so nearly adequate to the regulating work which must
be done that no state action is called for, is a debatable question.
Whether state action should take the form of a legal suppres-
sion of combinations is a question which a brief trial of such a
policy would place beyond the debatable line. To regulate
combinations is possible and, in some directions, desirable ; to
permanently suppress them is impossible ; to temporarily re-
press them is either to force them into illegal forms, or to
restore the internecine war from which a natural evolution has
delivered us. To accept the results of this evolution and to
meet the demands of the new era is the part of wisdom.

John B. Clark.

THE PERSISTENCE OF COMPETITION.

THE late Walter Bagehot probably knew the " market "
better than any other thinker who has grappled with
theoretical questions of political economy. This fact lends
weight to his views of the present, past, and future of compe-
tition, as presented in those luminous essays on The Postulates
of English Political Economy, written just before his death.
John Stuart Mill had said that "only through the principle of
competition has political economy any pretension to the charac-
ter of a science," ^ — a dictum that compressed into a sentence
the economic system of Ricardo, James Mill, Senior, and
McCulloch. John Stuart Mill himself distinctly recognized
the hypothetical character of this system, and in the chapter
on " Competition and Custom " he undertook to show that it
was only the wholesale trade and the great articles of com-
merce that were really under the dominion of competition.
At the same time he asserted that the influence of competition
was " making itself felt more and more through the principal
branches of retail trade in the large towns," and that " the
rapidity and cheapness of transport, by making consumers less
dependent on the dealers in their immediate neighborhood,"
were " tending to assimilate more and more the whole country
to a large town." Mr. Bagehot, bringing to his investigations
a rare mastery of deductive reasoning, a breadth of view gained
by many excursions into the domains of history and physical
science, and the worldly sagacity of a practical business man of
Lombard Street, became convinced that the fundamental postu-
lates of English political economy, besides being only hypo-
thetically true for a great portion of modern European society,
were not true at all for uncivilized and semi-civilized societies,
nor for European societies in their primitive eras. His demon-

^ Principles of Political Economy, chapter on Competition and Custom, second
paragraph.

THE PERSISTENCE OF COMPETITION:

stration that in the undeveloped society there is no free trans-
ferabihty of labor was based largely on the researches of such
investigators as Sir Henry Sumner Maine ; but his demonstra-
tion that capital was not so transferable until very recent times,
and in modern times is so transferable only in the great com-
mercial nations like England, is peculiarly his own. It consists
in showing that the free transferability of capital, and therefore
the perfect competitive action of capital, depends on three con-
ditions, namely : the existence of a vast loan fund, the existence
of a vast speculative fund, and the free movement of young
men into those channels of business that promise the largest
profits.^ Formerly neither of these conditions existed. Until
recently they existed only in financial centres like London, but
to-day they exist so generally that their influence begins to be
universally felt. In this fact Mr. Bagehot discerned the true
cause of the rapid extension of competitive economics beyond
the limits of wholesale trade. The laws of the " great com-
merce " were being irresistibly forced upon the minor com-
merce. Accordingly he concluded : " As ' men of the world ' are
the same everywhere, so the great commerce is the same every-
where. Local peculiarities and ancient modifying circumstances
fall away in both cases ; and it is of this one and uniform com-
merce which grows daily, and which will grow, according to
every probability, more and more, that English political econ-
omy aspires to be the explanation." ^ In a word, it was Mr.
Bagehot's final conclusion that the mobility of labor and capital
is to become practically perfect, and the economic science based
on "the principle of competition," though not true at all of the
economic world of the past, is to become completely true of the
economic world of the future.

Meanwhile Professor J. E. Cairnes, in his attempt to adapt
the deductive political economy more perfectly to the present
facts of economic society, had discovered limitations of compe-
tition not imposed by "local peculiarities or ancient modifying
circumstances," but inherent in the nature of men, and there-

1 Economic Studies, edited by R. H. Ilutton, pp. 45-47.
^ Economic Studies, p. 20.

20 POLITICAL SCIENCE QUARTERLY.

fore permanent. Here, then, in the constitution of the " non-
competing groups " was an obstacle to the fulfilment of Mr.
Bagehot's predictions that could by no possibility disappear.
This limitation was not regarded, however, as of the greatest
importance. It would have the effect of creating a sort of
stratification of prices, but within each stratum the prices of
specific services and things would be determined more and
more perfectly by competition. Professor Cairnes himself dis-
tinctly admitted the importance of the loan and speculative
funds as a competitive force.

It is plain, too [he said], that the capital thus disposable is sufficient
for the purpose we have here in view, namely, to render competition
effective among the various industries ; since we find a portion of it con-
stantly moving abroad for foreign investment — a destination it would
scarcely receive while there was a prospect of reaping exceptionally high
returns from investment within the country. We have, therefore, in the
existence of this fund all that is required for a practically effective corn-
petition, so far as one instrument of production is concerned, and this
without necessitating any serious encroachment on the capital actually
engaged in productive operations.^

Little more than a decade has passed, and we witness a state
of things that, to superficial observation at least, seems totally
to contradict these final conclusions at which Ricardian political
economy had arrived. Just when the disappearance of the last
vestiges of a volitional restriction of competition was looked
for, and the universal application of the " rule of the market "
was confidently expected, we see a wide-spread revival of eco-
nomic methods and agencies over which The Wealth of Nations
was read as a funeral service. And most remarkable of all, it
is not only labor, to the absolutely free competition of which
natural and permanent limitations were admitted, but capital —
that very agent which Mr. Bagehot said " runs as surely and
instantly where it is most wanted and where there is most to be
made of it, as water runs to find its level," ^ that seems to have
voluntarily massed itself into a solidarity, hedged itself about

^ Leading Principles, Harper's ed., pp. 63, 64.
^ Lombard Street, p. 13.

THE PERSISTENCE OF COMPETITION: 2 1

with new and most ingenious restrictions, and bound itself by
heavy penalties not to run to any new level or deviate from
wonted channels. This increasing prominence of pools and
combinations has given a new direction to theoretical thought.
A majority of the working economists who have kept up with
the progress of events no longer look to see the supremacy of
an unhindered competition. By not a few of the ablest investi-
gators the gradual suppression of the competition now existing
is predicted. Instead of moving toward freer competition, they
affirm, we are moving away from it,^ and reasons are offered to
show that in the very nature of business facts no other result
is possible. Not only of such vast organizations of capital as
the railroad system is thi^ tendency supposed to be true, but of
almost all industries having a large permanent investment.^
New agencies for adjusting prices it is expected will be neces-
sary. Between a solid body of non-competing employers on
one side, and a solid body of non-competing workingmen on the
other, will have to stand committees of conciliation and boards
of arbitration.^ The standard of \.\\c justiivi prctiitm, the "rea-
sonable price " of the middle ages, will be again set up and
enforced by an appeal, through compulsory publicity, to public
opinion.*

That combinations are to play an increasingly important part
in economic affairs, is altogether probable. But that competi-
tion is to be to a corresponding extent destroyed, and that
arbitration and publicity are to perform any other function than
that of equalizing temporary inequalities of competition, as
commercial credit equalizes temporary inequalities of economic
pressure, or as insurance equalizes temporary inequalities of
loss, are conclusions that should not be too hastily accepted.
We should be on our guard against two assumptions. We must
not assume that because competition is not observable in the
form seen on the produce exchange, it is not discoverable in

1 Arthur T. Hadley, Railroad Transportation, p. 65.

' Hadley, Private Monopolies and Public Rights, Quarterly Journal of Eco-
nomics, October, 1886.

8 John B. Clark, The Philosophy of Wealth, p. 66.

* Report of the Connecticut Bureau of Labor Statistics, 1885, pp. 16, 106.

2 2 POLITICAL SCIENCE QUARTERLY. '

any form. We must not assume that when market competition
is imperfect it may be ignored, as if it were quite non-existent.
These assumptions would be as unwarrantable as the assump-
tion of the a prioj'i economists has been in regarding the laws
of the wholesale market as so nearly true of economic society
everywhere and always that conflicting facts might be dis-
missed as irrelevant. That competition in some form is a per-
manent economic process, is an implication of the conservation
of energy. Given an aggregate of units of unequal energy,
their unequal activity is an inevitable consequence. With the
complexity of social environment that every quarter of the earth
presents, and the limitless variations of heredity, a society com-
posed of individuals of equal energy is an impossibility. There-
fore, when market -competition seems to have been suppressed,
we should inquire what has become of the forces by which it
was generated. We should inquire, further, to what degree
market competition actually is suppressed or converted into
other forms, and within what limits combinations can hold
together and act effectively. The combination equilibrium
may be, at best, an unstable one. The economic affairs cf
every member are in a constant ebb and flow. The relative
advantages of members as possible competitors cannot remain
long unaltered. And however nearly equal they may be at any
moment in economic strength, they will be unequal morally.
Not every member of a combination goes into it expecting to
break the agreement, but hoping that all other members will
keep it ; ^ but this is a true description of the conduct of some.
Different producers are always unequal in respect of that larger
fidelity that imparts a unique value to a commodity through
care in selecting the best materials and the most careful and
trustworthy workmen. They are unequal also in those faculties
by which production is adapted to changing conditions. The
discerning and alert secure the advantages that accrue from the
first production of superior substitutes for articles in common
use, or the first adoption of more economical methods. Dis-
turbances of equilibrium by any of these means may requicken

^ J. SchcEnhof, The Industrial Situation, p. 74.

THE PERSISTENCE OF COMPETITION: 23

competition within the combination. Competition may be
forced upon the combination from without by the accumulation
of outside capital seeking employment. The latter is a force
that nothing can overcome, though it may be to some extent
diverted. It is the organic process of growth, multiplying cells
in the vital organism, multiplying individuals in society, multi-
tiplying capital in financial centres, — all crowding perpetually
upon the existing means of subsistence and profitable occupa-
tion, — that insures the permanence of competition throughout
the whole range of organic phenomena.

The history of combinations to the present time fully verifies
these propositions. Combinations have not prevented the com-
petitive investment of new capital, or sustained prices, or main-
tained an effective discipline among their own members. The
general decline of prices has gone on with little interruption
since 1870 ; that is, during the period within which combinations
have had their phenomenal growth. Late calculations ^ give
the money cost of the average daily supply of food, dry goods,
boots, and fuel, for one adult, as 43.53 cents in 1870, and 30
cents in 1885. The charge for moving a ton of freight per mile
over one of the trunk line pool roads is given by the same sta-
tistician as 1.853 cents in 1870, and .68 cents in 1885.2 The
industrial depression of 1883-84, which carried nearly all prices
to a much lower level than they had reached in the previous
depression of 1878^79, did not spare the goods "controlled" by
combinations. As compared with the lowest prices at which
they were quoted previous to 1882, cut nails were 12 per cent
lower in 1884, and steel rails 39 per cent lower.^ The nail
industry affords a good illustration of the inability of combina-
tions to withstand the competitive action of new capital. In
1883 the Western nail association made several attempts to
restrict production by suspending work. Notwithstanding this,
the number of mills was increased during the year from ^^^
having an annual capacity of 8,500,000 kegs, to 79, with an

^ Those of Mr. Edward Atkinson in Bradstrcet's of December 18, 1SS6.

2 The Relative Strength and Weakness of Nations, The Century, Janur.r}-, 1SS7.

8 BiaJstrecl's, January 10, 18S5.

24 POLITICAL SCIENCE QUARTERLY.

annual capacity of 12,500,000 kegs, and half of the increase
was in the western district.^ In 1884 a new effort was made
to restrict competition ; but almost before it took shape the
manufacture of nails from steel began, and within a year the
steel nail mills that sprang up in the Wheeling district, not to
mention others, had a capacity of 2,600,000 kegs per annum.^
Combinations that might be expected to be strong and efficient,
because of their enjoyment of franchises and natural monop-
olies, are all the while breaking because of internal disagree-
ments. No longer ago than the autumn of 1885 trunk line
railroad business was completely disorganized because the roads
could not agree on their respective allotments. The anthracite
coal combination, formed in 1873, succeeded in controlling the
output for three years. Prices were gradually forced to a height
that the market would not bear, and stocks accumulated, in
spite of the restriction of production, until the combination
broke, in August, 1876, and 500,000 tons of coal were sold at
auction. Another attempt, made in 1878, was broken by rate-
cutting by the Lehigh Valley company and the contention of
the Reading company for a larger allotment. A third combina-
tion lasted from 1879 ^^ 1884, when its efficiency was destroyed
by the commercial depression and the increasing resort to
bituminous coal.^ A fourth arrangement, made in 1885, has
been imperfectly successful. Of all the industrial combinations
that have been described in alarming terms in the popular
reviews and anti-monopoly organs, probably not one-tenth have
continuously and effectively limited competition. One of the
most perfectly organized and most talked about of these has
been the wall-paper combination, and its fortunes have been
peculiarly instructive. It was formed in 1880, and made a
great deal of money. One party was paid ;^ 20,000 a year to
cease production. A scale of prices was established, and every
member was assigned his proportion of the total production.
The penalty for underselling was a forfeit of ^1000, one-half
to go to the informer. Monthly meetings were held, at which
every manufacturer presented a detailed statement of his sales,

1 Braditreet's, May lO, 1884. 2 /^/^^ July 18, 1S85. 3 Ibid., January 17, 1885.

THE PERSISTENCE OF COMPETITION: 25

specifying the quality and price of every roll sold, and naming
the purchaser. Then the executive committee equalized the
proceeds, taking from those that had oversold, and distributing
among those that had not sold up to their quota. Yet, not-
withstanding these elaborate precautions, competition was not
prevented, either within the combination or from without. One
member has chosen to pay $10,000 a year in forfeits rather
than desist from underselling. By paying factories for keeping
idle, the combination has tempted so much new capital into
the business that it is now impossible to control production
or prices.

The conditions determining the area within which combina-
tions can govern market competition, divert it into new chan-
nels, and convert it into new forms, are to be found in certain
natural demarcations in the industrial structure of society.
This structure, resting on the basis of crude materials, which
it transforms, adapts, and consumes, is constituted by the segre-
gation of men into functional groups, corresponding to the sub-
divisions of industrial operations and the broader differences of
personal qualification. A rude attempt to indicate this structure
is made in the diagram upon the following page. The subdivision
of operations corresponds to the evolution of general utilities into
utilities that are more and more highly specialized, and to the
division and redivision of materials into successive sub-products,^
or, more strictly, into successive series of sub-products, as the
diagram indicates. Professor Clark has shown that the grada-
tion of sub-products marks off the producers into non-competing
groups of an entirely different kind from those described by
Professor Cairnes, and that the latter, constituted by such dif-
ferences of personal acquirement as those that separate artisans
from unskilled laborers, have been much broken down by
industrial progress. Yet there remains a grouping by differ-
ences of personal qualification, which Professor Cairnes failed
to state in sufficiently general terms. There is one class of
workers fit only for automatic manual labor ; namely, common
laborers and machine tenders. Above these is a class fit to be

1 John B. Clark, The Philosophy of Wealth, p. 112.

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THE PERSISTENCE OF COMPETITION. 27

intrusted with some responsibility and liberty of self-direction.
It is impossible for those in the first class to compete for places
with those in the second, though those in the second may
become competitors with those in the first in times of indus-
trial depression. A third class is composed of the automatic
brain-workers, such as book-keepers ; and a fourth class, of the
responsible brain-workers, including the superintendents and
directors. The basis of these distinctions, it will be seen, is a
much broader one than Professor Cairncs had in mind as the
ground of his grouping. It is also broader than the differences
of moral quality that the adjective responsible, used for the
lack of a more exact word, suggests. It is that broadest psy-
chological gradation, which Mr. Herbert Spencer has described
as consisting of differences of mental mass and complexity.^
These divisions cut transversely across those described by Pro-
fessor Clark, and constitute sub-groups within his groups. It
is, further, within the non-competing groups so constituted that
combinations are formed ; and, for reasons fully set forth by
Professor Clark, any one combination is usually confined within
the limits of a single group. This introduces a new complica-
tion, for the combination is a radically distinct aggregate from
the non-competing group within which it exists. While the
non-competing group consists of those that are supposed not
to compete with the members of any other group, but to com-
pete freely with each other, the combination consists of those
that are supposed not to compete at all with each other, but to
compete freely with those outside of its limits. The employer
groups and combinations are further complicated by the central-
ization there of capital.

It is plain that these demarcations describe groups that are
very unlike in composition and very unequal in economic condi-
tion. Heterogeneity of composition increases as we go back-
ward in the scale of sub-products toward crude materials, be-
cause the dimensions of the group enlarge, both geographically
and in respect of numbers. The group producing a final sub-
product is necessarily limited in size, not only because it repre-

^ See the article on The Comparative Psychology of Man, Mind, January, 1876.

28 POLITICAL SCIENCE QUARTERLY.

sents a minute sub-division of a more general product, but
because the quantity of a highly specialized product that society
can consume is itself limited quite narrowly. The market is
easily oversupplied and demands but a relatively small number
of producers. It follows that the possibilities of combination
are slight in the large and loose groups that produce the pri-
mary sub-products, unless their operations are protected by nat-
ural, or legal, especially patent-right, monopolies. In the small
and compact groups producing final and highly specialized sub-
products, the possibilities of effective combination are much
greater. Anthracite coal mining is a primary process, but it
yields to combination because it is a natural monopoly and
easily forms illicit alliances with the railroads. Steel making is
a secondary process, amenable to combination because protected
by patents ; but in iron making, also a secondary process, com-
bination is maintained very imperfectly and with great difficulty.
Besides being at this disadvantage in the matter of combina-
tion, the primary and secondary sub-product groups are sub-
jected to the further strain that disturbances of the economic
equilibrium, anywhere in the industrial structure, distribute
themselves backward toward the primary groups. Within each
group the distribution is downward, through the sub-groups
toward the lowest — the automatic laborers. A strike that
stops the production of a sub-product may cause the suspension
of operations and the bankruptcy of producers in the sub-pro-
duct group beyond it, by cutting off supplies ; but the liabilities
of the advanced group will be due chiefly to the preceding
groups, and the bankrupted employers and discharged workmen
will force their way downward as competitors for employment ;
some of the bankrupted employers obtaining places as clerks,
and some of the clerks and foremen taking work as machine
tenders and laborers. Furthermore, as Professor Clark has
shown, 1 the primary and secondary groups dispose of their pro-
ducts to society and receive their recompense only through the
tertiary, and arc therefore much at the mercy of any conditions
that the latter may impose.

1 rhilosophy of Wealth, p. 114.

THE PERSISTENCE OF COMPETITION: 29

One important conclusion is now in sight. When a product
is supplied to society in the full measure of the social needs,
the supply of correlative needs being taken into consideration,
the further investment of capital and labor in producing that
product should cease. That combinations in the final sub-
product series may often restrict competition to this extent is
evident from the fact that they often attempt to do more.
What, then, becomes of the competitive forces — where do
accumulating capital and labor find employment ? We are con-
fronted here with our primary question, and the answer to it
that now appears is one full of meaning for progressive socie-
ties. Diversion backward into the primary or secondary sub-
product groups would be the natural course for labor and capital
to take when barred out from the final groups, but for the facts
just noted ; vis.^ that the primary and secondary groups are
dependent on the tertiary for their market, and are obliged
ultimately to bear a large proportion of the losses of the entire
industrial system. In progressive societies, rich in inventive
talent, channels of less resistance will be opened by the inven-
tion or discovery of new utilities. These may be satisfactions
of wants that were never met before, or they may be superior
substitutes for the products that the new capital was deterred
from producing. The possibilities in the latter direction are
shown by the present production from steel of such articles
as rails, nails, tacks, and wire, that formerly were made only
from iron. The production of Bessemer steel ingots during
the first six months of 1885 was 40,000 tons in excess of
the production during the second six months of 1884. The
production of steel rails was 70,000 tons less. The differ-
ence had gone into other manufactures for which puddled iron
was formerly used.^ In societies that have learned to value
quality above quantity of possessions, other channels will be
found in the almost limitless possibilities of bettering the
quality of commodities. New utilities afford opportunities for
capital accumulating outside of the combinations ; the improve-
ment of quality gives vent to competitive energies within the

1 Bradsireei^s, August i, 1SS5.

30 POLITICAL SCIENCE QUARTERLY.

combinations. How this may be, is well illustrated by a cer-
tain brass goods combination that has maintained uniform
prices but made no attempt to pool production. The result
has been precisely that higher form of competition that John
Ruskin advocated in Unto This Last as the only one that
Christian communities should tolerate. The members of the
combination have rivalled each other in offering the most per-
fect goods for the price, and their products have attained a
degree of excellence that is unique in American mechanism.

But that competition shall be thus diverted into new and
higher forms, it is not necessary that combinations shall keep
production below the full supply of the social needs, or main-
tain prices above the level that yields average returns to the
labor and capital employed. Taking one series of years with
another, neither of these things can be done. While the area
within which combinations are possible is determined by the
industrial structure, the degree to which they can control com-
petition within that area is limited by the strength of the com-
petitive forces. These, as we have seen, are two : the pressure
of accumulating capital upon the opportunities of employment,
and the necessities of the producers already in the field. Dur-
ing an industrial depression the active competition of new
capital is at a minimum, but the established producers find in-
creasing difficulty in meeting their liabilities. Self-defence
becomes the ruling motive. Conversely, when demand is in-
creasing and prices are rising, the pressure of new capital
becomes intense ; but, the struggle to meet liabihties having
given place to an easy accumulation of gains, the motive for
resisting the competition of new capital is weak. Combinations
are therefore, in their historic origin and in practical limitations,
defensive organizations, for mutual protection against a compe-
tition that has become, or that threatens to become, predatory
and ruinous. It was during the industrial depression of 1883,
when production was far in excess of the demand, that the cut
nail combination, already referred to, tried to restore the bal-
ance by suspending operations. It was when the prices of
their product had declined nearly 13 to 15 per cent within

THE PERSISTENCE OF COMPETITION:

six months, that the writing paper manufacturers effected
a combination that limited production temporarily, but that
had the ultimate effect, as one of its members assured the
writer, of " building new mills." When the Bessemer steel rail
combination made its compact at Long Branch in August, 1885,
to limit its output by the demand for consumption, the capacity
of the works represented was greatly in excess of the demand,
and price-cutting within the combination had been going on for
some time. The market improved, and, at the end of a year
and a half, the Bulletin of the iron and steel association
announced that 1,500,000 gross tons of steel rails were made
in 1886, against 950,471 in 1885. And this improvement of
the market, enjoyed by other branches of the iron and steel
industry also, instead of tempting the combinations to extort
the highest possible prices, created a strong feeling on the part
of manufacturers that if prices were permitted to go higher, it
would so largely increase production as to bring about a reac-
tion.^ These are but examples at random from many that might
be cited. If stati-stics of the extent and efficiency of combina-
tions could be obtained, the curve undoubtedly would rise and
fall with the curve of industrial depressions.

The degree to which combinations can restrict competition
is further limited in more specific ways. As defensive organi-
zations they cannot sustain their weakest members indefinitely.
All business is in a sense a combination. Commercial credit
and personal accommodation enable all parties in the great
struggle for existence fairly to try their powers. By such
assistance temporary difficulties are overcome. Combinations
perform a like service in a negative way by restraining conduct
that is mutually injurious. But just as recurring waves of
bankruptcy from time to time sweep off the competitors that
are essentially weak, notwithstanding the help that they may
have alternately received and extended, so an industrial depres-
sion of unusual severity or duration forces one or another party
to unload his stocks at any prices that he can get, regardless of
combination agreements, and consummates the extinction of

^ Bradstreefs, December 25, 1 886.

32 POLITICAL SCIENCE QUARTERLY.

those producers whose disadvantageous situation or antiquated
methods make their cost of production relatively high. On the
other hand, any attempt of the combination to become an
aggressive agency for the positive enrichment of its members
is subject to the limitation, that the conditions that might
enable a combination to force prices to an unnatural level are
the very ones that insure the most disastrous reaction upon
such a policy. Other things being equal, new capital will hesi-
tate longest about entering into competition with established
producers in those industries in which each producer must have
a plant that is costly in proportion to the value of the total
product of all producers. But the combination that would reap
advantage from this hesitancy must face the fact that it is
precisely this expensiveness of plant that entails heavy fixed
charges, — which must be met at whatever sacrifice of profits,
— and impels competition to a ruinous extreme if more capital
is tempted into the business than the normal social need re-
quires. A short-sighted and grasping policy by railroad com-
panies and industrial combinations that might, by a liberal
course, have kept entire markets to themselves, has resulted
in the building of scores of railroads and hundreds of mills for
which no real need existed, and the struggles of these for sub-
sistence has kept rates and prices below the dividend-paying
level for years together.

Hence, as combinations learn their unalterable limitations in
"the nature of things," they must adjust prices and production,
by a conscious policy, to the normal basis that otherwise will be
reached in a more wasteful way. They must permit the full
satisfaction of normal demands and allow prices to gravitate to
an equality with cost of production. If there is really room for
new plant, and new capital seeks investment in new plant, the
combination by standing in the way will only encourage invest-
ment in excess. If a member of the combination, or a new
competitor, is able through the adoption of new machinery or
better methods, or by any other advantage that he enjoys, to
make his goods at a lower cost than has been possible before,
and therefore to put them on the market at a lower price in the

THE PERSISTENCE OF COMPET/T/OIV. 33

hope of increasing his sales, the combination must let him make
the price and leave other members to conform to it by adopting
his methods. Failing to do this, it will but intensify the inevi-
table struggle for survival when it comes. It does not invalidate
all this that pools sometimes pay would-be competitors for ceas-
ing production, and that members of combinations can some-
times afford to pay forfeits for price-cutting. These are but
means of testing the probable permanence of the existing rela-
tions of demand and supply. If the undersupply of the market
that tempts new capital is but temporary, the price paid to pre-
vent it from entering the field is the cost of warding off a loss
otherwise certain. If the undersupply continues, the attempt
to buy off competition will only stimulate it. If forfeits were
graduated according to the degree of price-cutting and the
volume of sales, and were made recoverable by the party paying
them if he demonstrated his ability to maintain his terms per-
manently, they might afford a nearly perfect test of the price
the combination must prepare to accept, and a nearly perfect
check against underselling for predatory purposes. Expendi-
tures in these ways, within the limits dictated by prudence and
the lessons of experience, are elements in the cost of produc-
tion under modern conditions as legitimate as insurance pre-
miums, and it is not impossible that combination actuaries will
yet reduce the principles governing combination forfeits to
something like scientific form.

If our conclusions so far are sound, can the affirmation be
maintained that market competition has been really suppressed,
or that the essential principles of Ricardian economics have
been overthrown 1 Ricardianism never contemplated competi-
tion in the production of additional goods for a market already
overstocked, or chronic competition in selling goods below the
cost of production. It assumed that when competition had
forced the price of any commodity down to the sum that barely
recompensed labor and risk, production and underbidding would
cease and labor and capital would find other employment. When
Ricardo wrote, this assumption was warranted by commercial
facts. It is only v.-hcn production is carried on by processes

34 POLITICAL SCIENCE QUARTERLY.

involving heavy fixed charges that producers are impelled to
continue operations without regard to the state of the market.
It is only when large reserves of capital can be drawn on that it
is possible to sell below cost, on a great scale, for the sake of
winning a strategic advantage. In Ricardo's time these condi-
tions did not exist in any trade or manufacture. If, then, com-
binations deal effectively only with competition below the sol-
vency line, are not the essential Ricardian principles as true
to-day as they ever were, and are not Mr. Bagehot's predictions
verified .-• The competition that wastes resources and ruins com-
petitors is an abnormal process that in a sound industrial system
will necessarily create reactions against itself. Such competition
will probably encounter an increasingly perfect resistance. The
competition that forces production to supply fully the social
demand, and forces prices down to an equivalence with the cost
of production, is normal. Limitation of the range through which
the series of competitive acts may extend but increases the
amount of normal competition, since by preventing the wasting
of capital it increases one of the chief competitive forces.

Franklin H. Giddings.

PROFITS UNDER MODERN CONDITIONS.

"\'X /"E arc drifting toward industrial war for lack of mental
* ^ analysis. Classes in society arc at variance over a ratio
of division, and have no clear conception of the thing to be
divided. If the profits of business constitute a limitless fund,
they furnish a corresponding incentive to strife ; aind if this sum
is virtual plunder, if it consists of wealth wrested by a social
arrangement from the men whose labor creates it, the discon-
tented class ought to include every member of society, and will
include most members. It needs to be definitely known what
profits are, and who earns them ; and again how large they are,
and who actually gets them. The nature of the prize of the
social contest and the equities of the case need to be made far
clearer than they have been.

Adam Smith's "profits of stock" included the general re-
turns of the capitalist-employer. More recent writers have
recognized that this person performs two functions, and receives
a reward in each capacity. That which accrues to him as a
capitalist is interest ; and that which comes to him as an em-
ployer, or business manager, is known as cntrcprc7icnr s profit.
This element is computed by deducting from his gross returns
the interest on the capital that he uses.

What is not recognized in the prevalent theories is that the
entrepreneur as such is a composite person. Besides furnishing
some capital he still performs two unlike functions, and receives
two distinct rewards. Of these rewards one is constant and the
other intermittent ; and it is this latter element that, as vaguely
conceived, constitutes the incentive to social strife. It is the
fact of confounding the two functions and merging the rewards
attaching to them that has placed economic writers where it
has been impossible either to make consistent theories or to
comprehend the developments of modern business.

36 POLITICAL SCIENCE QUARTERLY.

An entrepreneur is, first, an industrial organizer ; he directs
the productive energies of other persons. If he be a manu-
facturer he divides and subdivides the labor of making a prod-
uct, and assigns to each workman the part of the process to
which he is adapted. The thing to be accomplished is pre-
scribed ; there is a certain article to be produced, and there is
an accepted manner of producing it ; and the routine function
which first falls to the employer consists in directing the opera-
tion in its execution. He guards against wastes, impels workers
to effective effort, and co-ordinates their labors. By his direc-
tion the work of many individuals is brought into organic unity.
He is the brain of a little social organism ; he does its executive
planning, and communicates to the muscles the motive impulses
that set them at work and control their action.

In this capacity the employer is the most important part of
W^Q. personnel of the shop. He is a directive laborer. The out-
come of his effort is a certain mechanical result, a transforma-
tion of matter. Directive labor, muscular labor and machines
together create "form utilities"; they transform iron into im-
plements, wool into cloth, etc. ; and in these changes of form
lies the value that they jointly bring into existence. Employer
and workman are thus far laborers together ; what they get for
their efforts is, in the broad sense of the term, wages ; and the
employer's part is distinctively the wage of directive labor.

In addition to this there comes to an employer a return hav-
ing a wholly different origin and nature ; it is essentially mer-
cantile. An employer buys, sells and gets gain like any dealer
on the street. The business operations of a woolen manufac-
turer do not begin with wool in the sorting room, and end with
goods in the storehouse. He must obtain the wool from dealers,
and must hand the goods over to purchasers. The mechanical
part of his business is completed at the mill, and by the work-
ing organism of which he is the head ; the mercantile part ex-
tends into the world, and brings him into connection with other
producing organisms. In this particular excl^anging function
the workmen have no part ; the employer only is recognized in
the market as the buyer of materials and the seller of goods.

PROFITS UNDER MODERN CONDITIONS. 37

The buying of raw materials, however, does not end the em-
ployer's function as a purchaser ; there is something more to be
acquired if he is to become the valid owner of the product.
Into the finished goods there enter other elements than raw
materials, and these must be in part acquired by purchase.
Within the mill itself there are titles to be transferred. Day
by day, hour by hour, as the manufacturing goes on, new utili-
ties come into existence. Every turn of the engine results in
more cloth, more yarn, more carded wool, etc. The utilities
thus created have definite values ; unfinished goods may not be
immediately salable, but the employer would know how to rate
them were he to take an account of stock. Every step in the
process that brings them nearer to the condition in which they
can be placed upon the market adds something to the value of
the crude materials with which the process began. These in-
crements of utility are, as we have said, jointly created by three
agencies : directive labor, muscular labor and machines. This
determines their ownership : they belong, in undivided shares,
to the director, the workmen and the furnisher of machines, or
the capitalist.

Now the essential fact is that the employer buys out his
partners in the productive operation. He pays for the share of
the workmen in wages and for that of the capitalist in interest,
and acquires thereby a title to the utilities created in the mill.
As the raw material is his from the outset, he ends by becoming
the owner of every element of the product. In his own name
he may place the goods on the market and get what he can for
them.

The function of the entrepreneur as such consists therefore
in two operations, the one mechanical and the other mercan-
tile : he directs a productive process, and he buys the elements
that enter into the product and sells them collectively in the
product itself. In the one capacity he is a laborer and receives
a higher variety of wages ; in the other capacity he is a mer-
chant, and receives a margin of difference between what he
pays and what he gets. The finished goods are supposed to

38 POLITICAL SCIENCE QUARTERLY.

bring in the market more than the cost of all the elements
that compose them.^

In a complete study of profits it needs to be noticed that the
mercantile part of the employer's function requires both labor
and capital. He must spend time in obtaining materials, in
making contracts with workmen and capitalists, and in disposing
of goods. Here there is a need of labor ; and there is a neces-
sity for capital of the circulating kind in the holding of goods
until they can be sold and paid for. Mercantile labor as well as
mechanical is entitled to wages, and circulating capital as well
as fixed is entitled to interest. A mercantile wage constitutes
the second part of the general wage of business management ;
and an item of interest on circulating capital constitutes a part
of the general claim of capital.

The labor involved in buying and selling is only incidental to
the mercantile function. It is not the essence of it ; that lies
in the mere acquiring and surrendering of ownership. It is
because the elements that enter into a product come succes-
sively into an employer's possession, and then pass collectively
out of it, that he can look for a return 'over and above the wages
of every kind of labor and the interest of every kind of capital
involved in the business operation. We must group in one item
all that comes to an employer in compensation for effort of any
kind, and in another all that goes to compensate the capitalist.

The general wage of business management constitutes one of
the preferred claims on the returns of business ; it must be
deducted from them before final profits can be computed. Ordi-
nary wages constitute another preferred claim, interest a third
and the cost of materials a fourth. If, to avoid intricacy, we
group taxes, all forms of insurance and incidental expenses as a
fifth claim the sum of these five amounts will represent the
total cost of acquiring the title to a product In selling the
product for more than this sum total lies the employer's chance
of ultimate gain. Pure profit is the return of simple ownership.
It is free from all admixture of wages and of interest. It accrues

^ This analysis of gross profits was published in Work and Wages for March,
1887, in an article by the writer of the present paper.

PROFITS UNDER MODERN CONDITIONS. 39

to him who simply extends the aegis of his civil rights over the
elements of a product, and then withdraws it in order that the
product may pass into other hands. The C7itrcpreneiir ox assiimer
is he who takes upon himself the responsibility of ownership.

That the capitalist, the manager, and the owner of the prod-
uct may at times be one and the same person does not affect the
analysis ; the three functions are distinct, and the rewards
attaching to them are equally so. The growth of corporations
tends in a practical way to separate these functions. Capitalists
are here a body of stockholders, bondholders and business cred-
itors ; managers are a body of salaried officials ; while entre-
preneurs, in the limited sense of the term, are the stockholders.
Pure profit resides in the portion of the dividends that is in
excess of current interest on the paid-up capital.

Pure profit is the prize that lures men into business ventures.
On this element in the returns of industry are centered the
larger expectations of working men. There is no other element
from which they can draw a considerable dividend by a change
in distribution. Though interest were reduced by a half, and
managers' salaries curtailed in the same proportion, the sum
thus saved would, as divided among workmen, raise wages only
by a small fraction. The elastic margin of pure mercantile profit
appears to the undiscerning to be a more promising source of
gain. It is important to know how large, under modern con-
ditions, this sum is becoming.

The elements in the cost of a product are primarily deter-
mined by conditions over which the employer has no control.
Wages are fixed in the general market for labor ; there is not
one rate for a particular manufacturer and another for his rival
in the trade, nor are there considerable differences between the
rates prevailing in most of the different trades. Labor passes
freely from one establishment to another, and even from one
industrial group to another, and the permanent tendency of
wages is toward uniformity. This large element in the cost of
products is fixed by uncontrollable movements in a universal
market.

Interest is determined by equally general conditions, and is

40 POLITICAL SCIENCE QUARTERLY.

uniform to all borrowers who furnish equal guaranties for the
certainty and promptness of their payments. The cost of raw
materials is determined in a market that is somewhat more
limited ; it is gauged by the transactions that take place be-
tween the industrial group that produces it and the several
groups that use it. This market is broad enough to be beyond
individual control.

The cost of the labor of management is subject to more dis-
turbing influences than almost any other economic elem.ent ;
and general statements concerning this item of outlay need to
be made with adequate reservations. Personal relations may
make a particular salary abnormal. The principle that tends
to determine the wage of business management may be formu-
lated and, with due caution, applied ; it is fixed in a general
market for labor of a given intellectual and moral quality.
Tried ability and integrity demand high rates of pay, but gravi-
tate toward any honorable occupation that offers them ; and
the general tendency here as elsewhere is toward a certain
uniformity. Rates of insurance and taxation are governed by
impartial rules. The elements that constitute the cost of a
product to the man who is to own and sell it are fixed by
conditions which he cannot change.

His returns are equally beyond his control. The price of his
product is adjusted in the open market by transactions between
the group to which he belongs and the various groups that con-
tain his custcfmers. The adjustment is similar to that which
governs the price of raw materials. Pure profit is the differ-
ence between this uncontrollable amount and the sum of the
equally uncontrollable amounts disbursed. The reward of the
entrepreneur in his capacity as owner of a product comes to him,
as rain from the clouds, through the action of forces lying be-
yond the range of his dominant influence. He has nothing to
do but to receive it. He must accept what comes into his
treasury, and submit to what goes out of it ; the difference,
which is pure profit or loss, is fixed without appeal.^

^ Gains etTected by the illegitimate manipulation of values, such as is sometimes
practiced in Wall Street and elsewhere, do not fall within the scope of this discussion.

PROFITS UNDER MODERN CONDITIONS. 41

In his other capacity, that of manager, the entrepreneur is not
the helpless creature of fate. His fortune is largely in his own
hands. Moreover the fortune of the owner is, in a negative
way, entrusted to the manager, who can always mar it, though
he cannot always make it. In a study of profits it needs to be
assumed that the shop is running under competent direction ;
otherwise, under modern conditions, it will quickly pass from
the industrial field. Materials must be well selected, the work-
ing force well handled, and the goods rapidly and safely mar-
keted, or the pure profit will become a negative quantity, and
the business will be terminated. There are transient condi-
tions in which mediocrity may for some time hold its place ;
but the sword is over its head from the outset, and will fall in
due time.

The modern struggle for existence means the survival of the
fittest type of industrial establishment. Elements that deter-
mine the question of fitness are location, working method and
managing efficiency. The shop that is unfavorably located
yields its business to others ; and industries tend automatically
to concentrate in places where they can thrive. The mill that
uses an antiquated process must change it or stop working ; and
industries tend towards uniform mechanical excellence. The
establishment that is badly conducted must change its manage-
ment or fail ; and business tends to concentrate in the hands of
those who conduct it with the greatest energy and wisdom.

The centralization of industry gives a special impulse to the
tendency to eliminate mediocre management ; it permits a divis-
ion of the directive function. There are diversities of gifts in
the business world ; the good mechanic may be a bad financier,
salesman, etc. The great establishment places in every respon-
sible position a man specially adapted to it. The entrepreneur
of a highly developed establishment is a collective personality.
The shop that is under individual direction is no longer typical ;
and if we continue to speak in the singular number of the man-
ager, the owner, and the capitalist, it is to keep in mind the
essential unity of the several groups that the terms must really
designate. In clear cut distinctness of function, it is as though

42 POLITICAL SCIENCE QUARTERLY.

they were individuals ; in efficiency, they greatly surpass them,
and tend to supplant them in the industrial field. Modern
business demands and secures an aggregation of forces in every
department. Groups that have supplanted individual managers
continue the competition among themselves, and the entrepre-
neur that tends to ultimately survive is a body of men, each one
of whom has shown special capacity in his department. The
typical modern manager is an organization that is perfect in
each separate part.

In formulating the principle that gauges the returns of a
particular manager at a given time, the analogies between rent
and profit are instructive. They have been well utilized by one
of the most eminent of living economists, General Francis A.
Walker. Having now in view a different end, that of establish-
ing a law of development, and of determining the rate toward
which the different elements in general profits are tending, I
find it possible to derive complementary lessons from the con-
trasts presented by the Ricardian principle of rent and the
principle that asserts itself in the management of modern
business.

The area of cultivation in agriculture is governed by a law of
extension ; the range of managing ability is subject to a prin-
ciple of elimination and contraction. According to accepted
formulas the best land is first used, and cultivation then extends
to poorer and poorer qualities. The process begins with one
grade and ends with many. In general business, various
degrees of managing ability come early into the field ; compe-
tition eliminates one after another, till the best only is sure of
permanent survival. With one qualification, hereafter to be
stated, the process begins with many grades and ends, if it is
ever completed, with one. The difference in productiveness
between the best land and the worst is increasing ; that between
the best management and the worst that we need to take
account of is diminishing. The rent of lands varies as their
qualities, from nothing to an increasingly large sum ; the wages
of managers tend, like their business qualities, in the direction
of uniformity.

PROFITS UNDER MODERN CONDITIONS. 43

Agriculture is dominated by a law of diminishing returns ;
and general business by a law of increasing returns. Double
the labor and capital expended on an acre of ground and you do
not double the crop ; double the labor and capital entrusted to
an efficient manager and you more than double the product.
The concentration of labor and capital renders more costly the
products of agriculture ; and the same influence cheapens those
of general business.

It follows that the demand for agricultural products tends to
outrun the supply ; while the supply of manufactured commod-
ities tends to outrun the demand. In the one case increasing
population is the primary fact ; and this calls for more food, etc.,
in spite of the greater cost at which it is obtained. In the other
case cheapened production is the primary fact ; and this influence
thrusts an increasing product upon the market, notwithstanding
the diminished price at which it must be sold. The output of
great manufacturing industries is disposed of by a process that
tends continually to take on somewhat of the character of a
forced sale. The normal condition of many industries is one
that, from a business man's point of view, must be termed over-
production ; it is the condition in which more is produced at
each particular interval than can be sold at prices that through
the preceding interval prevailed. It is this final test of over-
supply that weak producers cannot endure.

The struggle for existence is pending, and industrial groups
show various degrees of approach to the consummation to which
it leads. In some groups the surviving establishments are
already in a state of high and nearly uniform efficiency ; while
in others they still differ considerably in this respect. There
is, moreover, scattered over the industrial field, an experiment-
ing class, whose presence renders necessary the qualification in
the statement of general laws to which reference has already
been made. These men are testing their capacity to survive in
the contest with men of tried ability. A few win permanent
places ; the remainder pass from the field ; but their transient
presence disguises the operation of the law of survival. They
must be left out of account if we are to know how far the devcl-

44 POLITICAL SCIENCE QUARTERLY.

opment has proceeded, and what grade of managing efficiency
has a chance of permanent continuance. Any group may have
its experimenters who are of greatly inferior quaHty. The old
employer who is about to be crowded from the field marks the
margin of survival ; better managers may remain in the field,
while worse ones will be cast out.

The merging of the functions of owner and manager intro-
duces another element of variation, and makes farther care
necessary in practically testing the theoretical rule. A man
who, besides pure profit, receives a salary and perhaps an ele-
ment of interest may not take leave of the competitive field
when, according to simple theory, he ought to do so. After
profits and interest have vanished he may live on a salary, and
may struggle against fate till his capital is curtailed. Through
all variations in its application, the law of survival holds true,
and places in control of the material fortunes of humanity a
class of managing agents who are diminishing in number and
improving in quality. They are in fact agents and not princi-
pals ; it is the interests of others that are primarily entrusted
to their keeping ; for though their wages become relatively
high, they are kept within sharp limitations, while the largest
fruit of their invaluable labor passes by an irresistible law to
society.

Wages of management are radically affected by the division
of directive labor. The typical modern manager, as already
noticed, is a collective personality. Were the rare qualities
that are needed for conducting a great enterprise combined in
one man he could command a monopoly wage. It would be
impossible to replace him, in case he were to leave his employ-
ment ; and the limit of his salary would be set only by the
paying ability of the capitalist-owner. It is possible to replace
any member of a managing organization, and the salaries of the
members cannot well be excessive. There is a graded list of
candidates for the different positions. Counting rooms are full
of potential presidents, secretaries and treasurers ; shops are
full of potential superintendents ; and though some of the can-
didates may be, by a certain margin of difference, inferior to

PROFITS UNDER MODERN CONDITIONS. 45

the men now occupying the higher places, the fact of their
presence places a definite check on the salaries that are paid.
Experience in work of the higher sort would reduce the differ-
ence in quality between the men in the better positions and the
candidates for them. The tried man has the preference ; but
his tenure of office depends in a measure on his success in what
may be termed a continuous competitive examination. There
are complications arising from the fact that personal relations
to capitalists are not without a large influence on the awarding
of the prizes in this contest ; but available candidates are always
numerous enough to place a definite limit beyond which the
wages of directive labor may not rise. This element of an
employer's returns is determined by active competition in a
general market for labor of a certain intrinsic quality.

There remains to be determined the amount of pure mercan-
tile profit. This is the final element in the analysis of the gross
returns of business, and if there arc principles governing it,
then the division of social wealth is at least a scientific process.
Pure profit is the seemingly uncertain quantity which lures men
into business, and which figures in the minds of the discon-
tented as the prize of agitation. Here, if anywhere, lies the
spring that fills the pools of unearned wealth.

Pure profit is a vanishing sum. The a priori laws of political
economy demand the annihilation of it, and it submits to the
decree. In the Ricardian sense of the term the natural amount
of this ultimate profit is nil. It is a positive quantity where
the competitive law has not fully asserted itself, and where,
\vithin the sphere of its control, it is checked by temporary in-
fluences. Economic orthodo.xy concedes to this element no
theoretical existence ; and where the assumptions of this sys-
tem concerning competition are realized, the practice of the
world becomes orthodox ; pure profit actually disappears. This
is an unanticipated vindication of logic. Ricardo did not pre-
dict such an outcome, nor did he so far analyze the returns of
industry as to distinguish the element that is subject to the law
of annihilation. Yet his system involved the principle, and the
conformity to it of actual practice is the latter-day triumph of
Ricardianism.

46 POLITICAL SCIENCE QUARTERLY.

With capital seeking investment at the prevalent rate of in-
terest, with directive labor seeking employment at the high rate
of wages that its quality demands, can they fail to find each
other out, if by union they can each secure a premium ? Can
anvthing prevent them from simultaneously migrating to the
point where, besides their wages and interest, they can com-
mand an ulterior gain ? Nothing can do so in theory. Ordinary
risk is not a barrier, since that is counterbalanced by the item
of insurance which in our analysis we have recognized. Eco-
nomic formulas call for a prompt migration of labor and capital
to the point of special inducement ; and the formulas are justi-
fied. A subject of common remark is the reckless promptness
with which the movement actually takes place. An employer
who is getting more than interest and wages of direction is in-
terested to enlarge his product by drawing on the loan fund of
the market ; and a capitalist who by engaging in industry can
secure more than interest and wages of direction, is interested
to create a new establishment by drawing on the market for
directive labor. By enlargements from within and accessions
from without the productive plant is enlarged, the product in-
creased and the price of it reduced to the point at which capital
and labor of every kind receive only their normal reward.
The point of stable equilibrium is that at which a capitalist-
employer realizes neither more nor less than interest on his
capital and a salary for his time.

Stable equilibrium is not usually rest. Influences may dis-
turb the adjustment, and in this instance they do so as regu-
larly as it is effected. It is not to be anticipated that the
myriad of different industries that occupy the economic field
will ever simultaneously reach their natural level of productive-
ness. Pure profits will always be found at numerous points,
though at no one of them will they prove permanent. If we
continue to watch a particular industry we shall see pure profit
appearing, as the result of a disturbing influence, and then
slowly vanishing, as competition reasserts its control. If we
watch the entire industrial field we shall see pure profit appear-
ing, now here and now there, shifting forever its place in the
field, but never absent from it.

PROFITS UNDER MODERN CONDITIONS. 47

One influence which periodically raises the returns of busi-
ness above their natural limit is the rhythmical movement of
trade, or the fluctuation from under-consumption to over-con-
sumption that results from internal changes in the economic
system. The period of active demand yields profits where,
other conditions remaining the same, that of slackened demand
entails losses. The two results should be made to offset each
other by averaging the returns of a considerable number of
years, if the true status of an industry is to be ascertained.
When, in a long interval, the pure profits just balance the losses
the natural rate of returns may be considered as maintained.

The settlement of a fertile continent is a disturbing influence
that may extend through a hundred years, and this period must
then be regarded as a prolonged interval of adjustment. Com-
petitive law cannot fully vindicate itself while soil exploitation
— not agriculture — is pouring treasures into every one's lap.
Yet in the end the slow moving law will assert its power. The
opening of America to settlement created an originally high
level of general profits, from which level competition has re-
duced them with varying rates of rapidity. Some localities and
some industries still realize abnormal gains from this source.

There is another disturbing influence which gives a promise
of constantly recurring as long as the economic system con-
tinues. It acts intermittently, and on particular industries,
but is always present at a thousand different points in the gen-
eral field. It is the legitimate creator of pure mercantile profit ;
and though we call its action a disturbance, since it counteracts
the action of competitive law, yet this influence is as natural as
the force that it abrogates. It affords a guaranty for continued
civilization. It is the result of a unique human service, that is
the most far-reaching in its effects of any that an industrial
worker can render. This is the making and applying of inven-
tions. While the rest of humanity are working, an elect few
are searching. The results of their search come partially and
temporarily to themselves ; the major rewards diffuse them-
selves among the members of society as a whole, who in the
end absorb the total jrain. The natural rewards of invention

48 POLITICAL SCIENCE QUARTERLY.

are the most economical and effective of all possible modes of
ensuring the advance of material civilization. They come in a
form adapted to secure a maximum result with a minimum of
expense to the beneficiaries. They are not stipends, but prizes ;
and their effect is to enlist the services of scores of men where
only one can receive a personal return.

Invention may give to an establishment a temporary monop-
oly of a new process or a new product, and raise profit for the
time being above the natural level. The making of such dis-
coveries is not a part of the routine work of a manager. It does
not fall within the scope of any function for which a salary is
paid. Some Yankee ingenuity, some power of adapting me-
chanical means to ends is indeed required in a successful super-
intendent. The exercise of it in minor ways lies within the
routine of his business. But the inventions that we are now
considering are those that materially change that routine. If a
salaried manager makes such an invention, it is extra-ofificial
work, and entitles him to the same reward that would accrue
to any other inventor.

The relations between the makers of inventions and those
who introduce them are an interesting subject of study; and so
are the effects which the introduction of them has on establish-
ments that continue to use the older methods. It is not, how-
ever, desirable to obscure our main propositions by too many
corollaries. The device that effects an important economy
must, in the end, force itself into general use, and thus end
the advantage which prior possession gives to its originators.
Patents expire, and secrets become known. The public gets a
part of the benefit from the first introduction of an economical
process, and gets the whole benefit in the end. Competition
restores the natural rate of profit, and leaves, as a permanent
result, an increase of productive power, an elevation of the level
of human life. Patent laws are an evidence that the personal
rewards to be gained by this service are too small, rather than
too large, and that it is the aim of the state to prolong the fruits
of invention beyond the limit of time during which, by natural
law, the inventor could enjoy them.

PROFITS UNDER MODERN CONDITIONS. 49

If the theory here advanced is true, an inquiry into the busi-
ness profits reaHzcd in this country during the past few years
should show that some industries are, and others are not, ap-
proaching the condition in which only natural profits are
afforded. Statistics that group several branches of manufac-
turing and state returns in the aggregate may be expected to
show a profit somewhat above the natural rate ; and figures for
the country at large must certainly do so. The general rate of
profit in the United States is high, not only because of gains
realized by many inventions, but because of returns still realized
by the quick exploitation of natural resources. Statistics taken
a few years hence would probably eliminate much of this latter
variation. The profits from invention would remain, and the
returns of any considerable group of industries must be expected
to show a permanent average profit somewhat above the natural
limit.

On the other hand, the returns of particular branches of
industry would show, in many cases, a close approximation to
the limit. Figures taken in a single case would show the stage
of development that one industry has reached ; they would show
whether it is still enjoying a residuum of originally high profit,
or whether the competitive pressure has reduced its gains to the
rate that can be permanently maintained.

It will be seen that the facts that we need in order to fully
verify our theory are not at present to be had. Fortunately,
however, the facts that are most useful are those that relate,
in each case, to one specific department of business ; and here
the knowledge which each employer in that department pos-
sesses is of more than ordinary scientific value. For many
purposes aggregates and averages taken from many branches
of production are necessary ; and these the business man can-
not furnish. For our present purpose averages are misleading,
and the returns of different departments taken each by itself,
give the testimony that we desire. It is not difficult to obtain
facts of this kind which strikingly illustrate the tendency of
recent influences to crowd profits to a point that affords noth-
ing beyond interest and the wages of management.

50 POLITICAL SCIENCE QUARTERLY.

The returns of the textile industries of New England, as
shown in the report of the Boston stock market, reveal the fact
that a few members of this extensive group have, during the
fifteen years preceding 1886, enjoyed a certain immunity from
the full effects of competitive law. The returns of the group
as a whole have, during that interval, been strikingly near to
the point of natural profit. The same appears to be true of the
shoe and leather industries. The iron and steel manufactures
and the numerous branches affiliated with them compose a group
so extensive that its average profits would be unavailable for
our purpose. Though such gains as those which patents secured
to the screw-making industry may now be rare, there are de-
partments enough in which competition is held in temporary
abeyance to cause considerable deviation from the theoretical
standard. Yet within this general group may be found numer-
ous cases in which the law is verified ; and the same is true
in other parts of the manufacturing field.

Public transportation is a department of production essentially
peculiar. The local traffic of railroads enjoys a certain im-
munity from the full effects of competition. ' This source of
variation from theoretical standards is apparently counter-
balanced by influences of an opposite character, and the rail-
roads of the United States show an approximation to the
normal rate of profits that is even closer than that of the textile
industries. More and better statistics than are now available
are certain soon to be collected ; and there is no risk in affirm-
ing that where the prescribed conditions exist, the normal rate
of profits will be realized. Labor of every sort will be paid for ;
capital will be rewarded ; but there will be no bonus for any one.^

We are living in a half-developed system, and in the law of
its growth may discern more clearly than was formerly possible
an outline of the form that it will ultimately take. That law
connects the rewards of business life with services, and gauges
them in amount by the value of those services. It gives more

1 I am indebted to the Hon. Joseph II. Walker, of Worcester, Mass., for statistics
tending to show that, in manufacturing industries, profits in excess of the natural
rate, when they are not secured by inventions, have of late been rapidly disap-
pearing.

PROFITS UNDER MODERN CONDITIONS. 5 I

to intellect than to muscle, and more to character than to either ;
the largest stipends that it offers are for fidelity to trusts. It
checks undue discrimination in favor of mere position, and
ensures to the men in the industrial ranks rates of pay not
too far below those enjoyed by their leaders. It offers special
prizes for the discovery of secrets of effective work. It limits
more closely than statute law could do the personal benefits
that accrue to the men who render this service, so that when
the law is invoked it is for the purpose of increasing them. By
organization and discovery it constantly places humanity upon
new vantage ground in the struggle for well-being. Less and
less, measured in effort, is becoming the cost of a day's enjoy-
ments ; greater and greater, measured in enjoyments, are the
returns of a day's labor. In cheapened production, which is
never appreciated, and is often blindly resisted, lies, according
to this social law, the chief hope for modern workers. The
leaders and discoverers whose labor ensures this constant gain
find their rewards limited in amount and in time, while the
wealth that they diffuse throughout society is, in both direc-
tions, limitless. The outline of the coming industrial state has
the shape neither of despotism nor of democracy ; it is the

outline of a true republic.

John B. Clark.

THE NATURAL RATE OF WAGES.

IN his chapter on " Popular Remedies for Low Wages "
John Stuart Mill described a certain " considerable body of
existing opinion on the subject." The opinion here referred
to was not critical opinion merely, it was also opinion as an
active force. Taking form in legislation, or, less coercively, in
moral influence, it undertook to provide that the workman
should have "reasonable" or "sufficient" wages. That is, it
was exerted to maintain wages " above the point to which they
would be brought by competition."

As in Mr. Mill's time, so now, there are two sets of forces
operating with reference to the rate of wages. One set is com-
posed of the forces of competition. Their action is automatic.
Their resultant is a mechanical equilibrium. The other forces
are self-conscious forms of human feeling and opinion. They
set up a standard of justice, and take form in moral judgments,
appeals to reason, the policy of labor organizations, legislation,
and administration. Whatever their efficacy for good or ill, the
self-conscious forces are acquiring an increasing prominence.

In regard to these two kinds of forces that make, or are
supposed to make, the rate of wages, we may discover three
different views among economic thinkers.

By economists of severely deductive habits and somewhat
reactionary tendencies, the self-conscious forces are dismissed
as of no importance except as a disturbing element. They are
regarded as impotent to affect the rate of wages in the long run.
Competition is held to be the only agency that needs to be con-
sidered, because, sooner or later, the rate of wages will be made
inexorably, in the outworking of an automatic natural process.

Another class of thinkers, if we may call them such, deniers
of natural law in the social world, reach the opposite conclusion.
Competition they regard as a kind of human conduct that can
be checked and presently made end of, like crime or intemper-

THE NATURAL RATE OF WAGES. 53

ance. The self-conscious social efforts are believed to be quite
sufficient, if fully put forth, to make the rate of wages, so far
as the making is an affair of distributing a certain total product
among the parties engaged in its production.

According to a third and middle view, the self-conscious
forces sustain some relation to the physical and automatic forces
by way of limitation and supplement. Just what this relation
is, is a fact for scientific investigation to determine.

In science, as in practical affairs, the mean hypothesis is
often more promising than either extreme, and it certainly is so
in the highly complex sciences of social phenomena. Assuming
then, provisionally, that the rate of wages is the resultant of
competitive and moral forces acting simultaneously, the true
wages problem, as it presents itself to the economist to-day,
is to resolve this resultant, and ascertain whether it lies mainly
within the projection of the competitive, or mainly within the
projection of the moral forces.

We may conveniently begin the study of this problem by
examining the standards of ideal, or just, wages, that are set
up, and attempting to 'decide what, if any, is their common and
valid content. We may then study the competitive process as
it goes on in the absence of consciously imposed restrictions
and ascertain how nearly the results approximate to the ideal.
Lastly, we may inquire whether the application of the self-
conscious forces serves, or can serve, to make the approximation
more complete.

We are so accustomed to make a sharp distinction between
the communistic and the individualistic ideals of society that it
may seem absurd to affirm that, within rather broad limits, there
is no absolute contradiction between the communistic rule :
"From each according to his abilities, to each according to his
needs," and the individualistic rule : " To each according to the
value of his work." But if we go back to organic principles we
shall soon discover that, as a general and average fact, the one

54 POLITICAL SCIENCE QUARTERLY.

rule cannot mean anything else than the other, and that, so far
as the two do not coincide they correct each other. Taking
the phenomena of life as a whole, there is, and must be, an
equivalence between needs and work, and an equivalence
between the satisfaction of needs and the existence of abilities
to work. Needs are, in general, but the requirements of certain
things to replace the tissue consumed in physical and mental
efforts, or to build up and develop tissue for greater future
efforts. These efforts, adjusted to useful ends, are work, and
apart from work, therefore, there are no genuine needs. Ex-
cepting the needs of childhood, old age and misfortune — excep-
tions more nominal than real — desires or requirements for other
ends than those of useful service for self or others are pseudo-
needs, illegitimate in economy as in ethics. The satisfaction
of needs is not limited, however, to the mere restitution of an
exact equivalent of human energy already expended. To some
extent it anticipates work to be done. Nature makes generous
advances to her children, but inexorably enforces payment.^
A given amount of food contains more energy, usually, to be
set free through its consumption, than was expended in obtain-
ing it. Consequently, the value of work is usually a little more
than the value of the antecedent work from which it was evolved.
To these advances persistently utilized — advances converted
into abilities, abilities in turn put forth in work — the progress
of mankind from savagery to civilization has been due.

Occasional and individual misadjustments between needs and
work are sure to occur, because social changes make misadjust-
ments of every possible kind. It is in order then to inquire
how the misadjustmcnt comes about, and what is its true cor-
rection. It may be that men whose needs have been and are
fully supplied are not converting their supplies into an equiva-
lent of useful work, or it may be that men who are willing to
work and have the will to develop their abilities beyond present

* Professor Sumner's assertion : " Whenever nature yields to man an atom which
he has not earned, or advances it one second of time l)cfore he has earned it, we may
all turn socialists and utopists " (Collected Essays in Political and Social Science,
p. 50), contradicts the truth of both biology and history.

THE NATURAL RATE OF WAGES. 55

limits arc inadequately supplied with what they need. Obviously
the remedy in the one case is to bring educational disciplines
to bear ; in the other to correct, as far as possible, errors in
distribution. The correction belongs for the most part within
the sphere of moral effort, education, and philanthropy. It
belongs to economic effort so far as the value of the laborer's
work falls below the amount that will both recompense him for
energy expended, and afford him something for the development
of his potential abilities ; for this is its natural value, the value
nature commonly gives it. The rule of ideal distribution is, to
each accordinir to the full natural value of his work.

II.

Such being the ideal, how far does the competitive process
tend to make it actual .-• What is the rate of wages in the
absence of self-conscious agencies acting in other than com-
petitive ways }

English political economy has always more or less distinctly
affirmed that in any society there is a certain natural rate of
wages. The first description of natural wages was strikingly
different from the definition that soon after gained acceptance.
It was Adam Smith's saying, — the first sentence in his discus-
sion of wages, — that "the produce of labor constitutes the
natural recompense or wages of labor," and was made in view
of "that original state of things" when there was neither land-
lord nor master, and the whole produce of industry belonged
to the laborer. The truth, so fundamental in our modern
philosophy of wages, that in a later industrial state also —
when the active population has been differentiated into vari-
ous classes of employers and employed — the wages of the
laborer are still approximately equivalent to what he produces,
is not worked out in The Wealth of Xaiions. If Adam
Smith ever distinctly perceived that the employer's profit is
value created by his own services, not by the laborer's exer-
tions, the idea was no link in the chain of thought that took
shape in the chapter on wages. Consequently, in treating of

56 POLITICAL SCIENCE QUARTERLY.

labor as conditioned by landlord and master, his thought gravi-
tates to the minimum limit to which wages can be forced by
competition. " There is, however," he says, " a certain rate
below which it seems impossible to reduce, for any considera-
ble time, the ordinary wages even of the lowest species of
labor." This rate is the wage that will maintain the laborer,
and enable him to rear another laborer to take his place in the
next generation. If the wealth of a country were stationary,
the competition of the laborers and the interest of the masters
would soon reduce wages to this lowest rate which is consistent
with common humanity. If wealth is increasing, and so long
as it continues to increase, wages will be above the minimum.
If wealth were decreasing, wages would fall below the lowest
humane rate until, by famine, "the number of inhabitants in
the country was reduced to what could easily be maintained by
the revenue and stock which remained in it." ^

This analysis was seized upon by Ricardo, who condensed it
into a definition. Giving a new, and, as it proved, permanent
meaning to the term "natural" which Adam Smith had used
in a sense so different, Ricardo defined natural wages as "that
price which is necessary to enable the laborers, one with another,
to subsist and to perpetuate their race without either increase
or diminution." 2 To its author this definition meant a great
deal more than the words explicitly affirm. Saying nothing of
Ricardo's analysis of minimum wages in terms of food, which
we need not follow, it is plain that the limit below which he
supposed wages could not permanently fall is considerably above
tlie minimum described by Adam Smith. He assumed that the
laborer was master of the minimum rate below which wages
could not be permanently lowered. " It is not to be under-
stood," he said, "that the natural price of labor, estimated
even in food and necessaries, is absolutely fixed and constant.
It varies at different times in the same country, and very mate-
rially differs in different countries. It essentially depends on
the habits and customs of the people." It is safe to say that

1 The Wealth of Nations, chapter viii.

2 Principles of Political Economy and Taxation, chapter v.

THE NATURAL RATE OF WAGES. 57

if this last assumption of Ricardo's had been warranted by the
facts of the actual industrial world, English political economy
would have escaped the wrath of humanitarians and the name
of a dismal science. But when John Stuart Mill restated and
elaborated the body of doctrine evolved by his predecessors, he
was not long in proving that the moral minimum of wages was
a myth. Any disadvantageous change in the circumstances of
laborers, — that is, any reduction of actual below natural wages,
— he pointed out, "may permanently lower the standard of living
of the class in case their previous habits in respect of popula-
tion prove stronger than their previous habits in respect of com-
fort. In that case the injury done will be permanent, and their
deteriorated condition will become a new minimum tending to
perpetuate itself as the more ample minimum did before ; "^ and
this has happened and does happen so frequently as to render
all propositions ascribing a self-repairing quality to the calami-
ties which befall the laboring classes, practically of no validity.

III.

Yet it does not follow that there is not a true natural rate of
wages, well above the limit at which a man must starve or beg.
There is a soul of truth in Ricardo's idea, and it happens to be
the only part of the doctrine that the economist, as such, is
really concerned with. Far above the limit of mere subsistence
there is a limit below which the permanent reduction of wages
is uneconomical. The maximum production of wealth depends
on the most complete and perfect division of labor, and the
division of labor depends not only on the extent of the market
but on the size of the population. The extent of the market
itself depends on the size of the producing and consuming popu-
lation, and an occupation can become differentiated from allied
occupations and developed into a distinct trade, business, or
profession, only when there is a considerable number of persons
to engage in it. There is, therefore, a limit below which the
reduction of the laboring population reduces the incomes not

^ Principles of Political Economy, book ii, chapter xi.

58 POLITICAL SCIENCE QUARTERLY.

only of laborers themselves but of all classes in the community.
The farmer cannot develop the resources of his land, or the
manufacturer increase his product. The reward of management
is curtailed and interest reduced. Again, there is for each
laborer a maximum efficiency in proportion to his consumption.
Up to a certain point the more real wages put into him the
more useful service can be gotten out of him. To quote once
more from Adam Smith, the industrial experience of a century
has been but cumulative proof of his saying : " A plentiful sub-
sistence increases the bodily strength of the laborer, and the
comfortable hope of bettering his condition and of ending his
days in ease and plenty animates him to exert that strength to
the utmost."^ As statistical science and methods improve, it
should be possible to ascertain the economical rate of wages
for any given occupation at any given time, and with a fair
approximation to accuracy, by means of statistical averages
drawn from selected results. These would include statistics of
the cost of labor of the same nationality, employed under sub-
stantially similar conditions except differences of real wages.

Now this economical rate is none other than the ethical rate.
To give the laborer the wage that calls out his full efficiency
and affords him a comfortable hope for old age, is to give him
no less than that sum which is sufficient to develop his potential
abilities. In communities accustomed to change and progress,
the actual rate of wages must equal this ethical and economical
rate, or fall very much below it. Where the ideas and aspira-
tions of the successful are communicated to all classes the
laborer can never remain in an equilibrium of contentment.
The stimulus and tone of his life is the prospect of doing better.
Remove that stimulus and he does not simply remain a station-
ary economic quantity, he deteriorates from that moment. His
efficiency is impaired, he adds less and less to the world's sum
total of wealth. Losing the ambition to do as well as he can,
he loses also the ambition to live as well as he can, to make the
most of what he has. He falls into unsanitary habits. His
vitality and that of his children is impaired, and, while he may

^ The Wealth of Nations, chapter viii.

THE NATURAL RATE OF WAGES. 59

have as many children as he would have if living in wholesome
prosperity, not as many of them will survive to maturity. Both
in efficiency and in numbers the labor force is diminished, and
the total production of society is lessened. Consequently, in a
community advancing in wealth and refinement, that cannot be
an economical rate of wages which is insufficient to enable the
workingman to share in the general expansion of life.

Giving to the laborer the full natural value of his work, the
economical rate of wages is no less than the produce of his
labor. The economical rate, moreover, is the rate to which
wages actually would conform if competition were governed
only by the expectation of gain, and the losses of excessive
competition could not be shifted by the competitors upon others.
Competition carried to the extent of keeping wages as low as
this rate is beneficial to all. It forces men to make the most
of their opportunities, it sharpens thought and disciplines char-
acter, and calls the creative powers into fullest action. Carried
the least degree farther, competition merely deadens and
destroys, and the majority of men do not habitually carry
competition to destructive lengths when acting freely by the
impulse of natural motives. The economic limit of competition
is its natural limit — not always its actual limit — and the rate
of wages made by competition restricted within this limit is a
natural rate.

Therefore, in the fullest sense, the economical rate is at once
the true natural and the true ethical rate of wages. Stripped
of fallacy and rightly developed, the Ricardian doctrine of
natural wages is identical with the earlier affirmation of Adam
Smith. The natural remuneration of the laborer is the produce
of his labor, and in an improving society this produce is not less
than the "reasonable" and "sufficient" wages which humani-
tarian feeling demands.

IV.

Let us now inquire to what extent the actual rate of wages,
so far as competition determines it, tends to conform to the
natural rate.

6o POLITICAL SCIENCE QUARTERLY.

The wages-fund doctrine has been finally overthrown, and it
has been abundantly demonstrated that the actual rate of wages
is made by the productiveness of industry ; but the proposition
has not been reduced to perfect definiteness. That is to say,
it is no longer disputed that wages are more when product is
more and less when product is less, but there is still dispute
whether increasing production tends to benefit chiefly the
employer or chiefly the laborer. The decisive answer to this
question will be given some day by statistics. Meanwhile we
can satisfy ourselves on two important points.

The formula of Cobden that wages rise when two bosses are
after one man and fall when two men are after one boss, means
that every increase in the number of employers who can make
a sufficient profit from their business to maintain themselves as
employers, acts favorably on the rate of wages. And this is
true, notwithstanding the fact that consolidations of productive
undertakings, concentrating them in the hands of the most
competent men, are attended with economy of production. So
long as new employers can find a place in any industry, and
profitably maintain themselves in it, the benefits arising from
concentration have not yet been distributed in wages and
reduced prices of utilities. The profits of the employers
hitherto in the field have been abnormally large. It is not the
intrusion of poorer employers into the field that increases the
profits of abler employers, any more than it is the actual resort
to poorer land that increases the rent of better land. It is the
increasing value of the produce of the best land, due to its
failure to supply an increasing demand upon it, that makes the
profitable cultivation of poorer land possible and affords rent to
the best. The actual cultivation of the worst land that can be
cultivated with profit establishes a limit beyond which the value
of the produce of the best land cannot rise. But for the prod-
uce of poor land the owners of fertile land could obtain famine
prices.^ So of employers. If there is any condition necessi-
tating a resort to poorer employers it is the failure of the best

' Malthus understood, or at least stated, the cause of rent more accurately than
Ricardo. Cf. James lionar, Malthus and his Work.

THE NATURAL RATE OF WAGES. 6 1

employers to supply the demand for employer functions. The
number of men of superlative business genius is small, and the
powers of the ablest men are not unlimited. If there were no
resort to a commoner grade of talent the value of the employer
function would rise above any assignable price. So far from
deducting in any way from the laborer's real wages, the multi-
plication of employers who can sustain themselves above bank-
ruptcy reduces the prices of goods and increases the wages of
labor.

Does a condition of improving industry tend to multiply
employers .'' The true answer to this question is that the num-
ber of employers tends to multiply just as far as the more
gifted employers, or combinations of gifted employers, fail to
discharge the employer function with decreasing cost to the
community, thereby leaving for real wages an increasing portion
of the total product of industry. This law is absolute. That
combinations economize production we know. It is one of the
most striking phenomena of modern industrial life. It is as if
the owners of superior lands should discover some means by
which increasing investments of capital in agriculture should
yield increasing, instead of diminishing, returns. They could
then drive the cultivators of the poorer lands out of the market
if they chose, but only by dividing their increasing gains with
consumers. Should they attempt to retain all, the humbler cul-
tivators would again meet them in the market. It is the same
with employers. Centralization of the employer function and
the extinction of the smaller employers is possible only by con-
veying to the laborer a larger share of product than he previ-
ously enjoyed. There is, indeed, a limit in every industry
beyond which the intrusion of new competitors will ensure the
bankruptcy of some ; and when that limit is reached the
stronger survivors endeavor, by a judicious policy as to prices,
to hold the field. But there remains the limitless domain of
new utilities, and the specialization of utilities depends not only
on that geographical extension of the market wiiich Adam
Smith described, but even more, under modern conditions, on
the productiveness of industry, the greater or lesser incomes of

62 POLITICAL SCIENCE QUARTERLY.

the people. When a man's income is increasing he does not
increase all his expenses in proportion ; he adds some new ones
outright, purchases some utilities that he did not enjoy before.
When his income is decreasing he lops off some at a stroke.

From all this it would appear that in communities enjoying
increasing prosperity the actual rate of wages must tend con-
stantly to conform to that true natural rate which is at once
the economical and the ethical rate. That this is, indeed, the
real tendency in the industrial nations at the present time,
there is much reason to believe ; but there are, unfortunately,
many exceptions extending over large areas of population and
through long intervals of time. To conform to the natural rate
would be the real tendency everywhere and always, if competi-
tion were always uniform and normal. But in the actual indus-
trial world competition is never uniform, and because not
uniform it is often carried to ruinous excess.

I have elsewhere shown that the competitive process, judged
by economic or ethical standards, is inherently defective,^ and
this because, like all natural processes, it assumes a rhythmical
form. " Competition begins only after gains in excess of nor-
mal profits have accrued to employing producers. As a conse-
quence of this fact, when competition does begin it goes to
excess." When, passing the normal limit, competition assumes
that terrible intensity that presages business ruin, the employer
is driven to every expedient to save some part of his narrowing
margin of profit. The readiest expedient, the most available
for the moment, though costliest in the end, is the exploitation
of wages. In a mild way this is done by tacitly or openly
restricting competition in the purchase of labor. Whatever
brings additional employers into productive enterprise and in-
tensifies competition in the sale of products will naturally in-
tensify competition in the purchase of labor ; but we must be
careful not to confound the two processes. To some cxtc^^t it

* The Theory of Profit Sharing, Quarterly Jctirual of Economics, April, 1887.

THE NATURAL RATE OF WAGES. d-iy

is easily possible for employers to separate them in their indus-
trial practice, thereby adding to their profits a sum that would
otherwise be added to wages. In its worst and most brutal
form the exploitation of wages becomes a positive extortion
from working men and women who have been reduced by mis-
fortune to such straits that all power of resistance is gone. It
becomes the "sweating" system of the clothing trades, the
"plucking" system of the coal districts. Between these ex-
tremes are all those gradations that substitute the labor of
women for the labor of men, the labor of children for the labor
of women, and replace the native laborer with a foreign compet-
itor of a lower grade of life. All these exploitations, reducing
wages below the true economical rate, react disastrously on
production, in time, and are contrary to the interests of em-
ployers as a class ; but they profit for a while, and may continu-
ously profit the individual employer who can shift upon society
or his competitors the losses that his practice creates. He
divides his ill-gotten ga.ins with the consumer, and thereby,
commanding the market, compels worthier competitors to
adopt his methods.

Now to these deplorable results of ill-regulated competition
there is no automatic correction, springing from motives of
individual self-interest, that meets the case. The wide-spread
belief that, if the exploitation of wages is carried so far as actu-
ally to enrich the employer, the sum so gained, if converted into
capital, will return to labor, is still shared by many respectable
economists. It is true to the extent that increasing capital
does act favorably on wages. In overthrowing the wages-fund
doctrine economists have somewhat lost sight of the real func-
tion performed by capital in employing labor. The owners of
accumulating capital, casting about for productive investments,
select, according to their best judgment, those that promise to
yield the best returns. Labor for such new enterprises must be
drawn, by the offer of increased wages, from other employ-
ments— to some extent even when there is a large body of
unemployed workmen, since the unemployed are always the
relatively inefficient. Even the replacement of old capital gives

64 POLITICAL SCIENCE QUARTERLY.

rise to this process of selection among actual and possible enter-
prises with reference to their anticipated profitableness, and the
consequent drafting of labor from the less profitable to the more
profitable employments. The accumulation of new capital
amplifies and accelerates it. Hence the ratio of capital to popu-
lation, though having in its static aspect no such relation to
wages as the old doctrines ascribed to it, has yet a dynamic
relation that is definite and important. But when the capital
has been wrung from labor, the original wrong is never righted.
The capital has become the property of the employer, and
has increased his power. The way in which it has been
obtained has cultivated the disposition to acquire power in
that way by continuing to exploit wages, even when indus-
trial conditions no longer afford an excuse. The loss sus-
tained by the laborer may never be repaired, for degradations
of men and women are converted into organic changes. A
lower type of life is the result, and ultimately the reaction
is completed in a positive impairment of the productive force
of the community.

Neither are the evil results of unequal competition corrected
by efforts springing from altruistic motives, so long as these are
not reinforced by associated action. The ultimate cure for
industrial evils is, indeed, in the growth of altruistic feeling.
Employers must cease to exploit wages, either to avoid loss
or to increase their profit and power. They and others must
endeavor, by personal help and encouragement, to counteract
the tendency to degradation in the unfortunate and discouraged.
But that these efforts on the part of those who have the dispo-
sition to make them may avail, a restraint must be put on those
who have no such disposition. Unselfish men, acting as indi-
viduals, without reference to each other, would be crowded out
in the struggle for survival. That ninety-nine fair employers
may have a chance, there must be some restraint upon the hun-
dredth unfair one ; and that restraint can be effectively organ-
ized only by the interests injuriously affected. It must be their
united resistance and co-operation.

THE NATURAL RATE OF WAGES. 65

VI.

So \vc arc brought, at last, to consider the action of those

self-conscious forms of feeling and opinion which undertake to

■govern the competitive process by such means as the policy of

labor organizations and legislation. What can they accomplish ?

It requires neither argument nor marshalling of facts to prove
that by no means whatever can employers be forced to surren-
der from their gross profits, for addition to the wages of their
employees, any part of the sum that constitutes the normal
reward of the employer function. Any attempt, temporarily
successful, to secure more, would simply drive employers out
of business and throw labor out of employment. But when
competition among the undertakers of enterprise is carried to
its full normal limits there will be no ulterior profit in excess
of such reward of the ctitrcprcnetir function as will maintain
that function unimpaired. With capital accumulating for in-
vestment, the competition of producers as sellers of their pro-
ducts is sure to reach its full normal limits. The only sums,
then, that can be added to wages by any means whatever are:
First, the sum labor is in danger of losing, either (i) through the
failure of employers to compete as freely as purchasers of labor
as they compete as sellers of products, or (2) by that merciless
competition which takes advantage of the laborer's ignorance
or weakness to rob him and divides the plunder between the
employing producer and the buyer of goods. Secondly, the
sum that might be produced by calling into action any potential
manhood and ability of the laborer that actual competition fails
to develop. Can as much as this be accomplished }

The power of the labor organization is the strike, actual or in
reserve, and back of the strike the ability of the organization to
hold together. Unless there is some ulterior motive for permit-
ting the strike, the employer can better afford to yield to the
demand of labor any sum less than the amount the strike will
cost him and not exceeding the aggregate of the sums above de-
scribed as possible additions to wages. Let us designate this
aggregate by d and the cost of the strike by c. Included in the

66 POLITICAL SCIENCE QUARTERLY.

sum ^will be a sum d' which, if d does not go to labor, cannot
go to the employer. It is the sum wrested from labor by the
illegitimate forms of competition and given to the consumer in
an abnormal reduction of price, as for example in the case of
the white underclothing made by sewing women. All that an
employer can add to his own profit at the expense of labor is
d—d'. If, now, the demand of labor over which a strike is
threatened is for a sum exceeding d, the employer has no alter-
native but to resist until labor is starved into submission or the
business is indefinitely suspended, since he may as well quit
business entirely and accept a salary as to permanently surren-
der a part of the normal and equitable reward of his own ser-
vices. Again, if there is a good prospect that labor can be
brought to surrender before the cost of the strike c, plus d' (the
sum conveyed by competition to the consumer) amounts to the
sum d, it is the employer's policy to resist it for the sake of sav-
ing as an addition to his profit the remainder, d— (c -\- d'). If,
on the other hand, labor can hold out until c—d' equals d, the
employer can better afford to surrender at once the entire sum
d, unless there is an ulterior object to be gained by resistance.

Such an ulterior object, if it could be achieved, would be the
discouragement of organized and concerted action by labor, and
it could be achieved if the sum to be lost by labor in maintaining
its organization was greater than the sum to be lost by permit-
ting its disintegration or if the organization of labor limited and
weakened itself by mistakes of policy. On the contrary, if labor
must lose as much by disintegration as it can possibly lose in
defending its organization, and if the amount that the employer
can add to his own profits by breaking down the organization
is small at the best in proportion to the sum that labor can gain
by concerted action, employers will not follow a policy of war-
fare against labor organizations.

And these, it is easy to see, arc the actual facts. The sura
that labor has to gain is the sum d. The utmost that the em-
ployer can add to his profit is d—d\ the sum withheld from
labor by unequal and illegitimate competition, less the sum con-
veyed by illegitimate competition to the consumer. And the

THE NATURAL RATE OF WAGES. 67

loss by labor of the sum d means, as wc have seen, the progres-
sive degradation of labor. If the loss is inevitable, workmen
may as well lose by strikes as by competition with each other.
They can afford to sacrifice in defence of organization all that
it is possible for them to lose.

By organization, therefore, labor can secure the whole sum d
Avhen abnormal competition tends to convey it to employers and
consumers, and the organization can be broken only by its own
defects of constitution or mistakes of policy. The principles
governing the coherence of the labor organization are the same
as those governing the coherence of combinations of producers.
It is essentially defensive, not aggressive. It is more or less
coherent as it is more or less homogeneous in composition. It
can only correct the results of imperfect competition and bring
illegitimate competition within normal limits. If it attempts to
secure more than the sum d, it curtails employment and sets up
economic reactions against the whole wages class. And it
must allow to its members the best wages they could severally
make by their individual competition. Men will join and re-
main in labor organizations only if they can thereby secure
better wages than they can secure by individual efforts. They
will secede if their superior abilities are refused reward, or if
mistaken policy reduces wages below the sum they could com-
mand as individuals and still be above the minimum at which
resort to charity begins. The Knights of Labor in their earlier
organization violated the law of homogeneity. In reorganizing
on trade lines they are attempting to conform to it. Trade
unions have traditionally made the mistake of refusing to allow to
the best workmen the wages they could command as individuals.

We need not linger to prove that arbitration and legislation,
so far as they have to do with wages, are subject to the same
general limitations as the policy of labor organizations. They
have to do only with securing to labor the sum d. They can
add to wages only the sum that would be added by competition
in the purchase of labor as perfect as the competition in selling
products, and by restriction of competition in selling products
to normal limits.

68 POLITICAL SCIENCE QUARTERLY.

VII.

Must we not therefore conclude that the rate of wages is
made mainly by the competitive forces, and that the moral forces,
acting through organization and public opinion, are powerful to
correct the distributive errors caused by the inherent defective-
ness of the competitive process, but that, beyond such corrective
work, they are unavailing ? Apparently we must, if we consider
the direct process only. But beyond the direct, immediate process,
is an indirect process in which moral forces have a larger sweep.
We have seen that on the productiveness of industry depends
not only the absolute amount of the laborer's remuneration, but
also its relative amount, the proportion it bears to the whole
product. And that the productiveness of industry is condi-
tioned by the moral quality of the people is no new truth of
either political economy or practical wisdom. Whatever per-
sonal or associated effort, education or legislation, can do to
develop the physical vigor and moral powers of vvorkingmen,
will amplify the product of their labor and increase their in-
comes. It will narrow somewhat the gulf between the abilities
and incomes of the few and those of the many. The function
of the man of business is essentially that of co-ordinating the
factors and processes of the economic world — labor, capital,
invention, and superintendence in the factory, supply and
demand in the market. Throughout organic nature, and no
less in human society, the co-ordinating function is useful and
costly compared with the mere expenditure of energy in direct
and simple ways. If the many are to share in the great rewards
now enjoyed by the few, they must become competent to assist
in discharging the functions now discharged by the few. This
thought suggests another, that, perhaps in a much more direct
way than has been supposed, the more serious economic dis-
turbances of modern times, those industrial depressions that
follow the enormous displacements of cnpital and labor which
invention and discovery are continually making, are aggravated
or mitigated by the intellectual and moral qualities of the people.
For on what else docs the utilization of such changes with least

THE NATURAL RATE OF WAGES. 69

loss depend, than on the ability of the people to make quickly
and easily the necessary readjustments? This is a large and
perhaps a fruitful subject, on which we cannot enter at this time.
It is sufficient to know that, if not in the way contemplated by
Ricardo, yet in a way immeasurably more important, the rate
of wages depends on "the habits and customs of the people":
above all on the habit of " acting upon each other not as the
forces of inorganic nature work, in blind impact and resistance,
but rather as the forces of organic life, assimilatively — each
finding his ends in the ends of the others, and all working
in and through the others for the development of one organic
social whole, in which each individual is at once the means and
the end of all the rest." ^ The growth of this habit will contin-
ually raise the natural rate of wages — the rate below which
reductions are wasteful and immoral. The competition that
forces actual wages down to that natural rate — to the rate, that
is, that rewards a man according to the use he makes of the
powers with which he is endowed, affording him the means to
develop them, but not to idle them away — also tends, no less
certainly, to raise the natural rate, for it stimulates effort and
quickens thought. It is the chief cause of intellectual progress
and systematic endeavor. Legislation, arbitration and efforts of
organizations, so far as they correct the tendency of competition
to reduce actual below natural wages, play their part also in
raising the natural rate. Carried the least degree farther, they
but interfere with the normal action of other forces, and thereby
retard progress.

Franklin H. Giddings.

^ Daniel Greenlcaf Thompson, The Problem of Evil, p. 2S0.

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