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BY  THE  SAME  AUTHOR. 


AN  INTRODUCTION  TO  POLITICAL  ECONOMY,       -        -        -        -  $1  00 

THE  LABOR  MOVEMENT  IN  AMERICA,          -        -        -        -        -  1   50 

TAXATION  IN  AMERICAN  STATES  AND  CITIES,        -        -        -        -  1   75 

PROBLEMS  OF  TO-DAY,         -                 ______  150 

SOCIAL  ASPECTS  OF  CHRISTIANITY,       ____-„  90 

FRENCH  AND  GERMAN  SOCIALISM  IN  MODERN  TIMES,    -  75 


Gbautauqua  IReaDing  Circle  literature 


OUTLINES 


OF  ECONOMICS 


BY 

RICHARD  T.  ELY,  PH.D.,  LL.D. 

Professor  of  Political  Economy  mid  Director  of  the  School  of  Economics, 

Political  Science,  and  History  in  the  University  of 

Wisconsin,  Madison,  H'w. 


FLOOD  AND  VINCENT 
Cbc  (jiEbautauqua^enturin  preprf 

MEADVILLE  PENNA 

150  FIFTH  AVE.  NEW  YORK 

1893 


Copyright,   1893,  by 

HUNT    &     EATON 

NEW  YORK. 


Composition,  Eloctrotyping,  and  Printing  by 

HUNT  &  EATON, 
ISO  Fifth  Avenue,  New  York. 


PREFACE. 


WHEN  I  began  the  present  work  I  asked  the  assistance  of 
Mr.  H.  II.  Powers,  then  of  the  graduate  department  of  the 
University  of  Wisconsin,  and  now  professor-elect  of  Political 
Economy  in  Smith  College,  Northampton,  Mass.  I  antici- 
pated help  which  could  be  passed  over  with  little  more  than 
mere  mention  in  the  preface,  but  the  aid  received  is  so  great 
that  it  becomes  both  my  duty  and  pleasure  to  make  particular 
acknowledgment  of  it  and  to  state  frankly  that  this  book  is 
a  joint  product.  While  I  am  primarily  responsible  for  the 
whole,  as  according  to  agreement  I  have  freely  rejected, 
qualified,  or  accepted  what  has  been  done  by  Mr.  Powers,  it 
should  be  known  that  much  credit  is  due  to  my  fellow- worker 
for  whatever  success  the  book  achieves. 

Mr.  M.  B.  Hammond  has  rendered  efficient  assistance  in 
the  collection  and  critical  examination  of  statistics,  and  Mr. 
J.  W.  Crook  has  read  the  proofs  of  the  book  and  offered 
useful  suggestions  from  time  to  time.  I  am  also  indebted  to 
Mr.  David  Kinley  for  helpful  suggestions.  All  of  these 
gentlemen  are  connected  with  the  graduate  department  of 
Economics  in  the  University  of  Wisconsin,  and  I  wish  to 
express  to  them  my  thanks  for  their  aid.  Professors  Turner 
and  Haskins,  of  the  same  institution,  have  read  the  earlier 
chapters  in  the  book,  and  I  have  to  thank  them  for  helpful 
criticism. 

The  present  book  was  begun  as  a  revision  of  my  Introduc- 

22O5121 


vi  PREFACE. 

tion  to  Political  Economy,  but  it  has  become  practically  a 
new  book,  and  the  publishers  will  retain  the  older  work  on 
the  market.  This  newer  work  is  more  theoretical,  and  perhaps 
naturally  follows  the  earlier  one.  The  Introduction  to  Polit- 
ical Economy,  which  has  been  used  in  many  schools  and 
colleges,  gives  large  scope  to  a  teacher  to  develop  his  own 
line  of  thought,  and  may  still  be  preferred  by  some  who  have 
become  accustomed  to  it.  In  any  future  revision  of  the  two 
books  an  effort  will  be  made  to  develop  still  further  the 
peculiar  characteristics  of  each;  the  aim  of  the  Introduction 
being  to  furnish  chiefly  historical  and  descriptive  material; 
the  aim  of  the  Outlines  being  to  give  a  systematic  sketch  of 
theory. 

The  limits  set  for  the  present  work  have  made  it  impos- 
sible to  include  a  discussion  of  State  revenues  and  taxation, 
as  well  as  much  other  matter  necessary  to  fit  the  book  for 
school  and  college  use.  The  matter  thus  excluded  will  be 
included  in  a  larger  edition  issued  simultaneously  with  this 
and  designed  especially  for  college  classes. 

MADISON,  Wis.,  June,  1893.  RICHARD  T.  ELY. 


TABLE  OF  CONTENTS. 


BOOK    I. 

HISTORICAL    INTRODUCTION. 

CHAPTER    I.  PAGB 

THE  ECONOMIC  LIFE  or  UNCIVILIZED  MAN 3 

CHAPTER    II. 

THE  ECONOMIC  LIFE  OF  SEMICIVILIZED  MAN 7 

CHAPTER  III. 
THE  ECONOMIC  LIFE  OF  CIVILIZED  MAN — FIRST  STAGE 14 

CHAPTER  IV. 
THE  ECONOMIC  LIFE  OF  CIVILIZED  MAN — SECOND  STAGE 18 

CHAPTER    V. 
THE  INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  1 26 

CHAPTER    VI. 

THE  INDUSTRIAL  REVOLUTION  IN  ENGLAND — PABT  II 34 

CHAPTER   VII. 

THE  INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  III 42 

CHAPTER  VIII. 

REMARKS  ON  THE  ECONOMIC  HISTORY  OF  THE  UNITED  STATES 54 

CHAPTER    IX. 

TENDENCIES  TO  REACTION  AGAINST  A  PASSIVE  POLICY  OF  GOVERNMENT 

IN  THE  UNITED  STATES  . .  64 


viii  CONTENTS. 


CHAPTER    X.  PAGE 

THE  NATURE  OP  THE  SUBJECT  OP  ECONOMIC  STUDY 72 

CHAPTKR  XI. 

DEFINITION  OP  ECONOMICS  AND  ITS  RELATION  TO  THE  OTHER  SOCIAL 
SCIENCES.  . ,  ....     81 


BOOK   II. 

PRIVATE    ECONOMICS. 


PART  I. 

PRODUCTION. 


CHAPTER  I. 
INTRODUCTORY..  89 


CHAPTER  II. 
THE  FACTORS  OF  PRODUCTION 99 

CHAPTER  III. 
ORGANIZATION  OP  THE  PRODUCTIVE  FACTORS Ill 


PART  II. 

TRANSFERS  OF  GOODS. 

CHAPTER  I. 
INTRODUCTORY 118 

CHAPTER  II. 

THE  ORIGIN  AND  ORGANIZATION  OF  EXCHANGE.  .  .  127 


CONTENTS.  ix 


CHAPTER    III.  PAGE 

MONEY  AND  rrs  VARIETIES 140 

CHAPTER   IV. 
CHANGES  IN  THE  AMOUNT  OF  MONEY — BIMETALLISM 150 

CHAPTER  V. 
CREDIT  AND  THE  MECHANISM  OF  CREDIT 157 


PART  III. 
DISTRIBUTION. 

CHAPTER    I. 

DEFINITIONS  OF  DISTRIBUTION  AND  RENT 166 

CHAPTER    II. 

KENT  WITH  AND  WITHOUT  FREE  LAND.  .  .....  .173 


CHAPTER  III. 
WAGES 180 

CHAPTER    IV. 

THE  LABOR  MOVEMENT 187 

CHAPTER    V. 

PROFIT  SHARING  AND  COOPERATION 199 

CHAPTER  VI. 
INTEREST  AND  PROFITS ». 209 


PART  IV. 

CONSUMPTION. 

CHAPTER     I. 

INTRODUCTORY 219 

CHAPTER  II. 

CONSUMPTION  AND  SAVING  ...  224 


CONTENTS. 


CHAPTER    III.  PAGE 

LUXURY 230 

CHAPTER  IV. 
TI ARMFUL  CONSUMPTION 236 

CHAPTER  V. 
CRISES  AND  ANALYSIS  OP  CONSUMPTION , .  242 


BOOK    III. 

PUBLIC     ECONOMICS. 


PART    I. 

PUBLIC  INDUSTRY  AND  THE  RELATION  OF  THE  STATE  TO 
PRIVATE   ENTERPRISE. 

CHAPTER    I. 

INTRODUCTORY 249 

CHAPTER    II. 

FUNDAMENTALS — THE  RIGHT  OP  PRIVATE  PROPERTY 257 

CHAPTER     III. 

FUNDAMENTALS — GUARANTEED  PRIVILEGES 265 

CHAPTER    IV. 
STATE  PARTICIPATION  IN  INDUSTRY 271 

CHAPTER  V. 

STATE  REGULATION  OP  INDUSTRY 279 

CHAPTER    VI. 

STATE  REGULATION  OP  INDUSTRY  BY  POSITIVE  STATUTE.  .         .  287 


CONTENTS.  xi 


CHAPTER— VII.  PAGE 

STATE  MANAGEMENT  OP  INDUSTRY 295 

CHAPTER    VIII. 
SOCIALISM.  . .  308 


PART   II. 
STATE  EXPENDITURE. 

CHAPTER     I. 

INTRODUCTORY 316 

CHAPTER    II. 
EXPENDITURES  FOR  SECURITY 324 

CHAPTER     III. 

EXPENDITURES  FOR  THE  POOR  AND  UNFORTUNATE 329 

CHAPTER    IV. 
EXPENDITURE  FOR  EDUCATION 336 

CHAPTER   V. 
EXPENDITURE  FOB  COMMERCE,  DIPLOMACY,  AND  GOVERNMENT 343 


BOOK    I. 
HISTORICAL  INTRODUCTION. 


' 


->^>e. 


<77^^ 
/ 


CHAPTER  I. 

THE   ECONOMIC   LIFE  OF  UNCIVILIZED  MAN. 

WITHOUT  troubling  ourselves  at  present  about  exact  defi- 
nitions, let  us  notice  what  kind  of  history  we  have  before 
us.  The  history  of  literature,  the  history  of  government, 
the  history  of  religion,  and  many  others,  all  have  one  thing 
in  common:  they  are  all  of  them  histories  of  man.  They 
each  treat  of  man,  however,  in  one  line  of  his  activities.  So 
with  economic  history.  Its  subject  is  man,  but  it  deals  pri- 
marily not  with  his  thought  or  his  government  or  his  wor- 
ship, but  with  his  efforts  to  get  a  living.  If  any  one  is 
tempted  to  think  this  a  narrow  subject  he  should  remember 
that  it  means  more  than  bread  and  butter.  Literature, 
science,  art,  religion,  government,  all  require,  not  only  bread 
and  butter  for  those  employed  in  them,  but  books  and  papers 
and  laboratories  and  art  galleries  and  churches  and  court- 
houses— all  of  them  a  part  of  man's  "  living."  It  is  plain 
that  every  kind  of  activity  depends  on  material  things  to 
some  extent.  So  this  subject  of  ours — man  in  his  effort  to 
acquire  and  to  use  material  things  to  satisfy  his  wants,  or,  in 
other  words,  to  get  a  living — is  of  interest  to  everybody  and 
to  every  kind  of  human  effort. 

The  various  ways  of  getting  things  may  be  roughly  re- 
duced to  two:  one  must  find  things,  or  else  one  must  make 
them.  Of  course  these  two  ways  shade  into  each  other,  but 
they  are  sufficiently  distinct  for  our  purpose.  Uncivilized 
man  finds  things;  civilized  man  makes  things.  Indeed, 
material  civilization  consists  largely  in  wanting  many  things 
and  in  learning  how  to  make  and  to  use  them. 

The  Hunting  and  Fishing  Stage. — The  first  want  is 
food,  and  the  primitive  man,  who  has  not  learned  to  make 


4  OUTLINES  OF  ECONOMICS. 

or  "  raise  "  it,  must  depend  upon  what  he  can  find.  Wild 
berries  and  roots  will  count  for  something,  but  plainly  not 
for  much.  He  must  live  principally  on  game  and  fish.  It 
has  been  suggested  that  as  man  has  to  fight  many  animals  to 
keep  them  from  eating  him  he  naturally  eats  them  when  he 
kills  them  in  the  fight.  This  would  hardly  seem  to  be  a  sat- 
isfactory account  of  the  origin  of  the  use  of  animal  food,  for 
as  a  rule  the  animals  dangerous  to  man  are  not  those  he  eats, 
but  it  is  possible  that  the  attacks  of  wild  animals  may  have 
helped  to  accustom  man  to  slaughter  animals  generally,  and 
this  may  have  rendered  it  easier  to  kill  even  men.  Hunting 
is  the  first  thing  in  which  man  learns  skill. 

Another  thing  that  sometimes  arises  at  this  early  stage  is 
cannibalism.  Cannibals  are  not  simply  very  wicked  men, 
but  men  who  are  very  ignorant  and  very  hungry.  Inasmuch 
as  they  do  not  know  enough  to  help  Mother  Nature  to  raise 
food  she  furnishes  very  little.  A  tribe  of  hunting  savages 
is  said  to  require  fifty  thousand  acres  per  person  to  live  on. 
Now,  as  we  know,  the  human  race  tends  to  multiply  rapidly. 
Hence  they  live  continually  on  the  verge  of  starvation.  If 
we  remember  that  even  civilized  peoples  are  guilty  of  occa- 
sional cannibalism  in  times  of  famine  we  shall  not  be  sur- 
prised that  uncivilized  man  should  be  guilty  of  it  frequently 
when  he  has  to  choose  between  that  and  starvation.  The 
subject  of  cannibalism  is  one  which  does  not  appear  to  have 
been  sufficiently  investigated,  but  the  practice  is  often  con- 
nected with  war  and  religious  rites.  If  begun  as  a  result  of 
hunger  it  would  seem  not  unnatural  that  it  should  be  con- 
tinued for  other  reasons  by  an  ignorant  and  degraded  tribe. 

However,  we  must  not  suppose  that  the  lowest  savages 
ever  killed  and  ate  one  another  indiscriminately.  No  body 
of  men  ever  existed  on  the  basis  of  "  every  man  for  him- 
self." In  the  lowest  stages  men  respected  family  ties,  and 
these  in  a  larger  and  larger  circle,  till  a  tribe  was  the  result. 
Within  the  tribe  men  were  brothers  who  shared  what  they 
had  with  each  other.  Outsiders  were  enemies,  to  be  robbed, 
killed,  or  eaten  as  the  circumstances  might  require. 


THE  ECONOMIC  LIFE  OF  UNCIVILIZED  MAN.  5 

Let  us  notice  very  carefully  this  fact  which  we  find  at  the 
very  bottom  of  human  life,  in  the  lowest  tribes  of  which  we 
know  anything.  Man  never  leaves  all  his  fellows  to  their 
fate.  Even  while  as  yet  he  is  little  more  than  an  animal  he 
begins  to  be  a  moral  animal,  setting  bounds  to  his  own  lib- 
erty and  imposing  upon  himself  certain  duties.  Of  course 
his  morals  are  crude  and  his  circle  of  brotherhood  narrow, 
but  they  are  facts.  We  have  said  that  material  civilization 
consists  in  wanting  many  things  and  in  learning  how  to 
make  and  to  use  them.  Moral  civilization  consists  in  per- 
j'«-tii«j  tin;  ilnt'n'S  and  enlarging  the  circle  of  brotherhood. 
From  the  beginning  until  now  man  has  divided  his  fellows 
into  those  who  were  to  be  fed  and  those  who  were,  figura- 
tively at  least,  to  be  eaten,  and  his  progress  is  measured  by 
the  proportion  between  the  two. 

What  has  been  said  of  hunting  tribes  applies  with  slight 
changes  to  fishing  tribes.  The  difference  of  occupation  is 
due  to  location.  On  the  whole,  however,  fishing  requires 
more  skill  and  more  tools  than  hunting,  and  so  these  tribes 
are  as  a  rule  slightly  more  advanced,  and  they  are  more 
likely  to  advance  to  a  higher  stage  in  a  near  future.  But 
primitive  fishing,  like  hunting,  is  a  precarious  means  of  get- 
ting a  living,  and  leaves  those  who  follow  it  in  a  low  social 
condition.  Of  course  there  is  little  buying  and  selling  under 
such  circumstances.* 

So  long  as  man  depends  for  his  living  upon  what  Nature 
furnishes  of  her  own  accord  population  is  thin,  poverty  ex- 
treme, starvation  frequent,  and  war  and  cannibalism  a  natural 
outcome  between  the  small  and  scattered  tribes.  To  be  rich, 
man  must  learn  to  want  and  learn  to  make;  to  be  strong  and 
safe,  he  must  learn  the  meaning  and  extent  of  brotherhood. 
\\  e  shall  see  as  Ave  go  on  how  impossible  it  is  either  to  de- 
velop or  to  study  these  things  separately. 

*  There  is  said  to  be  little  buying  and  selling  to-day  among  the  inhabit- 
ants of  Iceland,  because  nearly  all  produce  substantially  the  same  things. 
2 


OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Economic  history  is  tlie  history  of  man  in  his  efforts  to  get  a  living; 
that  is,  to  gel  the  things  needed  in  all  his  activities. 

2.  He  may  find  things  or  make  them;  uncivilized  man  finds  things;  civ- 
ilized man  makes  them. 

3.  Material  civilization  consists  in  the  making  and  using  of  things;  moral 
civilization  in  the  development  of  brotherhood. 

4.  Uncirilized  man  fi.-hes  and  hunts.     Scarciiy  of  food  makes  him   a 
fighter  and  sometimes  a  cannibal. 

5.  Even  the  savage  is  a  moral  animal,  and  limits  his  depredations  by  self- 
imposed  duties. 

QUESTIONS. 

1.  How  much  is  included  under  the  term  "living?"      What  are  the 
economic  elements  in  religions  work?  in  education?  in  government? 

2.  What  two  ways  are  there  of  getting  things?     In  which  way  can  man 
get  more  ? 

3.  What  is  civilization?     What  two  kinds  and  the  difference  between 
them  ?     What  are  the  advantages  of  material  civilization? 

4.  What  is  the  cause  of  cannibalism?  its  limits?  its  cure? 

5.  Ts  moral  civilization  dependent  on  material  civilization?     If  so,  how? 

-7 

LITERATURE. 

English  works  bearing  upon  the  economic  aspect  of  the  developments  of 
civilization  are  inadequate.  The  following  may  be  read  w  iih  profit: 

Lubbock,  Sir  John:  Prehistoric  Times,  particularly  the  last  chapter;  also, 
Origin  of  Civilization  and  Primitive  Condition  of  M<m. 

Wilson,  Dr.  Daniel :  Prehistoric  Man,  dealing  chiefly  with  natives  of 
America. 

Morgan,  L.  H. :  Ancient  Society. 

Tylor,  E.  B. :  Anthropology. 

Drnmmond,  Henry:   Tropical  Africa,  especially  chapter  iii. 

Stanley,  Henry  M. :  In  Darkest  Africa. 

Gomnie,  G.  L. :    The  Village  Community. 

Reports  of  the  Bureau  of  Ethnology  connected  with  the  Smithsonian  In- 
slit  ution.  Washington. 


CHAPTER  II. 

THE  ECONOMIC  LIFE  OF  SEMICIVILIZED  MAN. 

BETWEEN  the  uncivilized  man,  who  uses  what  he  can  find, 
and  the  civilized  man,  who  makes  what  he  wants,  there  is  a 
middle  ground.  The  man  of  this  period  neither  depends  on 
what  he  finds  nor  yet  makes  things  to  any  great  extent,  but 
he  "raises"  his  living  ;  in  other  words,  to  a  limited  extent 
he  has  learned  to  give  direction  to  the  forces  of  nature.  He 
lias  learned  to  produce,  but  he  lives  on  "  raw  materials,"  not 
knowing  how  to  work  them  up.  Man  very  soon  makes  a  few 
simple  tools  like  bows  and  arrows  and  the  early  stone  imple- 
ments, as  knives,  hatchets,  and  arrowheads;  but  with  this 
exception  it  is  worthy  of  note  that  as  man  begins  to  subdue 
nature  he  begins  not  with  dead  nature,  but  with  living  na- 
ture; he  uses  not  metals,  but  animals  and  plants,  and  learns 
to  increase  their  amount.  Moreover,  of  these  two  kinds  of 
living  things,  he  first  subdues  the  higher  life,  that  most  like 
his  own,  and  not  until  long  after  learns  to  control  plant  life 
for  his  uses. 

The  Pastoral  Stage. — Man  may  have  tamed  dogs  for 
hunting  and  sometimes  horses  while  still  in  the  hunting  stage, 
but  the  pastoral  stage  begins  with  an  extensive  pasturing  of 
animals  for  food  and  clothing.  Man  no  longer  depends  upon 
hunting;  but  having  learned  that  if  he  is  to  have  animals  in 
plenty  he  must  take  care  of  them,  not  simply  kill  them,  he 
gains  their  confidence  and  now  has  flocks  and  herds.  Some 
marked  features  of  the  preceding  stage  still  continue.  While 
man  now  lives  upon  his  flocks  the  gi'asses  and  plants  upon 
which  they  feed  are  still  left  to  themselves  ;  the  flocks  still 
live  on  what  they  can  find.  So,  while  man  no  longer  needs 
in  wander  in  search  of  food  for  himself,  he  must  do  so  for 


8  OUTLINES  OF  ECONOMICS. 

his  flocks.  Cities  are,  therefore,  still  impossible.  Moreover, 
while  the  land  will  now  support  many  more  inhabitants  than 
before,  much  land  is  still  needed  to  pasture  the  flocks,  and 
as  the  tribes  or  families  roam  about  at  will  they  frequently 
come  into  collision  and  fight  over  desirable  pastures.  Thus 
war  continues,  keeping  down  the  population,  but  with  one 
important  change.  Cannibalism  ceases.  For  a  long  time 
the  victims  of  war  continue  to  be  slaughtered,  but  men  with 
flocks  at  their  disposal  do  not  feed  upon  human  flesh.  Doubt- 
less even  this  is  an  advance  toward  brotherhood,  for  it  re- 
moves one  inducement  to  war  and  so  paves  the  way  for  its 
final  abandonment.  Then,  too,  men  very  slowly  begin  to  see 
that  war  is  disastrous,  scattering  their  flocks  and  destroying 
their  wealth.  Thus  it  is  clear  that  on  the  whole  property 
tends  to  make  men  more  humane,  although  this  tendency 
may  be  one  working  within  comparatively  narrow  limits. 
War  becomes  somewhat  more  difficult  when  men  have  prop- 
erty to  lose,  although  the  pursuit  of  wealth  has  itself  been 
the  cause  of  many  wars. 

The  history  of  Abraham  gives  us  examples  of  pastoral 
society  and  warfare,  also  of  the  peaceful  settlement  of  diffi- 
culties between  Abraham  and  Lot.  Evidently  these  men  are 
afraid  that  war  will  result  in  their  mutual  impoverishment. 
Still  it  is  worthy  of  note  that  they  were  kinsmen,  and  perhaps 
would  not  have  made  this  arrangement  but  for  the  feeling, 
known  from  the  first,  that  kinsmen  must  not  make  war  upon 
each  other.  War  still  remains  common — due,  as  we  have 
said,  to  overcrowding,  to  the  wandering  habit  of  the  peo- 
ple, and  to  human  passions  of  all  kinds.  It  is  in  this  stage 
that  those  great  migrations  occur,  so  unlike  anything  we 
now  know,  whole  tribes  leaving  their  country  and  seeking 
a  new  one,  dri\  ing  out  the  former  inhabitants  before  them. 
Many  individuals  do  the  same  thing  to-day;  but  who  ever 
heard  of  a  whole  city,  still  less  a  whole  country,  being  aban- 
doned in  our  day  by  its  inhabitants?  That  happens  only 
in  this  early  stage,  while  as  yet  men  are  used  to  a  wander- 
ing life. 


THE  ECONOMIC  LIFE  OF  SEMICIVILIZED  MAN.          9 

It  follows  from  what  we  have  said  that  there  is  very  little 
ownership  of  land  at  this  time.  Tribes  as  a  whole  lay  claim 
to  certain  districts  and  try  to  keep  other  tribes  from  pastur- 
ing on  them.  But  individuals  own  either  no  land  or  very  little, 
and  it  is  doubtful  whether  even  the  tribe  would  claim  any- 
thing quite  like  ownership  in  our  sense  so  long  as  land  is 
used  only  for  pasturage.  The  notion  of  ownership  develops 
as  land  becomes  more  useful. 

In  this  stage  there  are  frequently  great  accumulations  of 
wealth,  such  as  it  is.  It  consists  mostly  of  great  flocks,  and 
gold,  silver,  and  precious  stones,  which  early  appeal  to  the 
barbarian  taste  for  showy  ornament.  Wealth  produces,  as 
everywhere,  extremes  of  condition,  the  rich  and  poor  being 
sharply  contrasted  with  each  other.  But  this  early  wealth 
does  not  produce  commerce  to  any  considerable  extent.  The 
reason  is  plain.  In  order  to  have  trade  we  must  not  only 
have  wealth,  but  diversity  of  wealth.  There  is  in  general 
veiy  little  reason  why  men  should  exchange  one  ox  for 
another,  and  as  this  is  about  all  the  primitive  "  cattle  king  " 
can  do,  trade  does  not  develop.  Of  course  there  is  some  lit- 
tle exchange  besides  this.  The  precious  metals  are  obtained 
in  this  way  by  the  wealthy,  and  linely  woven  fabrics  may  be 
procured  from  a  wandering  merchant. 

The  Agricultural  Stage. — Man's  next  accomplishment 
is  of  immense  importance.  He  has  learned  to  manage  ani- 
mals to  his  advantage  ;  he  now  learns  to  manage  plants  and 
"  raise "  them  at  will.  The  effect  is  almost  incalculable. 
The  first  result  is  to  increase  population  immensely.  The 
soil  which  formerly  maintained  a  handful  of  herdsmen  with 
their  scattered  sheep  now  supports  a  whole  community.  The 
second  result  is  even  more  important.  Men  cease  to  roam 
about  and  settle  in  one  place.  Now,  nothing  is  more  neces- 
sary for  human  development  than  that  men  should  live  in 
definite  places  and  have  homes  and  a  country.  This  results 
at  once  in  new  relations  between  men,  new  duties,  new  arts, 
and  new  possibilities.  A  man  never  accomplishes  much  in 
this  or  any  other  age  till  he  settles  in  a  definite  territory ; 


10  OUTLINES  OF  ECONOMICS. 

and  in  the  slow  development  of  the  race  the  taking  up  of 
agriculture  was  a  decided  advance.* 

A  third  result  which  came  naturally  though  gradually  was 
the  private  ownership  of  land.  The  cultivation  of  the  soil 
required  a  good  deal  of  detailed  personal  attention,  and  some 
sort  of  a  division  was  necessary  in  this  work.  We  must  not 
suppose,  however,  that  this  first  parceling  out  of  the  soil  re- 
sulted immediately  in  private  ownership.  The  tribe  still 
owned  the  land,  and  the  division  was  only  a  temporary  one 
for  purposes  of  convenience.  Strangely  enough,  the  first 
owners  of  the  soil  were  in  many  countries  not  the  cultivators, 
but  the  chieftains  of  the  tribes,  an  ownership  which  became 
very  important  in  its  later  consequences,  as  we  shall  see. 

But  the  most  important  characteristic  of  this  period  is 
slavery.  Men  now  cease  to  kill  their  prisoners  of  war,  but 
make  them  slaves  instead.  Slavery  begins  long  before  agri- 
culture, but  it  now  attains  its  full  magnitude  as  an  institution. 
It  is  hard  work  to  till  the  soil,  and  men,  especially  primitive 
men,  are  not  fond  of  hard  work.  So  they  save  the  lives  of 
their  prisoners  in  order  themselves  to  be  spared  the  neces- 
sity of  work.  This  is  a  poor  reason  for  becoming  humane, 
perhaps,  but  it  is  well  to  become  humane  even  for  a  poor 
reason.  There  have  been  many  discussions  as  to  whether 
slavery  is  right  or  wrong.  It  is  both.  There  is  a  time  in 
human  development  when  slavery  represents  a  step  in  human 
progress,  the  best  and  longest  that  men  are  able  then  to  take. 
Such  a  step  is  always  right.  It  is  wrong  when  men  have 
learned  how  to  do  better.  The  slavery  of  the  early  period 
we  are  now  considering  was  not  only  inevitable,  but,  inns- 
much  as  slaves,  like  other  property,  were  seldom  bought  and 
sold,  it  was  very  mild.  The  existence  of  a  large  slave  popu- 
lation, however,  which  can  be  kept  regularly  at  work  greatly 

*  The  Book  of  Job  gives  us  a  fine  picture  of  an  early  agricultural  stage. 
The  plow  was  in  use,  but  wealth  was  estimated  in  "live  stock."  His  "sub- 
stance was  seven  thousand  sheep,  and  three  thousand  camels,  and  five  hun- 
dred yoke  of  oxen,  and  five  hundred  she  asses,  and  a  very  great  household; 
so  that  this  man  was  the  greatest  of  all  the  men  of  the  east." 


THE  ECONOMIC  LIFE  OF  SEMICIVILIZED  MAN.        11 

increases  the  wealth  of  society.  We  now  know  that  free 
labor  is  better  than  slave  labor,  especially  in  the  later  stages 
of  industrial  development;  but,  inasmuch  as  primitive  man 
is  with  difficulty  induced  to  work  at  all,  slave  labor  is  a  great 
improvement  on  free  idleness.  Of  course  all  that  we  have 
said  is  subject  to  many  exceptions,  for  as  men  develop  they 
become  more  diverse.  Among  some  peoples  slavery  never 
became  an  important  institution,  while  in  others  it  was  highly 
developed,  affecting  their  entire  social  life. 

With  every  increase  of  wealth  the  tendency  to  trade  in- 
creases, but  as  yet  the  occasion  for  it  is  comparatively  slight, 
for  men's  wants  and  wealth  aixi  still  much  the  same  every- 
where. Fixed  residence  develops  village  communities — not 
cities;  these  have  a  different  origin — and  these  have  little  to 
gain  by  trading  with  others  like  themselves.  Such  trade  is 
usually  by  barter;  that  is,  goods  are  exchanged  for  goods,  not 
for  money.  Money  does  not  at  this  time  perform  important 
functions  in  the  life  of  every  day. 

But  we  must  notice  the  change  or  enlargement  in  men's 
ideas  during  this  period.  This  we  shall  find  in  their  laws 
and  customs;  the  Mosaic  code  is  our  best  example,  as  it  was 
designed  to  govern  a  people  in  the  pastoral  and  agricultural 
stages.  Before  this  time  there  were  numerous  customs  reg- 
ulating life,  and  there  may  have  been  such  a  thing  as  even 
the  tyranny  of  custom,  but  we  are  struck  with  the  immense 
increase  of  duties  and  restrictions  which  are  now  recognized. 
With  fixed  residence  has  come  the  State,  with  its  institutions 
of  justice,  guidance,  and  protection,  its  numerous  thou  shalts 
and  thou  shalt  nots.  At  every  turn  we  see  that  men  may  not  do 
as  they  please,  but  that  they  arc  restricted,  or  perhaps,  rather, 
have  restricted  themselves  for  their  own  good.  Why  all  this, 
when  we  saw  comparatively  little  of  it  before  ?  Simply  be- 
cause men  are  now  become  permanent  neighbors,  and  they 
have  need  of  an  understanding  on  many  points  to  keep  from 
trespassing  on  each  other's  liberty.  If  men  are  to  live  close 
together  and  accumulate  property  and  enjoy  it  in  peace 
there  must  be  general  agreement  among  the  many  and  vig- 


12  OUTLINES  OF  ECONOMICS. 

orous  compulsion  for  the  few  on  many  points.  And  so  again 
interests  of  property  and  person  lead  men  to  recognize  du- 
ties and  establish  laws  which  they  learn  to  obey  later  as  a 
matter  of  sacred  honor,  even  though  it  cost  them  life  and 
property  to  do  so.  It  is  noteworthy,  however,  that  these 
duties  and  laws  are  chiefly  recognized  at  home.  Beyond  the 
boundaries  of  the  tribe  or  nation  these  duties  are  scarcely 
held  to  be  binding  at  all.  In  the  early  German  communi- 
ties, when  the  scattered  tribes  were  still  small  and  separated 
by  unoccupied  land,  each  tribe  lived  in  relations  of  brother- 
hood within  itself,  property  being  common  and  mutual 
rights  closely  guarded.  But  between  different  tribes  no  rules 
held.  "When  they  met  on  the  neutral  ground  or  Mark,  as  it 
was  called,  to  trade,  all  kinds  of  sharp  practice  were  deemed 
admissible.  Things  not  to  be  thought  of  at  home  were  here 
unquestioned.  This  Mark  and  the  trading  that  took  place 
in  it  suggest  our  modern  market,  and  even  if  the  word 
market  is  not  derived  from  the  word  Mark,  as  their  simi- 
larity would  indicate,  it  probably  gets  some  of  its  practices 
from  the  trading  in  this  neutral  ground.  Thus  we  still  see 
the  division  with  which  we  are  already  familiar  into  those 
who  are  protected  from  man's  rapacity  by  moral  restrictions 
and  those  who  are  not. 


THE  ECONOMIC  LIFE  OF  SEMICIVILIZED  MAN.        13 


SUMMARY. 

1.  Between  the  finding  of  things,  which  is  savagery,  and  the  making  of 
things,  which  is  civilization,  comes  a  period  of  "  raising  "  things,  or  semi- 
civilix.ation. 

2.  The  domestication  of  animals  assures  subsistence,  helps  to  stop  canni- 
balism, introduces  slavery,  checks  war,  and  creates  wealth. 

3.  The  cultivation  of  the  soil  fixes  residence,  extends  law  and  custom, 
and  develops  tribal  ownership  of  land. 

4.  Barter  trade  begins  with  a  different  code  of  law,  and  honor  for  neighbors 
and  strangers,  much  to  the  disadvantage  of  the  latter. 

QUESTIONS. 

1.  \Vhatpartofnaturedoesmansubduefirst?     Why? 

2.  Why  does  the  hunter  not  accumulate  wealth?     Why  does  he  not  own 
land?     Why  does  the  shepherd  not  own  land?     What  advantage  has  the 
shepherd  o"er  the  hunter? 

3.  What  influence  has  agriculture  on  wealth,  and  why?  on  slavery?  on 
law?  on  moral  civilization? 

4.  What  was  the  Mark?  its  code  of  honor?     How  much  does  this  code 
correspond  with  our  present  market  code? 

LITERATURE. 

Maine,  Sir  Henry:  Ancient  Law;  Village  Communities  in  the  East  and 
West;  Early  History  of  Institutions;  Early  Law  and  Custom;  especially 
chapter  viii  in  the  last  work.  These  four  works  are  standard. 

Seebohm,  F. :   The  English  Village  Community. 

Allen,  W.  F. :  MonograpJis  and  Essays. 

Wallace,  Mackenzie :  Russia,  contains  a  popular  account  of  Russian  com- 
munities. 

Stepniak:  Russia  Under  the  Tsars,  contains  a  clear  account  of  the  Russian 
village  community,  the  Mir.  A  cheap  edition  is  published  in  Harper's 
Franklin  Square  Library, 

NOTE.— The  works  enumerated  at  the  end  of  these  chapters  often  bear  upon  the  sub- 
jects of  other  chapters  as  well,  but  to  save  space  we  shall  mention  works  but  once, 
except  in  cases  of  special  Importance.  No  attempt  is  made  to  make  the  enumeration 
a  complete  bibliography. 


CHAPTER  III. 

THE  ECONOMIC  LIFE  OF  CIVILIZED  MAN— FIRST  STAGE. 

IT  must  not  be  supposed  that  these  periods  are  sharply 
defined  in  date  or  character.  They  shade  into  one  another 
gradually,  and  come  at  very  different  times  for  different 
peoples.  But,  nevertheless,  most  peoples  pass  through  these 
stages,  and  at  any  particular  time  a  given  kind  of  economic 
life  will  be  found  to  be  dominant  among  a  given  people. 

We  have  said  that  civilization  begins  with  making  things, 
or,  if  we  prefer  a  longer  word,  manufacture.  This  is  of  two 
kinds,  hand  manufacture  and  power  manufacture.  It  is  with 
hand  manufacture  that  we  now  have  to  deal. 

The  Trades  and  Commerce  Stage. — Though  this  stage 
is  characterized  by  the  development  of  trades  and  commerce, 
as  the  name  implies,  the  real  cause  of  this  is  manufacture. 
Men  learn  to  weave  fabrics  and  fashion  things  in  wood, 
metal,  etc.,  and  use  dead  as  well  as  living  nature.  The  re- 
sults of  this  arc: 

1.  Trades.     To  make  anything  well  requires  so  much  skill 
that  a  man  needs  all  his  time  at  it.     The  man  who  makes 
only  one  thing  makes  it  better  than  he  who  makes  many 
things.     So  labor  learns  to  specialize,  as  we  say,  and  we  have 
division  of  labor  or  trades,  such  as  blacksmiths,  shoemakers, 
weavers,  dyers,  etc. 

2.  Commerce.     We  have  seen  that  there  was  little  com- 
merce so  long  as  everybody  was  engaged   in  one  business — 
the  raising  of  animals  and  grain — because  each  had  nearly 
all  the  kinds  of  wealth  which  any  one  else  had  to  sell  him. 
But,  plainly,  when  men  learn  trades  and  each  makes  only 
one  kind  of  an  article,  he  will  neither  want  all  the  things  he 

*  O 

makes  nor  make  all  the  things  he  wants.     He  must  trade. 


ECONOMIC  LIFE  OF  CIVILIZED  MAN — FIKST  STAGE.     15 

And  so  wherever  manufacture  develops  we  find  trade  grow- 
ing up  as  a  necessity.  For  convenience'  sake  some  men 
spend  all  their  time  in  exchanging  goods  which  other  men 
make,  and  so  save  them  time  and  trouble.  Different  coun- 
tries have  different  trades,  and  merchants  find  it  convenient 
to  make  exchanges  between  them. 

3.  Money.     Plainly,  such  a  general   system  of  exchange 
cannot  be  carried  on  by  barter.     The  shoemaker  who  needs 
bread  cannot  wait  till  he  finds  a  baker  who  needs  shoes  and 
make  a  trade  with  him.     Under  such  a  system  everybody 
would  be  poor  for  the  lack  of  the  things  that  everybody  else- 
was  anxious  to  furnish.     They  would  simply  fail  to  make 
necessary  exchanges.     In  order  to  effect  exchanges  easily  we 
must  have  some  common  article  for  which  we  can  exchange 
everything.     This  was  early  felt,  and  yet  it  has  proved  one 
of  the  most   difficult  of  all   problems  to  find  precisely  the 
right  thing  and  just  enough  of  it.     Many  things  have  been 
tried:  near  the  times  of  barter,  skins,  shells,   cattle,   etc. ; 
then  iron,  copper,  bronze,  silver,  and  gold.     Silver  and  gold, 
which   still  constitute  the   world's   universal  money,  came 
fully  into  use  during  this  period,  and  money  becomes  in- 
creasingly important. 

4.  Cities.     We  have  seen  the  tendency  of  those  emploj'ed 
in  agriculture  to  form    small  village  communities.     These 
existed  in  early  times  for  reasons  of   protection,  coopera- 
tion,   and    sociability,    but   they   could   not   become    large 
because    agriculture   required   the    population   to   be   scat- 
tered.     Manufacture    requires   precisely    the   opposite.      If 
people  are  to  live  by  trades   and  exchanging  each  other's 
goods  they  must  be  near  together  for  convenience'  sake.     So 
cities  situated  according  to  the  convenience  of  commerce 
develop  wherever  men  learn  to  manufacture.     Except  in  case 
of  rare  combinations  of  political  forces,  cities  not  only  do 
not,  but  they  cannot,  grow  up  until  men  learn  to  manufac- 
ture ;  for  if  they  only  knew  herding  and  agriculture  the  in- 
habitants would  perish  for  lack  of  employment  where  there 
was  no  land  for  cultivation  or  pasture.     So,  wherever  we 


16  OUTLINES  OF  ECONOMICS. 

find  the  remains  of  a  city,  we  may  conclude  that  the  people 
had  learned  manufacture  and  commerce  and  passed  into  the 
stage  of  economic  civilization. 

5.  The  Guild  System.     New  forces  introduced  into  society 
do  not  take  care  of  themselves.     So  the  trades  had  to  organ- 
ize in  order  to  reduce  their  business  to  some  kind  of  order. 
Each  trade  had  its  guild,  which  specified  in  detail  how  the 
business  should  be  carried  on,  how  many  should  be  admitted 
to  it,  and  how  the  trade  should  be  learned.     Where,  as  was 
usual,  the  guilds  controlled  the  cities  their  rules  were  early 
sanctioned  by  law. 

6.  Political  Freedom.     The  agricultural  stage  had  in  the 

o  o 

greater  part  of  Europe  culminated  in  the  feudal  system. 
The  feudal  lord  occupied  a  commanding  position,  like  that 
held  by  the  patriarch  in  an  earlier  state,  and  he  owned  the 
land  occupied  by  the  tribe,  and  the  tillers  of  the  soil  had 
become  serfs;  that  is,  while  they  could  not  be  sold  they 
were  obliged  to  stay  on  their  lord's  domains  and  work  for 
him  lor  such  pay  as  he  chose  to  give  them  or  such  remunera- 
tion as  might  be  established  by  custom  and  public  opinion, 
especially  as  manifested  through  the  Church.  The  manu- 
facturing cities  were  the  natural  rivals  of  these  great  feudal 
estates.  The  lords  felt  their  power  threatened  and  bitterly 
opposed  the  cities.  And  so  there  were  wars  and  alliances 
and  treaties  until  finally  the  cities  conquered,  as  they  were 
bound  to  do  in  the  end.  These  cities  were  free,  and  serfs 
who  fled  to  them  were  accepted  and  made  freemen.  Thus 
feudalism  began  to  perish,  and,  slavery  and  serfdom  grad- 
ually disappearing,  another  step  was  taken  toward  liberty  and 
humanity  by  man's  progress  in  learning  to  get  his  living. 


ECONOMIC  LIFE  OF  CIVILIZED  MAN — FIRST  STAGE.     17 


SUMMARY. 

1.  Economic  civilization  begins  with  in;iiuif;icturc,  at  first  by  hand. 

2.  The  result  is  the  learning  of  trades  and  the  development  of  exchange 
and  commerce. 

3.  Money  is  devised  to  facilitate  exchange. 

4.  Trades  organize  into  guilds,  and   commerce  develops  cities  which  be- 
come free  and  destroy  the  feudal  system  after  bluer  opposition. 

QUESTIONS. 

1.  Why  does  manufacture  necessarily  lead  to  commerce? 

2.  What  is  the  difference  between  barter  and  money  exchange  ?     What 
things  have  been  used  as  money  ?     Why  did  people  choose  such  things? 

3.  Why  could  not  agriculture  alone  develop  cities?     Why  do  they  de- 
velop under  manufacture? 

•1.  What  was  a  guild?     What  were  its  purposes? 

5.  What  produced  the  feudal  system?     Why?     What  were  its  advan- 
tages?    Its  weakness ?     What  caused  its  downfall?     Whj*? 

<!.  What  was  the  effect  of  manufacture  and  commerce  on  slavery  and 
serfdom?     Why? 

7.  Does  liberty  depend  on  the  absence  of  restraint?     Why? 

LITERATURE. 

Rogers,  Thorold :    Work  and  Wages. 

Ashley,  W.  ,T. :  Introduction  to  English  Economic  History  and  Tltcnry. 

Cunningham,  W. :   The  Growth  of  English  Industry  and  Cmmncn-e. 


CHAPTER  IV. 

THE  ECONOMIC  LIFE  OF  CIVILIZED  MAN— SECOND  STAGE. 

WE  have  seen  in  the  preceding  stage  an  immense  develop- 
ment of  wealth  and  of  those  soeial  institutions  upon  which 
the  welfare  of  men  depends.  This  all  results  from  man's 
learning  to  make  things  by  distribution  of  occupations  or 
division  of  labor.  But  there  was  one  great  limitation  to  this 
progress.  Things  were  still  made  and  moved  for  the  7iiost 
part  by  mere  muscle.  Machines  were  used  to  some  extent, 
but  they  were  almost  altogether  such  as  could  be  run  by  the 
power  of  man  or  some  lower  animal,  as  the  ox  or  the  horse; 
for  with  the  exception  of  sailing  vessels,  windmills,  and 
water  wheels  men  knew  no  other.  Invention  progressed 
slowly  under  such  circumstances  ;  but  the  tools  and  imple- 
ments already  in  use  were  improved,  their  number  gradually 
increased,  and  wind  and  water  were  utilized  as  forces  to  a 
greater  extent  as  time  went  on.  When  things  were  made 
they  were  hauled  and  transported  by  horses  and  mules  or 
boats  and  vessels  to  their  destination.  Now,  mere  muscle  is 
an  insignificant  thing  compared  with  the  powers  of  the  uni- 
verse, and  man  accomplishes  relatively  little  so  long  as  he 
depends  upon  it.  But  man  has  more  brains  than  any  other 
creature,  and  progresses  by  their  use.  The  next  step  in 
progress  is  easy  to  anticipate. 

The  Industrial  Stage. — The  characteristic  of  this  stage, 
as  we  have  said,  is  power  manufacture.  It  is  hardly  neces- 
sary to  say  that  this  dates  from  the  invention  of  the  steam 
engine  in  1769.  Though  little  used  at  first,  it  was  destined 
soon  to  accomplish  changes  such  as  men  still  hardly  under- 
stand. Up  to  this  stage  men  had  practically  what  their  own 
muscle  could  produce.  No\v  it  is  estimated  thai  the  power 


ECONOMIC  LIFE  OF  CIVILIZED  MAN — SECOND  STAGE.    19 

employed  in  manufactures  produces  twelve  times  as  much  as 
all  human  labor  could  produce  unaided.*  In  some  manufac- 
tures, as  in  making  steel  rails  and  sawing  lumber,  the  power 
employed  is  many  hundred  or  even  thousand  times  that  of 
the  workmen's  muscle.  This  is  plainly  an  advantage.  The 
great  number  of  things  which  we  now  enjoy  must  be  a  mat- 
ter of  satisfaction  to  all  who  believe  in  human  comfort. 
Yet  there  appear  to  have  been  few  periods  in  human  history 
when  so  many  have  been  dissatisfied.  What  is  the  reason 
of  all  this  ?  Simply  that  the  change  from  the  old  to  the 
new  way  of  manufacture  has  been  violent  and  rapid,  and  has 
required  a  reconstruction  of  the  old  social  order.  The  old 
system  of  rights  and  duties  and  laws  would  not  apply  to  the 
new  conditions,  which  soon  broke  them  down  and  left  society 
in  a  disorder  from  which  we  have  plainly  not  yet  recovered. 
Men  learned  with  astonishing  rapidity  how  to  make  new 
things,  but  they  were  slower  in  learning  how  to  use  them 
wisely,  much  slower  still  in  learning  how  to  distribute  them 
justly.  So  manufacturers  made  more  than  they  could  sell, 
and  had  to  stop,  throwing  workmen  out  of  employment 
until  factories  started  up  with  another  spurt,  only  to  stop 
again  with  returning  "  hard  times."  The  multitude  of 
hand  manufacturers  found  their  business  ruined  and  suffered 
abject  misery  before  they  understood  the  situation  and 
moved  to  the  great  cities  to  become  workmen  in  the  facto- 
ries. The  process  moved  on  slowly,  and  one  trade  after 
another  had  the  same  fate.  Some  are  in  the  process  to-day. 
There  is  always  the  same  reluctance  to  give  up  the  old  busi- 
ness, the  same  poverty  and  hardship  compelling  men  to  do 
so,  and  the  same  feeling  of  Avrong  and  injustice  at  the  dire 

*  Mr.  Gamier,  in  Lalor's  Cyclopedia,  estimates  that  iu  the  production  of  flour 
the  labor  of  one  person  is  equal  to  that  of  one  hundred  and  forty-four  per- 
sons in  the  time  of  Ulysses.  In  the  iron  industry  twenty-five  times  as 
much  is  now  produced  with  the  best  inventions  as  in  the  Pyrenees  with  the 
old  methods.  In  the  cotton  industry  three  hundred  and  twenty  times  as 
much  is  produced  now  per  person  employed  as  in  17'JO.  Transportation  by 
railway  i.s  ten  times  easier  than  on  ordinary  roads. 


20  OUTLINES  OF  ECONOMICS. 

compulsion.  Let  us  notice  some  of  the  contrasts  between 
this  and  the  former  stage. 

1.  Relation  Between  Classes.  Under  the  system  of  hand 
manufacture  each  master  in  the  trade  worked  by  himself  or 
with  a  few  others.  He  employed  one  or  more  journeymen 
and  apprentices,  but  as  these  were  simply  learners,  who  in 
time  became  masters  themselves,  we  may  say  that  men  in 
full  possession  of  their  trade  worked  on  their  own  account 
and  owned  what  they  made.  If  prices  rose  they  received  the 
benefit  of  the  higher  prices;  but  this  was  seldom  the  case, 
for  the  guilds  regulated  the  number  of  masters,  the  number 
of  apprentices,  and  the  mode  of  manufacture.  Thus  all  went 
on  evenly,  employment  was  relatively  constant,  and  there 
was  in  the  first  part  of  this  period  general  satisfaction  with 
the  existing  order,  although,  of  course,  there  were  then,  as 
there  always  have  been,  individual  grievances.  Strictly 
speaking,  there  were  no  class  divisions  in  manufactures,  ap- 
prentices and  journeymen  being  simply  masters  not  grown 
up,  and  living  on  friendly  terms  in  the  master's  family  as  his 
industrial  children.  This  system  was  not  specially  favor- 
able to  progress,  but  it  was  good  for  social  order,  which 
is  the  next  best  thing. 

But  each  workman  cannot  have  an  engine  and  machinery. 
They  cost  more  than  he  can  pay,  and  furnish  more  power 
than  he  can  use.  If  the  masters  had  known  enough,  they 
would,  perhaps,  have  combined,  bought  machinery,  and 
changed  their  methods;  the  local  guild  would  have  become  a 
cooperative  factory,  and  all  would  have  gone  well.  But  they 
did  not  know  enough.  Men  are  generally  opposed  to  change 
and  "  new-fangled  notions."  So  a  few,  more  enterprising  and 
wealthy  than  the  rest,  made  the  experiment  to  the  certain  loss 
of  the  rest.  We  can  hardly  expect  them  to  enjoy  the  process 
or  be  patient  under  its  operation.  They  appealed  to  the  guild 
laws,  but  these  were  not  equal  to  the  emergency.  They  turned 
mob  and  broke  machines,  but  the  result  was  only  delayed 
a  little.  "With  their  fortunes  wasted  and  their  business 
ruined,  they  had  nothing  else  to  do  than  to  yield  and  sullenly 


ECONOMIC  LIFE  OF  CIVILIZED  MAN — SECOND  STAGE.  21 

seek  places  as  workmen  in  the  new  factory.  Before,  they  had 
all  been  "masters;"  now  they  have  a  master  in  a  sense 
unknown  before.  Before,  any  man  with  health  and  sense 
could  become  a  master,  and  permanent  class  distinctions  did 
not  exist  among  them.  Now,  in  some  industries,  not  one  in 
a  hundred  can  by  exceptional  ability  become  an  independent 
employer,  and  the  workman  knows  that  he  is  a  workman  for 
life.  So  we  have  now  two  industrial  classes,  with  a  great 
gulf  between  them  which  comparatively  few  men  can  cross, 
and  with  interests  which  seem  irreconcilable.  It  is  not  too 
much  to  say  that  the  relation  between  employer  and  em- 
ployee  has  tended  to  become  strained  and  unfriendly  ever 
since  it  existed  on  a  large  scale — that  is,  for  the  last  hun- 
dred years. 

2.  The  Wages  System.  Formerly  the  workman  had  what 
he  made  and  sold  it  for  what  he  could  get.  This  was  natu- 
ral under  the  division  of  labor,  where  each  man  made  one 
article  and  a  whole  article.  But  now  we  have  a  much  greater 
division  of  labor,  or  rather  a  combination  of  labor;  for  it 
takes  a  whole  gang  of  workmen  to  make  a  single  article. 
When  a  set  of  men  have  finished  a  case  of  shoes,  and  one 
has  cut  out  the  soles  and  another  made  the  heels,  etc.,  how 
many  shoes  has  each  man  made  ?  Then,  too,  the  employer 
has  furnished  the  stock  and  tools,  and  must  be  paid.  How 
many  shoes  shall  he  have?  Some  way  out  of  the  trouble  has 
to  be  found.  The  way  adopted  was  the  simplest  and  per- 
haps the  best.  The  employer  takes  all  the  shoes  and  pays 
the  workmen  stipulated  wages.  This  system,  which,  though 
very  old,  has  only  recently  become  general,  seems  natural 
and  right  to  us  who  know  no  other,  but  it  must  be  confessed 
that  it  has  not  been  entirely  satisfactory.  One  reason  is  that 
we  have  discovered  no  very  good  way  of  telling  just  how 
much  wages  to  pay.  Once  it  was  thought  that  competition 
would  settle  it,  and  it  is  true  that  employers  cannot  by  any 
means  do  just  as  they  please;  but,  after  a  century's  experience, 
there  is  a  widespread  feeling  that  in  all  these  bargains  about 
wages  the  workman  is  at  a  disadvantage,  and  does  not  get 


22  OUTLINES  OF  ECONOMICS. 

the  share  which  it  would  be  well  for  him  to  have.     Thus  the 
wages  system  is  a  source  of  difficulty. 

3.  Competition.     Under  the  guild  system  prices  were  reg- 
ulated by  custom  or  law.     The  man  who  tried  to  undersell 
his  neighbor  would  have  been  considered  a  mean  man  and 
been  boycotted,  or  treated  even  worse.     He  could  compete 
with  his  neighbor  by  making  better  goods,  but  not  much 
was  done  in  this  line,  quality,  like  prices,  being  generally 
fixed  by  custom  or  law.     But  when  the  factory  came  it  had 
to  undersell.     Only  so  could  it  sell  its  large  output.     When 
the  competition  was  once  started  there  was  no  stopping  it. 
Factories  competed  with  each  other,  and,  as  one  after  another 
became  hard  pressed,  a  new  machine  was  invented  or  a  new 
process  discovered,  and  progress  was  continual.    It  was  what 
men  needed  to  develop  their  enterprise.     Machine  followed 
machine,  cost  was  lowered,   and  year  after  year  the  buyer 
rejoiced  in  lower  prices.     Thinkers  of  this  time  were  pro- 
foundly impressed  by  the  increase  of  wealth  due  to  competition 
as  well  as  by  the  irksomeness  of  the  old  guild  restrictions, 
which  still  made  awkward  and  futile  efforts  to  control  the 
new  movement.     And    so   they   concluded    that   the   State 
should  not  try  to  guide  industry,  as  it  had  so  long  been  do- 
ing, but  that  all  that  industry  needed  was  to  be  let  alone. 
We  shall  note  later  some  of  the  results  of  the  attempt  to 
follow  this  principle. 

4.  Hanking  and  Credit.     The   preceding  age  developed 
money;    this  age  developed  credit.      Money  is   used   now 
chiefly  in   retail  trade,  and  in  large  transactions  has  been 
almost  displaced  by  ci'edit  and  the  instruments  of  credit,  as 
checks,  drafts,   and  bills  of  exchange.     A  debtor  pays  his 
creditor  by  a  check  on  his  bank  account.    The  creditor  hands 
the  check  into  the  bank,  and  the  amount  is  charged  to  the 
debtor  and  credited  to  the  creditor.     If  the  two  men  have 
accounts  in  different  banks  the  banks  exchange  checks  and 
pay  the   difference.     In    the   New    York    Clearing    House, 
where  all  the  New  York  banks  exchange  checks  and  bal- 
ance  accounts,    the    whole    amount  of  payments  averaged 

l>  0y(sQs*^'-4^&6   J, 

>  j&A.  ',  MX^U  (•' 

~Eb>  V*  sj:  «*"***»  <*^~  •«£ 

— ef-a-is^^..,  -*^i^-». , 


ECONOMIC  LIFE  OF  CIVILIZED  MAN — SECOND  STAGE.  23 

$113, 019,011. 01  per  clay,  not  long  ago;  but  the  checks  so 
nearly  offset  each  other  that  only  $5,403,941.40  remained  to 
be  paid  between  the  parties,  and  almost  all  of  this  was  paid 
in  another  form  of  credits,  clearing  house  certificates,  and 
almost  none  in  money.  That  is,  of  every  $100  paid,  all  but 
$4.78  was  paid  in  checks  and  only  a  few  cents  in  money. 
To  manage  this  great  business  of  credit,  banks,  as  we  now 
know  them,  have  been  created.  In  1782  there  was  but  one 
bank  in  America,  now  we  have  9,307.* 

5.  Transportation.      The  moving  of   things  was  far  less 
important  before  this  period.     Not  much  could  be  moved 
long  distances  on  land  while  only  pack  horses  and  wagons 
were  known.     Sailing  vessels,  although  slow,  could  transport 
even  commodities  of  large  bulk  between  places  connected 
by  water,  and  cities  were  then  ports.     The  invention  of  the 
locomotive   and  steamboat  has  been  hardly  less  important 
than  that  of  the  engine  itself.     We  need  not  dwell  on  this 
point.     Any  man  who  has  taken  wheat  to  market  in  a  farm 
wagon  over  a  muddy  road,  and   has  seen  a  railway  train 
dash  past  him  on  its  steel  track,  has  had  a  glimpse  of  the 
progress  we  have  made   in  a  hundred   years.      This  illus- 
tration, however,  calls  to  mind  only  one  aspect  of  this  prog- 
ress.    Another  is  suggested  by  the  statement  that  we  have 
become  relatively,  though  not  wholly,  independent  of  water- 
ways furnished  by   nature  or  by  art.     Cities   can   now  be 
located  elsewhere  than  on  the  seacoast  or  navigable  rivers. 
The  power  of  man  over  nature  has  increased.     The  percep- 
tion of  this  fact  led  to  an  excessive  reaction,  and  recently, 
in  the  United  States,  at  least,  the  importance  of  waterways 
has  been  underestimated,  to  our  disadvantage. 

6.  Moral  and  Legal  Restraints.     We  have  seen  hitherto 
a  sharp  distinction  made  between  neighbors  and  strangers. 
The  former,  in  large  or  small  circle,  were  protected  by  detailed 

*  There  wore  in  the  United  States,  October  31,  1892,  3,788  national  banks, 
3,191  State  banks,  1,161  private  banks,  1,059  savings  banks,  and  168  loan 
and  trust  companies.  The  latter,  though  not  performing  all  the  functions 
of  banks,  may  properly  be  included  in  our  aggregate. 


24  OUTLINES  OF  ECONOMICS. 

laws  and  customs  from  the  overreaching  of  one  another,  and 
of  strangers;  the  latter  were  exposed  to  whatever  treatment 
might  be  considered  advantageous.  A  characteristic  of  the 
industrial  stage  is  that  there  is  no  longer  any  such  clearly 
defined  distinction.  We  naturally  ask,  Have  all  men  become 
brothers,  or  are  they  all  enemies  ?  Opinions  will  differ,  but 
few  will  claim  that  men  in  their  business  dealings  are  very 
brotherly.  Nor  did  men  make  any  pretense  of  establishing 
universal  brotherhood  when  the  old  protective  customs  and 
laws  were  repealed.  They  thought  every  man  could  take 
care  of  himself  if  he  were  let  alone.  The  old  customs  and 
laws  were  so  outgrown,  so  selfish  in  their  later  form,  and, 
above  all,  so  utterly  inadequate  to  the  new  industry  that  was 
growing  up,  that  all  activity  of  the  State  was  distrusted. 
Then,  too,  the  change  has  been  going  on  so  rapidly  and 
constantly  that  it  seemed  impossible  to  devise  laws  for  the 
new  society.  The  result  is  that  this  stage  has  been  charac- 
terized, especially  at  first,  by  a  minimum  of  law  and  moral 
sense  in  economic  life.  It  would  be  a  mistake  to  suppose 
that  men  were  less  moral  than  formerly,  but  circumstances 
have  turned  moral  effort  into  other  channels  and  left  the 
economic  life  relatively  non-ethical. 

Our  history,  so  far,  has  been  put  wholly  in  general  terms 
for  convenience'  sake,  but  the  industrial  stage,  being  the  one 
in  which  we  live  and  whose  problems  we  have  to  settle,  must 
now  be  studied  more  in  detail. 


ECONOMIC  LIFE  OF  CIVILIZED  MAN — SECOND  STAGE.    25 


SUMMARY. 

1.  The  invention  of  the  steam  engine  multiplies  human  power;  revolution- 
;.ry  changes  and  disorder  appear  in  industrial  society. 

2.  The  reorganization  of  industry  produces  widely  separated  classes  be- 
fore unknown,  resulting  in  hostility  and  resistance  to  the  new  order,  espe- 
cially to  machinery. 

3.  The  subdivision  and  dependence  of  labor  develops  the  wages  system. 

4.  Custom  gives  place  to  competition  in  the  government  of  prices,  and  a 
great  fall  is  the  result.   As  a  result,  competition  is  urged  by  many  as  a  suffi- 
cient regulator  of  economic  relations. 

5.  Credit  now  develops,  limiting  greaily  the  use  of  money.     Banks  are 
organized. 

6.  Canals,  railways,  and  steamboats  revolutionize  transportation. 

7.  There  is  a  great  diminution  of  moral  and  legal  restraints  in  business. 
The  economic  life  of  the  period,  owing  to  distrust  of  State  interference  and 
confidence  in  competition,  is  non-ethical. 

QUESTIONS. 

1.  Why  has  machinery  made  relations  between  employers  and  men  un- 
friendly ?     Why  were  they  not  unfriendly  before  ? 

2.  Why  do  men  dislike  machinery?     Is  their  dislike  justified ?    Why? 

3.  What  is  the  objection  to  the  wages  system  ?    Why  was  it  not  adopted 
sooner?     What  system  went  before  it ? 

4.  Were  the  former  objections  to  competition  reasonable ?    Why?    What 
are  its  advantages  ?     Its  disadvantages  ?    How  did  machinery  introduce  it  ? 

5.  What  is  a  bank  ?     What  good  does  it  do  ?    What  is  the  advantage  of 
checks  and  drafts? 

6.  How  does  transportation  affect  manufacture? 

7.  What  change  of  feeling  did  men  experience  at  this  time  regarding  law 
and  custom?    Why?    Was  it  for  the  better ?    Why? 

LITERATURE. 

Toynbee,  Arnold :  Tlic  Industrial  Revolution  in  England.  An  admirable 
work  of  which  free  use  lias  been  made  in  the  preparation  of  this  and  the 
following  chapters. 

Rand,  Benjamin :  Selection*  IHustratlnij  Economic  History  Since  the  Seven 
War. 


CHAPTER  V. 

THE  INDUSTRIAL  REVOLUTION  IN  ENGLAND*— PART  I. 

THE  passage  from  the  trades  and  commerce  stage  to  the 
industrial  stage  is  generally  known  in  England  as  the  Indus- 
trial Revolution.  The  name  is  appropriate.  A  change  that 
takes  place  gradually,  so  that  life  adjusts  itself  to  the  new 
conditions  easily  and  no  great  loss  or  suffering  results,  a  change 
like  that  which  takes  place  in  the  plant  which  is  always  grow- 
ing while  it  seems  to  be  at  a  standstill — such  a  change  we  call 
a  development  or  evolution.  But  a  change  that  comes  so  fast 
that  life  cannot  adjust  itself  to  the  new  conditions,  a  change 
which  breaks  down  the  old  order  with  much  confusion  and 
suffering — this  we  call  a  revolution.  In  England  particularly 
the  adoption  of  the  industrial  system  was  one  of  these  vio- 
lent changes  last  described.  To  understand  it  we  must  first 
notice  the  condition  of  things  just  before  it  began. 

The  Economic  Condition  of  England  in  1760.— 
1.  Agriculture.  We  have  seen  that  the  cultivation  of  the  soil 
develops  the  idea  of  ownership,  first  by  the  tribe  and  later 
by  the  individual.  But  the  slowness  of  this  process  may  be 
understood  from  the  fact  that  in  1760  immense  tracts  of  land 
were  still  held  as  "common"  or  "  waste  "  land.  Seven  mil- 
lion acres  of  such  land  were  made  private  property  between 
1760  and  1833.  Upon  this  common  land  the  laborers  built 
their  cottages,  cultivating  little  patches  of  it  for  themselves, 
and  pasturing  upon  the  rest  the  few  geese  or  sheep  which  they 
were  able  to  keep.  The  advantage  was  that  the  laborers 

*  In  the  preparation  of  the  following  chnpters  lnrge  use  has  boon  made  of 
Toynbee's  Industrial  Revolution,  but  in  accordance  with  a  principle  adopted 
throughout  this  book  detailed  references  have  not  been  introduced  into  the 
text. 


INDUSTRIAL  DEVOLUTION  IN  ENGLAND — PART  I.       27 

were  somewhat  independent,  paid  no  rent,  and  had  a  little 
means  of  support  besides  their  wages.  The  disadvantage 
was  that  the  land  was  mostly  "  waste  "  in  fact,  the  marshes 
undrained  and  the  partial  cultivation  very  primitive  and 
poor.  A  traveler  at  this  time  describes  it  us  "  beneath  con- 
tempt." Even  the  private  lands  were  ill  cultivated.  It  is 
not  strange  that  Great  Britain,  raising  all  her  own  food  as 
yet,  should  have  had  in  1760  little  more  than  one  fifth  her 
present  population. 

2.  Manufactures.  Here  we  are  especially  interested,  as 
it  was  in  this  department  that  the  great  change  was  to  take 
place.  The  system  of  hand  manufacture  was  still  in  general 
operation.*  The  principal  manufacture  was  woolen  goods, 
of  which  England  exported  in  1770  about  £4,000,000  worth, 
or  nearly  a  third  of  her  entire  export  trade.  The  manufac- 
ture was,  however,  primitive.  A  writer  somewhat  before 
this  time  thus  describes  it  :  The  land  "  was  divided  into 
small  inclosures  from  two  acres  to  six  or  seven  each,  seldom 
more;  every  three  or  four  pieces  of  land  had  an  house  belong- 
ing to  them,  .  .  .  hardly  an  house  standing  out  of  a  speaking 
distance  from  another.  .  .  .  We  could  see  at  every  house  a 
tenter,  and  on  almost  every  tenter  a  piece  of  cloth  or  kersie 
or  shaloon.  ...  At  every  considerable  house  was  a  manu- 
factory. .  .  .  Every  clothier  keeps  one  horse,  at  least,  to  carry 
his  manufactures  to  the  market;  and  everyone  generally  keeps 
a  cow  or  two  or  more  for  his  family.  By  this  means  the 
small  pieces  of  inclosed  land  about  each  house  are  occupied,  for 
they  scarce  sow  corn  enough  to  feed  their  poultry.  .  .  . 
The  houses  are  full  of  lusty  fellows,  some  at  the  dye-vat,  some 
at  the  looms,  others  dressing  the  cloths;  the  women  and 
children  carding  or  spinning,  being  all  employed,  from  the 
youngest  to  the  oldest.  .  .  .  Not  a  beggar  to  be  seen  nor  an 
idle  person."  This  seems  a  most  wretched  way  to  make  cloth, 

*The  word  manufacturer  at  this  time  signified  a  person  working  wiih  his 
own  hands.  In  1776,  in  his  Wealth  of  Nations,  Adam  Smith  said,  "A  man 
grows  rich  by  employing  a  multitude  of  manufacturers."  The  use  of  the 
word  as  a  large  employer  is  of  later  origin. 


28  OUTLINES  or  ECONOMICS. 

but  we  must  not  forget  that  the  picture  has  some  attractive 
features.  The  "  manufacturer,"  as  the  hand  worker  was  then 
properly  called,  had  his  home,  his  cows,  and  his  poultry;  he 
bought  his  own  wool,  his  wife  spun  it  into  yarn,  and  together 
they  wove  it  and  sold  it  at  the  "  fair,"  enjoying  all  the  pro- 
ceeds. These  proceeds  were  not,  could  not  be,  very  great,  and 
he  never  became  rich,  but  he  enjoyed  independence  and  rude 
comfort.  It  is  much  to  say  in  favor  of  any  system  that  it 
produces  general  independence  and  comfort,  but  "  not  a 
beggar  or  idle  person."  Before  the  age  of  which  we  write, 
however,  this  had  somewhat  changed.  Cities  began  to  at- 
tract "  manufacturers  "  according  to  the  inevitable  law  we 
have  mentioned.  The  inevitable  tendency  to  divide  the 
process  appeared ;  manufacturers  found  it  difficult  to  buy  wool 
and  spin  it  along  with  the  weaving  process.  So  the  proc- 
esses were  divided  and  a  middleman  appeared  who  bought 
yarn  from  the  spinners  and  sold  it  to  the  weavers.  Then  he 
oieased  to  sell  the  yarn,  but  advanced  it,  keeping  a  claim  on 
the  cloth  and  paying  a  certain  sum  for  the  weaving.  Thus 
the  "manufacturer"  became  a  workman,  a  wage-earner,  and 
a  dependent  upon  the  capitalist  who  furnished  the  stock. 
The  germs  of  the  factory  system  thus  existed  in  1760, 
though  as  yet  the  work  was  generally  done  by  hand. 

The  iron  industry  was  next  in  importance,  but  England  in 
1737  imported  perhaps  20,000.  tons  of  iron,  or  more  than 
she  produced,  while  in  1881  she  exported  3,820,315  tons. 
The  iron  manufacture  was  evidently  waiting  for  the  power 
blast  furnace.  The  cotton  manufacture,  destined  later  to 
eclipse  almost  all  others,  was  scarcely  begun. 

3.  Transportation.  This  was  exceedingly  backward.  The 
roads  are  described  by  a  traveler  as  "most  execrably  vile," 
which  would  seem  a  reasonable  epithet  when  he  tells  us  that 
he  found  ruts  four  feet  deep  and  "  saw  three  carts  break 
down  in  a  mile  of  road."  Such  was  their  condition  that 
pack  horses  were  still  the  common  means  of  transporting 
goods  to  and  from  market.  Nothing  so  greatly  impeded  the 
development  of  manufactures  as  the  difficulty  of  moving 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  I.       29 

about  and  taking  wares  to  any  but  neighboring  markets. 
The  only  improvement  in  this  line  up  to  1760  was  the  build- 
ing of  a  few  canals,  which  were  a  great  help  as  far  as  they 
wont;  but  this  was  not  very  far. 

4.  Economic  Legislation.  This  to  us  will  seem  strangest  of 
all.  The  mediaeval  notion  of  government  was  still  nominally 
in  force.  This  notion  was  in  general  that  detailed  and 
special  legislation  was  required  in  many  places  where  we 
now  consider  general  laws  preferable.  So  the  State  passed 
many  laws  to  regulate  religion,  agriculture,  manufactures, 
and  commerce.  Some  of  these  laws  we  must  notice.  We 
have  seen  that  men  did  not  believe  in  competition.  They 
dreaded  the  mischief  which  a  stranger  might  work,  coming 
into  a  town  and  carrying  on  a  trade  in  an  irregular  fashion. 
So,  by  the  law  of  settlement  no  man  could  carry  on  a  trade 
in  a  city  unless  he  was  a  citizen  of  that  city  and  a  member  of 
the  trade  guild  in  that  place.*  By  another  law  he  could  not 
get  this  right  unless  he  served  seven  years  as  an  apprentice 
at  the  trade,  and  in  a  manner  prescribed  in  much  detail. 
Further  still,  there  were  regulations  as  to  the  number  of 
apprentices,  so  that  in  any  case  he  might  be  refused.  The 
purpose  of  such  regulations  was  to  protect  the  trade  from 
overcrowding  and  irregular  methods,  and  from  the  result- 
ing disorder  and  confusion.  Another  law  required  inspec- 
tion by  government  officials,  because  it  was  thought  that 
society  must  be  protected  from  adulteration  and  all  kinds  of 
cheating  by  dishonest  manufacturers  and  dealers,  it  being 
taken  for  granted  that  buyers  did  not  know  enough  to  tell 
honest  goods  from  shams.  Of  course  this  was  so.  Even 

*  The  law  of  settlements  aimed  also  to  make  each  parish  support  its  own 
poor,  and  a  workman  coming  into  a  new  town  had  to  give  evidence  or 
surety  that  he  would  not  become  dependent  on  the  poor  rates.  As  few 
could  furnish  adequate  guarantees,  this  was  so  serious  an  obstacle  to  free- 
dom of  movement  that  Adam  Smith  said  there  was  in  his  day  scarcely  a 
"  poor  man  in  England  of  forty-seven  years  of  age,  .  .  .  who  had  not  in 
some  part  of  his  life  felt  himself  most  cruelly  oppressed  by  this  ill-con- 
trived law  of  settlements." 


30  OUTLINES  OF  ECONOMICS. 

to-day  how  many  can  tell  pure  baking  powder,  or  all-wool 
goods,  from  those  that  are  not  ? 

But  perhaps  the  most  striking  of  all  was  the  law  which 
left  it  to  justices  of  the  peace  to  fix  the  wages  of  workmen. 
It  was  often  held  that  workmen  would  be  oppressed  if  left  to 
the  mercy  of  employers ;  but  the  real  purpose  of  the  law 
seems  to  have  been  the  protection  of  the  employer  against 
high  wages,  and  the  spirit  of  the  administration  of  the  law 
appears  to  have  conformed  to  this  purpose.  Laws  regulating 
wages  were  passed  after  the  plague,  or  "  Black  Death,"  had 
in  the  fourteenth  century  carried  off  a  large  part  of  the 
working  population  of  England  ;  and  the  avowed  aim  of  this 
legislation  was  then  to  prevent  the  wage-earner  from  taking 
full  advantage  of  the  scarcity  of  labor.  Inasmuch  as  they 
were  held  to  be  thus  protected  by  law  in  their  wages,  combi- 
nations among  workmen  were  considered  unnecessary  and 
dangerous  and  were  strictly  forbidden. 

We  cannot  mention  the  many  other  laws  governing  foreign 
commerce  and  other  lines  of  business,  still  less  those  that 
governed  religion,  politics,  and  other  departments  of  life. 
What  the  experience  of  the  eighteenth  century  proved  in 
England  was  not  that  the  State  should  not  regulate  the 
economic  life  of  its  citizens,  but  that  it  was  then  regulating 
it  in  an  antiquated  and  injurious  way. 

The  careful  observer  will  notice  that — in  spite  of  laws 
which,  when  enumerated,  seem  to  cover  all  the  affairs  of  life 
— many  subjects  of  legislation,  now  regarded  as  of  prime 
importance,  were  then  neglected.  Police  protection  was 
inadequate,  the  fire  department,  as  we  know  it,  was  not 
organized,  education  was  not  fostered,  and  sanitary  laws 
were  few  in  number,  and  there  was  then  no  great  branch  of 
the  public  service  engaged  in  the  administration  of  such 
laws.  This  brings  us  to  the  last  point  of  this  chapter. 

5.  The  Condition  of  Thought  in  1760.  Here,  especially, 
we  shall  fail  to  understand  the  industrial  revolution  if  we 
look  only  at  the  economic  life.  A  tremendous  revolt  had 
begun  against  the  whole  system  of  government  we  have 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  I.       31 

de-scribed  and  in  favor  of  liberty.  But  it  would  be  a  great 
mistake  to  suppose  that  this  revolt,  which  carried,  eventually, 
everything  before  it,  showed  itself  only  in  the  Held  of 
industry.  The  restrictions  which  were  most  objected  to 
were  those  upon  conscience  and  religion.  This  was  the  real 
animus  of  the  revolution  under  Cromwell  a  century  before; 
but  it  must  not  be  supposed  that  the  most  of  the  Puritans 
desired  this  liberty  for  others  as  well  as  for  themselves. 
Next  to  religious  liberty  political  liberty  was  the  desire  of 
Englishmen,  and  this  had  been  a  prominent  issue  in  the  rev- 
olution under  Cromwell.  While  restrictions  upon  trade 
were  contentedly  accepted  the  passion  for  personal  liberty 
worked  itself  up  to  a  fanaticism.  Rousseau  stormed  against 
the  artificiality  of  society  and  summoned  men  to  free  them- 
selves from  its  restraints  and  return  to  nature,  winning  the 
sympathy  of  Thomas  Jefferson,  who  was  profoundly  influ- 
enced by  French  thought.  In  a  universal  struggle  for  free- 
dom economic  life  could  not  be  left  out.  The  same  year  that 
Thomas  Jefferson  wrote  the  Declaration  of  Independence, 
asserting  that  all  men  are  by  nature  free  and  equal,  Adam 
Smith,  formerly  a  professor  in  Glasgow  University,  pub- 
lished TJie  Wealth  of  Nations,  the  most  influential  book  ever 
written  on  economics.  We  can  notice  here  only  the  central 
idea  of  his  remarkable  book.  It  is  the  same  as  that  of 
Jefferson,  only  applied  to  economic  rather  than  to  political 
life.  Men  are  by  nature  free  and  equal  ;  the  law  should  not 
establish  artificial  inequalities  among  them.  What  men  need 
in  business  is  not  protection  but  liberty.  Under  free  com- 
petition each  man  seeks  his  own  interest,  and  in  seeking  his 
own  interest  promotes,  as  a  rule,  the  best  interests  of  society.* 
Such  was  the  temper  of  the  time,  so  universal  the  impa- 
tience with  restraint,  even  the  most  wholesome,  and  so  mis- 
chievous much  of  the  existing  economic  legislation,  that  the 

*  The  exceptions  to  the  rule,  which  the  careful  reader  of  Adam  Smith 
discovers,  are  more  important  than  generally  supposed ;  yet  the  chief  empha- 
sis was  laid  on  the  rule  and  not  the  exceptions,  and  the  impression  which 
the  book  produced  was  in  favor  of  the  abolition  of  legal  restrictions. 


32  OUTLINES  OF  ECONOMICS. 

book  was  soon  elevated  to  the  rank  of  a  gospel  of  economics, 
and,  followed  by  works  equally  great,  it  inspired  the  eco- 
nomic policy  of  the  next  century.  We  shall  see  the  results 
of  this  policy  in  the  next  chapter.  It  is  sufficient  now  to  say 
a  word  about  its  central  principle.  If  we  consider  this  as  an 
expression  of  the  passionate  yearning  of  an  age,  namely,  that 
all  men  should  be  free  and  equal,  it  is  worthy  of  our  highest 
honor.  But  if  we  consider  it  as  a  sober  judgment  it  is  open 
to  an  objection  which  to-day  a  schoolboy  can  see ;  men  may 
be  made  free  and  equal  before  the  law,  but  by  nature  all  men 
are  not  free  and  equal. 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PAKT  I.       33 


SUMMARY. 

1.  The  passage  to  the  industrial  stage  was  sufficiently  violent  in  England 
to  be  called  a  revolution. 

2.  England  in  1760  had  a  poor  agriculture,  with  much  land  held  in  com- 
mon. 

3.  Manufactures  were  divided,  largely  rural  and  inefficient,  but  steady 
and  prosperous  in  their  way. 

4.  Transportation  was  backward,  roads  being  exceedingly  bad. 

5.  Economic  legislation  was  detailed  and  special,  adapted  to  former  con- 
ditions, but  hindering  industrial  progress. 

6.  The  public  mind  was  in  strong  revolt  against  former  restrictions,  re- 
Mgious,  political,  and  economic. 

7.  Adam  Smith's  Wealth  of  Nations  asserts  the  doctrine  of  economic  lib- 
erty.    The  motto  of  the  age  is,  "All  men  are  by  nature  free  and  equal" 

QUESTIONS. 

1.  What  is  the  difference  between  an  evolution  and  a  revolution?    Which 
is  best?     Why? 

2.  What  were  the  advantages  of  waste  or  common  lands?     The  disad- 
vantages?    Who  gained  most  by  change  to  private  ownership? 

3.  Why  was  the  old  manufacture  of  cloth  inefficient?     Why  were  manu- 
facturers prosperous?     Who  suffered  most  by  the  old  system? 

4.  What  was  the  general  character  of  legislation  in  this  period?     How 
different  from  that  of  our  day?   What  old  laws  have  we  abandoned?   What 
new  ones  have  we  added  ?     Why? 

r>.  What  was  the  trend  of  thought  at  that  time  ?  Where  did  it  first  ap- 
pear? What  countries  did  it  affect?  Who  applied  it  to  economics?  Why 
did  he  oppose  labor  legislation? 

6.  Are  men  free  and  equal  in  any  sense  ?  In  what  sense  free  and  equal  ? 
In  what  sense  not?  What  are  the  inequalities  which  exist  among  men? 
To  what  are  they  due  ? 

LITERATURE. 

Taylor,  E.  W.  C. :  Introduction,  to  a  History  of  the  Factory  System.  • 
Wright,  Carroll  D. :  Tlie  Factory  System  in  the   United  States.     Vol.  II, 

Tenth  Census  Reports.     Reviews  English  and  Continental  experience   as 

well  as  that,  of  America. 

Ashley,  W.  J. :  Early  History  of  the  English  Woolen  Industry.     American 

Economic  Association  Publications.     Vol.  II,  No.  4. 


CHAPTER  VI. 

THE  INDUSTRIAL  REVOLUTION  IN  ENGLAND— PART  II. 

Haifa  Century  of  a  Passive  Policy  of  Government 
in  England. — It  is  hard  to  be  fair  in  drawing  conclusions 
from  history.  The  things  that  happen  are  due  to  so  many 
causes  that  it  is  difficult  to  tell  how  much  any  one  cause  lias 
to  do  with  them.  This  is  especially  true  of  the  period  of 
English  history  with  which  we  now  have  to  do.  In  addition 
to  the  new  methods  in  manufacture  there  were  wars,  peculiar 
facts  about  land-ownership,  duties  and  taxes,  and  other 
things  of  great  influence  on  the  economic  life  of  the  period. 
It  is  hard  to  tell,  therefore,  how  much  machinery  and  the 
new  economic  policy  had  to  do  with  it.  But  that  they  had 
much  to  do  with  it  everybody  admits.  We  must  get  as  clear 
an  idea  as  we  can  of  what  this  influence  was. 

1.  Changes  in  Legislation.  We  have  seen  that  Adam 
Smith  argued  for  liberty.  He  asserted  that  every  man,  if 
allowed  to  do  as  he  pleased,  would  sooner  or  later  do  that  for 
which  he  was  best  fitted,  and  would  consequently  work  where 
he  could  get  the  most  wages.  Every  man  would  buy  what 
suited  him  best,  and,  after  some  experiment,  manufacturers 
would  make  what  was  called  for.  If  one  business  was  making 
more  money  than  the  rest  more  men  would  go  into  it,  and  by 
their  competition  would  bring  prices  down.  If  men  cheated 
their  customers,  the  customers  would  go  somewhere  else,  and 
cheating  would  not  pay.  And  so  on  indefinitely.  Everywhere 
men  would  look  out  for  their  own  interests,  would  make  the 
bargain  that  was  most  advantageous  to  themselves.  This 
system  of  balanced  self-interest  resulting  from  competition 
was  the  best  regulator  possible,  infinitely  better,  he  claimed, 
than  the  old-time  laws,  which  only  encumbered  the  devel- 


INDUSTRIAL  DEVOLUTION  IN  ENGLAND — PART  II.      35 

opment  of  industry.  If  the  policy  of  industrial  freedom 
were  adopted,  he  prophesied  a  great  increase  in  the  national 
production  of  wealth. 

Tli is  system  was  adopted.  Not  that  a  wholesale  repeal 
of  the  old  laws  occurred — such  things  never  happen  in  Eng- 
land and  are  difficult  anywhere — but  there  is  a  quiet  and 
effective  way  of  changing  laws  by  simply  changing  men's 
ideas  regarding  them  and  leaving  them  unenforced.  A  law 
that  has  been  long  observed  has  often  to  be  long  dead  before 
people  gain  the  courage  to  repeal  it.  So  the  law  requiring 
seven  years'  apprenticeship  before  one  could  enter  certain 
trades  quietly  died  during  the  eighteenth  century,  and  when, 
finally,  in  the  labor  troubles  early  in  this  century,  some 
workmen  in  desperation  discovered  the  old  law  and  prose- 
cuted employers  for  violating  it  the  law  was  first  suspended 
and  then  repealed,  as  being  plainly  ill  adapted  to  the  new 
condition  of  industry.  So,  little  by  little,  the  old  laws  were 
repealed  or  forgotten,  and  men  were  left  free  to  bargain  and 
manufacture  as  they  pleased. 

One  reason  that  these  laws  were  the  more  easily  set  aside 
was  that  they  never  had  been  really  intended  to  protect  trade 
in  general  and  secure  the  economic  welfare  of  all.  In  the 
legislation  of  the  Middle  Ages  social  and  political  considera- 
tions were  always  mingled  with  economic  questions.  The 
restrictions  placed  upon  trade  were  not  in  the  interest  of 
trade,  but  in  the  interest  of  a  few  people  engaged  in  that 
particular  trade.  Thus  the  very  influential  dealers  in  woolen 
goods,  alarmed  at  the  introduction  of  cotton,  had  secured  a 
law  placing  a  heavy  tax  on  cotton  goods,  lest  these,  by  their 
cheapness,  should  injure  the  woolen  trade.  Other  trades  did 
the  same,  till  finally  there  was  a  network  of  burdensome 
restrictions  under  which  all  suffered.  Laws  regulating 
labor  at  that  time  were  not  so  much  to  help  workmen  as  to 
check  their  growing  power  and  aspirations.* 

*  Adam  Smith,  in  declaiming  against  laws  regulating  labor,  had  in  mind 
laws  aimed  against  labor,  and  not  laws  like  those  of  modern  times  designed  to 
Vnefit  labor.  He  said  in  one  place  in  his  Wealth  of  Nations  that  if  any  law 


36  OUTLINES  OF  ECONOMICS. 

A  striking  instance  of  the  unfairness  of  the  old  laws  is 
seen  in  the  law  against  labor  combinations.  Although  cap- 
italists had  been  allowed  to  combine  from  the  tirst,  workmen 
were  forbidden  to  do  so  under  severe  penalty.  Even  after 
the  laws  of  apprenticeship,  regulation  of  wages,  inspection 
of  goods,  and  many  others  had  been  repealed  this  law  was 
retained,  and  men  who  attempted  to  form  unions  were  se- 
verely punished.  This  was  due  to  the  slow  recognition  of 
the  workman's  rights,  and  also  to  the  curious  fact  that  even 
the  believers  in  the  new  gospel  were  opposed  to  labor  unions, 
believing  that  competition  among  workmen  would  secure 
their  proper  wages  and  their  best  rights.  Eventually  this 
law  also  was  repealed. 

2.  Changes  in  Manufacture.  In  1769,  the  year  that  Na- 
poleon and  Wellington  were  born,  James  Watt  invented  the 
steam  engine.  It  is  an  interesting  fact  that  Watt  was  a 
friend  of  Adam  Smith  ;  and  when  the  city  of  Glasgow  re- 
fused to  let  him  work  at  his  trade  because  he  was  not  a 
member  of  the  guild  at  that  place,  Adam  Smith  allowed  him 
to  set  up  a  shop  on  the  university  grounds  outside  the  city's 
jurisdiction,  and  thus  the  two  great  forces  that  created  the 
revolution  were  born  close  together.  The  same  year  that  the 
steam  engine  was  invented  began  a  series  of  inventions 
which,  during  the  next  fifty  years,  completely  revolutionized 
the  manufacture  of  cotton.  The  earlier  of  these  inventions 
affected  only  the  spinning  of  cotton,  and,  while  hand  spin- 
ning immediately  ceased,  hand  weavers  were  kept  busier 
than  ever.  The  improvement  in  goods  and  lower  prices 
immensely  increased  the  demand,  while  weavers  were  paid 
not  less,  but  rather  more,  than  before.  Finally,  however,  the 
power  loom  was  introduced,  and  then  there  was  a  change. 
The  immense  number  of  hand  weavers  thrown  out  of  work 
could  not  find  employment  in  tending  the  new  looms,  nor 
could  they  immediately  secure  another  occupation.  The 

chanced  to  be  beneficial  to  labor  it  was  sure  to  be  a  just  law.  Writers  of 
our  day  who  protest  against  labor  legislation  are  opposing  laws  of  a  differ- 
ent kind  from  those  which  aroused  the  ire  of  Adam  Smith  and  his  friends. 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  II.      37 

number  of  power  looms  was  at  first  much  smaller,  and  the 
machinery  was  so  nearly  self-acting  that  one  person  easily 
tended  four  looms.  Moreover,  as  the  work  required  deftness 
rather  than  strength,  women  and  children  were  employed  in- 
stead of  men,  because  they  could  be  hired  cheaper.  The 
distress  among  the  unemployed  wrorkmen  was  very  great. 
Forbidden  to  combine  openly,  they  did  so  secretly  in  dark 
conspiracies  to  wreak  vengeance  on  their  enemies,  as  they 
gradually  conceived  the  class  of  employers  to  be,  and  espe- 
cially upon  the  machinery,  which  they  considered  the  par- 
ticular cause  of  their  misfortunes.  This  was  a  perfectly 
natural  result  of  free  competition,  allowing  every  man  to  do 
as  he  pleased,  at  a  time  when  invention  was  necessitating 
rapid  changes  in  the  economic  life  of  society.  Laws  were 
passed  against  the  rioters,  punishing  machine  breakers  with 
death.  This  did  nothing  to  cure  the  misery  of  the  land,  but 
was  a  strong  argument  to  men  to  endure  it.  It  took  Par- 
liament a  long  time  to  learn  that  it  could  interfere  in  a  way 
to  lessen  the  suffering  of  the  people. 

The  great  battle  of  the  industrial  revolution  was  fought 
out  in  the  manufacture  of  cotton,  an  industry  which  has  held 
one  of  the  first  places  in  English  economic  life.  But  the 
same  experience,  in  greater  or  less  degree,  was  repeated  in 
the  manufacture  of  woolen,  linen,  and  silk  goods.  The  en- 
gine applied  to  the  manufacture  of  iron  furnished  the  blast 
furnace,  and  the  industry  was  revolutionized.  Here,  however, 
the  change  was  principally  one  of  simple  increase,  and  did 
not  cause  suffering  ;  or,  rather,  if  there  was  suffering  it  wras 
transferred  to  other  countries,  for  England  had  imported  a 
large  part  of  her  iron,  and  now  she  made  all  her  own  and  ex- 
ported to  these  same  countries  and  others.  This  relation  of 
England  to  foreign  countries,  which  were  slower  to  adopt 
machinery,  did  much  to  lessen  the  suffering  of  English  workmen 
by  deranging  the  industries  of  foreign  countries  rather  than 
her  own.  To  estimate  in  human  suffering  the  cost  of  this  revo- 
lution we  should,  therefore,  have  to  consider  much  more  than 
the  suffering  of  Englishmen;  but  that  is  enough  to  appall  us. 


38  OUTLINES  OF  ECONOMICS. 

3.  Transportation.     We  have  seen  that  the  building  of 
canals  had  begun  before    1760.      This  received  a  decided 
stimulus  from  the  growth  of  manufactures  and  trade  at  this 
period.     The  invention  of  a  new  kind  of  turnpike  by  Mac- 
adam greatly  improved  the  roads  at  this  period,  and  led  to 
the  construction  of  those  magnificent  highways  which  are 
now  the  wonder  and  admiration  of  the  American  traveler. 
In  1830  the  first  railway  was  opened,  and  was  soon  followed 
by  that  vast  network  of  railways  which  now  covers  the  Brit- 
ish kingdom.     We  must  not  for  a  moment  suppose  that  this 
was  an  undesirable  change.     Such  a  development  of  commu- 
nication is  of  immense  advantage  to  all  human  interests,  just 
as  is  the  introduction  of  machinery  and  the  perfection  of  man- 
ufacturing processes.     But,  in  considering  these  advantages, 
we  must  not  forget  that  these  changes  were  revolutionary. 
We  have  seen  how  the  hand  industi-ies  were  scattered  over 
the  country,  largely  to  suit  people's  convenience  who  found 
it  difficult  to  bring  things  from  a  distance.     But  as  it  be- 
came easy  to  bring  things  from  a  distance  the  balance  of 
convenience  turned  in  favor  of  concentrating  manufactures 
in  certain  places  where  they  could  be  carried  on  to  special 
advantage  and  then  distributing  the  goods  over  the  country. 
Thus  not  only  were  the  country  artisans  driven  out  of  busi- 
ness, but  certain  towns  were  sacrificed  to  other  towns  more 
favorably  situated.     It  could  not  be  expected  that  people 
would  understand  this  and  adapt  themselves  to  it.     People 
are  slow  to  believe  that  things  are  not  going  on  as  they  al- 
ways have  done,  and  so  they  stick  to  the  old  stand  or  the 
old  way  till  hunger  and  desperation  compel  them  to  change. 

4.  Fluctuations  in   Trade.     One  great  advantage  of  the 
old  slow-going    system  of  manufacture  and  trade  was  its 
regularity.      One  year  was  like  another,  and  men's  incomes 
from  their  work  were  generally  much  the  same.     This  was 
due,  not  to  any  peculiarity  in  the  method  of  manufacture, 
but  to  the  fact  that  it  was  settled  and  men  knew  what  to  ex- 
pect.    Moreover,  it  dealt  mostly  with  necessities,  which  are 
less  subject  to  caprice  than  luxuries  are.     But  the  introduc- 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PAKT  II.      39 

tion  of  machinery  both  increased  the  amount  and  changed 
the  quality  of  manufactured  goods  ;  and  the  improvement 
in  the  means  of  communication  and  transportation  finally 
substituted  a  world-market  for  the  earlier  local  markets. 
Now,  while  men  can  learn  to  consume  almost  any  amount  of 
goods,  and  that  in  endless  variety,  they  learn  to  do  so  grad- 
ually, because  habits  are  hard  to  change,  sometimes  even  in 
the  direction  of  greater  indulgence.  Moreover,  the  nature  of 
our  industrial  organization  is  such  that  it  is  difficult  to  re- 
arrange social  relations  which  have  been  disturbed,  and  the 
readjustment  requires  time.  Manufacturers  had  little  to  help 
them  to  decide  what  and  how  much  to  make,  especially  as  the 
area  of  their  markets  increased.  If  they  were  careful  and 
increased  their  output  cautiously  the  demand  outran  their 
supply,  and  high  prices  encouraged  them  to  extend  their 
business.  More  workmen  were  called  for,  wages  were  good, 
and  the  workmen  became  accustomed  to  living  well.  But 
now  they  had  gone  too  far  ;  goods  did  not  sell,  or  fell  greatly 
in  price;  they  had  to  shut  down  and  wait  for  better  prices, 
or  perhaps  failed  altogether.  And  for  the  wage-earners  the 
years  of  plenty  were  succeeded  by  years  of  famine.  It  has 
been  noticed  that  these  fluctuations  have  occurred  ever  since 
manufacture  was  carried  on  on  a  large  scale.  It  is  due  to 
the  fact  that  manufacture  is  carried  on  with  reference  to  a 
changing  and  enlarging  demand  which  it  cannot  calculate, 
and  also  that  manufacture  itself  is  constantly  disturbed  by 
improvements  which  cannot  be  foreseen.  The  large  scale  of 
manufacture  itself  may  not  be  responsible  for  the  fluctua- 
tions except  in  so  far  as  it  is  itself  responsible  for  the  facts 
just  mentioned.  A  still  larger  scale  of  manufacture  hereafter 
may  perhaps  bring  steadiness  in  industry.  But,  whatever  the 
cause  of  these  fluctuations,  the  effect  upon  the  wage-earner  is 
demoralizing.  If  he  were  wise  enough  to  save  his  earnings 
during  good  times,  and  so  have  something  for  hard  times,  he 
would  not  suffer  so  much.  But  very  few  people  who  live  in 
abundance  can  do  this  ;  how  much  less  those  whose  con- 
dition even  in  good  times  is  one  of  meager  comfort  ! 


40  OUTLINES  OF  ECONOMICS. 

5.  Pauperism.  We  remember  the  statement  of  the  trav- 
eler who  in  1760  found  among  the  country  weavers  "not  a 
beggar  or  idle  person."  Looking  at  the  country  as  a  whole, 
we  should  say  that  it  was  poor,  that  is,  the  total  wealth  was 
small  ;  but  it  was  so  distributed  that  there  was  general  com- 
fort. The  revolution  changed  this  condition  of  things. 
Adam  Smith  urged  that  free  competition  would  greatly 
increase  the  production  of  wealth.  Whether  this  was  true 
or  not  it  is  certain  that  free  competition  and  machinery 
together  did  increase  the  production  of  wealth  immensely. 
There  is  reason  to  believe  that  this  was  due  in  a  con- 
siderable degree  to  competition,  but  it  was  undoubtedly 
largely  due  to  machinery.  Turning,  however,  from  the  pro- 
duction of  wealth  to  its  distribution,  we  find  that  competition 
had  an  immense  influence,  an  influence  in  part  disastrous. 
While  wealth  increased  at  a  hitherto  unheard-of  rate  pov- 
erty increased  nearly  or  quite  as  fast.  In  1760  the  amount 
spent  in  poor  relief  was  £1,250,000,  while  in  1818,  after 
an  immense  increase  in  national  wealth  production,  it  was 
£7,870,000.  While  the  population  had  increased  seventy 
per  cent  the  cost  of  poor  relief  had  increased  five  hundred 
and  thirty  per  cent.  Here  more  than  anywhere  else  fairness 
compels  us  to  consider  other  things  than  the  changes  of 
economic  conditions.  War  had  something  to  do  with  this 
increase;  both  the  appropriation  of  waste  or  common  land 
and  the  continuance  of  unwise  legislation,  made  largely  with 
a  view  to  the  interests  of  others  than  the  paupers,  contrib- 
uted to  this  result.  But  industrial  changes,  likewise,  had 
much  to  do  with  it.  One  of  the  best  of  modern  writers  says, 
in  speaking  of  Adam  Smith  and  the  impending  revolution  : 
"  There  were  dark  patches  even  in  his  age,  but  we  now  ap- 
proach a  darker  period,  a  period  as  disastrous  and  terrible  as 
any  through  which  a  nation  ever  passed  ;  disastrous  and 
terrible  because  side  by  side  with  a  great  increase  of  wealth 
was  seen  an  enormous  increase  of  pauperism,  and  production 
on  a  vast  scale  led  to  a  rapid  alienation  of  classes  and  to 
the  degradation  of  a  large  body  of  producers." 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  II.      41 

SUMMARY. 

1.  There  is  a  general  decrease  in  the  legal  restrictions  of  industrial  liberty 
in  England  at  the  beginning  of  the  century. 

2.  These  restrictions  had  been  in  the  interest  of  special  classes,  and  had 
been  more  and  more  ignored  during  the  preceding  century. 

3.  The  invention  of  the  steam  engine,  followed  by  that  of  the  spinning 
jenny,  the  power  loom,  and  other  machinery,  revolutionizes  the  manufacture 
of  cotton  and  establishes  the  factory  system.     This  soon  follows  in  other 
manufactures. 

4.  Distress  results  to  workmen ;  men  give  place  in  a  degree  to  women  and 
children ;  rioting  and  unsuccessful  efforts  at  legal  repression  follow. 

5.  New  turnpikes  and  canals,  and,  later,  railways,  revolutionize  transpor- 
tation, with  further  disarrangement  of  industry. 

6.  The  great  expansion  of  trade  produces  fluctuations  of  prosperity  and 
adversity,  greatly  enhancing  the  sufferings  of  the  working  population. 

7.  There  was  an  immense  increase  of  pauperism  during  this  period. 

8.  Adam  Smith's  prophecy  that  unrestricted  competition  would  increase 
production  was  fulfilled;  but  it  resulted  in  an  unfortunate  and  disastrous 

di.stribmiou. 

QUESTIONS. 

1.  How  and  why  were  the  mediaeval  restrictive  laws  abandoned  ?    Why 
did  Adam  Smith  object  to  them? 

2.  Why  did  the  invention  of  the  steam  engine  necessitate  the  factory  s\-s- 
tem?     How  did  this  system  differ  from  the  preceding? 

3.  What  was  the  result  of  the  earlier  inventions  on  workmen  ?     Of  the 
later  inventions?    What  influence  on  the  amount  of  goods?     On  their  qual- 
ity ?    Their  price  ? 

4.  Do  the  workmen  profit  by  this?   Why?    Does  society  profit?    Why? 

5.  Why  do  wage-earners  often  oppose  machines?    Is  there  any  ground  for 
their  feeling? 

6.  How  did  railways  tend  to  consolidate  industry?     Is  this  consolidation 
the  same  as  that  produced  by  machinery? 

7.  What  caused  fluctuations  in  trade  under  the  new  system?     Are  fluc- 
tuations inevitable  under  the  modern  system  ?     Why  ? 

8.  Are  uneven  wages  as  good  for  wage-earners  as  even  wages,  if  the  aver- 
age is  as  high?     If  so,  why?     If  not,  why  not? 

9.  Why  were  women  arid  children  now  employed?     What  arc  the  ob- 
jections to  this?    The  advantages? 

10.  How  was   increased   pauperism   possible   with    increased    national 
wealth?     What  is  wrong  when  this  is  the  case? 

LITERATURE. 

See  references  to  preceding  chapter;  also: 
Rand,  Benjamin:  Economic  History  Since  17G3.     Chapters  II,  V,  and  IX. 


CHAPTER  VII. 

THE  INDUSTRIAL  REVOLUTION  IN  ENGLAND— PART  III. 

The  Reaction  Against  the  Passive  Policy  of  Gov- 
ernment.— In  a  truly  progressive  country  all  reactions 
against  nominal  freedom  are  new  efforts  in  favor  of  real 
liberty;  reactions  against  false  liberty  in  favor  of  true  liberty. 
What  is  false  liberty  ?  Simply  permission  to  do  as  you  like. 
This  would  in  some  respects  be  an  admirable  thing  for  adults 
of  full  normal  development  if  it  were  not  that  other  people, 
enjoying  the  same  permission,  are  sure  to  do  things  that  you 
do  not  like,  and  thus  frequently  make  it  quite  impossible  to 
do  even  halfway  as  you  would  like.  If  men's  interests  did 
not  clash  it  would  be  different  ;  but  as  it  is,  the  general  per- 
mission to  do  as  one  pleases  results  in  liberty  for  the  strong 
and  slavery  for  the  weak ;  or,  more  truly,  since  the  strong  are 
themselves  dependent  ultimately  upon  the  weak,  it  results  in 
more  or  less  of  slavery  for  all. 

True  liberty  is  not  simply  the  permission  but  the  power  to 
act  freely.  We  are  truly  free  in  our  external  relations  just 
so  far  as  we  have  real  scope  for  unhindered  action  and 
normal  development  of  all  faculties.* 

It  is  plain  that  if  people's  tracks  cross  each  other  they 
must  occasionally  step  aside  for  each  other,  or  get  in  each 
other's  way,  in  which  case  the  weaker  suffers  first  and  worst. 
Of  course  the  best  possible  basis  of  freedom  is  to  have  every  - 

*  This  is  only  a  single  phase  of  this  important  subject.  Its  complete  dis- 
cussion would  require  a  book.  Wise  laws,  well  executed,  increase  real 
freedom,  although  they  appear  to  be  restraints.  Life  in  the  family  and  iu 
society  seems  to  impose  restrictions,  yet  actually  increases  real  freedom. 
External  restraint  at  times  acts  upon  character  and  frees  the  mind  from 
evil,  thus  increasing  real  freedom.  This  is  a  true  object  of  punishment  in 
the  family  and  in  the  State. 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  III.     43 

body  disposed  not  to  molest,  but  to  assist  everybody  else  at 
every  contact ;  but  men  are  not  yet  so  disposed.  There- 
fore the  law  is  appealed  to  to  supply  the  lack  of  individual 
wisdom  and  benevolence.  When  all  men  have  learned  to  do 
spontaneously  that  which  a  just  law  commands  the  law  has 
done  its  work,  in  so  far  as  this  is  merely  repressive,  and  it  is  no 
longer  needed;  but  until  then  it  is  needed.  Never  is  law  so 
much  needed  as  when  the  conditions  of  life  are  changing  and 
are  imposing  upon  men  new  duties  which  many  of  them  do 
not  see  or  own.  It  must  be  confessed  that  it  is  hard  to  make 
wise  laws  at  such  a  time,  but  even  tolerable  laws  are  better 
than  none.  Moreover,  it  may  be  remarked  in  passing  that 
while  repressive  laws  may  disappear  as  men  improve  in  dis- 
position, laws  of  positive  constructive  nature,  designed  to 
furnish  norms  for  guidance  and  rules  for  cooperative  effort, 
will  surely  increase  in  number  and  in  importance. 

We  have  seen  that  laws  regulating  industry  were  generally 
repealed  during  the  period  we  have  been  considering,  and 
that,  despite  the  commotion  produced  by  the  revolution, 
little  attempt  was  made  to  replace  them.  Up  to  that  time 
the  State  had,  on  the  whole,  increased  its  regulation  of  eco- 
nomic life  from  age  to  age;  but  now  there  was  a  sudden 
halt.  This  was  partly  due  to  the  feeling  that  men  had  really 
matured  enough  so  that  when  they  came  in  contact  with 
each  other  they  would  respect  each  other's  rights  at  least 
more  than  before;  but  this  feeling  had  not  much  to  do  with 
the  change.  The  real  cause  of  the  movement  was  Adam 
Smith's  central  doctrine  that  not  benevolence  but  self-inter- 
est would  regulate  men's  relations  for  the  general  good.  It 
is  hardly  too  much  to  say  that  this  theory,  which  has  domi- 
nated business  for  a  century,  implied,  if  it  did  not  assert, 
that  in  the  economic  world  there  was  little  need  of  a  moral 
law.  We  have  now  to  consider  some  of  the  points  in  which 
this  theory  broke  down  in  practice  and  men  reacted  against  it. 

1.  The  Quality  of  Goods.  In  repealing  the  laws  for  the 
inspection  of  wares  it  was  urged  that  cheating  would  not 
pay,  and  so  would  cure  itself.  It  is  strange  that,  though  the 


44  OUTLINES  OF  ECONOMICS. 

principle  of  "  honesty  is  the  best  policy  "  had  been  known 
for  centuries,  men  had  not  become  honest.  But  so  strong 
was  the  new  doctrine  of  self-interest  that  men  urged  that  the 
very  inspection  of  wares  by  the  government  was  the  cause  of 
fraud  ;  for,  the  government  brand  being  often  put  on  care- 
lessly, men  bought  poor  goods,  because  of  the  brand,  which 
they  would  have  rejected  if  they  had  examined  them.  The 
abolition  of  the  laws  would  result  in  each  examining  goods 
for  himself,  it  was  claimed.  It  is  hardly  necessary  to  say 
that  these  hopes  were  not  realized.  Nor  is  the  reason  hard 
to  see.  Men  might  be  trusted  to  attend  to  their  own  inter- 
ests if  they  knew  enough  to  do  so,  but  they  do  not.  Who 
can  tell  the  quality  of  baking  powder,  or  ground  spices,  or 
patent  medicines,  or  many  other  things  subject  to  constant 
adulteration  ?  Who  can  tell  whether  well  water  has  fever 
germs  or  pork  contains  trichinae  ?  For  these  the  ordinary 
buyer's  knowledge  is  worthless;  an  expert  must  be  employed. 
Such  has  been  the  experience  of  the  English  people,  and  the 
law  now  provides  for  the  inspection  by  government  experts 
of  meat  and  fish,  groceries,  drugs,  butter,  and  other  articles 
of  food.  Of  course  most  articles  in  which  differences  of 
quality  do  not  endanger  the  public  health  are  left  to  private 
management,  but  not  all,  as  for  instance,  butter  in  Ireland  and 
herring  in  Scotland,  where  the  government  test  is  used  for  con- 
venience. Gold  and  silver  plate  are  tested,  gun  barrels,  steam 
boilers,  drains  and  sewers,  gas,  weights  and  measures,  all 
on  the  same  general  principle  that  the  government,  through 
its  expert,  must  guard  people  from  those  serious  dangers 
against  which  they  cannot,  or  habitually  do  not,  protect 
themselves.  In  reality  men  do  protect  themselves  through 
government,  which  represents  cooperative  effort.  They  select 
certain  persons  to  act  for  them  as  their  agents,  and  what 
one  does  through  an  agent  one  does  one's  self.  For  every 
person  to  attempt  to  do  everything  directly  for  himself 
would  mean  return  to  barbarism.  Division  of  labor  and  co- 
operation are  a  law  of  civilization. 

The  theory  that  men  will  ruin  their  business  if  they  cheat, 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  III.     45 

and  so  will  be  deterred  from  cheating,  has  been  utterly 
exploded  by  this  great  English  experiment.  It  may  be  true 
of  those  long-established  concerns  whose  reputation  is  a  large 
part  of  their  capital  in  business;  but  many  a  man  has  per- 
petrated an  audacious  fraud  upon  a  country  for  a  few  years 
and  retired  with  a  fortune  when  his  cheating  began  to  be 
known.  The  inspection  of  goods  by  the  State  is  a  principle 
now  fully  recognized,  the  only  question  being  how  far  it 
should  be  applied. 

2.  T/ie  Protection  of  Labor.  Nowhere  was  freedom  more 
absolutely  demanded  than  for  labor,  and  nowhere  was  it 
more  needed.  The  old  restrictions  were  very  galling  and 
burdensome.  But  what  of  the  new  freedom  ?  The  introduc- 
tion of  machinery  made  it  possible  to  employ  women  and 
children,  as  has  been  said,  where  men  had  been  needed  before. 
But  modern  machinery  is  as  destructive  as  cannon  if  human 
life  comes  in  its  way;  and  the  destruction  of  life  and  limb 
was  appalling.  It  had  been  argued  that  employers  would 
find  it  to  their  interest  to  protect  their  emplo}Tees  from  injury 
of  every  kind,  but,  however  that  may  be,  they  failed  to  do 
it.  So  scandalous  was  their  neglect  that  the  law  had  to 
require  by  heavy  penalties  what  the  simplest  dictates  of 
humanity  ought  to  have  secured.  The  employment  of 
young  children  of  four  and  five  years  of  age,  the  bad  venti- 
lation of  factories,  working  overhours,  neglect  of  education 
of  children,  and  many  other  things  called  for  a  like  interfer- 
ence. It  would  be  difficult  to  mention  a  point  in  which 
employers  could  have  neglected  the  interests  of  their  em- 
ployees where  they  did  not  do  so.  And  here  it  must  be 
noted  that  free  competition  fastened  upon  industry  the  very 
evil  it  promised  to  prevent.  Many  employers  were  humane 
in  intention,  but  if  they  went  to  any  expense  to  help  their 
employees  their  less  scrupulous  competitors  too  often  under- 
sold them  and  drove  them  out  of  the  trade.  Thus  competi- 
tion not  only  did  not  recognize,  but  it  did  not  tolerate,  the  law 
of  benevolence. 

The  result  of  this  was  a  series  of  acts  of  Parliament  known 


46  OUTLINES  OF  ECONOMICS. 

as  the  Factory  Acts,  beginning  in  1802  and  culminating  in 
the  Consolidation  Act  of  1878,*  which  Mr.  Jevons,  one  of 
the  most  distinguished  of  English  economists,  calls  "  one  of 
the  brightest  achievements  of  legislation  in  this  or  any  other 
country."  He  well  adds:  "The  great  fact  is  that  it  embod- 
ies disinterested  legislation;  the  health  and  welfare  of  the 
people  at  large  form  its  sole  object;  no  one  class  or  trade  is 
to  be  promoted,  as  in  almost  all  the  older  industrial  laws." 
This  remarkable  act — "the  mere  table  of  contents  filling 
eight  pages  and  the  text  sixty-five  " — cannot  be  thoroughly 
stated  in  a  few  words.  In  general  it  establishes  :  (1)  the 
fencing  in  of  all  dangerous  machinery ;  (2)  ventilation  and 
other  sanitary  conditions  in  factories;  (3)  a  working  day 
for  women  and  children  of  not  over  ten  or  ten  and  one  half 
hours;  (4)  a  Saturday  half  holiday;  (5)  prohibition  of  employ- 
ment of  children  under  ten  years  of  age,  and  under  sixteen 
years  of  age  unless  furnished  with  a  certificate  of  fitness ; 
(6)  schooling  for  children  half  of  each  day  or  on  alternate 
days  ;  (7)  government  inspectors  to  supervise  and  enforce 
the  law.  This  last  provision  is  a  necessity  without  which 
the  law  would  be  a  dead  letter.  In  contrast  with  this  law, 
limiting  the  work  of  women  and  children  to  not  more  than 
ten  nnd  one  half  hours  per  day  (ten  in  cotton  factories  and 
the  like),  let  us  notice  the  old  law  of  apprenticeship  by  which 
a  boy  must  work  at  least  from  five  o'clock  in  the  morning 
until  between  seven  and  eight  o'clock  at  night,  with  time  off 
for  meals,  and  which  punished  him  with  imprisonment  if  he 
refused.  Is  it  not  plain  that  the  old  act  was  in  the  interest 
of  employers  rather  than  in  the  interest  of  the  people  ? 

Extensions  of  the  law  and  improvements  in  administration 
have  taken  place  from  time  to  time,  but  the  first  radical  in- 
novation seems  to  have  occurred  in  1891.  By  the  act  of  1891 

*  Improvements  have  since  been  made  in  English  factory  legislation,  but 
the  Act  of  1878  is  properly  designated  as  the  culmination,  as  it  may  almost 
be  called  a  code  of  factory  law,  and  contained  in  itself  the  more  important 
provisions,  and  also  the  germs  of  what  was  to  follow.  It  marks  an  epoch  in 
the  history  of  the  wage-earner. 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  III.     47 

the  age  at  which  children  could  be  employed  was  raised  to 
eleven  years.  The  powers  of  inspectors  were  increased, 
greater  sanitary  precautions  and  fire  escapes  were  required, 
and  certain  kinds  of  heavy  labor  prohibited  for  women.  But 
the  most  important  feature  of  this  act  is  an  attempt  to  regu- 
late work  done  in  homes.  Employers  are  compelled  to  keep 
a  register  of  those  to  whom  they  give  out  work,  and  by  this 
means  the  inspector  is  enabled  to  inspect  the  places  where 
such  work  is  done.  This  attempt  to  deal  with  a  most 
grievous  evil  is  distinctly  a  new  departure,  and  its  results 
will  be  watched  with  interest. 

Although  the  beneficence  of  these  laws  is  now  everywhere 
admitted,  they  were  bitterly  opposed  in  their  earlier  forms  by 
most  of  the  economists  of  the  Adam  Smith  school  in  Parlia- 
ment, who  claimed  that  it  would  injure  the  interests  of  the 
workmen.  Of  course  employers  predicted  ruin.  Neither 
proved  to  be  right.  It  is  to  be  noted  that,  except  in  its 
general  provisions,  the  law  does  not  protect  grown  men,  but 
only  three  classes,  namely,  (1)  women,  (2)  children,  (3)  young 
persons — young  persons  meaning  those  under  eighteen  years 
of  age.  Furthermore,  being  only  a  factory  act,  it  does  not 
extend  to  agricultural  laborers,  a  sadly  neglected  class  in 
England,  for  whose  amelioration  interest  has  been  generally 
awakened  only  in  recent  years.  The  interests  of  the  great 
landowners,  who  were  strongly  represented  in  Parliament, 
have  apparently  prevented  action  in  their  behalf. 

3.  Trades  Unions.  "We  have  noticed  the  guilds,  which 
played  a  large  part  in  the  history  of  the  Middle  Ages.  These, 
however,  were  not  like  modern  trades  unions.  They  were 
unions  of  men  who  worked,  but  not  exclusively  of  wage- 
earners,  nor  in  the  interests  of  wage-earners  even  chiefly. 
They  were  fo'rmed  of  masters.  As  we  have  said,  however, 
the  modern  division  into  employers  and  employees  scarcely 
existed.  With  the  development  of  the  wage  system,  however, 
there  grew  up  a  most  natural  tendency  on  the  part  of  wage- 
earners  to  combine  into  unions  for  protection  against  what 
seemed  to  them  the  rapacity  of  their  employers.  So  jealous 


48  OUTLINES  OF  ECONOMICS. 

had  the  ruling  classes  been  of  the  lower  classes,  who  outnum- 
bered them,  and  might  thus  endanger  their  power,  that  laws 
against  such  combinations  had  been  passed  at  intervals  ever 
since  1304.  When  these  classes  found  the  need  of  union 
increasing  they  were  driven  to  organize  clandestinely,  and 
adopted  secret  violence  in  lieu  of  the  open  methods  which  were 
denied  them.  In  1800  Parliament,  h'nding  that  unions  were 
steadily  increasing,  passed  a  most  comprehensive  law  to  sup- 
press them,  declaring  illegal  "  all  agreements  between  journey- 
men and  workmen  for  obtaining  advances  of  wages,  reductions 
of  hours  of  labor,  or  any  other  changes  in  the  conditions  of 
work."  Under  this  law  many  workmen  were  prosecuted  and 
severely  punished,  but  in  vain.  The  law  became  so  odious  that 
employers  were  led  to  pledge  themselves  to  their  workmen  not 
to  appeal  to  the  law.  In  1824  Parliament  confessed  the  law 
a  mistake  and  repealed  previous  laws  relating  to  combina- 
tions of  workmen.  Trades  unions,  thus  tolerated,  grew  at 
an  astonishing  rate,  but  they  were  still  subject  to  legal  perse- 
cution of  one  sort  and  another.  Judicial  decisions,  especially, 
were  adverse  to  them.  Their  efforts  were  condemned  as 
conspiracies  "in  restraint  of  trade;"  but  in  1875  a  law  was 
passed  which  declared  that  the  purposes  and  actions  of  trades 
unions  were  not  to  be  deemed  unlawful  merely  because  they 
were  "  in  restraint  of  trade  ; "  also  that  acts  which  were  lawful 
if  done  by  one  should  still  be  lawful  if  done  by  two  or  more 
in  furtherance  of  trade  disputes.  No  provision  was  made 
until  about  this  time  for  the  protection  of  the  property  of 
trades  unions,  and  treasurers  and  others  could  steal  from 
them  with  impunity.  This  protection  to  their  property  was 
at  last  afforded.  They  gradually  became  a  powerful  factor 
in  English  economic  life.  Whether  they  have  raised  wages 
or  not  is  disputed,  it  being  claimed  by  the  older  economists 
that  wages  are  governed  by  laws  that  no  direct  pressure  can 
modify.  The  view  of  most  economists  of  the  present  day, 
however,  seems  to  be  that  trades  unions  find  limits  to  their 
power  to  raise  wages  in  general  conditions  which,  merely  as 
trades  unions,  they  have  not  created  and  cannot  change,  but 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  III.     49 

that  within  these  limits  their  power  is  considerable  ;  in  other 
words,  well-managed  trades  unions  enable  wage-earners  to 
avail  themselves  of  favorable  circumstances  which  other- 
wise might  pass  unutilized  by  them.  It  may  be  added  that 
few  persons,  after  careful  investigation,  would  be  found  to 
deny  their  beneficial  effect  on  the  education  and  discipline 
of  the  laboring  classes. 

Trades  unions  hav.e  attained  their  highest  development  in 
England;  but  even  in  that  country  the  days  of  their  glory 
seem  to  be  passing  away.  The  recent  progress  of  industry 
has  broken  down  the  barriers  between  separate  trades,  and  it 
is  easier  to  pass  from  one  to  another,  or  even  from  the  ranks 
of  unskilled  workmen  into  factories  operated  by  machinery. 
It  is  now  necessary  for  artisans  and  mechanics  to  organize 
with  reference  to  those  outside  of  their  ranks,  if  they  would 
protect  themselves  and  advance  their  industry,  or  to  seek  an 
amelioration  in  their  condition  through  legislation.  This  is 
an  explanation  of  the  "new  trades-unionism"  in  England, 
which  strives,  on  the  one  hand,  to  organize  unskilled  wage- 
earners  ;  on  the  other  hand,  to  secure  the  assistance  of  law 
in  the  prosecution  of  their  plans. 

4.  Regulation  of  Wages  by  Law.  The  old  law  had  al- 
lowed justices  of  the  peace  to  fix  wages  authoritatively. 
This  law,  of  course,  went  with  the  rest,  as  being  opposed  to 
free  competition  in  the  labor  market.  Here  more  than 
almost  anywhere  else  the  new  principle  was  put  into  opera- 
tion. We  have  seen  as  a  first  result  the  employment  of 
women  and  children  instead  of  men.  This  was  strictly  in 
keeping  .with  the  principle  of  free  competition,  but  it  pro- 
duced the  fearful  evils  which  the  factory  acts  were  enacted 
to  correct.  It  was  further  found  that  men  were  often  un- 
able to  protect  their  own  interests  in  their  agreements  with 
the  employers.  If  higher  wages  were  paid  somewhere  else 
they  did  not  find  it  out,  or  if  they  found  it  out  they  and 
their  families  were  attached  to  the  place  and  could  not  move 
readily.  So  lower  wages  were  paid  until  the  man  who  paid 
more  was  forced  by  competition  to  cut  down  wages.  It  is 


50  OUTLINES  OF  ECONOMICS. 

appalling  to  watch  the  development  of  industry  early  in  this 
century.  The  limit  of  wages  was  bare  subsistence,  enough 
to  keep  the  wage-earner  in  working  condition,  and  in  this 
the  employers  were  apt  to  calculate  below  the  point  of  their 
own  interest,  not  appreciating  the  value  of  efficient,  well-fed 
employees  whom  perhaps  they  had  never  known.  The  com- 
placency with  which  employers  fell  back  on  the  law  of  self- 
interest  is  well  portrayed  by  Carlyle,  who  represents  one  of 
them  as  saying  in  self-defense:  "'My  starving  workers? 
Did  I  not  hire  them  fairly  in  the  market  ?  Did  I  not  pay 
them  to  the  last  sixpence  the  sum  covenanted  for  ?  What 
have  I  to  do  with  them  more  ? ' "  As  Carlyle  well  adds,  "  We 
have  profoundly  forgotten  that  cash  payment  is  not  the  sole 
relation  of  human  beings  ;  we  think,  nothing  doubting,  that  it 
absolves  and  liquidates  all  engagements  to  man."  It  is  here 
that  we  discover  the  fatal  weakness  of  the  competitive  theory 
in  its  dependence  upon  the  popular  political  error  of  the  day 
to  which  we  have  already  referred,  the  doctrine  that  "all 
men  are  by  nature  free  and  equal."  If  they  were,  competi- 
tion would  produce  better  results. 

The  downward  movement  of  wages  the  trade  unions 
claim  to  have  nrrested  and  even  reversed.  Certain  it  is  that 
wages  have  risen  during  the  period  of  their  influence. 
Others  claim  that  the  larger  wages  have  been  made  possible 
only  by  the  larger  production  of  wealth  in  our  age.  This 
last  was  a  necessary  condition,  but  if  the  helpless  inequality 
of  the  laborers  while  dealing  singly  with  their  employers 
had  continued  it  is  not  clear  that  wages  would  have  risen 
as  production  increased.  The  many  disputes  and  bitter 
quarrels  between  employers  and  employees  led  to  legislation 
which  aimed  to  adjust  the  differences  between  them.  An 
act  was  passed  in  1824  to  provide  for  the  settlement  of  ex- 
isting disputes  by  justices  of  the  peace  or  referees.  The 
arbitration  was  compulsory  with  reference  to  the  decisions,  for 
heavy  penalties  were  pi-ovided  which  could  be  inflicted  upon 
those  refusing  to  adhere  to  them.  An  act  in  1867  established 
"  Equitable  Councils  of  Conciliation  to  Adjust  Differences 


INDUSTRIAL  REVOLUTION  IN  ENGLAND — PART  III.     51 

between  Masters  and  Men."  These  Councils  were  more 
elaborately  constructed,  and  decisions  could  be  enforced  by 
legal  penalties.  An  act  of  1872,  commonly  known  as  Mr. 
Mundella's  Act,  gave  power  to  make  settlements  with  refer- 
ence to  the  future  as  well  as  to  settle  existing  disputes.  These 
acts  give  recognition  to  the  principle  of  legal  regulation  of 
controversies,  but  they  have  up  to  the  present  not  been  used. 
Voluntary  boards  of  conciliation  and  arbitration,  on  the 
other  hand,  have  proved  most  salutary  in  England.  Social 
action  has  in  that  country,  as  elsewhere,  been  found  neces- 
sary to  preserve  industrial  peace. 

The  last  three  chapters  are  a  brief  sketch  of  England's 
attempt  to  deal  with  a  new  economic  theory  and  a  new  eco- 
nomic power.  The  new  theory  was  industrial  freedom,  com- 
petition; the  new  force,  steam  and  invention.  Both  were 
relatively  unknown  before.  The  new  theory  proposed  to  do 
without  benevolence  in  men  or  interference  from  the  State,  and 
promised  immense  increase  of  wealth  and  harmonious  and 
equitable  distribution  of  it  among  the  various  parties  to  its  pro- 
duction. Both  proposals  were  assented  to;  were  both  prom- 
ises fulfilled  ?  An  imihense  increase  in  production  did  take 
place,  due  in  part  to  competition,  more  to  machinery.  But 
the  distribution  of  this  wealth,  growing  directly  out  of  the 
principles  of  competition  so  long  as  they  were  unrestrictedly 
applied,  was  such  that  poverty  grew  faster  than  wealth,  and 
the  laboring  population  of  the  realm  sank  day  by  day  into 
deeper  distress  and  degradation.  The  partial  benevolence 
of  employers,  which  would  fain  have  mitigated  this  disaster, 
was,  as  a  rule,  neither  welcomed  nor  tolerated  by  the  competi- 
tion which  had  made  itself  law.  Not  until  this  benevolence 
was  formulated,  generalized,  and  enforced  by  disinterested 
legislation  was  the  horror  of  the  situation  diminished.  When 
we  hear  the  principle  of  "a  fair  field  and  no  favor"  and  "no 
State  intervention "  advocated  by  a  man  strong  in  the  con- 
sciousness of  personal  advantages  (for  such  he  is  sure  to  be)  we 
must  remember  that  he  is  a  century  behind  his  time,  and  that 
he  has  not  read  or  has  not  profited  by  one  of  the  most  dolorous 


52  OUTLINES  OF  ECONOMICS. 

chapters  in  human  history.  The  English  nation,  after  a  trial 
of  free  competition  and  no  interference,  as  thorough  as  could 
well  be  made,  has  undeniably  returned  to  the  principle  of 
governmental  activity  which  she  had  abandoned — a  principle 
which  recognizes  as  the  function  of  the  State  the  pro- 
tection of  the  citizens  and  the  furtherance  of  their  material 
and  social  well-being,  by  every  law  and  every  activity  which 
offers  a  reasonable  guarantee  of  contributing  to  that  end. 

The  three  words  which  have  become  the  motto  of  the 
French  Republic,  "Liberty,  Equality,  Fraternity"  may  be 
found  on  the  public  buildings  of  France.  These  three 
words  likewise  convey  the  spirit  of  the  Declaration  of  Inde- 
pendence. If  the  aspiration  expressed  in  the  motto  is  ever 
realized  it  will  be  because  liberty  is  defined  and  equality 
secured  by  fraternity;  it  will  be  because  benevolence  as  well 
as  competition  will  rule  the  economic  actions  of  men  ;  also 
because  social  readjustments  will  render  our  neighbor's 
interests  more  nearly  our  own.  It  is  a  matter  for  regret 
that  for  so  long  a  time  England  and  America  tried  to  omit 
the  last  and  greatest  term  from  the  trinity  of  this  new  social 
creed.  The  theory  of  the  past  century  erred  in  its  central 
assumption  that  men  were  equal.  The  Creator  of  the  uni- 
verse, for  reasons  presumably  wise,  has  made  impossible  an 
equilibrium  of  balanced  selfishness  among  men. 


INDUSTRIAL  REVOLUTION  m  ENGLAND — PART  III.     53 

SUMMARY. 

1.  Liberty,  to  be  effectual,  is  found  to  require  mutual  limitations. 

2.  Expert  examination  of  certain  goods  is  found  to  be  necessary. 

3.  The  employer's  interest  fails  to  protect  employees  from  bodily  injury. 

4.  The  English  Factory  Acts  protect  the  interests  of  women,  children,  and 
young  persons  employed  in  i'actories,  specifying  the  time  and  conditions  of 
their  employment. 

5.  Trades  unions,  at  first  forbidden,  are  permitted  in  1824,  and  rapidly 
developed.    They  powerfully  affect  the  conditions  of  economic  life  in  England. 

6.  They  now  seek  to  organize  unskilled  laborers  both  in  city  and  coun- 
try, and  to  secure  the  aid  of  legislation. 

7.  Legal  boards  of  arbitration  are  established,  but  not  used. 

8.  Voluntary  boards  of  arbitration  are  widely  employed  with  beneficial 
results. 

9.  The  principle  of  non-interference  of  the  State  is  abandoned  as  a  prin- 
ciple in  England. 

QUESTIONS. 

1.  What  is  liberty?     What  is  its  counterfeit?     What  is  the  result  of 
general  permission  to  do  as  one  pleases? 

2.  Is  there  less  or  more  need  of  law  as  society  develops?    Why  ?    What 
change  takes  place  in  the  character  of  law  as  civilization  increases?     Why? 

3.  What  need  is  there  of  State  supervision  of  commerce?     Is  it  necessary 
in  all  lines  ?    Why  ? 

4.  Is  self-interest  a  guarantee  of  honesty?     Why? 

5.  Did  competition  protect  workmen  from  injury  ?     Why? 

6.  What  are  the  provisions  of  the  English  Factory  Acts?     How  do  they 
contrast  with  former  labor  legislation ?     What  are  their  defects?     Why? 

7.  Why  were  trades  unions  at  first  forbidden  bylaw?     What  was  the 
result?     Why  was  the  prohibition  removed?     What  results  followed? 

8.  What  was  the  attitude  of  the  earlier  economists  toward  trades  unions? 
Why?     Of  the  later  economists?     Can  they  affect  wages?    How  much? 

9.  What  is  "new  trades-unionism?  " 

10.  How  were  wages  formerly  regulated  in  case  of  difficulty?     Did  com- 
petition regulate  them  successfully?    Why? 

11.  What  modern  means  of  regulation?     Which  kind  is  more  used? 

LITERATURE. 

Brentano,  L. :    On  the  History  and  Development  of  Guilds  and  the  Origin  of 
Trade  Unions. 
Trant,  W. :   Trade  Uiuons. 

Seligman,  E.  R.  A. :    Two   Chapters  on   the  Jfediceval  Guilds  of  England. 
American  Economic  Association.   Yol.  II,  No.  5.   (Contains  a  bibliography.) 
•  See  also  references  to  preceding  chapters, 
5 


CHAPTER  VIII. 

REMARKS  ON  THE  ECONOMIC  HISTORY  OF  THE  UNITED  STATES. 

THE  economic  history  of  the  United  States  is,  in  part,  the 
history  of  an  attempt  to  apply  the  principles  of  free  compe- 
tition and  a  minimum  of  interference  on  the  part  of  the 
State  to  a  new  country  instead  of  an  old  one.  This  differ- 
ence is  so  great  as  to  have  modified  the  result  materially. 
As  is  well  known,  the  principle  of  non-intervention  was 
adopted  here  more  widely  than  in  England,  where  the  State 
has  never  ceased  to  exercise  a  certain  control  over  religion. 
Politically  and  economically,  also,  the  principle  of  no  State 
interference  beyond  what  is  absolutely  necessary  was  in  the 
main  recognized  for  a  time.  In  some  particulars  the  results 
have  been  parallel,  in  others  not.  There  has  been  the  same, 
perhaps  an  even  greater,  increase  of  wealth-production,  with 
a  concentration  of  wealth  which  is  without  parallel  in  mod- 
ern times — which  means  the  growth  of  great  fortunes — the 
same  extension  of  commerce,  development  of  railways,  and  in- 
troduction of  machinery.  In  the  most  important  points,  how- 
ever, the  darker  side  of  England's  experience  does  not  seem 
to  have  been  fully  repeated  here.  We  have  never  known 
such  low  wages,  such  extended  poverty,  such  suffering  and 
starvation  on  a  large  scale.  Real  wages  are  said  to  have 
risen  gradually  throughout  our  history,  and  this,  with  numer- 
ous exceptions,  may  not  be  far  from  the  truth.  Our  expe- 
rience, therefore,  has,  at  first  blush,  not  seemed  to  condemn 
a  passive  policy  of  government  so  strongly  as  has  that  of 
England.  The  question,  therefore,  naturally  arises  whether 
the  conclusions  drawn  from  English  experience  were  correct. 
Which  of  the  two  countries  has  given  the  principle  the  fairer 
test? 


THE  ECONOMIC  HISTORY  OF  THE  UNITED  STATES.      55 

It  will  be  remembered  that  the  suffering  accompanying 
the  industrial  revolution  in  England  was  of  two  kinds.  One 
was  temporary  or  transitional,  the  other  was  permanent  or  in- 
herent in  the  system.  The  first  was  due  to  the  simple  fact 
of  changing.  No  matter  what  the  change  might  be,  if  it 
were  equally  sweeping  and  rapid,  suffering  could  scarcely 
fail  to  result.  Thus  a  new  method  was  introduced,  and  those 
who  practiced  the  old  must  lose  their  occupation  and  in- 
come. Not  seeing  that  the  change  was  coming,  they  did  not 
adapt  themselves  to  it,  and  were  sacrificed  to  it.  Trade 
drifted  from  the  country  to  the  town,  and  from  one  town  to 
another,  the  retreating  wave  leaving  many  helplessly  stranded. 

The  second  kind  of  suffering  came  not  from  change,  but 
from  the  very  nature  of  the  system  introduced,  from  the 
sacrifice  of  the  weak  to  the  strong  in  the  soulless  struggle 
for  existence.  This  lowering  of  factory  wages  and  degrada- 
tion of  factory  operatives  would,  apparently,  have  happened 
just  the  same  if  the  system  had  come  in  ever  so  slowly  or 
had  existed  from  the  first.  Now  both  these  difficulties  in 
our  economic  experience  have  been  offset  by  features  pecul- 
iar to  our  country  as  compared  with  England. 

Difficulty  of  Transition. — This  was  slight  in  America, 
because  in  changing  to  the  new  system  there  was  little  to 
change  from.  Our  economic  littleness  was  our  salvation. 
Our  industries  were  scarcely  started  when  the  steam  engine 
was  introduced,  and  so  from  almost  the  beginning  the  fac- 
tory system  seemed  the  natural  one.  Such  change  as  there 
was  from  hand  industries  to  power  manufacture  produced 
results  similar  to  those  in  England;  but  this  change  was  rela- 
tively so  insignificant  in  amount  as  to  attract  comparatively 
little  notice.  Moreover,  the  artisans  thrown  out  of  employ- 
ment found  new  employment  in  the  growing  industries  and 
moved  willingly  from  place  to  place,  as  English  artisans  did 
not  do.  This  was  due  to  local  causes.  Thus  the  change 
which  in  England  was  a  revolution  in  America  was  an  evolu- 
tion, a  process  that  built  much  and  destroyed  little,  because 
there  was  little  to  destroy. 


56  OUTLINES  OF  ECONOMICS. 

Difficulty  of  Operation. — The  workingmen  of  this  coun- 
try seem  not  to  have  played  a  continually  losing  game,  as 
did  their  English  cousins,  during  the  period  of  unlimited 
competition.  The  reason  is  in  a  way  the  opposite  of  that 
just  considered.  If  the  littleness  of  our  industries  has  saved 
us  from  the  friction  of  transition  the  bigness  of  our  terri- 
tory has  saved  us  from  the  friction  of  operation.  The  Amer- 
ican workman,  either  by  immigration  hither  or  by  the  inherit- 
ance of  traditions  that  are  national,  moves  about  quite  freely 
in  search  of  his  own  interests.  Through  our  industrial  his- 
tory to  the  present  he  has  been  able,  by  going  a  reasonable 
distance,  to  find  cheap  or  free  land  where  he  could  earn  an 
independent  living.  Under  such  circumstances  it  has  been 
impossible  for  the  pressure  of  competition  to  work  out  its 
natural  results  in  manufacturing  industries.  It  is  free  land 
rather  than  a  protective  tariff  which  has  kept  up  the  wages 
of  labor,  and  if  that  resource,  which  has  thus  far  tempered 
the  asperities  of  the  struggle,  once  disappears  we  may  look 
for  different  results  unless  new  safeguards  take  its  place. 
It  is,  of  course,  objected  to  this  and  many  previous  state- 
ments that  wages  are  determined  by  the  product  of  industry 
divided  according  to  immutable  laws;  to  which  it  may  be  re- 
plied that  even  if  this  theory  of  "  immutable  law  "  be  true — 
a  very  doubtful  "  if" — it  holds  only  as  a  contract  holds  which 
divides  the  profits  of  a  partnership,  a  division  which  is  in  nowise 
certain  to  be  realized  if  some  of  the  partners  are  unable  to 
interpret  the  contract.  There  is  no  conceivable  expedient  by 
which  the  weak  and  ignorant  can  associate  with  the  strong 
and  unscrupulous  without  increasing  detriment  to  the  for- 
mer, unless  strength  and  disinterestedness  from  without  in- 
terpose efficiently  and  permanently  in  their  behalf.  Favor- 
able as  has  been  the  situation  of  the  United  States,  her 
economic  history  furnishes  abundant  illustrations  of  this 
fact.  As  free  land  becomes  less  abundant  and  less  accessible 
the  wage-earning  portion  of  our  eastern  population  finds  con- 
ditions of  life  forced  upon  it  which  at  least  hold  down  if  they 
do  not  lower  the  standard  of  life.  Pauperism  is  undoubtedly 


THE  ECONOMIC  HISTORY  OF  THE  UNITED  STATES.      57 

increasing  with  the  increase  of  wealth,  and  extremes  of  con- 
dition and  alienation  of  classes  are  familiar  to  all.  Riots 
that  call  for  military  interference  testify  to  the  fact  that  we 
have  not  escaped,  and  are  escaping  less  and  less,  the  friction 
that  accompanies  all  unfraternal  arrangements  among  men. 
Between  the  two  experiments,  therefore,  we  cannot  for  a 
moment  hesitate  as  to  which  has  fairly  tested  the  system. 
All  countries  tend  t»  fullness,  and  newness  always  disappears 
in  time.  That  system  which  will  not  work  in  a  thickly  set- 
tled country  is  a  condemned  system,  for  it  fails  to  work 
under  what  arc  now  generally,  and  will  soon  be  universally, 
the  normal  conditions  of  human  life. 

Competition  among  Employers  and.  Centralization. 
—We  have  so  far  considered  the  effects  of  competition  upon 
the  laborers,  and  in  tracing  this  effect  the  history  of  England 
has  been  peculiarly  instructive.  When  we  turn  to  the  results 
of  competition  upon  the  employers  we  shall  find  that  the  his- 
tory of  our  own  country  is  more  conclusive.  Owing  to  the 
peculiar  circumstances  of  our  situation  the  results  of  compe- 
tition among  employers  have  been  developed  more  rapidly 
than  abroad.  While  the  conflict  between  workmen  and 
employers  led  to  a  certain  feeling  of  common  interest  be- 
tween  the  latter,  and  frequent  combinations  among  them- 
selves for  mutual  protection  against  workmen  (combinations 
which  the  English  law  never  prohibited),  the  principle  of 
competition  made  them  perfect  Ishmaelites  in  their  relations 
with  e:ich  other.  If  they  could  undersell  each  other  or  outdo 
each  other,  by  any  means  recognized  in  the  very  flexible 
code  of  business  honor,  they  did  so.  One  of  the  saddest 
things  about  the  history  of  oppression  of  labor,  which  we 
have  been  considering,  was  the  fact  that  often  when  employ- 
ers were  dictating  ever-harder  terms  to  their  men  they  were 
themselves  crowded  to  the  wall  and  compelled  to  fight  for 
existence  by  the  merciless  competition  among  themselves. 
Oppression  thus  necessitated  oppression.  Of  course  the 
general  public,  including  workmen,  stood  at  the  end  of  this 
series  and  profited  by  the  lower  prices;  but  in  such  a  series 


58  OUTLINES  OF  ECONOMICS. 

the  lowest  term  suffers  most  and  profits  least  by  the  reduc- 
tion. The  employer's  position,  however,  not  infrequently 
was  such  as  to  appeal  to  sympathy. 

In  America,  where  no  old  system  had  existed  to  establish 
conservative  traditions,  and  where  the  acquisition  of  wealth 
has  been  a  far  more  distinctively  national  passion  than  in 
England,  the  law  of  competition  has  operated  far  more  fully 
among  employers  than  it  has  in  England.  The  resources 
which  have  so  mitigated  the  lot  of  the  employee  have  not 
been  available  for  the  employer.  Enslaved  by  fixed  invest- 
ments of  capital,  he  has  had  to  fight  out  to  the  end  this  war 
without  quarter.  In  every  such  warfare  the  number  of  com- 
batants tends  to  decrease.  In  spite  of  the  enormous  growth 
of  our  industries  and  population,  a  growth  which  continues 
with  unparalleled  rapidity,  the  number  of  competitors  in 
many  industries,  though  greatly  increasing  at  first,  has  of 
late  shown  a  remarkable  decrease.  In  1870,  according  to  the 
United  States  Census,  there  were  in  the  Southern  States  1 75 
concerns  engaged  in  the  manufacture  of  iron  and  steel,  with 
a  capital  of  $13,372,085  and  an  annual  product  of  $21,472,665. 
In  1880  there  were  218  firms,  with  a  capital  of  $29,145,830 
and  an  annual  product  of  $25,353,251,  an  increase  of  24.6, 
118,  and  18  per  cent  respectively.  In  1890  the  capital  had 
increased  to  $50,845,666,  or  over  74  per  cent  as  compared 
with  1880.  The  annual  product  had  increased  to  $42,590,822, 
or  about  68  per  cent.  Hut  the  number  of  concerns  had  de- 
creased to  145,  or  over  one  third.  The  woolen  manufacture 
presents  a  still  more  striking  example.  According  to  the 
census  there  were  in  the  United  States,  in  1870,  3,590  con- 
cerns in  this  business  ;  in  1880  the  number  was  2,689,  and  in 
1890,  2,503.  In  spite  of  this  decrease,  the  amount  of  goods 
manufactured  increased  in  the  last  decade  over  one  fourth, 
and  the  capital  employed  in  an  even  greater  degree.  The 
illustrations  we  have  chosen  are  good  types  of  the  industrial 
progress  of  the  country.  Competition  attained  its  maximum 
in  the  decade  between  1870  and  1880.  It  became  familiarly 
known  as  "  cut-throat  competition,"  and  but  for  the  existence 


THE  ECONOMIC  HISTORY  OF  THE  UNITED  STATES.      59 

of  free  land,  unworked  resources,  and  the  constant  increase 
of  inventions,  widespread  disaster  must  have  resulted.  Since 
then  the  number  of  competitors  who  have  been  forced  out  of 
the  struggle  has  steadily  increased  and  business  has  fallen 
into  fewer  and  fewer  hands.  This  centralization  of  estab- 
lished industries  has  been  much  more  rapid  in  America  than 
elsewhere,  due  primarily  to  the  absence  of  hampering  con- 
ditions, especially  to  the  lack  of  legal  restraint,  which  has 
characterized  our  economic  history ;  also  to  the  presence  of 
conditions  positively  promoting  centralization,  like  the  favor- 
itism which  has  been  shown  by  railways  to  a  fortunate  few. 
Thus  the  fruit  of  the  system  is  ripening  sooner  than  else- 
where. 

Monopolies.  —  The  centralization  of  which  we  have 
spoken  is  only  a  partial  one.  It  does  not  necessarily  lessen 
competition  at  all.  It  only  gives  the  business  into  the  hands 
of  those  competitors  who  are  best  able  to  continue  it  under 
the  rigorous  conditions  which  competition  has  imposed. 
Other  things  being  equal,  the  large  concerns  have  the  best 
chance,  and  so  the  tendency  is  more  and  more  to  give  them 
the  business.  This  seems  plainly  a  reasonable  thing  to  do, 
and  up  to  the  time  we  have  mentioned,  some  fifteen  or 
twenty  years  ago,  there  was  a  very  general  belief  in  the 
efficiency  and  sufficiency  of  competition  to  control  all  indus- 
tries. Horace  Greeley  even  urged  that  it  would  be  advanta- 
geous to  turn  the  business  of  the  post  office  over  to  the 
express  companies  and  thus  subject  it  to  the  great  law  of 
competition.  But  experience  has  shown  that  under  certain 
circumstances  competition  ceases  altogether  and  abandons  its 
beneficent  control.  TJiis  makes  a  monopoly,  which  is  not/tin (j 
else  than  a  business  not  limited  by  competition.  A  monopoly 
results  whenever  one  competitor  enjoys  certain  advantages 
which  the  other  competitors  cannot  obtain,  and  the  process 
of  competition  goes  on  far  enough  to  drive  them  from  the 
field.  This  advantage  may  be  natural  or  artificial,  and 
accordingly  we  have  natural  and  artificial  monopolies. 
Artificial  monopolies  usually  depend  on  some  favoritism  of 


60  OUTLINES  OF  ECONOMICS. 

legislation  or  of  great  corporations  like  railways,  or  sovereign 
power  shown  to  special  individuals.  Such  were  the  rights 
of  exclusive  manufacture  or  trade  in  certain  commodities 
granted  by  monarchs  to  their  favorites.  These  were  one  of 
the  most  hated  features  of  the  old  system  against  which 
Adam  Smith  and  the  men  of  his  day  rebelled.  Tariff  laws 
are  sometimes  so  framed  as  to  favor  certain  individuals, 
under  the  guise  of  general  rules,  and  thus  form  the  basis  of 
monopolies.  There  is  generally  very  little  excuse  for  arti- 
ficial monopolies  save  in  the  case  of  patents,  copyrights,  and 
the  like,  and  of  course  they  can  be  terminated  by  removing 
the  artificial  prop  which  supports  them. 

But  natural  monopolies  are  a  different  matter.  We  can- 
not legislate  away  the  inequalities  of  nature  in  such  cases. 
The  growth  of  natural  monopolies  has  of  late  years  been 
prodigious.  Without  trying  to  make  an  exhaustive  list  the 
following  monopolies  may  be  mentioned  as  having  assumed 
national  importance.  First,  the  railways  are  at  least  partial 
monopolies,  and  their  residual  competition  is  constantly  di- 
minishing. Great  commercial  cities  like  Chicago  and  New 
York  are  connected  by  several  lines,  and  at  times  a  fierce 
struggle  breaks  out  under  such  circumstances,  but  an  agree- 
ment is  soon  reached  and  the  minimum  of  competition  re- 
maining relates  to  quality  of  service  rather  than  to  price. 
Even  the  competition  in  quality  is  less  than  is  often  claimed, 
affecting  chiefly  a  few-through  trains.  But  the  great  major- 
ity of  people  in  the  United  States  are  not  situated  like  the 
residents  of  New  York  and  Chicago.  Smaller  places  are 
often  connected  with  larger  places  and  with  one  another  by  a 
single  line,  and  do  not  have  the  benefit  of  even  the  minimum 
of  partial  competition  which  exists  elsewhere.  The  power  of 
railways  left  to  themselves  is  almost  unbounded,  far  greater 
than  that  of  any  sovereign.  By  far  the  larger  number  of 
towns  in  the  United  States  are  on  one  line  of  railway  only, 
and  even  if  all  were  on  more  than  one  line  of  railway  the 
ultimate  result  would  be  combination  and  monopoly. 

Instances  are  numerous  where  railways  have  so  regulated 


THE  ECONOMIC  HISTORY  OF  THE  UNITED  STATES.      61 

rates  as  to  kill  one  town  and  build  up  another  as  they  saw 
fit.  In  the  West  they  have  built  grain  elevators,  allowed  no 
private  elevators  on  their  track  or  charged  exorbitant  rates 
for  private  shipments,  and  thus  compelled  farmers  to  sell 
grain  to  them  at  their  own  price.  They  have  put  up  and 
overthrown  manufactures  as  they  chose.  So  great  has  be- 
come the  importance  of  transportation  in  our  day  that  the 
control  of  it  by  a  monopoly  is  the  most  far-reaching  tyranny 
now  made  possible  by  our  economic  life. 

The  second  important  group  of  natural  monopolies  with 
which  we  have  become  familiar  consists  of  those  which  we 
may  know  as  the  centralized  branches  of  municipal  supply. 
These  are  city  water  works,  city  gas  works,  electric  lighting 
plants,  street-car  lines,  and  possibly  others.  That  these 
industries  are  monopolies  by  nature  was  not  at  first  clear,  but 
now  it  is  generally  admitted.  For  instance,  though  there 
may  be  several  street-car  lines  in  a  city  they  cannot  be  in 
the  same  street  and  cannot  compete  to  any  considerable  ex- 
tent. Competing  gas  and  water  companies  may  exist  in  the 
same  city  and  lay  parallel  systems  of  pipes,  but  the  cost 
of  such  a  system  of  pipes  with  a  central  plant  is  so  great 
that  the  interest  on  the  capital  thus  invested  constitutes  a 
very  large  part  of  the  cost  of  gas  and  a  still  larger  part 
of  the  cost  of  water.  So,  when  two  plants  are  put  in  to  do 
the  work  of  one,  the  increase  of  cost  is  so  great  that  it  more 
than  balances  the  gain  from  competition.  Competition  in 
such  cases  is  therefore  justly  regarded  as  out  of  the  question, 
and  rival  companies  never  long  compete  in  good  faith. 

The  third  group  of  natural  monopolies  consists  in  the  cen- 
tralized control  of  gi-eat  natural  treasures.  The  principal 
examples  are  the  Standard  Oil  Company  and  the  "  Coal  Com- 
bine." These  two  monopolies  control  almost  completely  the 
price  of  two  important  commodities.  It  is  to  be  noted  that 
both  these  monopolies  owe  their  existence  in  the  first 
instance  to  the  previous  monopoly  of  railways.  Natural  gas 
also  may  be  instanced  as  an  illustration  following  under  this 
head. 


62  OUTLINES  OP  ECONOMICS. 

In  addition  to  these  monopolies,  which  plainly  have  a 
natural  basis,  there  has  been  of  late  a  remarkable  movement 
toward  the  formation  of  monopolies  in  other  industries  which 
have  become  highly  centralized.  When  an  industry  has 
fallen  almost  entirely  into  the  hands  of  a  few  large  and  ably 
managed  concerns  these  have  united  in  an  agreement  not  to 
compete  with  each  other  in  the  matter  of  price.  They  have 
usually  limited  the  amount  of  the  total  output  and  assigned 
a  certain  quota  to  each  concern.  These  combinations,  vari- 
ously known  as  pools,  combines,  and  trusts,  according  to  the 
method  of  their  organization,  are  a  matter  of  great  interest, 
and,  it  must  be  confessed,  of  considerable  anxiety  in  our  own 
day.  So  long  as  they  last  they  constitute  real  monopolies 
and  regulate  prices  wholly  in  their  own  interest.  There  are 
those  who  claim  that  all  industries  will  become  monopolies 
if  competition  is  unchecked;  that  competitors  are  never  long 
equal,  and  that  the  first  result  is  bound  to  be  centralization 
and  the  final  result  monopoly.  The  instability  of  most  pools 
and  trusts  up  to  date  gives  little  warrant  for  such  an  asser- 
tion. Experience  beyond  what  we  now  possess  is  necessary 
to  decide.  All  we  can  now  say  is  that  certain  industries,  by 
virtue  of  natural  inequalities  necessarily  existing  between 
the  competitors,  if  left  to  the  control  of  competition,  inevi- 
tably become  monopolies,  while  others  find  it  seemingly  im- 
possible to  escape  from  the  control  of  the  competitive 
principle.  While  it  is  difficult  to  draw  the  line  between 
these  two  kinds  of  industries  they  seem  none  the  less  to  in- 
dicate the  existence  of  two  separate  industrial  fields,  the 
monopolistic  and  the  competitive,  requiring  different  princi- 
ples of  control. 


THE  ECONOMIC  HISTORY  OF  THE  UNITED  STATES.      63 


SUMMARY. 

1.  Non-intervention  in  its  extreme  form  became  the  early  policy  of  the 
United  States. 

2.  The  transitional  suffering  which  accompanied  the  industrial  revolution 
in   England  was  avoided  in  the  United  States  by  the  fact  that  industries 
were  but  little  developed  under  the  old  plan. 

3.  The  tendency  of  the  new  system  to  depress  wages  was  prevented  by 
the  competing  presence  of  free  land,  and  by  the  greater  mobility  of  American 
labor. 

4.  On  the  other  hand,  competition  among  employers  has  been  severe  and 
often  self-destructive,  resulting  largely  in  consolidation. 

5.  The  development  of  monopolies  based  on  natural  or  artificial  advan- 
tages has  been  a  marked  feature  of  our  industrial  experience. 

6.  These  are  chiefly  in  transportation,  collective  municipal  service  and 
natural  treasures,  with  a  suggestion  of  possible  monopoly  in  other  fields. 

QUESTIONS. 

1.  In  what  respect  has  private  enterprise  had  freer  scope  in  America 
than  in  England?     Its   results  on  labor?     Why?     Will  these  results  be 
permanent?     Why? 

2.  Why  has  competition  among  employers  been  freer  than  in  England? 
What  has  been  the  result  ? 

3.  What  constitutes  a  monopoly?     What  is  the  difference  between  a 
natural  and  an  artificial  monopoly  ?     Mention  examples  of  each.     Classify 
the  former. 

4.  Is  general  manufacturing  and  commerce  liable  to  become  monopolistic  ? 
Why? 

LITERATURE. 

Ely,  R.  T. :  Labor  Movement  in  America. 

Rand,  Benjamin:  Economic  History  Since  1873.  Chapter  XV.  This 
chapter  contains  four  reports  made  for  the  Tenth  Census  by  P.  A.  Walker, 
Carroll  D.  Wright,  Edward  Atkinson,  and  James  M.  Swank. 


CHAPTER  IX. 

TENDENCIES   TO   REACTION   AGAINST   A   PASSIVE   POLICY   OF 
GOVERNMENT   IN   THE  UNITED  STATES. 

WE  have  seen  that  the  misery  and  degradation  of  the 
wage-earning  classes  which  led  in  England  to  the  reaction  in 
favor  of  an  active  policy  of  government  did  not  at  first  exist 
in  the  United  States  to  so  great  an  extent  as  to  require  and 
secure  legislation  in  their  behalf;  but  soon  similar  conditions 
led  to  like  results,  and  in  most  of  the  commonwealths  of  the 
American  Union  we  have  now  a  considerable  body  of  factory 
laws  for  the  protection  of  the  wage-earning  classes  and  for 
the  promotion  of  their  interests.  Massachusetts  leads  the 
country  in  this  respect,  and  the  factory  legislation  of  this 
State  is  probably  surpassed  only  by  that  of  England.  The 
growth  of  factory  legislation  in  our  country  illustrates  the 
principles  already  stated,  for  it  follows  the  lines  of  indus- 
trial development  spreading  from  New  England  to  the  West 
and  the  South,  but  more  slowly  in  the  latter  direction. 

Nor  has  the  adulteration  of  foods  or  the  falsification  of 
wares  ever  received  any  such  attention  as  in  England,  though 
here  there  has  been  need  enough  surely.  Not  only  have  we 
become  painfully  familiar  with  the  style  of  goods  which  the 
competitive  system  always  produces,  and  which  in  England 
are  known  by  the  expressive  term  "  cheap  and  nasty,"  but 
dangerous  adulterations  are  as  common  here  as  anywhere  in 
the  world.  The  fact  that  the  theory  of  non-interference  was 
not  so  completely  broken  down  by  the  pressure  of  labor  inter- 
ests, together  with  the  general  weakness  of  our  administrative 
system,  accounts,  in  part,  at  least,  for  the  general  reluctance 
to  intrust  to  government  in  this  country  the  duty  of  inspecting 
wares  and  products  of  manufacture.  But  the  recent  growth 
of  monopolies  has  been  a  problem  calling  for  earnest  thought 


REACTION  AGAINST  A  PASSIVE  POLICY.  65 

and  revision  of  opinion.  Of  course  the  objection  to  monop- 
olies has  been  that  they  were  able  and  inclined  to  regulate 
prices  entirely  for  their  own  interest.  Even  this  would  have 
been  less  objected  to  if  the  employer,  thus  relieved  from  the 
necessity  of  forcing  down  wages,  had  been  careful  to  divide 
the  profits  thus  increased  with  his  employees.  But  the 
schooling  obtained  in  the  great  struggle  which  had  made  mo- 
nopoly widespread  was  not  of  a  kind  to  make  men  "  tenderly 
affectioned  one  to  another,"  and  the  increasing  size  of  man- 
ufacturing concerns  had  hopelessly  separated  the  two  classes. 
It  has  clearly  not  helped  the  wage-earning  classes  that  profits 
have  been  increased  by  monopolistic  control.  The  same 
could  be  said  of  other  important  interests.  Never  wns  in- 
dustry more  careless  of  life  than  under  monopolistic  control. 
The  greatest  of  our  monopolized  industries,  the  railways, 
in  1892  sacrificed  the  lives  of  over  seven  thousand  persons, 
a  number  almost  incredible  to  one  accustomed  to  the  legally 
enforced  precautions  of  European  countries.  Far  more  em- 
ployees than  passengers  were  killed ;  and  the  lives  of  most 
of  them,  and  of  many  of  the  passengers  and  other  persons 
killed,  might  have  been  saved  by  the  adoption  of  safeguards 
perfectly  well  known,  and  not  adopted,  simply  because  of 
their  cost. 

The  history  of  our  attempt  to  control  monopolies  is  long 
and  confusing.  In  general,  however,  three  methods  have 
been  employed — competition,  government  regulation,  and 
government  ownership.  Let  us  notice  briefly  each  of  these 
methods. 

Competition. — This  was  the  favorite  method  of  dealing 
with  natural  monopolies  so  long  as  competition  was  regarded 
as  the  only  safeguard  of  industry.  It  has  been  tried  espe- 
cially in  railways  and  in  gas  service.  We  may  say,  in  a 
way,  that  the  history  of  our  railway  business  is  the  history 
of  competing  lines  Avhich  have  tracked  each  other  across  the 
country,  endeavoring  rather  to  overreach  each  other  than  to 
serve  the  public.  While  we  can  safely  assert  that  but  for 
the  rivalry  of  competing  roads  the  enormous  fixed  invest- 


66  OUTLINES  OF  ECONOMICS. 

ments  of  our  railways  could  have  been  much  better  distrib- 
uted for  the  service  of  the  country,  it  must  be  admitted  that 
the  competing  lines  thus  constructed  have  often  served  dif- 
ferent local  interests,  and  they  have  been  constructed  accord- 
ing to  the  dictates  of  competition.  But  it  is  not  this  com- 
petition which  is  significant  under  the  heading  of  this  chapter, 
for  this  was  not  an  abandonment  of  the  principle  of  competi- 
tive control,  but  an  avowal  of  it.  Not  so,  though,  with 
certain  cases  like  that  of  the  West  Shore  Railway  in  New 
York.  This  was  built  almost  absolutely  parallel  to  the  New 
York  Central,  whose  monopoly  of  the  carrying  trade  of 
central  New  York  it  was  designed  to  check.  To  insure  this 
object  the  charter  provided  that  it  should  never  sell  out  to 
the  New  York  Central  Company;  that  is,  it  should  forever 
compete  with  it.  Let  us  notice  the  real  nature  of  this  provi- 
sion. The  doctrine  really  at  the  bottom  of  the  whole  was 
that  the  State  should  not  interfere  with  private  enterprise, 
but  should  allow  free  competition  to  regulate  prices.  But, 
free  competition  having  failed  in  the  case  of  railways,  the 
State  seeks  to  establish  compulsory  competition,  which  is  as 
direct  a  form  of  State  interference  as  well  could  be.  But 
so  strong  is  the  faith  in  competition  that  the  State,  having 
decided  to  interfere,  does  so  through  the  form  of  an  artificial 
competition,  the  most  expensive  and  least  efficient  means  that 
could  be  devised;  expensive  because  the  public  were  com- 
pelled at  once  to  suffer  the  complete  loss  of  the  needless 
railway  and  ever  afterward  to  pay  charges  high  enough  to 
cover  interest  on  the  larger  capital.  The  State  thus  sought 
by  increasing  the  cost  of  transportation  to  lower  profits, 
whereas  the  real  object  to  be  obtained  was  lower  charges  and 
better  service,  both  of  which  were  prevented  by  the  building 
of  the  new  road.  So  much  for  the  economy  of  the  method; 
now  for  its  efficiency.  After  it  was  opened  for  a  few  years 
the  road  was  leased  to  the  New  York  Central  Company  for  four 
hundred  and  seventy-five  years,  and  has  since  been  run  as  a 
needless  fifth  track  to  their  four-track  road.  Competition 
is  postponed  until  the  expiration  of  the  lease.  The  same 


REACTION  AGAINST  A  PASSIVE  POLICY.  67 

experience  has  been  continually  repeated  in  the  case  of  gas 
service.  Cities  oppressed  by  monopoly  have  eagerly  wel- 
comed a  new  company  which  has  torn  up  their  streets  and 
inflicted  on  them  great  inconvenience  to  lay  a  second  system 
of  gas  mains,  hoping  thereby  to  get  competitive  prices. 
What  has  been  the  result  ?  After  a  brief  pretense  of  com- 
petition, rather,  indeed,  industrial  war,  the  new  company, 
whose  purpose  from  the  first  had  only  been  to  force  the  old 
company  to  divide  its  monopoly  profits  with  them,  has  con- 
solidated with  its  rival,  and  prices  are  as  high  as  before,  with 
this  important  difference,  that  before  they  would  admit  of 
great  reduction  by  legal  enactment,  while  now  they  must  be 
high  to  pay  interest  on  the  capital  so  needlessly  increased. 
We  may  lay  down  the  general  maxim,  deduced  from  our 
national  experience,  that  the  public  must  pay  for  every  article 
needlessly  duplicated  in  monopoly  service,  and  that,  too,  with- 
out compensating  benefit.  So  thoroughly  has  this  method 
been  discredited  by  experience  that  laws  have  been  proposed 
in  certain  States  forbidding  the  construction  of  needless 
competing  railways  as  resulting  in  a  loss  to  the  public. 
Professor  Jevons  claims  that  English  railways  could  carry 
passengers  in  first-class  cars  at  one  cent  a  mile  (the  present 
rate  is  three  and  one  half  cents)  were  it  not  for  the  waste- 
fulness with  which  they  have  been  constructed  under  the 
system  which  we  have  been  considering,  and,  doubtless, 
much  the  same  could  be  said  of  our  own. 

Government  Regulation. — We  have  already  seen  that 
the  system  of  enforced  competition  is  a  species  of  govern- 
ment control  by  clumsy  and  costly  means.  It  is  a  sort  of 
compromise  between  new  necessity  and  old  tradition,  a  sort 
of  compulsory  freedom  with  most  of  the  losses  and  few  of 
the  gains  of  either  system.  From  this  half  regulation  we 
now  pass  to  the  avowed  application  of  the  principle  of  State 
control.  This  began  on  a  considerable  scale  more  than 
twenty  years  ago,  at  the  time  of  the  granger  movement,  as  it 
was  called :  at  first  an  uprising  of  unorganized  farmers 
against  railway  claims  and  abuses;  later,  an  organized  move- 


68  OUTLINES  OF  ECONOMICS. 

ment  which  centered  in  the  "  Order  of  the  Patrons  of 
Husbandry,"  an  organization  of  farmers,  founded  in  1867. 
Laws  were  passed  in  a  number  of  States  regulating  rates  and 
binding  the  roads  by  many  rules  of  action.  Much  of  this 
legislation  was  ill-considered,  passed  under  pressure  of  popu- 
lar excitement,  and  soon  repealed.  One  unfortunate  result  c 
was  the  discouragement,  for  a  time,  of  further  attempts  at 
regulation  of  railway  traffic.  Since  then,  however,  the  effort 
to  control  railways  by  legislation  has  steadily  increased  in 
strength,  and  has  resulted  in  the  creation  of  the  State  rail- 
way commissions  in  most  of  our  States  and  of  the  federal 
interstate  commerce  commission,  with  certain  powers  of 
adjudication  and  control.  The  application  of  the  principle, 
however,  has  proved  exceedingly  difficult.  The  railways 
have  endless  ingenuity  at  evasion  and  large  power  of  retalia-  ^ 
tion.  They  so  generally  cross  the  State  boundaries  that 
State  laws  are  of  comparatively  little  effect.  No  more  c 
troublesome  question  of  practical  legislation  now  confronts 
our  people. 

The  principle  of  municipal  control  has  resulted  even  less 
satisfactorily.  Very  seldom  have  equitable  prices  been 
secured,  while  the  corruption  of  city  councils  by  monopoly 
money  has  been  notorious.  Thus  the  enormous  needless  cost 
of  various  municipal  services  has  often  been  divided  between 
illegitimate  profits  and  still  more  illegitimate  bribes.  The 
"  Broadway  Street  Railway  "  franchise  in  New  York  is  still 
fresh  in  memory.  The  councilmen  were  bribed  to  give  away  ' 
a  franchise  worth  an  immense  sum,  and,  though  the  criminals 
were  punished,  and  the  fraudulent  charter  nominally  re- 
voked, by  a  legal  decision  the  franchise  and  all  assets 
of  the  company  were  turned  over  to  the  directors  to  be 
administered  for  the  benefit  of  the  stockholders,  and  the 
effect  was  practically  Q]}.  This  decision  of  the  New  York 
Court  of  Appeals,  it  ought  to  be  said,  has  often  been  called 
in  question,  and  it  is  to  be  hoped  that  it  will  not  be  followed 
by  other  courts.  This  episode  illustrates  the  great  weakness 
of  the  system  of  municipal  control,  a  corrupt  council  having 

'/ 
.     ff^y ,  '.4-^t><>O    o» * "jti.-t.-j-te-k 


v 


REACTION  AGAINST  A  PASSIVE  POLICY.  69 

power  to  perpetuate  indefinitely  the  mischief  they  do.  Here, 
if  anywhere,  "  the  evil  that  men  do  lives  after  them."  On 
the  other  hand,  it  is  equally  true  that  honest  councils  have 
often  exerted  their  power  wisely  and  secured  bargains 
reasonably  advantageous  to  the  city.  Still,  the  most  san- 
guine advocate  of  municipal  control,  as  opposed  to  munici- 
pal ownership  and  management,  would  hardly  claim  that  our 
experience  in  this  respect  has  been  satisfactory. 

Government  Ownership. — This  principle,  which  has 
been  extensively  adopted  in  European  countries,  has,  with 
exception  of  the  post-office,  been  applied  in  our  own  only 
to  municipal  monopolies,  and  that  to  a  limited  degree.  It 
is  now  the  generally  recognized  principle  for  the  manage- 
ment of  city  water  works.  Why  it  should  be  applied  here 
more  than  to  other  branches  of  the  municipal  service  is  not 
clear.  It  is,  to  be  sure,  the  most  essential  of  all,  and  the 
necessity  of  a  supply  that  shall  be  abundant,  constant,  cheap, 
and  pure  imperatively  demands  the  most  efficient  and  re- 
liable management  possible.  It  is  significant  of  the  growth 
of  popular  sentiment  that  this  necessity' has  led  cities  gen- 
erally to  resort  to  municipal  ownership  to  secure  this  result. 

Municipal  gas  works  now  exist  in  a  number  of  American 
cities  and  are  regarded  with  increasing  favor.  The  most 
rapid  extension  of  this  principle,  however,  comes  in  the  case 
of  electric  lighting  plants,  which  are  now  being  introduced 
throughout  the  country.  Very  many  cities  have  adopted 
the  principle  of  municipal  ownership,  and  the  tendency  to  do 
so  increases.  "Without  anticipating  here  the  discussion  of 
this  principle,  which  belongs  in  another  place,  it  may  be  said 
that  the  reduction  in  expense  to  those  cities  owning  their 
own  plants  has  been  very  great  indeed,  while  up  to  date  few, 
if  any,  cases  of  failure  or  mismanagement  seem  to  have  been 
reported.  The  means  of  bribery  and  the  occasion  for  it 
seem  to  have  been  largely  reduced. 

As  a  result  of  the  century's  experience  present  opinion 
seems  to  tend  toward — 

1.  Private  enterprise  in  the  competitive  field. 
6 


TO  OUTLINES  OF  ECONOMICS. 

2.  Government  ownership  in  the  field  of  monopoly. 

3.  Right  of  private  organization  for  all  legal  purposes. 

4.  Government  regulation  of  private  industry  to  protect 
the  life,  health,  education,  and  general  welfare  of  workmen. 

5.  Government  arbitration,  if  needed,  to  settle  labor  dis- 
putes. 


REACTION  AGAINST  A  PASSIVE  POLICY.  71 


SUMMARY. 

1.  The  enactment  of  factory  laws  in  the  United  States  has  been  less  gen- 
eral  than  in  England,  but  not  inconsiderable,  especially  in  some  States. 

2.  The  testing  of  i'oods  and  other  products  in  America  has  been  generally 
neglected. 

3.  Monopolies  have,  on  the  contrary,  attracted  much  attention. 

4.  State  encouragement  to  competition  in  the  case  of  natural  monopolies 
has  been  a  disastrous  failure. 

5.  Government  regulation  of  monopolies  by  law  has  been  tried  with  but 
partial  success,  especially  in  the  case  of  municipal  regulation. 

6.  Municipal  ownership  of  local  monopoly  services  has  proved  more  satis- 
factory, and  is  increasing  in  favor. 

QUESTIONS. 

1.  Against  what  features  of  our  industrial  system  has  there  been  a  re- 
action?   Contrast  with  England? 

2.  What  is  the  result  of  competition  as  a  means  of  controlling  natural 
monopolies  ?    "Why  ? 

3.  What  effort  has  been  made  to  control  railways  by  legislation?    With 
what  result?     Why? 

4.  What  is  the  difficulty  of  municipal  control  of  collective  services  ?    Why 
in  ust  this  be  so  ? 

5.  What  new  principle  has  this  difficulty  developed?    Where  has  it  been 
most  extensively  applied?     To  what  branch  has  it  been  applied  in  the 
United  States?     What  are  its  results ?     Why  ? 

LITERATURE. 

Ely,  R.  T. :  Problems  of  To-day. 
See  references  to  preceding  chapter. 


CHAPTER  X. 

THE  NATURE  OP  THE  SUBJECT  OF  ECONOMIC  STUDY. 

WE  began  this  book  by  saying  that  economic  history  was 
the  history  of  man  in  his  efforts  to  get  a  living;  that  is,  to 
get  and  to  use  material  things  to  supply  his  wants.  It  would 
have  been  easy  to  begin  at  once  to  define  the  subject  and  lay 
out  the  principles  of  our  science,  instead  of  going  so  much  at 
length  into  the  history  of  economic  effort;  but  we  should 
have  missed  some  important  points  or  been  in  danger  of 
missing  them  to  some  extent.  The  things  which  science 
learns  from  history  can  usually  be  duly  impressed  upon  us 
only  by  the  study  of  history.  In  a  way  we  may  know  the 
results  of  human  experience  without  history,  but  to  follow 
that  experience  with  something  of  attention  and  sympathy 
adds  a  new  and  deeper  quality  to  our  knowing.  What  facts, 
then,  are  especially  worth  noticing  as  we  follow  this  age-long 
struggle  of  man  to  get  a  living  ? 

1.  Economics  Treats  of  Man. — In  the  first  place,  we 
should  note  the  importance  of  man  in  contrast  with  all  the 
things  we  have  been  considering.  This  seems  a  very  com- 
monplace remark,  but  the  fact  is,  men  who  have  studied 
this  science  have  often  not  appreciated  this  fact  at  all. 
Among  the  most  serious  mistakes  is  to  consider  man  simply 
as  a  producer  of  goods,  one  "  by  whom "  are  all  things  of 
interest  to  our  science,  while  the  infinitely  greater  truth  is 
that  man  is  the  one  "for  whom  "  they  are  all  produced.  Of 
course  no  one  denies  this  truth,  but  men  might  almost  as 
well  deny  it  as  to  leave  it  out  of  account.  The  result  of 
such  neglect  is  that  men  devise  with  great  skill  rules  by 
which  man  may  be  made  the  best  possible  manufacturing 
machine.  It  sometimes  quite  escapes  the  notice  of  these 


THE  NATURE  OF  THE  SUBJECT  OF  ECONOMIC  STUDY.     73 

wise  men  that  in  making  of  man  the  best  possible  manufac- 
turing machine  they  may  make  him  a  very  poor  sort  of  a  man ; 
that  in  teaching  him  to  supply  his  wants  very  bountifully 
they  may  prevent  his  developing  and  correcting  those  same 
wants.  They  forget  that  there  are  two  kinds  of  poverty, 
one  a  lack  of  goods  for  the  higher  wants,  the  other  a  lack 
of  wants  for  the  higher  goods.  To  become  rich  in  goods 
while  losing  at  the  same  time  the  power  to  profit  by  them 
is  unfortunately  one  of  the  commonest  retrogressions  in 
human  experience.  We  do  not  mean  that  the  whole  prob- 
lem of  human  development  is  the  subject  of  economics,  but 
simply  that  manhood,  rounded  human  development,  is  the 
goal  of  all  social  sciences,  and  none  must  consider  their  sub- 
ject so  narrowly  as  to  exclude  that  object. 

Another'  common  mistake  has  been  to  regard  as  of  chief 
importance  a  class  of  men  in  their  efforts  to  get  a  living, 
especially  the  employer.     Other  men  were  treated  simply  as 
"  a  factor  in  production."     An  English  writer  speaks  of  dear 
labor  as  one  of  the  chief  obstacles  to  England's   economic 
pi'osperity.     Could  anything  be  more  utterly  an  oversight  of  j 
general  human  well-being?     Dear  labor  should  be  the  very  \ 
goal  of  England's  economic  effort,  for  that  means  abundant 
supply  of  the  wants  of  the  great  mass  of  her  people  ;  and 
the  fact  that  labor  is  dear,  so  far  from  being  an  obstacle 
to    prosperity,  is   the   very    proof    and   substance   of   that 
prosperity.      Our    glance    at    history    indicates    that    men  i 
have  made  these  mistakes  not  only  in  theory  but  in  practice.   » 
Industries  have  been  developed  to  majestic  proportions  while 
man  was  sinking  into  deeper  degradation  ;  wealth  has  gi'own 
at  the  expense  of  that  human  weal  in  whose  service  it  won 
its  name. 

2.  Economics  Treats  of  Man  in  Society. — This  is 
another  truism  which  only  history  can  make  true  to  us.  We 
have  seen  as  we  pass  from  the  savage  and  cannibal,  up 
through  all  the  stages  of  development,  an  ever-increasing  in- 
terdependence among  men.  Man  is  least  dependent  when  he 
wants  least,  cares  least,  has  least,  knows  least,  and  is  least, 


' 


74  OUTLINES  OF  ECONOMICS. 

With  every  betterment  of  condition  and  character  he  is 
more  dependent  than  before,  more  dependent  and  yet  more 
really  free.  The  beginnings  of  barter  are  a  confession  of 
mutual  need  ;  the  coining  of  money  is  a  declaration  of 
dependence  to  all  men.  We  look  with  pride  upon  a  century 
of  progress,  but  that  progress  has  consisted  in  little  else  than 
a  growth  of  dependence,  an  ever-increasing  departure  from 
that  rude  kind  of  literal  self-help  in  which  each  one  does 
everything  for  himself.  Our  fathers  drew  water,  each  for 
himself,  in  "the  moss-covered  bucket,"  while  our  mothers 
dipped  candles  for  the  evening's  light.  If  one  was  negli- 
gent the  rest  did  not  suffer.  To-day  a  network  of  pipes 
radiate  from  a  common  center  to  enter  a  thousand  house- 
holds. An  engineer  makes  a  blunder  at  the  station  and 
thousands  are  in  darkness  or  drought.  Society  is  an  organ- 
ism, and  that  increasingly.  Progress  is  nothing  other  than 
the  building  of  the  organism  called  society  out  of  the  atoms 
called  men ;  a  passage  from  independence  to  dependence, 
from  distrust  to  confidence,  from  hostility  to  amity,  from 
helplessness  to  helpfulness,  while  the  great  law  of  social 
solidarity  gains  ever-increasing  importance.  Our  science, 
then,  is  interested  wholly  in  man  in  his  relations  to  others, 
not  at  all  in  man  by  himself.  Moreover,  as  a  science  which 
studies  the  present,  in  order  that  it  may  predict  and  prepare 
the  future,  discovering  that  interdependence  is  the  law  of 
progress,  it  must  not  hesitate  to  shape  its  pi-inciples  with 
reference  to  a  solidarity  which  shall  grow  more  rather  than 
less,  stronger  rather  than  weaker. 

3.  Economics  Treats  of  Man  as  in  Process  of  De- 
velopment.— Few  truths  are  more  easily  admitted  or  more 
persistently  ignored  than  that  of  change  in  human  life  and 
condition.  History  makes  it  real.  Man  now  wanders  about 
by  force  of  necessity  and  age-long  habit,  now  starves  rather 
than  be  moved  from  his  home.  Land  is  now  free  to  all,  now 
parcelled  out  with  well-nigh  absolute  right  of  individual  pos- 
session. The  seemingly  eternal  features  of  the  social  struc- 
ture are  gone  in  a  few  generations.  Nothing  so  invalidates 


THE  NATURE  OF  THE  SUBJECT  OF  ECONOMIC  STUDY.     75 

theories,  laws,  general  principles,  institutions,  and  enterprises 
as  this  great  law  of  change  of  which  we  seldom  take  full  ac- 
count. Take,  for  instance,  bequests.  Nothing  is  commoner 
than  for  a  man  to  leave  a  legacy  under  specified  and  detailed 
regulations,  binding  for  all  time.  One  leaves  money  to  en- 
dow a  religious  service  in  a  language  which  in  a  few  genera- 
tions no  one  understands;  another  founds  a  college  to  teach 
certain  doctrines  which  in  a  century  no  one  believes;  and  so 
on  indefinitely.  These  and  a  thousand  other  laborious  efforts 
of  statesman,  warrior,  or  philosopher  quite  lose  their  worth 
for  the  future  because  their  authors  assumed  that  the  future 
would  be  like  their  present. 

This  was  the  mistake  of  the  early  economists.  They  dis- 
cerned, often  with  great  clearness,  some  of  the  forces  then 
at  work  in  economic  life,  and  correctly  measured  their  influ- 
ence. But  white  some  of  these  were  fundamental  and  per- 
manent others  were  scarcely  more  than  the  accidents  of 
their  day.  Thus  work  which  was  exceedingly  well  done  had 
soon  to  be  undone,  and  was  the  source  of  persistent  fallacies. 
Especially  must  we  remember  that  the  magnitude  and  pres- 
ent impor^nce  of  an  institution  argue  little  as  to  its  perma- 
nency. The  wages  system  and  the  division  between  capital 
and  labor  seem  rooted  in  the  constitution  of  society,  but 
they  are  scarcely  over  a  century  old  as  a  general  system. 

We  may  properly  study  economic  life  in  a  temporary  and 
local  stage  of  its  development  if  we  recognize  it  as  local  and 
temporary,  and  do  not  generalize  from  it  for  other  times  and 
places.  Such  a  study  is  a  static  or  standing-still  study,  and 
bears  much  the  same  relation  to  the  whole  subject  as  an  in- 
stantaneous photograph  of  a  crowded  thoroughfare  bears  to 
the  life  of  the  street.  If,  on  the  other  hand,  we  study  eco- 
nomic life  in  its  changes,  determining  the  laws  of  those 
changes  and  their  direction,  we  have  a  dynamic  science,  or 
a  science  of  forces  in  action.  It  is  as  though  we  followed 
up  the  men  on  the  street  day  after  day  until  we  know  who 
they  are,  where  they  come  from,  where  they  are  going  to, 
and  what  is  likely  to  come  of  all  their  doings.  It  is  a  harder 


76  OUTLINES  OF  ECONOMICS. 

and  more  valuable  study.  One  object  of  introducing  the 
study  of  history  into  that  of  economics  is  to  change  it  from 
a  static  to  a  dynamic  science. 

4.  The  Laws  with  which  Economics  Deals. — The 
question  is  often  asked  whether  economics  is  a  science  based 
upon  natural  law.  Such  questions  in  their  nature  are  some- 
times largely  questions  about  words.  What  do  we  mean  by 
natural  law  ?  In  the  narrowest  sense  natural  laws  are  the 
habits  of  nature  which  know  absolutely  no  variation.  Such 
are  gravitation  and  chemical  affinity  ;  and  the  sciences  based 
upon  such  laws — astronomy,  physics,  and  chemistry — were 
the  first  to  develop,  and  have  attained  a  maximum  degree  of 
exactitude.  The  term  science  is  sometimes  used  in  a  way  to 
imply  only  sciences  of  this  character.  These  sciences  are 
more  properly  known  as  exact  sciences,  and  they  are  charac- 
terized by  the  fact  that  the  relations  with  which  they  deal 
can  usually  be  expressed  quantitively,  that  is,  in  terms  of 
mathematics. 

When  we  come  in  contact  with  life,  however,  and  espe- 
cially with  its  higher  forms,  the  exactness  with  which  an 
astronomer  predicts  an  eclipse  or  a  chemist  anticipates  a  re- 
action becomes  impossible.  Not  that  life  is  without  laws ; 
very  far  from  it.  There  is,  in  the  first  place,  the  basis  of 
physical  nature,  with  its  perfect  regularity,  upon  which  all 
life  rests  and  to  which  it  must  conform.  Then,  too,  there 
are  laws  governing  life  directly  and  pertaining  to  it.  These 
form  the  subject  of  the  group  of  sciences  known  as  biology. 
We  must  remember,  however,  that  all  we  can  say  of  natural 
laws  is  that  they  are  habits,  not  compulsory  necessities  of 
nature,  and  the  laws  of  life  seem  to  differ  from  those  of 
inanimate  nature  in  that  they  are  not  quite  invariable  habits. 
Variability  seems  to  be  inherent  in  life,  increasing  as  life 
rises  in  the  scale  of  development.  It  is  often  assumed,  to 
be  sure,  that  these  laws  are  as  invariable  as  any  other,  and 
that  this  seeming  variability  is  only  a  greater  complexity 
which  we  do  not  yet  understand.  However  that  may  be,  the 
result  is  the  same  for  the  present.  The  sciences  of  life  are 


THE  NATURE  OF  THE  SUBJECT  OF  ECONOMIC  STUDY.     77 

not  exact  or  mathematical  in  the  sense  we  have  defined. 
We  must  further  note  that  in  so  far  as  a  science  deals  with 
facts  which  seem  to  be  governed  by  no  invariable  law,  or 
whose  law  has  not  been  discovered,  it  must  content  itself 
with  a  description  of  this  part  of  its  subject.  Thus  we  have 
the  term  descriptive  science.  We  might  better  speak  of  the 
descriptive  part  of  a  science,  for  all  sciences  are  able  in  part 
to  reduce  their  facts  to  law. 

What  has  been  said  of  the  sciences  dealing  with  life  ap- 
plies to  an  even  greater  extent  to  those  sciences  which  deal 
with  man.  It  is  perfectly  true,  of  course,  that  within  certain 
limits  man  is  governed  by  absolutely  invariable  laws.  He 
is  as  much  bound  by  gravitation  as  anything  else,  and  if  he 
falls  over  a  precipice  we  can  predict  the  results  as  certainly 
as  though  a  stone  fell  over.  But,  without  entering  the  bog 
of  discussion  as  to  the  nature  of  human  freedom,  we  may 
safely  assume,  for  practical  purposes,  that  man  is  also, 
within  certain  limits,  a  law  unto  himself.  Nowhere  do  we 
find  an  element  of  variability  so  great  and  so  seemingly 
ultimate  as  here.  We  must  remember,  therefore,  that  the 
sciences  which  deal  with  man  deal  with  a  being  who  is  mod- 
ified by  his  environment,  but  who  has  the  power  of  modifying 
that  environment  by  his  own  conscious  effort.  Let  us  consider 
very  carefully  what  this  means.  It  does  not  mean  simply  that 
man  modifies  his  environment  because  he  has  been  modified  by 
it  and  so  reacts  upon  it,  just  as  things  do  when  they  come  in 
contact.  If  we  accept  this  view  we  shall  come  to  Mr.  Herbert 
Spencer's  theory  of  natural  selection.  The  forces  at  work 
accomplish  their  own  results,  according  to  this  theory,  whether 
jimu  will  or  will  not,  simply  by  natural  action  and  reaction. 
This  implies  that  man  is  modified  by  his  enviixmment, 
and  that  he  in  turn  modifies  that  environment  without  con- 
scious effort.  This  theory  is  based  on  an  assumption  that 
man  has  no  power  of  initiating  an  influence,  and  consistently 
concludes  that  social  development,  like  geological  develop- 
mcMit,  must  be  left  to  work  itself  out.  Mr.  Spencer,  however, 
goes  farther,  and  stoutly  maintains  that  man  by  conscious 


78  OUTLINES  OF  ECONOMICS. 

effort,  especially  by  collective  or  state  effort,  not  only  does 
not  help  this  development,  but  actually  hinders  it.  In  this 
the  whole  theory  is  abandoned,  for  it  is  plain  that  if  man  by 
conscious  effort  can  hinder  a  process  he  can  help  that  process 
in  the  same  way  if  he  only  has  enough  wisdom  and  sense. 
These  it  is  the  purpose  of  science  to  give  him. 

In  opposition  to  the  theory  of  natural  selection,  or  uncon- 
scious development,  has  been  urged  the  theory  of  artificial 
selection,  or  conscious  development.  Ages  of  natural  selec- 
tion made  of  the  potato  a  lean,  watery,  unpalatable  tuber ; 
a  few  years  of  artificial  selection  made  it  a  valuable  food 
product  and  a  table  delicacy.  Compare  the  development  of 
domestic  animals  in  the  last  few  years,  under  man's  conscious 
guidance,  with  their  slow  and  meager  development  in  a  state 
of  nature.  Man  has  precisely  this  power  of  consciously 
modifying  the  natural  and  artificial  elements  of  his  environ- 
ment, and  this  power  continually  enlarges. 

So,  when  we  ask  if  economics  deals  with  natural  laws,  we 
really  ask  whether  this  being,  whose  activity  in  a  certain  line 
we  are  studying,  is  governed  by  such  laws.  If  we  mean  by 
this  to  ask  whether  his  action  is  characterized  by  absolutely 
invariable  habits,  like  the  forces  of  physics,  we  must  plainly 
answer,  no.  If  man  had  no  power  of  initiative,  or,  on  the 
other  hand,  were  so  perfectly  rational  as  to  always  do  the 
wisest  thing,  there  would  be  a  regularity  in  his  action  which 
might  perhaps  form  the  basis  of  a  complicated,  but  exact, 
science.  As  it  is,  all  social  sciences  are  approximate  and 
partly  descriptive.  There  is  much  in  man's  action  which  is 
exceedingly  (though  not  perfectly)  regular,  and  hence  we 
haVe  general,  though  apparently  not  invariable,  laws.  There 
is  a  part  of  his  action,  however,  that  seems  as  yet  to  be 
capricious,  and  we  can  only  make  note  of  it  till  we  have 
more  knowledge.  The  laws  of  economics  are  not  compara- 
ble to  the  laws  of  inanimate  nature  in  invariability,  but  they 
are  of  very  general  applicability,  and  are  wholly  in  line  with 
the  action  and  intent  of  nature,  and  are,  in  this  sense, "  natu- 
ral." But  the  laws  of  economics  are  not  natural  laws  in  the 


THE  NATURE  OF  THE  SUBJECT  OF  ECONOMIC  STUDY.     79 

sense  in  which  the  word  is  often  used,  namely,  laws  exter- 
nal to  man  and  not  at  all  the  product  of  man.  The  laws  of 
economics  have  been  designated  as  social  laws  to  distinguish 
them  from  those  of  physical  science.  Social  laws  describe 
tendencies,  or  regularities,  which  appear  especially  in  the 
consideration  of  large  masses  of  facts.  Human  mortality 
serves  as  an  illustration.  When  and  how  a  certain  man,  as 
A,  will  die  is  proverbially  uncertain;  but  when  we  speak  of 
hundreds  of  thousands  of  lives  we  can  predict  with  such  an 
approximation  of  accuracy  that  a  vast  business-like  life  insur- 
ance can  be  built  upon  the  regularity  of  the  action  of  death. 
The  importance  of  this  question  will  appear  later  in  consid- 
ering the  history  of  the  development  of  economics. 

The  foregoing  discussion  enables  us  to  answer  in  a  word 
the  much-mooted  question,  "  Is  economics  a  science  ?  "  It  is 
not  an  exact  or  mathematical  science,  though  certain  portions 
of  the  subject  may  possibly  become  so.  It  is  an  approxi- 
mate and  partially  descriptive  science,  like  all  sciences  deal- 
ing with  man,  or  even  with  life.  The  inexactness  of  the 
social  sciences  is  due  to  the  very  thing  which  gives  them 
their  supreme  value,  the  nature  of  man  and  the  greatness  of 
their  subject. 


80  OUTLINES  OF  ECONOMICS. 

SUMMABY. 

The  study  of  economic  history  emphasizes  the  following  facts  as  the  basis 
of  economic  science: 

1.  Man  must  be  regarded  primarily  as  a  consumer  if  his  true  dignity  is 
to  be  maintained. 

2.  The  recognition  of  a  social  class  existing  simply  for  the  sake  of  pro- 
duction has  tended  to  a  wrong  organization  of  society  and  a  wrong  concep- 
tion of  economic  science. 

3.  Economic  progress  has  been  a  progress  toward  interdependence,  toward 
social  as  contrasted  with  isolated  activity. 

4.  The  conditions  of  economic  life  are  constantly  changing,  and  conclusions 
based  upon  them  are  only  relative. 

5.  Economics  may  be  studied  as  a  static  or  a  dynamic  science,  each  having 
its  value,  but  needing   o  be  clearly  distinguished  from  the  other. 

6.  The  laws  with  which  economics  deals  are  not  invariable,  like  those  of 
physics  and  chemistry,  because  of  the  interplay  of  the  human  will,  which 
has  the  power  of  independent  initiative. 

7.  Economics  is  therefore  a  science,  but  not  an  exact  science. 

8.  Man's  power  of  consciously  modifying  his  environment  is  the  basis  of 
artificial  as  opposed  to  natural  selection. 

QUESTIONS. 

1.  What  is  the  necessity  of  making  man  rather  than  goods  the  prominent 
thing  in  economic  science  ? 

2.  What  ultimately  determines  whether  a  man  is  poor  or  not?     What 
kinds  of  poverty  are  there? 

3.  What  is  meant  by  "  dear  labor  ?  "     Is  it  a  good  or  a  bad  thing  for  so- 
ciety in  general,  and  why?  for  employers  in  general,  and  why?  for  an  indi- 
vidual employer,  and  why  ? 

4.  How  far  is  independence  a  good  thing?  dependence?     Are  the  two 
compatible? 

5.  What  is  a  static  science  ?  a  dynamic  science?  What  is  the  advantage  of 
each  ?  What  mistake  are  we  apt  to  make  iu  considering  a  science  statically  ? 

G.  What  is  the  difference  between  natural  and  civil  law?     How  do  the 
laws  of  inanimate  nature  differ  from  those  governing  life? 

7.  What  is  the  difference  between  an  exact  and  a  descriptive  science? 

8.  What  is  meant  by  natural  selection  ?  by  artificial  selection  ?     Which 
applies  to  human  society?    Why? 

LITEBATUBE. 

Sidgwick,  Henry:    The  Scope  and  Method  of  Economic  Science. 
Keynes,  J.  N. :    The  Scope  and  Method  of  Political  Economy. 
Ingram,  J.  K. :  A  History  of  Political  Economy.     Chapter  VII. 


CHAPTER  XI. 

DEFINITION    OF    ECONOMICS    AND    ITS     RELATION    TO    TI1K 
OTHER    SOCIAL    SCIENCES. 

WE  have  necessarily  anticipated,  little  by  little,  most  of 
the  elements  needed  to  define  economics,  but  we  need  to 
collect  and  formulate  them  as  exactly  as  possible.  Especially 
do  we  need  to  see  clearly  the  relation  between  economics  and 
its  sister  sciences. 

Man  has  been  busy  from  the  first  in  several  lines  of  effort. 
He  has  talked,  worshiped,  fought,  studied,  etc.,  and  each  of 
these  lines  of  effort  has  developed  its  own  faculties  and 
institutions.  For  convenience  we  may  arrange  these  in  eight 
groups,  as  follows:  language,  art,  education,  religion,  family 
life,  society  life,  political  life,  economic  life.  Each  of  these 
is  the  subject  of  a  science  more  or  less  developed.  The 
group  of  society  life — that  is,  the  life  of  polite  society,  calls, 
parties,  balls,  etc.,  has  been  studied  but  little,  and  we  know 
few  of  its  governing  principles.*  Language,  on  the  other 
hand,  is  a  science  which  has  attained  to  very  complete  de- 
velopment. The  rest  lie  scattered  between  these  extremes. 

A  peculiar  feature  of  these  activities  is  that  they  are  all  of 
them  collective  activities,  activities  which  one  man  cannot 
well  carry  on  alone.  This  is  obviously  true  of  family  and 
political  life,  language,  and  others,  and  on  careful  examina- 
tion it  proves  to  be  true  of  the  rest.  It  is  now  admitted, 
after  many  experiments,  that  art  and  even  religion  do  not 
thrive  in  solitude.  It  would  seem  that  if  a  man  could  do 

*  An  attempt  to  examine  scienti6cally  some,  at  least,  of  the  phenomena  of 
polite  society  has  been  made  by  a  learned  jurist,  the  late  Professor  Rudolph 
von  Ihering,  in  his  Zweck  im  Recht,  a  work  which  should  receive  more 
attention  from  American  and  English  scholars  than  they  have  heretofore 
accorded  it. 


82  OUTLINES  OF  ECONOMICS. 

anything  by  himself  it  would  be  to  get  a  living;  but  our 
brief  study  of  history  impi'esses  us  with  the  insignificance  of 
all  such  effort  and  the  inevitable  tendency  of  men  to  drift 
together  in  their  economic  activity.  If  it  were  possible  for 
men  to  live  in  isolation  we  may  safely  assert  that  in  such 
isolation  every  one  of  the  eight  lines  of  effort  we  have  men- 
tioned would  soon  dwindle  into  insignificance  or  altogether 
cease.  So  these  sciences  are  all  of  them  social  sciences;  and 
as  the  sciences  that  deal  with  life  are  now  grouped  together 
under  the  name  biology  (science  of  life),  so  the  social  sciences 
are  now  grouped  under  the  title  of  sociology,  or  the  science 
of  society.  It  must  be  remembered,  then,  that  sociology  is 
a  comprehensive  science,  or  rather  a  group  of  sciences. 

Economics  is  a  branch  of  sociology.  Next  to  language  it 
is  the  best  developed  of  them  all,  and  is  by  far  the  best 
introduction  to  the  larger  group.  Sociology  as  a  coordinat- 
ing science  is  in  a  most  undeveloped  condition,  and  must 
remain  so  till  much  painstaking  work  is  done  in  each  of  its 
branches.  Economics  may  be  defined  as  the  science  of  those 
social  phenomena  to  which  the  icealth-getting  and  wealth- 
using  activity  of  man  gives  rise.  This  wealth-getting  activ- 
ity is  called  economic.  We  may  speak  of  it  in  all  its  rela- 
tions as  economic  life,  or  economy.  "VVe  may  thus  say  that 
.economics  is  the  science  which  deals  with  the  economic 
life,  or  the  economy  of  man.  A  useful  distinction  in  lan- 
guage is  thus  made  between  economy,  the  life  itself,  and 
economics,  the  science  dealing  with  that  life.  If  this  dis- 
tinction could  always  be  observed  much  confusion  would  be 
avoided. 

We  have  economies  of  various  sorts:  the  economy  of  an 
individual,  of  a  family,  a  tribe,  a  city,  a  state,  or  a  nation, 
and  we  have,  correspondingly,  many  economic  units.  The 
dominant  unit  in  ancient  Greece,  for  example,  was  the  house- 
hold, which  included  the  family  and  all  the  slaves  and  other 
dependents.  These  lived  together  and  formed  a  little  group 
by  themselves.  The  economic  life  of  Greece  meant,  largely, 
a  sum  of  the  economic  activities  of  these  households,  each  of 


DEFINITION  OF  ECONOMICS.  83 

which  strove  to  be  sufficient  unto  itself.  It  is  interesting  to 
know  that  many  a  well-managed  Southern  plantation  before 
the  late  civil  war  endeavored  to  produce  all  the  means  of 
life  on  the  plantation,  and  in  this  respect,  as  in  others, 
resembled  a  Greek  household.  But  as  time  has  progressed 
these  old  groups  have  been  partially  dissolved,  and  in  many 
instances  in  modern  times  the  individual,  in  his  economic 
activity,  constitutes  a  unit,  although  the  family  is  still  the 
prevalent  economic  unit.  It  is  a  natural  outcome  of  industrial 
progress,  as  already  explained,  that  the  relations  between 
these  units  have  multiplied  indefinitely  in  number  and  in 
importance.  This  is  simply  another  way  of  describing  the 
growing  interdependence  of  men.  Economics  deals  espe- 
cially with  the  mutual  relations  of  economies  of  all  kinds, 
private  and  public.  It  is  chiefly,  if  not  exclusively,  a  science 
of  human  relations,  and  without  these  relations  could  not  exist. 

We  are  already  prepared  for  the  discovery  that  these  dif- 
ferent activities  of  which  we  have  spoken  cannot  be  wholly  - 
separated  from  one  another  either  in  theory  or  in  practice. 
We  have  noticed  the  bearing  of  legislation  on  economic  life; 
but  legislation  belongs  primarily  to  the  science  of  politics,  not 
to  economics.  If  we  had  studied  the  history  of  Russia  we 
should  have  found  that  the  number  of  saints'  days  is  so 
great  as  to  hinder  industry  seriously;  but  these  belong  pri- 
marily to  the  subject  of  religion.  The  dependence  of  eco- 
nomic life  upon  such  institutions  as  the  family,  education, 
etc.,  is  too  apparent  to  need  illustration.  Hence  our  defini- 
tion must  be  somewhat  broadened,  as  follows:  Economics  is 
the  science  (1)  which  treats  of  those  social  phenomena  due  to 
the  wealth-getting  and  wealth-using  activity  of  man,  and  (2) 
which  deals  with  all  other  branches  of  his  life  in  so  far  as 
they  affect  his  social  activity  in  this  respect.  Of  course  the 
other  social  sciences  require  a  similar  extension,  and  so  they 
all  are  dependent  upon  economics. 

The  Principal  Divisions  of  Economics.— Economics 
in  this  work  will  be  presented  under  two  main  heads,  Private 
and  Public. 


84  OUTLINES  OF  ECONOMICS. 

1.  Private  Economics  treats  of  the  economic  life  of  individ- 
uals  and  private  combinations.     It  is  not  to  be  understood 
that  this  economic  life  is  isolated,  for  such  scarcely  exists. 
The  individual,  whether  single  or  in  association,  is  still  con- 
sidered in  his  relations  to  society.     The  distinguishing  char- 
acteristic of  this  economy  is  that  it  is  under  the  control  of 
private  persons  subject  only  to  such  general  regulations  as 
the  government  may  prescribe  for  the  protection  of  the  gen- 
eral interests  of  society. 

2.  Public  Economics.      This  branch  of  economics  corre- 
sponds to  some  extent,  but  not  wholly,  to  the  economic  politics 
or  practical  economics  of   the  Germans.     It  treats  of  the 
economic  life  of  man  as  manifested  in  the  activity  of  the 
State.*     In  this  we  have  to  do  both  with  the  intervention  of 
the  State  in  private  industries  and  with  that  economic  activity 
which  is  carried  on   exclusively  under  its  direction.     Such 
are  taxation  in  its  various  forms,  the  management  of  State 
property,  the  appropriation  of  State  revenues,  and  the  man- 
agement of  monopolies   owned  by  the  municipality  or  the 
State.     This  branch  of  economics  naturally  increases  in  im- 
portance as  the  functions  of  the  State  are  enlarged,  and  it 
is  now  attracting  great  attention,  f 

Private  economics  is  again  divided  into  four  departments, 
production,  distribution,  transfer  of  goods,  and  consumption. 
Production  is  the  creation  of  utilities  ;  distribution  is  the 
dividing  of  the  product  thus  created  among  the  different 
factors  of  production  ;  that  is,  among  those  different  persons 

*It  will  be  observed  that  "State"  is  used  here  in  the  generic  sense  cor- 
responding to  the  original  meaning  of  "political."  It  includes  the  activity 
of  local  political  units,  the  commonwealth,  and  the  nation. 

f  On  some  accounts  it  would  be  better  to  entitle  the  two  main  divisions 
Social  Economios  and  Political  Economics,  in  which  case  "  political "  would 
be  used  in  its  true  meaning,  referring  to  the  State.  Social  economics  in  the 
broadest  sense  would,  however,  naturally  include  political  economics,  for 
society  is  larger  than  government,  and  includes  all  its  activity  within  itself. 
It  would,  therefore,  not  be  an  absolutely  correct  arrangement,  if  reference 
is  had  to  the  strict  meaning  of  the  terms.  It  is,  however,  frequently  neces- 
sary to  restrict  technical  terms  more  or  less  arbitrarily. 


DEFINITION  OF  ECONOMICS.  85 

or  elements  which  have  combined  to  produce  it;  transfer  of 
goods  is  explained  by  the  words,  meaning  their  transfer  from 
one  person  to  another,  usually  in  form  of  exchange ;  con- 
sumption is  the  use  made  of  goods,  not  always  a  using  up, 
but  the  process  in  which  goods  serve  their  final  purpose  and 
for  which  they  exist. 
7 


86  OUTLINES  OF  ECONOMICS. 


SUMMABY. 

1.  The  different  groups  of  men's  social  activities  correspond  to  as  many 
social  sciences  which  collectively  constitute  sociology  or  the  science  of  society. 

2.  Economics  is  the  branch  of  sociology  which  treats  of  those  social  phe- 
nomena to  which  the  wealth-getting  and  wealth-using  activity  of  men  gives 
rise. 

3.  Economics  deals  with  all  other  social  activities  in  so  far  as  they  affect 
economic  activity. 

4.  Private  economics  treats  of  the  economic  life  of  individuals  and  private 
combinations. 

5.  Public  economics  treats  of  the  economic  life  of  the  State,  not  only  in 
its  independent  activities  but  in  its  connection  with  individual  enterprise. 

G.  Private  economics  is  divided  into  production,  distribution,  transfer  of 
goods,  and  consumption. 

QUESTIONS. 

J.  Into  what  groups  have  men's  social  activities  been  divided?     Why? 

2.  What  is  the  group  with  which  economics  deals?     Does  it  have  any- 
thing to  do  with  the  other  groups?     How  much?     Why? 

3.  What  have  these  groups  in  common  ?     What  is  the  relation  of  eco- 
nomics to  sociology? 

LITEB  ATUBE . 

Giddings,  F.  H. :  The  Sociological  Character  of  Political  Economy.  (Pub- 
lications of  American  Economic  Association.  Vol.  Ill,  p.  29.) 

Roscher,  W. :  Political  Economy.  (Lalor's  Translation.)  Introduction, 
Chapter  II. 


BOOK   II. 

PRIVATE   ECONOMICS. 


PART  I. 

PRODUCTION. 


CHAPTER  I. 

INTRODUCTORY. 

WE  have  defined  private  economics  as  that  portion  of  the 
science  which  deals  with  private  enterprise;  that  is,  with  the 
economic  activities  of  individuals  left  to  themselves.  Of  course 
no  individual  in  a  civilized  country  is  left  to  himself  entirely. 
Society,  through  the  organization  of  government  and  other- 
wise, always  controls  the  individual  to  some  extent,  but  in 
the  great  majority  of  cases  he  is  left  to  his  own  devices  ex- 
cept for  certain  general  rules.  What  these  rules  should  be 
we  shall  consider  under  public  economics,  as  well  as  certain 
cases  in  which  private  enterprise  has  to  be  altogether  dis- 
pensed with.  What  we  have  now  to  consider  is  not  the  case 
of  enterprises  which  are  wholly  private,  for  there  are  none 
such,  but  rather  the  private  side  of  economic  activities.  The 
line  is  not  easy  to  draw,  but  it  is  very  important  to  con- 
sider the  relation  between  these  two  functions.  This  is  the 
most  important  economic -question  of  our  day. 

Utilities. — Man  creates  no  new  matter.  Neither  the  farm- 
er nor  the  merchant  adds  one  atom  to  the  existing  material 
of  the  earth.  Yet  they  are  both  properly  called  producers. 
What  do  they  produce  ?  Simply  quantities  of  utility.  And 
how  do  they  produce  quantities  of  utilities  ?  Simply  by  put- 
ting things  in  their  proper  places.  Man  can  only  move 
things,  and  when  he  moves  them  in  a  suitable  manner  he  cre- 
ates utilities.  "  This  one  operation,"  says  John  Stuart  Mill, 
"  of  putting  things  into  fit  places  for  being  acted  upon  by 


90  OUTLINES  OF  ECONOMICS. 

their  own  internal  forces  and  by  those  residing  in  other  nat- 
ural objects  is  all  that  man  does  or  can  do  with  matter."  * 

It  has  seemed  to  some  that  the  farmer  is  more  truly  a  pro- 
ducer than  the  manufacturer,  and  the  manufacturer  than  the 
merchant;  but  such  is  not  at  all  the  case.  All  of  these  in- 
dustrial classes  do  the  same  thing.  They  produce  utilities 
by  putting  things  into  the  right  places.  The  farmer  adds 
nothing  to  the  material  of  the  globe,  but  he  gives  direction 
to  the  forces  of  nature  so  that  existing  material  becomes  better 
adapted  to  the  wants  of  man,  and  thereby  more  useful.  He 
drops  corn  into  the  earth,  and  thereby  puts  it  into  a  fit  place 
for  being  acted  upon  by  external  natural  forces.  From  time 
to  time  he  removes  weeds  and  throws  earth  about  the  stalk 
which  grows  up,  and  portions  of  earth,  air,  and  moisture  take 
new  relative  positions,  and  the  result  is  again  corn,  and  more 
corn.  Changed  places  and  natural  forces  have  rendered 
things  more  useful.  All  this  while  man  has  done  nothing 
but  put  things  in  fit  places. 

The  manufacturer  changes  forms  and  combinations  of  raw 
material  by  putting  things  into  fit  places,  and  likewise  pro- 
duces utilities.  The  merchant  similarly  takes  things  from 
places  where  they  are  less  useful  to  places  where  they  are 
more  useful.  He  produces  utilities  as  truly  as  the  farmer  or 
manufacturer.  It  may  well  happen  that  the  utilities  pro- 
duced by  the  merchant  could  be  produced  with  a  smaller  ex- 
penditure of  economic  force,  and  that  by  a  better  organization 
of  the  factors  of  production  saving  could  be  secured;  or  it 
may  be  that  at  times  the  merchant  has  been  able  to  secure 
a  larger  return  for  the  production  of  a  given  quantity  of 
social  utility  than  the  fanner;  but  all  this  is  no  justification 
whatever  for  the  popular  impression  that  he  is  less  produc- 
tive than  any  other  person  who  is  engaged  in  economic  work. 

Production,  then,  means  the  creation  of  utilities  by  the 
application  of  man's  mental  and  physical  powers  to  the  phys- 
ical universe,  which  furnishes  materials  and  forces.  This 
application  of  man's  powers  is  called  labor. 

*  Political  Economy,  book  i,  chap,  i,  §  2. 


INTRODUCTORY.  91 

Those  quantities  of  utility  which  result  from  labor  are 
called  economic  goods;  but  not  all  economic  goods  are  the 
result  of  labor.  Economic  goods  have  not  been  defined  thus 
far,  but  they  have  been  described  as  material  good  things. 
Probably  any  reader  of  this  book  would  call  a  vacant  lot  on 
Fifth  Avenue  in  New  York  city  a  material  good  thing,  even 
if  no  person  has  ever  expended  a  day's  labor  on  it.  It  is  de- 
sirable at  this  point  to  have  a  clear  idea  of  economic  goods, 
and  a  definition  is  offered.  We  will  begin  with  the  word 
u  good."  Everything  which  satisfies  a  human  want  we  call 
a  good;  and  here,  on  the  threshold  of  our  science,  we  see 
how  absurd  it  is  to  say  that  economic  laws  are  independent 
of  man  and  would  be  what  they  are  if  man  did  not  live 
on  the  enrth.  We  cannot  get  half  way  through  our  defini- 
tion of  economic  goods  before  we  have  brought  in  the  human 
element. 

Goods  we  divide  into  free  goods  and  economic  goods. 
Free  goods  are  those  which  exist  in  superabundance  and  are 
offered  freely  to  every  one  without  charge.  Air  and  water 
are  usually  free  goods.  Land  in  a  new  country  is  frequently 
a  free  good. 

Economic  goods  are  those  goods  which  are  usually  and 
regularly  obtained  by  man  only  by  exertion,  and  which,  or 
the  use  of  which,  may  be  disposed  of  for  other  goods.  They 
may  be  further  characterized  as  directly  or  indirectly  ex- 
changeable for  all  goods  which  come  on  the  market.  After 
money  comes  into  use  they  may  be  defined  as  goods  which 
exchange  for  money  or  as  goods  which  are  bought  and  sold. 

A  few  points  require  further  explanation.  "  Usually  "  they 
are  obtained  by  exertion.  One  may  pick  up  a  diamond  or  a 
nugget  of  gold  upon  which  one  has  stumbled.  Mere  picking 
up  of  these  articles  cannot  properly  be  called  labor. 

Man's  Original  and  Acquired  Powers. — The  goods  or 
their  use  may  be  disposed  of  for  other  goods.  This  enables 
us  to  include  in  our  definition  both  material  and  immaterial 
goods,  like  a  person's  technical  skill  acquired  by  labor,  and 
often  very  productive.  The  central  point  of  our  science  is 


92  OUTLINES  OF  ECONOMICS. 

the  conception  of  man  in  his  relations  to  material  good  things; 
but  it  does  not  seem  practicable  to  exclude  utilities  fixed 
and  embodied  in  human  beings  from  the  rank  of  economic 
goods  because  man  cannot  be  bought  and  sold.  Once  men 
could  be  bought  and  sold,  and  they  then  took  their  place 
with  horses  and  oxen  among  material  goods.  Now  man  may 
sell  the  use  of  his  powers.  It  is  hard  to  draw  the  line,  but  it 
may  be  done  with  sufficient  accuracy  by  keeping  in  mind  our 
central  conception.  We  would  not  speak  of  the  cultivation 
of  our  faculties,  merely  for  the  sake  of  our  own  better  devel- 
opment, as  economic  exertion  in  any  strict  sense,  although  it 
might  well  have  economic  consequences.  The  economic  life 
and  its  goods  are  subservient  to  man.  We  call  the  acquisi- 
tion of  a  technical  skill  an  economic  process,  because  it  has 
reference  to  the  creation  of  utilities  incorporated  in  material 
good  things.  The  direct  labor  expended  on  matter  we  may 
call  a  primary  economic  process,  and  that  labor  which  pre- 
pares us  to  expend  our  augmented  power  on  material  things 
to  render  them  useful,  or  more  useful,  we  may  call  a  second- 
ary economic  process.  There  is  a  production  where  economic 
exertions  and  non-economic  exertions  meet,  as  in  the  com- 
mon school  education  of  the  young.  There  are  such  border 
lines,  where  discrimination  is  difficult  or  impossible,  in  natu- 
ral sciences  as  well  as  in  social  and  mental  sciences,  but  they 
need  not,  as  a  rule,  occasion  much  difficulty. 

"Wealth. — Political  economists  have  usually  called  eco- 
nomic goods  wealth.  This  term  is  not  wholly  satisfactory, 
on  account  of  the  many  uses  to  which  the  word  has  been  put. 
It  commonly  means  abundance  of  economic  goods,  either 
absolutely,  in  proportion  to  one's  wants,  or,  as  is  more  fre- 
quently the  case,  relatively,  with  reference  to  the  possessions 
of  others.  Wealth  is  also  used  often  to  denote  the  economic 
goods  belonging  to  an  organized  society  of  men,  especially 
of  a  nation.  We  compare  the  wealth  of  England  with  the 
wealth  of  France  or  Germany.  We  would  hardly  say  Ger- 
many is  not  a  wealthy  country,  but,  rather,  not  a  rich  coun- 
try. Notwithstanding  the  ambiguity,  wealth  has  so  gener- 


INTRODUCTORY.  93 

ally  been  used  for  economic  goods,  and  is  so  convenient  a 
term,  so  much  more  so  than  the  larger  term  of  two  words, 
that  it  may  not  be  possible,  perhaps  not  even  desirable,  to 
displace  it  entirely.  The  two  terms  can  be  used  interchange- 
ably in  many  cases,  care  being  taken  to  employ  economic 
goods  wherever  it  will  make  our  meaning  clearer  or  help  to 
avoid  misunderstanding. 

The  Individual  and  Society.— One  distinction  runs  all 
the  way  through  political  economy,  and  that  is  the  distinc- 
tion between  the  social  and  the  individual  standpoint.  We 
have  consequently  to  distinguish  between  social  and  individ- 
ual wealth,  for  what  is  wealth  to  the  individual  is  often  not 
wealth  to  society. 

Many  illustrations  offer  themselves.  A  mortgage  is  indi- 
vidual wealth.  If  the  claim  it  stands  for  is  extinguished 
society  is  neither  richer  nor  poorer.  Similarly  all  State, 
municipal,  and  federal  bonds  represent  claims  on  the  indus- 
try of  the  people.  If  all  these  bonds  should  be  destroyed 
the  bondholders  as  individuals  would  suffer  loss,  but  so- 
ciety as  a  whole  would  be  neither  richer  nor  poorer,  and 
society,  exclusive  of  bondholders,  would  have  gained  at  their 
expense. 

Census  Estimates  of  Wealth. — Census  returns  of 
wealth,  from  their  very  nature,  give  little  idea  of  the  eco- 
nomic well-being  of  the  country.  First,  census  returns  are 
made  in  money.  Now,  it  is  a  well-known  fact  that  prices 
vary  greatly  according  to  the  amount  of  money  in  circula- 
tion. If  the  amount  of  currency  is  increased,  prices  rise, 
and  the  returns  show  an  increase  in  valuation  when  perhaps 
there  is  no  real  increase  of  commodities.  Plainly  such  an 
increase  of  wealth  on  paper  means  no  real  advantage  to  the 
country.  Second,  an  article  may  be  so  increased  in  amount 
that  its  value  may  be  reduced  in  even  greater  amount.  Thus 
a  very  abundant  wheat  crop  may  reduce  the  price  so  low 
that  the  whole  crop  sells  for  less  than  a  poor  crop.  The 
cotton  crop  of  1869,  for  example,  amounted  to  1,129,811,645 
pounds,  with  a  farm  value  of  $303,600,000,  or  a  little  over 


94  OUTLINES  OF  ECONOMICS. 

26  cents  per  pound.  Two  years  later  the  crop  had  increased 
to  2,020,693,736  pounds,  but  tlie  total  farm  value  was  only 
$288,300,000,  or  a  little  over  14  cents  per  pound.  Thus  while 
the  amount  of  the  crop  had  increased  890,000,000  pounds, 
or  nearly  79  per  cent,  the  total  farm  value  had  deceased 
over  $15,000,000.*  Third,  the  value  of  things  is  greatly 
affected  by  the  arbitrary  disposition  of  society.  When 
law  gives  valuable  privileges  to  a  company  there  is  an 
immense  increase  of  value  in  that  company's  plant  but 
no  increase  in  social  well-being ;  perhaps  even  a  positive 
decrease,  for  property  is  often  rendered  less  serviceable 
by  such  a  disposition.  When  we  congratulate  ourselves 
on  having  more  wealth  than  a  country  like  Prussia  we  must 
remember  that  there  the  immense  property  of  telegraph  and 
railway  lines  represents  cost,  while  with  us  it  represents  sev- 
eral times  the  cost  on  account  of  the  peculiar  privileges  we 
have  granted  to  such  enterprises.  Economic  well-being,  on 
the  other  hand,  depends  upon  the  abundance  of  economic 
goods,  their  adaptation  to  the  satisfaction  of  wants,  and  on 
the  importance  of  the  wants  which  they  satisfy.  Increase 
in  valuation  may  mean  nothing  but  increased  abuse  in  the 
management  of  the  nation's  goods. 

Take  our  own  post  office.  It  can  figure  in  census  re- 
turns only  for  the  actual  value  of  its  plant,  while  if  it  should 
be  made  over  to  a  private  corporation  it  would  soon  have  a 
capitalization  of  hundreds  of  millions  of  dollars.  Apparently 
the  wealth  of  the  country  would  be  increased,  but  really  we 
would  be  poorer,  for  we  should  be  obliged  to  support  many 
highly  paid  officials  and  costly  attorneys,  and  an  expensive 
and  demoralizing  lobby  to  shape  post  office  legislation  for 
private  ends. 

Most  countries  have  granted  limited  charters  to  gas  com- 
panies, street-car  corporations,  steam  railway  companies,  and 
the  like.  Very  often,  at  the  expiration  of  a  given  period,  as 
thirty,  fifty,  or  ninety  years,  the  entire  property,  without  rec- 

*  Statistical  Abstract  of  the  United  States,  Eleventh  Number  (1888), 
page  13G. 


INTRODUCTORY.  95 

otnpense,  passes  over  to  the  people  and  becomes  public,  like 
our  post  office.  This  is  the  case  with  street  cars  in  Glasgow, 
Scotland,  and  Berlin,  Germany,  and  steam  railways  in  France 
and  Austria.  Elsewhere  the  right  is  reserved  to  purchase 
property  at  the  expiration  of  a  prescribed  period,  paying  for 
the  plant  only  at  an  appraised  valuation,  giving  nothing  for 
the  franchise.  This  prevents  an  inflation  of  values,  but  en- 
riches a  country. 

The  results  of  the  household  work  of  women  do  not  ap- 
pear in  the  census  returns,  and  yet  they  include  a  large  part 
of  the  utilities  created  every  year  in  a  country.  If  bread 
should  universally  come  to  be  baked  outside  the  home  it 
would  increase  the  wealth  of  the  country  as  reported  in  the 
census  returns. 

Various  Kinds  of  Production. — We  have  isolated 
production  and  social  production,  domestic  production  and 
production  of  economic  goods  for  exchanges.  Isolated  pro- 
duction is  found  only  in  the  earliest  stages  of  human  devel- 
opment, and  even  then  it  is  not  isolated  in  the  strictest  sense 
of  the  term.  Even  the  beasts  of  the  field  are  not  altogether 
isolated  in  their  efforts  to  obtain  food,  although  they  differ 
considerably  among  themselves  in  this  respect.  While  we 
do  not  find  individuals  living  a  strictly  isolated  economic 
life  we  do  discover  families  or  households  organized  as  iso- 
lated economic  units.  We  find  in  history,  and  we  discover 
in  the  records  of  travelers,  a  relatively  isolated  economic  ac- 
tivity. Products  are  gathered  from  nature,  and  these  are 
used  to  satisfy  the  wants  of  the  various  members  of  this 
economic  unit.  But  as  time  goes  on,  the  greater  part  of 
what  is  produced  in  industrial  centers  is  destined  for  the 
consumption  of  others,  and  the  production  of  to-day  is  chiefly 
social.  Men  produce  for  one  another.  Domestic  production, 
production  in  and  for  the  household,  is  distinguished  from  pro- 
duction for  exchange  even  in  present  industrial  civilization. 

We  have  also  individual  and  social  production  in  a  sense 
just  described  in  this  chapter.  Individual  production  is 
sometimes  social  destruction  of  economic  goods.  A  proprie- 


96  OUTLINES  OF  ECONOMICS. 

tor  of  a  lottery  may  produce  things  valuable  to  him  and  ac- 
quire wealth,  while  his  activity  is  from  a  social  standpoint 
pestiferous.  The  same  thing  may  be  said  of  the  class  of 
saloon-keepers  and  of  all  those  unhappy  wretches  who  minis- 
ter to  vice.  We  have  also  the  familiar  terms  of  production  on 
a  large  scale  and  on  a  small  scale,  well  enough  understood. 

Overproduction  and  Underconsumption. — The  pur- 
pose of  production  is  consumption,  and  if  more  is  produced 
more  must  be  consumed.  Power  to  consume  is  measured 
by  purchasing  power,  and  power  of  consumption  sets  a 
limit  to  production.  There  is  no  such  thing  as  general  over- 
production, for  more  economic  goods  of  all  kinds  have  never 
been  produced  than  men  really  need  to  satisfy  their  legiti- 
mate wants.  On  the  contrary,  not  enough  has  ever  yet  been 
produced  for  this  purpose.  Sometimes  production  does  not 
go  forward  evenly,  and  there  is  an  undue  amount  of  labor 
and  capital  directed  to  certain  pursuits;  but  until  all  men  are 
well  clothed,  housed,  and  fed,  and  furnished  with  material 
appliances  for  their  higher  life,  like  books,  pictures,  musical 
instruments,  church  buildings,  etc.,  it  will  be  a  manifest  ab- 
surdity to  talk  about  a  general  overproduction.  When 
there  is  almost  universal  difficulty  in  disposing  of  goods  pro- 
duced the  real  phenomenon  is  described  by  underconsump- 
tion. Men  want  these  goods;  they  are  willing  to  give  serv- 
ices in  exchange  for  them,  but  they  cannot  dispose  of  their 
services,  and  consequently  they  lack  purchasing  power.  A 
glut  in  the  market  always  means  underconsumption.  This 
is  one  of  the  sad  and  curious  features  of  the  life  of  the  mod- 
ern socio-economic  organism.  Its  parts  do  not  always  fulfill 
their  functions  harmoniously;  frequently  parts  are  partially 
incapacitated  and  the  body  is  in  a  diseased  condition. 

Some  have  supposed  that  luxury  and  extravagance  are 
able  to  remedy  gluts  in  the  markets,  but  this  is  impossible. 
On  the  contrary,  they  frequently  bring  about  a  diseased, 
condition  of  industrial  society  which  leads  to  gluts.  We 
shall  consider  this  subject  at  greater  length  when  we  come 
to  consumption. 


INTRODUCTORY.  97 

The  Relation  of  Production  to  Other  Departments 
of  Economics. — Production  in  its  broadest  sense  includes 
the  greatest  part  of  all  the  branches  of  private  economics  ex- 
cept consumption.  We  have  seen  that  all  man  can  do  is  to 
change  the  place  of  things.  He  puts  things  together  in  new 
relations,  and  new  things  result.  But  the  process  of  exchange, 
which  includes  transportation,  etc.,  is  plainly  only  a  part  of 
this  process.  It  looks  very  strange  at  first  to  think  of  a  mer- 
chant as  a  manufacturer,  but  when  we  remember  that  he  sub- 
divides things  which  are  too  bulky  for  use  we  see  at  least  a 
suggestion  of  the  manufacturer's  function.  On  the  other 
hand,  does  not  the  man  who  puts  a  spoke  into  a  wagon  wheel 
do  much  the  same  thing  as  the  one  who  puts  the  wagon  into  the 
place  where  it  is  to  finally  serve  its  purpose  ?  To  a  certain  ex- 
tent also  distribution,  or  the  sharing  of  a  good  among  several 
persons  who  have  contributed  to  its  production,  is  an  insepara- 
ble part  of  our  present  system  of  production,  though  the  con- 
nection here  is  not  quite  so  absolute  or  quite  so  apparent.  In 
a  primitive  condition  of  society,  however,  distribution  was  not 
separate  and  distinct  from  production.  What  a  man  pro- 
duced, that  he  had  as  his  share  of  the  total  wealth  produced ; 
it  was  his  income.  Public  economics  also,  the  part  played 
by  the  State  in  economic  life,  is  largely  a  direct  factor  in 
production.  The  remainder  has  to  do  with  consumption. 
We  are  thus  led  to  conclude  that  the  most  essential  division 
of  economic  activities  from  one  standpoint  is  that  of  pro- 
duction and  consumption,  which  are  natural  correlatives. 
But  the  branch  processes  of  transfers  and  distribution  are  so 
important,  so  peculiar,  and  have  so  long  received  separate 
treatment,  that  it  is  every  way  more  expedient  to  keep  them 
coordinate  with  the  others. 


98  OUTLINES  OF  ECONOMICS. 

SUMMARY. 

1.  Man  cannot  create  matter,  but  can  change  its  place.     When  this  is 
done  so  as  to  create  utilities  we  call  it  production. 

2.  All  parts  of  the  process  of  preparing  things  for  man's  use — agriculture, 
manufacture,  transportation,  etc.,  are  alike  productive. 

3.  A  good  is  anything  which  satisfies  a  want;  an  economic  good  is  one 
which  may  be  regularly  had  for  exchange. 

4.  Men  have  been  excluded  from  the  exchange  market,  but  their  labor  and, 
in  a  way,  their  skill  are  still  bought  and  sold,  and  so  are  economic  goods. 

5.  Wealth  ofien  means,  in  economics,  not  an  abundance  but  simply  an 
aggregate  of  economic  goods. 

6.  Individual  wealth  is  not  necessarily  wealth  to  society. 

7.  Census  estimates  of  wealth  are  a  most  imperfect  index  of  well-being, 
among  other  things,  on  account  of  the  fluctuating  values  of  money  and  of 
goods. 

8.  Domestic  production  does  not  appear  in  these  estimates. 

9.  In  almost  all  cases  production  is  a  social  process. 

10.  What  is  usually  called  overproduction  is  really  underconsumption 
due  to  bad  distribution. 

11.  A  large  part  of  both  distribution  and  transfer  might  be  treated  as 
a  subordinate  part  of  production,  but  they  are  coordinated  with  production 
and  consumption  for  convenience. 

QUESTIONS. 

1.  What  is  production  ?     How  much  does  it  include? 

2.  What  is  a  good  ?   What  is  the  difference  between  a  good  and  a  thing  ? 
What  is  an  economic  good  ? 

3.  Why  are  not  men  classed  as  economic  goods?    Why  are  horses  so 
classed?     Is  there  any  inherent  difference  between  the  two  from  the  eco- 
nomic standpoint? 

4.  What  different  meanings  of  wealth  ?  What  is  the  economic  meaning  ? 

5.  What  is  the  difference  between  individual  and  social  wealth  ? 

6.  Why  can  we  not  tell  by  census  reports  of  wealth  whether  the  country 
is  "  well  off"  or  not?     Why  is  domestic  production  not  considered  ? 

7.  Define  overproduction.     Why  is  it  generally  misunderstood? 

8.  What  is  the  relation  between  production  and  the  other  branches  of 
private  economics  ? 

LITER ATUBE . 

Any  of  the  standard  works  on  political  economy,  as  J.  S.  Mill's,  F.  A. 
Walker's,  or  Marshall's,  treats  of  the  subjects  discussed  in  this  and  the  fol- 
lowing chapters  on  Production.  On  the  productivity  of  commerce  and  the 
erroneous  opinion  that  agriculture  alone  is  production,  see  Chapter  IV  in 
Ely's  Problems  of  To-Day. 


CHAPTER  II. 

THE  FACTORS  OF  PRODUCTION. 

THERE  are  three  factors  of  production,  of  which  two, 
nature  and  labor,  are  primary,  and  the  third,  capital,  is 
secondary.  We  will  consider  these  briefly  in  the  order 
named. 

1.  Nature. — We  include  under  nature  all  natural  forces 
used,  as  the  wind,  the  movement  of  water,  attraction  of 
gravitation,  cohesion,  etc.  Many  of  these  things  fur- 
nished by  nature  are  free  goods  and  not  economic  goods. 
Nature,  economically  considered,  is  generally  called  simply 
land,  because,  of  what  belongs  to  external  nature,  it  is  with 
land  that  we  have  principally  to  do  in  political  economy.  It 
must,  however,  be  observed  that  land  has  a  very  broad  mean- 
ing, and  includes  what  is  below  the  surface  of  the  earth,  and 
water  so  far  as  it  is  appropriated  by  private  parties  or  public 
bodies  like  cities  ;  also  in  some  respects  the  entire  surface  of 
the  earth.  This  factor  is  in  early  stages  generally  common 
property,  but  in  later  stages  of  life  it  has  been  private  prop- 
erty, and  a  return  for  its  use  has  been  secured  by  private 
individuals,  or,  in  cases,  by  the  public  when  owned  by  the 
public  and  leased  to  private  parties.  The  return  which  land 
in  itself,  apart  from  capital  or  labor,  yields  is  called  rent. 
This  is  pure  rent,  or  economic  rent,  which  is  different  from 
rent  as  ordinarily  understood,  for  rent  in  popular  usage  in- 
cludes recompense  for  the  other  factors  of  production.  Pure 
rent  can  best  be  observed  in  cities,  where  it  is  the  annual 
value  of  lots  on  which  buildings  stand.  A  large  portion  of 
the  land  of  Baltimore,  Philadelphia,  and  London  is  owned  by 
men  who  do  not  own  the  buildings  and  other  improvements 
but  receive  from  owners  of  improvements  an  annual  rent. 


100  OUTLINES  OF  ECONOMICS. 

Land  renders  three  services  to  production  :  First,  it  gives  a 
"  standing  place."  It  is  something  on  which  we  can  rest  and 
move  about  while  conducting  productive  processes.  Mere 
space  in  itself  is  often  extremely  valuable,  as  can  be  seen  in 
the  case  of  city  real  estate  ;  and  as  population  is  rapidly 
growing,  and  as  a  continually  increasing  proportion  of  the 
population  dwells  in  cities,  this  service  is  constantly  becom- 
ing more  important,  and  the  return  in  rent  will  probably 
augment  rapidly  for  a  long  time  to  come.  Second,  land 
contains  the  elements  needed  by  plant  life,  and  thus  serves 
agriculture.  We  call  this  property  of  the  soil  its  fertility. 
Third,  land  contains  natural  products  below  the  surface  of 
the  soil,  like  coal,  natural  gas,  petroleum,  iron,  gold,  silver, 
and  other  metals.  These  are  the  natural  treasures  of  the 
earth.  Man  does  not  create  them  nor  give  direction  to 
nature  in  their  formation.  It  has  seemed  to  some  nations 
unfair  that  these  natural  treasures  should  become  the  prop- 
erty of  individuals,  and  they  have  treated  them  as  a  common 
heritage,  exacting  a  rent  or  royalty  for  the  opportunity  to 
appropriate  them.  This  is  perhaps  generally  the  case  on  the 
continent  of  Europe,  but  English  law,  with  its  inclination  to 
the  exaggeration  of  private  rights,  established  the  principle 
that  he  who  owns  the  surface  owns  to  the  center  of  the  earth, 
and  upward  to  the  sky.  It  is  a  peculiarity  of  land  that  its 
quantity  cannot  be  increased  appreciably,  and  thus  it  is 
spoken  of  as  a  natural  monopoly.  This  seems  hardly  accu- 
rate. It  is  a  limited  factor,  but  in  the  ownership  or  manage- 
ment of  land  there  is  no  inevitable  tendency  to  monopoly. 

2.  Labor. — Labor  is  the  second  of  the  two  primary  things 
in  production.  It  is  here  used  in  a  broad  sense,  and  includes 
all  the  capacities  of  every  sort,  intellectual  as  well  as  phys- 
ical, in  man  which  have  economic  significance.  We  might 
perhaps,  on  some  accounts,  better  substitute  man  for  labor 
as  the  second  factor. 

It  is  service  supplied  by  human  beings,  and  is  different  from 
other  goods  because  it  is  always  connected  with  a  personality. 
Moral  and  intellectual  qualities  increase  its  productiveness., 


THE  FACTOKS  OF  PKODUCTION.  101 

Temperance,  trustworthiness,  skill,  alertness,  quick  percep- 
tion, a  comprehensive  mental  grasp — all  these  and  other  good 
qualities  belonging  to  the  soul  of  man  are  of  chief  impor- 
tance in  man.  Man's  mere  physical  strength  in  itself  is  a 
poor  thing,  being  surpassed  by  that  of  lower  animals,  as 
oxen  and  horses ;  but  man  is  far  more  productive,  and  even 
as  a  slave  sold  for  far  more  than  the  lower  animals.  The 
economic  value  of  intellectual  training  is  generally  not  suffi- 
ciently appreciated.  It  has  been  ascertained  that,  with  no 
noteworthy  exceptions,  the  higher  in  any  part  of  the  United 
States  the  per  capita  expenditure  for  schools  the  higher  is  the 
average  of  wages,  and  the  larger,  consequently,  the  produc- 
tion of  wealth. 

Growth  of  Population. — The  supply  of  labor  is  increased 
with  the  growth  of  population,  and  to  this  there  is  no  limit 
save  the  means  of  subsistence.  Fear  has  been  expressed  that 
the  growth  of  population  may  outrun  the  means  of  subsist- 
ence. A  theory  of  population  has  been  advanced  by  the 
English  economist,  Malthus,  which  is  called  Malthusianism. 
It  is  simply  this  :  population  tends  to  increase  as  2,  4,  8,  16, 
32,  etc.,  or  in  geometrical  progression,  while  the  best  we  can 
hope  is  that  food  supply  will  increase  as  2,  4,  6,  8,  10,  etc., 
or  in  arithmetical  progression  ;  consequently,  if  there  were 
no  check  to  the  natural  increase  of  population  men  would  in 
a  short  time  starve  to  death.  But  there  are  checks  to  the 
growth  of  population,  and  these  are  of  two  kinds,  namely, 
positive  and  preventive.  Positive  checks  are  those  which 
keep  down  population  by  killing  off  people,  like  plagues, 
pestilence,  intemperance,  vice,  crime,  war.  Preventive  checks 
are  those  which  keep  down  population  by  preventing  the 
birth  of  an  undue  number  of  people,  as  prudence  in  con- 
tracting marriage  or  abstinence  from  marriage.  These  are 
checks  of  a  moral  character.  Men  who  are  conscientious  will 
not  marry  until  they  feel  that  they  will  probably  be  able  to 
support  a  wife  and  bring  up  children  worthily.  As  popula- 
tion becomes  denser  this  postpones  marriage,  and  as  the  age 
of  marriage  increases  the  average  number  of  births  will 


102  OUTLINES  OF  ECONOMICS. 

decrease.  Innumerable  customs  exist  all  over  the  world, 
especially  in  older  countries,  postponing  the  age  of  marriage, 
and  these  tend  to  prevent  an  undue  growth  of  population. 
The  only  practical  conclusion  which  Malthus  drew  from  his 
doctrine  was  this :  let  no  one  marry  until  he  has  a  reasonable 
prospect  that  he  will  be  able  to  support  and  bring  up  a  family 
of  the  average  size.  He  wished  to  intensify  the  feeling  of 
parental  responsibility. 

At  the  present  time  nothing  more  in  the  way  of  restraint 
to  population  seems  necessary  in  the  United  States  than  to 
keep  from  our  shores  the  lowest  classes  of  foreigners,  and  to 
exercise  in  contracting  marriage  that  prudence  which  has 
long  characterized  the  really  best  classes  of  American  society. 
Nevertheless,  it  must  be  admitted  that  by  no  human  possi- 
bility can  population  long  continue  to  increase  in  the  United 
States  as  it  has  done  in  the  past,  for  in  a  comparatively  short 
period  there  would  not  be  standing-room  on  the  surface  of 
the  earth  for  all  the  people.  It  is  said  that  our  population  is 
now  doubling  in  less  than  twenty-five  years.  If  it  continues 
to  increase  at  this  rate  we  have  a  geometrical  progression. 
Let  us  suppose  it  is  now  sixty  millions  and  that  it  doubles 
once  in  twenty-five  years.  Two  hundred  and  fifty  years  is  a 
short  period  in  the  world's  history,  but  our  population  at  the 
expiration  of  that  period  would  exceed  sixty  thousand  mil- 
lions of  people,  which  is  forty  times  the  estimated  population 
of  the  globe  at  present. 

How  momentous  a  thing  a  geometrical  progression  is  in 
such  a  case  has  been  shown  more  clearly  still.  Let  us  sup- 
pose that  there  are  only  t\vo  people  on  the  face  of  the  eai'th, 
and  that  population  doubles  only  once  in  fifty  years.  At 
the  expiration  of  three  thousand  years  the  whole  surface  of 
the  earth,  land,  and  sea  would  be  covered  with  people  piled 
one  on  top  of  the  other  eight  hundred  deep.* 

Manifestly  the  present  rapid  rate  of  increase  of  population 
cannot  continue  forever;  yet  it  does  not  cause  great  uneasi- 
ness. It  has  been  urged  by  some  writers  that  as  man  de- 
*  Marshall's  Economics  of  Industry,  cliap.  v. 


THE  FACTORS  OF  PRODUCTION.  103 

velops  more  highly  his  fecundity  will  decrease  and  the  growth 
of  population  will  become  slower.  Others  think  that  pru- 
dential and  moral  restraints  will  be  ample  to  prevent  an 
undue  increase  of  population. 

The  chief  cause  for  anxiety  is  this:  For  some  reason  or 
another  it  seems  to  be  more  difficult  for  a  large  population 
to  live  peaceably  together  under  present  industrial  conditions 
than  for  a  small  one,  and  there  is  ground  for  the  anticipation 
that  the  growth  of  population  will  test  the  worthiness  of  our 
civilization  to  endure,  as  other  causes  have  tested  older  civili- 
zations. "We  may  be  sure  that  if  there  is  a  moral  governor 
of  the  universe  modern  nations,  like  ancient  nations,  will  be 
called  upon  to  show  their  fitness  to  survive.  Every  time  the 
sun  i*ises  it  looks  upon  a  lai-ger  population  than  ever  before 
in  the  United  States,  and  consequently  upon  a  more  complex 
industrial  civilization.  A  force  mighty,  and  it  almost  seems 
irresistible,  is  at  work  day  and  night,  day  and  night,  never 
ceasing,  thrusting  upon  us  more  and  more  serious  social  prob- 
lems. These  problems  can  never  be  solved  by  the  police- 
man's club  or  the  soldier's  bullet,  for  this  quiet  on-moving 
force  laughs  such  repression  to  scorn.  Only  righteousness 
can  solve  them,  for  only  in  righteousness  is  there  power  to 
enable  us  to  adjust  ourselves  to  our  new  environment. 

3.  Capital. — Capital  is  the  third  factor  in  production. 
It  is  not  one  of  the  two  first  things  in  political  economy,  but 
it  is  a  combination  of  these  two.  Land  and  labor  together 
produce  capital,  just  as  oxygen  and  hydrogen  combine  and 
produce  water.  Capital  is  neither  land  nor  labor,  but,  re- 
sulting from  the  two,  it  is  a  new  thing  and  has  properties 
of  its  own.  Capital  is  every  product  which  is  used  or  held 
for  the  purpose  of  producing  or  acquiring  wealth. 

It  is  often  said  that  capital  is  the  result  of  saving,  but  this 
is  misleading.  Saving  is  merely  a  negative  act  and  cannot 
produce  any  positive  result.  TVe  must  have  something  to 
.save;  that  is,  we  must  first  produce,  and  then  over  and  above 
the  necessities  of  life  there  must  be  a  surplus;  if  this  is  in 
productive  use,  or  held  for  production,  it  is  capital.  It  is 


104  OUTLINES  OF  ECONOMICS. 

to  be  noted  that  a  simple  surplus  is  not  capital.  If  a  man 
gathers  food  and  necessaries  for  a  year  or  for  a  lifetime, 
and  then  simply  takes  advantage  of  them  to  spend  his  time 
in  idleness,  it  is  clear  that  his  accumulation  serves  no  new 
purpose.  It  is  wealth,  but  it  is  not  capital.  Supposing,  fur- 
ther, that  he  lives  on  this  accumulation  and  meanwhile 
makes  machines  or  tools  with  which  to  assist  the  process  of 
production.  The  accumulation  on  which  he  lives  is  still 
wealth  rather  than  capital,  for  it  is  used  primarily  to  satisfy 
the  man's  wants,  not  to  produce  machines.  It  is  a  great 
mistake  to  think  of  man  only  as  a  producing  machine,  and 
of  the  things  which  he  consumes  as  capital  spent  for  the  sake 
of  production.  This  view  forgets  that  production  exists  for 
the  sake  of  man,  not  man  for  the  sake  of  production.  It  is 
a  conception  which  degrades  labor,  as  any  conception  does 
which  forgets  that  the  laborer  is  first  of  all  a  man,  and  that 
he  eats  for  his  own  sake  as  much  as  a  king.  The  real  dis- 
tinction between  capital  and  other  goods  is  that  capital  is 
employed  as  an  instrument  to  acquire  wealth,  not  to  satisfy 
human  wants  directly.  When  goods  are  used  to  satisfy  hu- 
man wants  directly  they  are  rendering  the  ultimate  service 
which  goods  can  render,  and  to  speak  of  them  in  such  cases 
as  employed  in  production  is  to  forget  the  most  important  of 
all  truths,  that  they  are  employed  for  the  satisfaction  of  man. 

But,  while  the  distinction  between  capital,  or  wealth-get- 
ting goods,  and  consumption  goods  is  an  easy  one,  it  will  be 
seen  that  two  different  conceptions  are  still  included  under 
the  word  capital.  We  may  view  capital  from  the  standpoint 
of  society  or  of  the  individual,  and  each  standpoint  gives  us 
its  own  conception.  These  we  may  call  social  and  individ- 
ual capital. 

Social  Capital. — The  most  obvious  way  of  getting  wealth 
is  to  produce  goods.  This  is  the  only  way  that  society,  as  a 
whole,  has  of  getting  wealth.  Individuals  may  grow  rich  at 
the  expense  of  others,  but  this  does  not  enrich  society.  Thus 
it  is  that  social  capital  cannot  be  anything  else  than  pro- 
ductive. Productive  capital  includes  all  goods  used,  not  to 


THE  FACTORS  OF  PRODUCTION.  105 

satisfy  wants  directly,  but  to  aid  in  the  production  of  other 
goods.  Every  device,  from  the  bow  and  arrow  of  the  sav- 
age up  to  the  steam  engine  of  to-day,  is  of  this  sort,  as  well 
as  such  goods  as  wool,  cotton,  lumber,  etc.,  commonly  known 
as  raw  material.  No  one  wants  these  goods  for  their  own 
sake,  but  for  the  sake  of  what  they  will  produce.  It  is  here 
that  we  see  the  significance  of  saving.  Not  that  mere  sav- 
ings are  capital  necessarily,  but,  by  accumulating  a  surplus 
of  subsistence  goods,  men  are  able  to  produce  these  devices 
which  aid  them  in  their  work.  Thus  capital  is  rather  the 
result  of  a  special  production  than  of  simple  saving. 

The  assistance  of  productive  capital  is  necessary  to  any 
production  of  economic  goods  except  the  most  primitive 
and  limited.  It  means  buildings,  tools,  machinery,  steam- 
ships, railways,  telegraphs,  telephones,  manufacturing  and 
commercial  establishments.  To  spend  each  day  in  working 
for  those  things  which  will  directly  satisfy  our  wants  is  to 
live  from  hand  to  mouth  in  the  most  disastrous  poverty. 
As  society  advances  an  increasing  part  of  men's  efforts  are 
spent  on  goods  which  in  themselves  have  no  power  to  satisfy 
human  wants,  but  which,  in  their  further  working,  supply 
much  more  than  man's  direct  efforts  can  furnish. 

Individual  Capital. — While  social  capital  is  necessarily 
productive,  and  productive  capital  necessarily  social,  the 
same  is  not  necessarily  true  of  individual  capital.  Individual 
capital  is  means  of  the  acquisition  of  wealth  to  the  individ- 
ual, and  the  individual  may  acquire  wealth  by  other  means 
than  production.  Now,  by  far  the  greater  part  of  capital 
owned  by  individuals  is  not  only  acquisitive  but  productive; 
such  as  factories,  machines,  etc.  This  we  call  social  capital 
as  well  as  individual  capital.  By  individual  capital  we  mean 
goods  employed  to  get  goods  from  other  people  as  well  as  to 
produce  goods.  Food  is  used  to  furnish  ultimate  satisfaction 
to  men,  and  thus  is  subsistence  or  consumption  goods  from 
the  standpoint  of  society.  We  toil  to  get  food,  and  that  is 
the  end  of  our  economic  efforts.  But  the  individual  may 
look  upon  the  food  of  workmen  merely  as  a  means  for  the 


106  OUTLINES  OF  ECONOMICS. 

acquisition  of  further  wealth.  He  gains  an  income  from  it, 
and  to  him  it  is  capital.  He  speaks  of  it  as  such.  It  is  evi- 
dent that  this  wealth  does  not  produce  any  further  wealth, 
and  so  cannot  be  classed  as  social  capital.  It  does  serve, 
however,  to  enrich  individuals,  and  so  constitutes  something 
which  from  the  individual  standpoint  may  be  called  capital. 
Thus  we  may  say  that  any  economic  good,  whatever,  is  cap- 
ital to  the  individual  who  holds  it  not  for  consumption,  but 
for  the  purpose  of  gaining  wealth  by  it.  Shoes  are  capital 
to  the  shoedealer,  but  not  to  the  man  who  wears  them.  From 
the  social  standpoint  they  are  never  capital.  From  the  so- 
cial standpoint  the  question  of  capital  is  one  of  production  ; 
from  the  individual  standpoint  it  is  primarily  one  of  distri- 
bution. It  may  be  unfortunate  that  capital  has  to  be  used 
to  designate  goods  which  do  not  produce  and  do  not  enrich 
society,  but  usage  is  so  firmly  established  here  that  it  is 
useless  to  protest. 

Representative  Goods. —Still  another  class  of  goods,  if 
they  may  be  so  called,  must  be  distinguished  from  capital  in 
the  social  sense,  and,  indeed,  from  social  wealth,  although 
they  may  be  regarded  as  capital  from  the  individual  stand- 
point. We  refer  to  what  are  known  as  representative  goods, 
which,  strictly  speaking,  are  not  goods  at  all  but  only  signs 
of  ownership,  partial  or  complete.  Such  are  notes,  mort- 
gages, bonds,  stock  certificates,  etc.  Their  nature  will  be 
clear  on  a  moment's  reflection.  A  mortgage  is  a  conditional 
title  to  a  piece  of  property.  Its  only  value  is  the  value  of 
the  property  behind  it.  A  certificate  of  stock  is  a  title  to  an 
undivided  portion  of  the  property  controlled  by  a  corpora- 
tion. A  government  bond  is  a  title  to  a  certain  portion  of  the 
nation's  income  which  the  government  pledges  itself  to  collect 
and  deliver  to  the  bondholder.  It  is  characteristic  of  this 
class  of  "goods"  that  they  are  not  goods,  but  that  they 
represent  goods,  and  by  this  characteristic  they  are  easily  dis- 
tinguished. They  are  not  to  be  recognized  in  estimates  of 
social  wealth.  The  individual  may  speak  of  his  wealth  or 
his  capital  as  consisting  of  bonds  and  mortgages,  but  this  is, 


THE  FACTORS  OF  PRODUCTION.  107 

strictly  speaking,  only  a  figure  of  speech.  It  is  as  incorrect 
to  suppose  that  these  things  actually  constitute  his  wealth 
as  to  call  wealth  the  figures  of  his  notebook  in  which  he  has 
calculated  its  amount. 

Franchises  are  no  part  of  social  capital,  they  are  simply 
permission  to  make  use  of  existing  social  capital  or  to  create 
social  capital.  The  capital  of  society  is  not  diminished  when 
the  value  of  corporate  property,  like  railways,  telegraphs,  tele- 
phones, and  the  like  is  reduced  to  a  fair  valuation  for  the 
actual  social  capital  invested.  It  may  or  may  not  be  morally 
right,  it  may  or  may  not  be  legally  possible,  to  equalize  in 
a  concrete  case  social  and  individual  capital;  only  the  partic- 
ular circumstances  surrounding  that  case  can  determine.  It 
is  now  simply  desired  to  bring  out  clearly  the  distinction. 

Fixed  and  Circulating  Capital.— A  common  division 
of  capital  is  into  fixed  and  circulating.  Circulating  capital  is 
capital  which  can  be  used  only  once,  or  in  one  round  of  oper- 
ations. Its  entire  value  passes  over  into  the  product.  Fixed 
capital,  on  the  other  hand,  is  capital  which  lasts  for  a  suc- 
cession of  operations,  and  only  a  part  of  the  value  of  which 
passes  over  into  the  product  with  each  use.  Coal  used  in  a 
furnace  is  an  example  of  circulating  capital;  the  coal  cart  in 
which  the  coal  is  huuled  is  fixed  capital.  Of  course  the  dif- 
ference is  one  of  degree  only. 

Capital  Saved  by  Being  Consumed. — Capital  is  as 
truly  consumed  as  any  other  form  of  wealth,  and  exists  only 
for  that  purpose.  The  only  difference  is  that  consumption 
in  this  case  does  not  result  in  satisfaction  of  a  human  want  but 
in  the  production  of  a  new  good  into  which  passes  the  value 
of  the  capital  consumed.  The  widespread  impression  that  it 
is  better  for  a  man  to  spend  his  substance  in  riotous  living 
than  to  save  it  rests  in  part  upon  this  truth.  Wealth  plainly 
does  not  perform  its  function  when  hoarded,  and  the  popular 
objection  to  hoarding  is  certainly  justified  in  part.  Wealth 
is  lost  for  the  time  being  when  it  is  simply  hoarded.  Only 
when  it  is  employed  can  we  call  it  truly  saved.  But  while 
this  is  true  it  by  no  means  follows  that  all  using  of  wealth 


108  OUTLINES  OF  ECONOMICS. 

is  advantageous  to  the  community.  The  man  who  uses  his 
wealth  in  such  a  way  that  a  hundred  men  are  induced  to 
work  for  a  week  in  preparing  a  feast  which  goes  in  a  night 
does  not  profit  the  community.  That  labor  does  not  pro- 
duce anything  which  the  community  can  enjoy,  only  a  feast 
for  a  prodigal.  The  fact  that  he  pays  them  for  their  work 
only  means  that  he  enables  them  to  get  a  share  of  the  com- 
munity's stock  of  goods,  but  he  does  nothing  to  increase  that 
stock.  We  see,  therefore,  that  it  is  the  productive  use  of 
wealth,  its  use  as  capital,  which  benefits  the  community. 
Luxury  and  poverty  have  gone  hand  in  hand  all  through 
human  history.  , 

Increase  of  Capital. — Capital  is  a  growth,  and,  as  a  re- 
turn is  exacted  for  capital,  capital  begets  capital,  as  it  were. 
This  makes  it  infinitely  easier  for  a  man  who  has  capital  to 
accumulate  it  than  for  a  man  who  has  no  capital.  Precisely 
the  same  is  true  of  the  community  or  nation.  The  posses- 
sion of  large  wealth  in  the  form  of  capital  means  the  posses- 
sion of  large  productive  resources,  and  so  the  certainty  of 
large  returns  in  wealth.  So  intimately  is  present  capital 
connected  with  past  capital  that  it  has  been  said  that  there  is 
not  a  nail  in  all  England  which  could  not  be  traced  back 
over  eight  hundred  years  to  savings  made  before  the  Norman 
Conquest. 


THE  FACTORS  OF  PRODUCTION.  109 

SUMMARY. 

1.  Nature,  meaning  land  and  all  it  contains  in  its  broadest  sense,  is  the 
first  factor  in  production. 

2.  Land  renders  three  services :  it  furnishes  standing  room,  plant  life, 
and  mineral  treasures. 

3.  Labor  is  the  second  factor  in  production. 

4.  The  laboring  population  tends  to  increase  more  rapidly  than  the  means 
of  subsistence. 

5.  This  tendency  is  checked  by  positive  checks  which  kill  off  people, 
and  by  preventive  checks  which  postpone  marriage  and  prevent  births. 

6.  A  restriction  upon  undesirable  emigration  is  a  needed  check  at  present 
in  the  United  States. 

7.  The  difficulty  of  harmony  in  a  crowded  population  is  the  most  serious 
aspect  of  the  problem. 

8.  Capital  is  a  third  factor  in  production,  derived  from  land  and  labor. 
It  consists  of  products  used  to  increase  wealth. 

9.  Capital  is  the  result  of  a  surplus  in  production  which  is  saved,  and 
which  gives  rise  to  a  special  production. 

10.  Social  capital  consists  of  wealth  used  for  further  production. 

11.  Individual  capital  consists  of  wealth  used  for  further  acquisition, 
either  by  production  or  by  transfer. 

12.  Representative  goods  are  simple  signs  of  ownership. 

13.  Capital  that  is  used  up  in  one  using  is  circulating  capital;  that  which 
may  be  used  many  times  is  fixed. 

14.  Capital  can  be    saved  only  by  being  consumed;  to  hoard  it  is  to 
waste  it. 

QUESTIONS. 

1.  What  do  we  mean  by  nature  ?     How  much  of  nature  is  a  "  factor  in 
production  ?  "     Define  this  term. 

2.  What  is  meant  by  land  ?     What  does  it  include  ?     What  services  does 
it  render? 

3.  What  is  rent  ?     What  double  meaning  has  the  term  ? 

4.  What  is  the  third  factor  ?     What  is  its  principal  characteristic  as  con- 
trasted with  land  ? 

5.  What  is  the  Malthusian  law?    What  are  positive  checks?   preven- 
tive checks?     What  check  does  this  country  need  to  apply?     Why  this? 

6.  What  is  capital?     Its  origin?     Is  food  of  laborers  capital?     If  so, 
why?     If  not,  why  not? 

7.  What  is  social  capital?  individual  capital?     Does  either  include  the 
other,  and  if  so,  which  ? 


110  OUTLINES  OF  ECONOMICS. 

8.  What  are  representative  goods ?     Are  they  wealth  ?     Why? 

9.  What  is  the  difference  between  circulating  and.  fixed  capital  ?    Why  is 
capital  saved  by  being  used  up  ?  What  is  the  advantage  of  owning  capital  ? 

LITERATURE. 

On  capital,  see  Bohm-Bawerk's  Positive  Theory  of  Capital  (Smart's  Trans- 
lation), Books  I  and  II. 

On  population,  see  James  Bonar's  Malthus  and  His  Work,  and  J.  S.  Mills's 
Political  Economy,  Book  I,  Chapter  X;  also  Herbert  Spencer's  Principles 
of  Biology,  Part  VI,  Chapter  XII. 

On  wasteful  expenditure  and  saving,  see  Ely's  Problems  of  To-Day, 
Chapter  XL 


CHAPTER  III. 

ORGANIZATION  OF  THE   PRODUCTIVE    FACTORS. 

Early  Simplicity. — The  organization  of  the  factors  of 
production,  simple  at  first,  becomes  on  the  whole  continually 
more  complex  with  the  development  of  industrial  civilization. 
Differentiation  accompanies  development.  The  old  house- 
hold economy  is  organized  in  such  a  manner  that  the  exist- 
ence of  three  separate  factors  in  production  is  scarcely  per- 
ceived. The  same  man  is  owner  of  land,  labor,  and  capital, 
and  all  the  products  flowing  into  his  hand  are  distributed  by 
him  among  those  who  participate  in  production  according  to 
the  manner  which  he  deems  proper.  When  production  is 
carried  on  by  a  village  community  we  have  collective  owner- 
ship of  the  instruments,  management  by  a  common  author- 
ity, and  a  division  of  products  according  to  regulations  based 
on  custom.  The  products  are  not  divided  into  parts  corre- 
sponding to  the  factors  of  production,  but  the  same  man 
receives  in  every  case  wages,  interest,  rent,  and  profits.  It 
is,  in  fact,  only  recently,  with  a  new  organization  of  indus- 
try separating  these  factors  and  assigning  them  to  different 
industrial  classes,  that  the  factors  of  production  have  become 
commonly  recognized  as  distinct  either  in  production  or  in 
the  distribution  of  products.  Even  to-day  this  separation  is 
in  a  large  portion  of  the  industrial  field  not  effected,  and, 
consequently,  there  is  not  there  that  antagonism  between 
classes  elsewhere  observed.  The  American  farmer  in  our 
Northern  States  is  usually  landowner,  capitalist,  laborer,  and 
manager,  and  receives  rent,  interest,  wages,  and  profits,  and 
in  the  total  product  cannot  distinguish  one  from  the  other. 

The  Guilds. — The  old  guild  organization  of  industry  and 
commerce  united  the  factors  of  production  in  the  same  man. 


112  OUTLINES  OF  ECONOMICS. 

The  guild  of  the  Middle  Ages  embraced  apprentice,  journey- 
man, and  master,  and  regulated  industry  and  commerce 
under  governmental  supervision.  The  master  managed  the 
business,  owned  the  capital,  and  worked  with  his  own  hands. 
He  received  the  entire  product  of  the  business  after  support- 
ing the  apprentices  and  paying  his  journeymen.  Apprentices 
and  journeymen  were,  it  is  true,  workmen,  and  conflicts  about 
wages  arose  not  infrequently,  although  for  long  periods  har- 
mony prevailed,  particularly  during  the  best  days  of  the 
guilds.  There  was  a  partial  separation  of  labor  from  other 
factors,  it  is  true,  but  not  complete,  and  the  man  who  sup- 
plied labor  looked  forward  not  without  reason  to  the  time 
when  he  should  become  capitalist,  employer,  and  manager. 
This  advance  was  a  regular  part  of  the  guild  system. 

G-rowth  of  Complexity. — The  present  century  has  wit- 
nessed a  great  change  in  the  organization  of  the  productive 
factors,  especially  in  commerce,  manufactures,  and  transpor- 
tation. "We  have  a  large  class  that  furnishes  labor  only, 
another  class  that  furnishes  land  and  capital,  and  a  third 
class  that  organizes  and  manages  the  undertaking.  A  mod- 
ern railway  corporation  serves  as  a  good  illustration.  The 
stock  and  bondholders  furnish  capital  on  which  they  receive 
interest ;  the  stockholders  carry  on  the  business  through 
managers,  and  for  this  service  they  hope  to  receive  a  surplus 
above  interest,  called  profits  ;  labor  is  remunerated  by  wages 
and  by  salaries,  wages  being  the  remuneration  of  subordinates 
and  salaries  of  officials.  Land  is  supplied  by  owners  of  stock 
and  bondholders,  a  part  of  their  capital  being  exchanged  for 
land,  and  consequently  we  have  rent  also,  although  not  usually 
appearing  as  a  separate  factor.  Yet  land  may  appear  as  a 
separate  factor  when  land  is  leased.  No  doubt  railways  in 
Baltimore  and  Philadelphia  pay  ground  rents,  annual  returns 
for  land  itself,  to  those  who  do  not  own  the  improvements. 
We  observe,  then,  all  these  various  classes,  and  perceive  that 
the  product  or  revenues  of  the  undertaking  are  divided  into 
a  corresponding  number  of  portions.  It  can  readily  be  under- 
stood how  controversy  respecting  portions  allotted  to  the 


ORGANIZATION  OF  THE  PRODUCTIVE  FACTORS.        113 

different  classes  can  arise.  It  is  said  that  the  business  com- 
munity is  always  in  debt,  because  it  carries  on  business  with 
more  or  less  borrowed  money.  The  owner  of  the  business 
enterprise  is  an  organizer  and  manager,  and  receives  wages 
of  superintendence,  a  salary  which  he  pays  himself ;  he 
receives  a  return  for  risk,  he  pays  interest  and  receives  inter- 
est on  any  money  he  has  invested,  he  pays  wages  and  rent. 

The  Entrepreneur.  — The  one  who  manages  business  for 
himself  was  formerly  called  an  undertaker  or  an  adventurer, 
but  the  first  word  has  been  appropriated  by  one  small  class 
of  business  men,  and  the  latter  has  acquired  a  new  meaning, 
carrying  with  it  the  implication  of  rashness  and  even  of  dis- 
honesty. We  have  consequently  Jbeen  obliged  to  resort  to 
the  French  language  for  a  word  \o  designate  the  person  who 
organizes  and  directs  the  productive  factors,  and  we  call  such 
a  one  an  entrepreneur. 

The  function  of  the  entrepreneur  has  become  one  of  the 
most  important  in  modern  economic  society.  He  has  been 
Avell  called  a  captain  of  industry,  for  he  commands  the  indus- 
trial forces,  and  upon  him  more  than  any  one  else  rests  the 
responsibility  for  success  or  failure.  A  business  which  has 
achieved  magnificent  success  often  becomes  bankrupt  when, 
owing  to  death  or  other  cause,  an  unfortunate  change  in  the 
entrepreneur  is  made.  The  prosperity  of  an  entire  town  has 
sometimes  been  observed  to  depend  upon  half  a  dozen  shrewd 
captains  of  industry.  It  may  be  said,  then,  that  the  large 
reward  these  often  receive  is  only  a  legitimate  return  for 
splendid  social  services.  Such  is  the  case,  provided  this 
reward  is  gained  honestly  and  without  oppression.  Some- 
times gains  are  partially  legitimate  and  partially  illegitimate. 
It  is  this  mixture,  observed  by  all  in  notorious  cases,  which 
has  probably  more  than  anything  else  led  to  indiscriminate 
attacks  on  the  profits  of  the  captains  of  industry. 

The  productivity  of  industry  depends  largely  upon  the 
harmonious  development  of  all  the  factors.  Sometimes  labor 
is  specially  needed,  sometimes  capital,  sometimes  land  ;  most 
frequently  what  is  needed  above  everything  else  is  a  better 


114  OUTLINES  OF  ECONOMICS. 

organization  of  productive  factors.  Organization  is  often 
defective,  and  talent  for  organization  and  management  is 
unfortunately  rare. 

Division  of  Labor. — A  characteristic  feature  of  the 
organization  of  the  factors  in  the  present  stage  of  industrial 
enterprises  is  what  is  commonly  called  a  division  of  labor, 
but  which  might  with  equal  propriety  be  called  a  cooper- 
ation of  labor.  Productive  processes,  especially  in  man- 
ufactures, are  divided  into  minute  parts,  and  one  part,  or 
perhaps  two  or  three  very  small  parts,  given  to  each  la- 
borer. One  man  makes  one  little  part  of  a  watch,  another 
a  second,  and  there  are  so  many  little  parts  that  it  is  said 
that  it  requires  the  cooperation  of  at  least  three  hundred 
persons  to  organize  properly  a  watchmaking  establishment. 
There  are  sixty  or  seventy  distinct  branches  in  the  manufac- 
ture of  a  piano,  and  as  many  in  the  manufacture  of  a  boot. 
But  the  word  cooperation  used  shows  that  the  men  are 
working  together.  The  parts  divided  must  be  united  to 
form  one  whole.  When  the  phrase  division  of  labor  is  used, 
we  look  at  one  side  of  the  process  ;  when  the  word  co- 
operation, at  another.  Division  of  labor,  machinery,  and 
the  use  of  natural  powers,  like  water,  steam,  and  electricity, 
are  the  chief  part  of  the  explanation  of  the  marvelous  in- 
crease in  the  productivity  of  the  productive  factors,  one  man 
performing  the  labor  now  which  formerly  required  the  labor 
of  ten,  one  hundred,  or  even  a  thousand  men. 

Advantages  of  Division  of  Labor. — The  advantages 
of  a  division  of  labor  have  been  enumerated  as  follows: 
First,  a  gain  of  time.  A  change  of  operations  costs  time. 
Less  time  also  is  consumed  in  learning  one's  business,  as  the 
labor  of  each  is  more  simple.  Second,  greater  skill  is  ac- 
quired, because  each  person  confines  himself  to  one  operation 
and  in  that  becomes  remarkably  proficient.  Third,  labor  is 
used  more  advantageously.  Some  parts  of  an  industrial 
process  can  be  performed  by  a  weak  person,  others  require 
unusual  physical  strength ;  some  require  extraordinary  intel- 
ligence, some  can  be  performed  by  a  man  of  very  ordinary 


ORGANIZATION  OF  THE  PRODUCTIVE  FACTORS.        115 

intellectual  powers,  and  so  on  indefinitely.  Each  one  is  so 
employed  that  his  entire  power  is  utilized,  and  work  is  found 
for  all,  young  and  old,  weak  and  strong,  stupid  and  intellec- 
tually gifted.  Fourth,  inventions  are  more  frequent,  because 
the  industrial  processes  are  so  divided  that  it  is  easy  to  see 
just  where  an  improvement  is  possible.  Besides  this,  when 
a  person  is  exclusively  engaged  in  one  simple  operation  he 
often  reflects  on  this,  understands  it  thoroughly,  and  sees 
how  the  appliances  he  uses  could  be  improved.  Workmen 
have  made  many  important  inventions.  Fifth,  capital  is 
better  utilized.  Each  workman  uses  one  set  of  tools  or  one 
part  of  a  set,  and  keeps  that  employed  all  the  time.  When 
each  workman  does  many  things  he  has  many  tools,  and  some 
are  always  idle. 

Disadvantages. — The  disadvantages  of  a  division  of  la- 
bor should  be  noticed.  It  makes  it  possible  to  employ  women 
and  children,  and  the  proportion  of  men  employed  decreases. 
Child  labor  and  labor  of  women  often  displace  men,  and  in 
American  cities  one  sometimes  finds  fathers  at  home  keep- 
ing house  while  children  and  wives  are  at  work  in  fac- 
tories. The  home  is  thus  demoralized,  and  the  rising  gen- 
eration becomes  weak  in  body  and  mind  and  depraved  in 
character. 

The  dependence  of  man  upon  man  is  increased  in  the  man- 
ner previously  described,  and  this  is  frequently,  at  least,  par- 
tially an  evil.  An  international  dependence  arises  which 
occasionally  produces  intense  suffering.  The  so-called  "cot- 
ton famine  "  in  the  north  of  England  during  the  American 
civil  war  illustrates  this.  America  grew  cotton,  England 
manufactured  it,  and  this  seemed  to  work  well  until  it  be- 
came impossible  for  England  to  secure  the  cotton  supply 
from  our  South,  and  the  result  was  intense  suffering  of  hun- 
dreds of  thousands  of  working  people  in  no  wise  responsible 
for  the  distant  war. 

Workmen  are  often  rendered  helpless  on  occasion  of  a 
change  of  production,  having  learned  to  do  only  one  thing, 
which  is  now  no  longer  required,  and  having  become  too  old 


116  OUTLINES  OF  ECONOMICS. 

to  acquire  a  new  skill.  Dickens  describes  evils  of  this  kind 
in  his  Hard  Times. 

When  labor  is  rendered  simple  it  loses  both  its  attractive- 
ness and  its  educational  value  at  the  same  time.  One  can 
love  his  work  when  one  manufactures  a  whole  watch,  bear- 
ing the  impress  of  care  and  skill;  but  who  can  love  the 
mere  routine  of  raising  a  sledge  hammer  and  letting  it  fall 
for  ten  hours  a  day?  M.  de  Tocqueville,  in  his  Democracy 
in  America^  attributed  the  high  average  intelligence  of 
Americans  to  the  fact  that  labor,  when  he  wrote,  was  not  so 
divided  with  us  as  elsewhere. 

Remedies  for  the  Evils  of  Minute  Division  of 
Labor. — Education,  particularly  industrial  training,  labor 
organizations  with  their  debates  and  discussions,  political 
life  with  universal  suffrage,  and  increased  leisure,  are  all 
means  whereby  the  evils  of  division  of  labor  may  be  obvi- 
ated. When  labor  becomes  soulless,  ceasing  to  minister  to 
fullness  of  life,  increased  opportunities  for  development  out- 
side of  the  industrial  field  must  be  offered.  Hours  of  labor 
must  be  shortened,  but  not  necessarily  equally.  A  clergyman 
or  professor  finds  opportunities  for  the  harmonious  develop- 
ment of  all  his  faculties  in  his  occupation,  and  the  reasons 
for  a  short  labor  day  for  factory  operatives  do  not  exist  in 
his  case. 

Increased  Productivity. — The  tremendous  increase  of 
productive  power,  due  to  division  of  labor,  has  often  been 
estimated  more  or  less  accurately.  It  has  been  said,  for 
example,  that  modern  inventions  and  discoveries  in  the 
great  civilized  nations  have  a  productive  power  for  each  fam- 
ily of  five  persons,  equivalent  to  the  labor  of  sixty  slaves  in 
classical  Athens.  Now,  the  civilization  of  Athens  was 
based  on  slavery,  and  it  is  estimated  that  there  were  twelve 
slaves  to  a  free  Athenian  family.  If  this  estimate  is  correct 
natural  forces  do  for  us  five  times  as  much  as  slavery  did  for 
Athens. 


ORGANIZATION  OF  THE  PRODUCTIVE  FACTORS.        117 


SUMMARY. 

1.  The  earlier  industrial  organization  did  not  distinguish  the  three  factors 
of  production. 

2.  The  guilds  organized  industry  in  the  Middle  Ages  in  a  way  to  keep  at 
least  two  of  the  three  factors  united.  ••„ 

3.  Complexity  and  separation  have  rapidly  increased  in  our  own  century. 

4.  The  entrepreneur  or  manager  has  appeared  as  a  new  factor  in  pro- 
duction. 

5.  Division  of  labor  and  ils  organization  in  production  are  characteristic  of 
our  day. 

6.  The  result  is  greater  economy  and  productiveness  in  the  industrial 
process,  but  a  tendency  to  degradation  and  helplessness  of  the  laboring 
classes. 

7.  Kducation  and  leisure  must,  if  possible,  compensate  the  workman  for  his 
loss  of  inspiration  in  the  field  of  industry  itself. 

QUESTIONS. 

1.  Why  was  the  early  organization  of  industry  simpler  than  ours? 

2.  What  was  the  guild  system?    Why  was  it  advantageous  for  the  wage- 
earner? 

3.  What  is  division  of  labor?     How  does  it  affect  labor?     "Why  does  the 
workman  have  less  chance  to  rise  than  formerly? 

•i.  What  is  the  entrepreneur  ?  his  function?  his  importance  ? 

5.  What  has  brought  about  the  division  of  labor  and  the  appearance  of 
the  entrepreneur? 

6.  What  are  the  advantages  of  division  of  labor?    its  disadvantages? 
What  can  be  done  by  way  of  remedy  or  compensation  ? 

7.  What  is  the  relative  productiveness  of  the  present  as  compared  with 
the  earlier  systems  of  organization  ?     Is  this  necessarily  a  gain?     Why? 

LITERATURE. 

On  the  functions  of  the  entrepreneur,  see  Francis  A.  "Walker's  Political 
Economy  (Advanced  Course),   pn^es  231,  et  seq. 
9 


PART  II. 

TRANSFERS    OF     GOODS. 


CHAPTER   I. 

INTRODUCTORY. 

TRANSFERS  of  goods  are  of  two  kinds  :  one-sided  transfers 
and  two-sided  transfers  of  goods.  Transfers  of  goods  consti- 
tute a  large  part  of  our  economic  life.  The  business  of  one 
important  industrial  class,  called  merchants,  consists  in  effect- 
ing transfers  of  goods.  The  operations  in  which  merchants 
are  engaged  we  call  commerce.  But  commerce  requires  a 
multitude  of  other  businesses  to  assist  it,  and  among  them 
are  especially  prominent  the  means  of  communication  and 
transportation,  such  as  public  roads,  canals,  railways,  tele- 
graphs, telephones,  and  banks.  These  agents  of  commerce 
do  not  confine  their  functions  to  the  assistance  of  merchants, 
but  they  aid  the  entire  community  in  bringing  about  desired 
transfers  of  goods. 

Exchange. — The  pai't  of  political  economy  dealing  with 
transfers  is  usually  called  exchange,  because  transfers  arc 
mostly  two-sided,  and  it  is  with  these  two-sided  transfers 
that  we  are  especially,  though  not  exclusively,  concerned  in 
the  chapters  which  in  the  present  work  arc  placed  under  the 
title  "Transfers  of  Goods."  Taxes,  the  chief  kind  of  one- 
sided transfers,  and  bequest  and  inheritance  arc  treated  in 
Book  III,  since  they  all  involve  the  action  of  the  State.  Money 
and  banks,  however,  which  are  treated  in  the  present  part  of 
this  book,  are  agencies  for  assisting  in  one-sided  transfers  as 
well  as  two-sided  transfers  of  goods 


INTRODUCTORY.  119 

So  great  is  the  importance  of  exchange  that  some  writers 
have  made  it  the  subject  of  the  science,  and  have  defined 
economics  as  the  science  of  exchange.  While  this  is  far  from 
adequate,  it  is  true  that  many  of  the  conceptions  with  which 
the  science  deals  derive  their  chief  importance  from  ex- 
change. Such  conceptions  are  especially  value  and  price. 
These  terms,  together  with  certain  others  which  arise  out- 
side the  field  of  exchange  and  stand  in  contrast  with  the 
terms  mentioned,  we  must  now  examine  and  define.  Too 
much  importance  cannot  be  attached  to  the  thoroughness 
of  this  examination  and  the  accuracy  of  the  definition. 

Utility. — This  is  a  conception  which  stands  in  sharp  con- 
trast with  value.  To  understand  its  meaning  in  economics 
AVC  must  recall  the  central  fact  of  our  science,  a  fact  which 
we  are  apt  first  to  take  for  granted  and  afterward  to  forget. 
Economics  is  a  science  of  man.  Goods  may  be  of  interest  to 
chemistry  and  physics  merely  as  things,  but  they  have  no 
significance  whatever  in  economics  until  they  come  into  rela- 
tion to  man.  That  fact  in  man  which  reflects  upon  things 
a  new  character  and  makes  them  goods  is  the  fact  of  human 
flints.  Everything  starts  with  this  fact  of  man's  nature.  In 
order  to  live,  and  still  more  in  order  to  live  well,  a  man  needs 
certain  things.  If  lie  is  robbed  of  food,  air,  water,  etc.,  he 
will  die.  If  he  lacks  books,  clothing,  art,  friendship,  esteem, 
etc.,  he  will  live  less  well  than  if  he  has  these  things  in  abun- 
dance. So  AVC  say  man  has  wants  for  air,  water,  food,  cloth- 
ing, art,  esteem,  etc.  The  power  to  satisfy  a  human  want  is 
utility. 

But  it  is  apparent  at  once  that  the  wants  we  have  men- 
tioned are  very  unlike  in  character.  Air  and  water,  for 
instance,  we  seldom  think  of  as  things  we  want  at  all.  We 
usually  have  them  in  abundance  and  without  exertion,  so 
that,  though  they  satisfy  wants  as  vital  as  any  we  know,  we 
seldom  spend  any  time  thinking  about  them  or  our  depend- 
ence upon  them.  On  the  other  hand,  esteem  and  friendship 
are  very  much  desired  and  give  us  great  satisfaction  when 
we  secure  them,  but  we  feel  that  they  belong  to  a  different 


120  OUTLINES  or  ECONOMICS. 

class.  We  never  think  of  trying  to  buy  them  as  we  do  food 
and  clothing.  And  this  suggests  a  third  class  of  wants,  very 
heterogeneous  in  character,  but  having  this  in  common,  that 
the  things  which  satisfy  them  are  objects  of  exchange. 
These  are  economic  wants.  T/ie  goods  which  satify  these 
wants  are  objects  of  exchange.  This  distinction  is  one  of  con- 
venience, but  it  corresponds  more  nearly  to  the  course  of 
men's  thoughts  than  any  other  line  we  can  draw.  Air  and 
esteem,  two  goods  so  different  in  other  respects,  both  agree 
in  this,  that  men  do  not  buy  or  sell  them,  and  so  do  not 
consider  them  economic  goods.  Food  and  concerts,  differing 
as  they  do  in  the  most  fundamental  particulars,  agree  in  this, 
that  they  can  be  exchanged  for  any  and  every  kind  of  eco- 
nomic goods,  and  so  each  in  its  proper  sphere  is  always 
treated  as  an  economic  good.  We  shall  find,  if  we  look 
around,  that  some  goods  cannot  easily  be  put  on  either  side 
in  this  classification,  goods  which  cannot  be  had  usually  with- 
out payment,  nor  yet  altogether  for  payment.  Such  goods  are 
simply  semi-economic  and  in  no  way  invalidate  our  principle 
of  classification.  Having  reached,  therefore,  a  clear  idea  of 
economic  wants,  it  follows  without  difficulty  that  the  power 
of  satisfying  an  economic  want  constitutes  economic  utility. 
We  need  here  to  guard  against  a  misunderstanding  which 
the  word  utility  sometimes  suggests.  There  is  a  tendency 
to  confound  it  with  the  idea  of  benefit,  and  to  suppose  that 
articles  are  useful  just  in  proportion  as  they  are  beneficial. 
But  in  economics  these  two  ideas  have  no  necessary  connec- 
tion. Utility  is  the  power  to  satisfy  wants,  not  the  power 
to  confer  benefits.  Cigars  are  as  useful  in  the  economic 
sense  as  bread  or  books,  for  all  three  are  articles  of  exchange 
and  satisfy  human  wants.  Economists  have  as  strong  opin- 
ions as  anyone  as  to  the  relative  benefits  to  be  derived  from 
tobacco  and  books,  but  we  must  not  confuse  our  fundamental 
ideas  of  economics  by  inopportune  assertions  of  moral  con- 
victions. Economic  wants  may  be  serious,  frivolous,  or  even 
positively  pernicious,  but  the  objects  of  these  wants  are  all 
alike  useful  in  the  economic  sense. 


INTRODUCTORY.  121 

Value. — Sharply  distinguished  from  utility  is  value.  The 
contrast  is  seen  when  we  compare  the  value  of  articles  with 
the  service  which  they  render  in  satisfying  wants.  For 
instance,  take  water,  a  good  which  satisfies  one  of  the  most 
important  of  our  wants,  and  yet  where  it  has  any  value  at 
all,  as  in  cities,  it  costs  only  a  few  cents  per  thousand  gallons. 
Bread  is  the  staff  of  life  and  of  incalculable  utility,  but  ten 
cents  a  day  will  furnish  a  man  all  he  can  eat.  Although 
these  are  extreme  cases  it  holds  true  generally  that  value  is 
far  below  average  utility. 

We  must  again  turn  to  wants  before  we  can  understand 
value.  We  now  notice  that  in  general  an  economic  good 
is  capable  of  satisfying  several  wants  of  different  degrees  of 
importance.  Thus  water,  first  of  all,  satisfies  thirst.  The  im- 
portance of  this  utility  is  altogether  incalculable,  for  without  it 
we  should  die.  Then  it  serves  for  bathing,  a  use  which  cer- 
tainly seems  essential,  but  one  which  is  far  less  urgent  than 
the  foregoing.  If  we  had  to  do  without  one  or  the  other  there 
is  no  doubt  which  we  should  prefer.  Then  it  serves  for  washing 
dishes,  clothes,  and  a  multitude  of  such  things;  then  for 
sprinkling  lawns  and  streets,  then  for  fountains,  artificial 
ponds,  etc.  All  these  uses  and  many  more  are  economic,  be- 
cause men  will  and  do  pay  for  water  to  satisfy  these  wants. 
Thus  water  has  a  multitude  of  most  variable  utilities.  What 
then  determines  its  value  ? 

It  may  be  well  first  to  note  some  of  the  answers  already 
given  to  this  much-debated  question.  For  one,  the  socialists, 
with  Ricardo  and  many  of  the  older  economists,  say  that  the 
labor  spent  on  a  thing  determines  its  value.  This  seems 
very  plausible  in  the  case  of  water,  but  when  we  come  to  the 
other  goods  it  gets  us  into  trouble  at  once.  For  instance,  in 
a  church  at  Antwerp  hangs  a  picture  which  was  painted  two 
centuries  ago  by  a  man  who  worked  with  great  natural  ease 
and  finished  it  in  a  few  days.  Recently  three  hundred  and 
twenty  thousand  dollars  was  offered  for  the  picture  and  re- 
fused. Did  the  labor  give  it  this  value?  It  is  sometimes 
said  that  this  was  very  valuable  labor.  How  so  ?  because  it 


122  OUTLINES  OF  ECONOMICS. 

produced  a  valuable  picture  ?  Certainly  ;  but  is  it  not  clear 
then  that  it  was  the  picture  that  gave  value  to  the  labor,  not 
the  labor  that  gave  value  to  the  picture?  Stronger  cases 
can  be  found.  Trees  that  no  man  ever  touched  are  worth 
hundreds  of  dollars.  Land  is  valuable  that  men  never  set 
foot  upon.  Looking  to  the  other  side  the  evidence  is  just  as 
strong.  Men  have  worked  months  and  years  on  pictures 
that  no  one  will  buy,  and  yet  they  have  cost  labor.  It  is 
sometimes  said  that  such  labor  is  not  economically  expended; 
but  why  not?  Simply  because  it  produces  nothing  of  value. 
So  here  again  the  labor  does  not  determine  the  value  of  the 
pictures,  but  the  pictures  determine  the  value  of  the  labor. 
We  shall  find  that  this  is  a  general  rule.  Labor  never  gives 
value  to  products,  but  the  value  of  products  determines  how 
much  labor  men  will  put  into  them.  When  they  miscalculate 
the  value  of  the  product,  the  labor  is  simply  wasted. 

A  broader  explanation  of  value  is  that  it  is  the  result  of 
cost  of  production,  including  not  merely  labor  but  in  certain 
cases  capital  and  rent  or  use  of  land.  However,  this  is  open 
to  much  the  same  objections  as  the  labor  theory.  It  does 
not  explain  how  some  goods  get  value  far  beyond  their  cost 
and  others  fall  far  below  it.  Suppose  I  perfect  a  machine 
at  a  cost  of  ten  thousand  dollars  which  will  blow  soap-bub- 
bles at  the  rate  of  a  million  an  hour  ?  Will  it  be  worth  ten 
thousand  dollars  ?  Certainly  not,  but  why  not  ?  The  the- 
ory of  costs  will  not  explain  it.  To  say  that  the  labor  and 
materials  have  not  been  wisely  used  is  simply  to  say  that  the 
machine  has  no  value,  which  is  just  what  we  are  trying  to  ex- 
plain. Nor  will  it  do  to  say  that  soap-bubbles  do  no  good. 
They  may  perchance  be  as  beneficial  as  cigars,  which  end  in 
smoke,  and  yet  cigarmakers  find  their  product  valuable. 

To  explain  the  case  of  those  goods  which  are  valuable  far  be- 
yond their  cost  of  production  reference  is  made  to  their  scarcity. 
But  scarcity  alone  does  not  always  produce  value.  Platinum 
is  far  more  scarce  than  gold,  but  only  about  half  as  valuable. 
And  even  when  scarcity  docs  raise  value,  why  does  it  ? 

We  have  mentioned  these  attempts   to  explain  value  be- 


INTRODUCTORY.  123 

cause  they  are  very  common,  and  this  is  one  of  the  points  of 
debate  just  now  in  economics,  and  it  is  important  that  we 
should  be  clear  in  our  conceptions  about  it.  In  attempting 
to  explain  the  origin  and  variations  of  value  we  will  for  a 
moment  recall  the  cases  we  have  mentioned  and  see  if  we 
can  find  a  common  element.  Why  will  men  pay  for  water? 
Because  they  want  it.  Why  did  the  man  offer  so  much  for 
the  picture  ?  Because  he  wanted  it  very  much.  Why  will 
men  pay  for  land  and  trees  which  have  cost  nothing  ?  Be- 
cause they  want  them.  Why  will  they  not  pay  for  poor 
pictures  or  soap-bubble  machines  which  have  cost  much  ? 
Because  they  do  not  want  them.  Thus  we  are  forced  back 
for  our  explanation  here,  as  always,  to  man.  The  funda- 
mental facts  in  economics  come  from  man  rather  than  from 
things.  If  man  desires  a  thing  it  has  value,  no  matter 
whether  it  cost  anything  or  not,  and  if  he  does  not  desire 
it  it  has  no  value,  no  matter  how  much  it  cost. 

Thus  we  find  that  value,  like  utility,  depends  on  wants. 
But  we  have  still  to  explain  why  it  is  that  value  is  low  when 
utility  is  very  great,  and  that  in  general  the  two  seem  to 
rise  and  fall  without  the  slightest  reference  to  each  other. 
Plainly,  value  and  utility  are  different;  but  what  is  the  dif- 
ference ?  We  can  best  explain  this  by  the  annexed  diagram. 
We  return  to  our  illustration  of  water,  which  we 
remember  had  numerous  uses  of  various  degrees  of 
importance.  The  lower  line  represents  the  amount 
of  water  to  be  had.  We  have  marked  off  five  dif- 
ferent portions  of  the  base  line  representing  quanti- 
ties of  water  available  for  man's  use.  The 
first  quantity,  a  b,  is  just  enough  for  drink- 
ing purposes.  Suppose  this  is  all  the  water 
to  be  had.  Evidently  there  will  be  no  ques- 
tion of  sprinkling  lawns  or 

m  \    n   ' —       i  even  °f  bathing  under  such 

a       ft e d e       /  ~ff   circumst<T.nces.      What    will 

be  the  utility  of  water?  Evidently  the  extent  of  the  service 
Avhich  it  renders  us,  and  as  this  is  the  saving  of  our  life  AVC 


124  OUTLINES  OF  ECONOMICS. 

cannot  estimate  it.  We  will  indicate  it  by  the  area  above 
the  line  a  b,  which  runs  on  upward  indefinitely  as  the  curved 
Hne  fails  to  close  in.  What  will  be  the  value  of  another 
portion  of  water  at  this  point  of  supply?  The  whole  value 
of  the  service  the  existing  supply  renders  us  ?  Certainly  not. 
Undoubtedly  we  should  like  more,  and  would  pay  well  for 
it,  but  as  this  "  more  "  which  we  desire  is  not  needed  for 
drinking  but  for  a  less  important  purpose,  the  value  of  water 
now  will  depend  upon  this  next  unsatisfied  want.  Now  sup- 
pose we  have  three  portions  of  water,  represented  by  the 
lines  a  b,  be,  and  c d.  We  now  have  enough  for  all  our  wants 
down  to  sprinkling  the  lawn  and  the  street.  We  are  willing 
to  pay  something  for  more  water  for  this  purpose,  but  how 
much?  As  much  as  when  we  had  only  water  enough  to 
drink  ?  By  no  means.  The  next  want  on  our  list  is  com- 
paratively unimportant,  and  of  course  we  value  an  increased 
supply  of  water  accordingly.  With  two  or  three  more  por- 
tions of  water  all  our  wants  are  satisfied,  and  water  will 
have  for  us  no  value  whatever.  Thus  we  see  that  as  the 
amount  of  water  is  increased  the  value  falls  along  the  curved 
line,  h  i,  till  finally  it  touches  the  base  line  where  the  utility  of 
water  ceases,  and  it  has  no  value  at  all.  Its  utility,  as  a  whole, 
is  greater  than  ever  before,  but  its  value  is  now  zero.  With 
only  one  portion  of  water,  a  b,  the  utility  is  represented  by 
the  area  j,  and  the  value  of  an  additional  portion  by  the 
first  dotted  line.  With  two  portions  the  utility  is  represented 
by  the  first  two  areas,  and  the  value  of  each  portion  by  the 
second  dotted  line.  Thus  the  value  decreases  as  the  total 
utility  increases,  simply  because  each  new  portion  adds  less 
utility  than  the  previous  one,  and  the  utility  of  the  last  por- 
tion determines  the  value  of  each  portion.  This  is  a  fact 
with  which  we  are  familiar.  A  poor  crop  of  low  grade  wheat 
may  be  worth  twice  as  much  per  bushel,  and  even  more  in 
the  aggregate,  than  a  fine  crop  of  good  quality. 

Our  two  definitions  are,  therefore,  as  follows:  Tlie  total 
utility  of  a  commodity  is  measured  by  the  intensity  of  all 
the  wants  which  it  satisfies.  The  value  of  a  commodity  is 


INTRODUCTORY.  1 25 

the  degree  of  the  want  which  the  existing  supply  of  the  com- 
modity has  still  left  unsatisfied.  Or,  remembering  that  un- 
satisfied wants  take  the  form  'of  desires,  we  may  define  them 
thus:  Utility  is  the  capacity  to  satisfy  wants;  value  is  the 
capacity  to  excite  desire.  The  total  value  of  the  commodity 
is  equal  to  the  number  of  units  of  supply  multiplied  by  the 
value  of  the  last  unit,  for  according  to  what  has  been  called 
the  law  of  indifference  no  more  will  be  given  for  one  unit 
than  for  another.  We  might  give  our  all  for  one  loaf  of 
bread  if  that  were  necessary  for  the  support  of  life  and  no 
other  could  be  obtained,  but  if  ten  loaves  are  offered  we 
will  give  no  more  for  the  first  than  for  the  last.* 

Having  defined  utility  and  value,  the  remaining  definitions 
are  easy. 

Wealth  is  an  aggregate  of  economic  goods.  If  we  esti- 
mate wealth  according  to  values  we  see  that  two  statements 
of  national  wealth  would  mean  opposite  things  according  as 
goods  were  abundant  and  values  low,  or  goods  scarce  and 
values  high  ;  but  the  amount  in  the  two  cases  might  be  the 
same. 

Economic  well-being  is  an  aggregate  of  utilities;  that  is, 
of  satisfied  wants,  not  an  aggregate  of  values. 

Price  is  an  expression  of  value  in  terms  of  money.  When 
you  say  you  will  give  three  dollars  for  a  hat  you  mean  obvi- 
ously that  you  desire  the  hat  as  much  as  you  desire  the  three 
dollars,  or  anything  else  which  the  three  dollars  might  buy. 

*  Those  familiar  with  recent  economic  literature  will  observe  that  this 
statement  of  the  law  of  value  differs  somewhat  from  a  formulation  which  is 
perhaps  more  familiar.  It  is  frequently  stated  that  value  is  equal  to  the 
utility  of  the  last  satisfied  want.  It  seems  to  the  writer  of  the  present 
work  that  we  produce  regularly  for  unsatisfied  want,  and  especially  is  this 
the  case  in  a  dynamic  society  witli  increasing  production.  Of  course  if  we 
are  asked  to  part  with  a  portion  of  existing  supply  which  we  intended  to 
use  to  satisfy  our  wants,  the  value  will  depend  upon  the  least  important 
want  which  that  portion  could  satisfy.  Manifestly  under  ordinary  circum- 
stances the  two  statements  are  nearly  identical.  When  we  consider  small 
increments  the  last  satisfied  and  the  first  unsatisfied  want  differ  but  little 
Value  is  viewed,  then,  in  this  work  from  the  standpoint  of  the  first  unsatis- 
fied want. 


126  OUTLINES  OF  ECONOMICS. 

SUMMARY. 

1.  Transfers  of  goods  are  one-sided  or  two-sided.     The  latter  are  known 
as  exchange,  and  develop  the  phenomena  of  value  and  price. 

2.  Utility  is  the  capacity  to  satisfy  wants,  and  things  having  this  capacity 
are  goods;  exchangeable  goods  are  economic  goods. 

3.  Value  is  the  capacity  to  excite  desire,  and  so  depends  upon  the  in- 
tensity of  the  greatest  unsatisfied  want. 

4.  Utility  varies  for  the  different  portions  of  a  good  devoted  to  different 
purposes,  but  value  is  uniform  for  a  given  time  and  place. 

5.  Economic  utility  is  not  sj'nonymous  with  benefit,  but  applies  equally 
to  nnbeneficial  or  injurious  goods  if  they  are  desired. 

6.  Labor  and  cost  do  not  determine  value,  but  are  determined  in  their 
amount  by  value  so  far  as  this  can  be  anticipated. 

7.  Price  is  value  measured  in  money. 

8.  Wealth  is  an  aggregate  of  goods  estimated  according  to  their  value. 

QUESTIONS. 

1.  "Why  do  useful  things  often  have  little  value?     "Why  do  we  not  buy 
and  sell  air?     Is  it  useful?    Is  it  valuable?     Why? 

2.  Is  esteem  valuable ?     Why?     Is  whisky  valuable ?     Why? 

3.  What  is  the  difference  between  value  and  utility  ? 

4.  What  is  the  relation  between  labor,  or  cost  and  value  ? 

5.  Are  useful  tilings  always  beneficial  ?     Why  ? 

G.  What  is  price?     Do  high  prices  necessarily  mean  high  value? 

7.  What  is  wealth  ?     In  what  two  ways  may  wealth  increase  ? 

8.  Does  an  increase  of  wealth  always  mean  an  increase  of  economic  well- 
being?     Why? 

LITERATURE. 

1.  Bohm-Bawerk,  E.  von:  Positive  Theory  of  Capital,  Book  III,  is  the  best 
existing  statement  of  the  theory  of  value. 

2.  Smart,  W. :  Introduction  to  the  Theory  of  Value,  an  admirable  resume  of 
the  subject  in  brief  form. 

3.  Clark,  J.  B. :   T/ie  Philosophy  of  Wealth,  especially  Chapter  V,  is  sug- 
gestive. 

4.  Marx,  K. :    Capital  is  the  standard  presentation  of  the  labor  theory 
of  value. 

5.  Ricardo,  D. :  Political  Economy ; 

G.  Mill,  J.  S. :  Principles  of  Political  Economy,  and 

7.  Cairnes,  J.  E. :   Some  Leading  Principles  of  Political  Economy,  all  pre- 
sent the  subject  from  the  point  of  view  of  the  cost  of  production.     Mill  and 
('airncs  are  especially  good. 

8.  Jevons,  W.  S. :    Tlieory  of  Political  Economy  is  suggestive.     Articles  on 
the  subject  of  value  and  allied  subjects  are  found  in  all  the  economic  jour- 
nals at  frequent  intervals  during  recent  years. 


CHAPTER  II. 

THE  ORIGIN  AND  ORGANIZATION  OF  EXCHANGE. 

WE  have  defined  value  as  the  power  of  a  good  to  excite 
desire,  a  capacity  which  is  measured  by  the  greatest  unsat- 
isfied want  which  the  good  in  question  is  able  to  satisfy. 
Thus  the  value  of  a  good  is  not  something  inherent  in  the 
good  itself,  but  something  attributed  to  it  by  human  desire. 
If  desires  change  values  change  even  when  goods  remain 
the  same.  Ask  a  milliner  if  hats  and  bonnets  carried  over 
from  last  year  are  as  valuable  as  ever.  By  no  means,  and 
this  purely  because  women  have  different  wants  or  desires 
from  last  year.  The  hats  and  bonnets  would  be  as  service- 
able as  ever  if  women  could  only  be  made  to  think  so,  but 
the  stubborn  fact  that  they  do  not  think  so  destroys  both 
utility  (the  power  to  satisfy  wants)  and  value  (the  power  to 
excite  desire)  in  these  articles,  and  no  sensible  milliner  thinks 
of  arguing  against  this  fundamental  fact.  Thus  we  see  that 
ralne  is  a  fluctuating  fact.  Here  again  we  reach  in  theory  a 
truth  which  experience  abundantly  confirms. 

Individual  Valuations. — A  general  rise  or  fall  in  values 
such  as  we  have  noticed  is  by  no  means  the  only  variable 
factor  in  value.  Not  only  do  people  put  different  values 
upon  things  at  different  times,  but  as  a  matter  of  course 
different  people  put  different  values  upon  things  at  the  same 
time.  Illustration  is  hardly  necessary.  How  much  does  a 
woman  care  for  a  meerschaum  pipe  or  a  man  for  a  Brussels 
lace  handkerchief  ?  The  vast  majority  of  goods  we  care 
nothing  for  so  far  as  our  own  use  is  concerned.  Even  among 
people  who  want  the  same  things  in  general  there  is  the  ut- 
most variety  of  opinion  as  to  the  relative  importance  of 
these  things.  There  is  much  difference  of  opinion  as  to 


128  OUTLINES  OF  ECONOMICS. 

the  value  which  things  ought  to  bear.  In  this  variety  in 
individual  valuation  lies  the  origin  of  exchange.  When  two 
men  in  primitive  life  find  themselves  in  possession  of  things 
which  they  mutually  desire,  but  each  man  desires  his  neigh- 
bor's good  more  than  he  does  his  own,  an  exchange  is  natu- 
ral. Thus  each  is  better  satisfied,  and  the  utility  of  each 
good  is  increased  by  being  used  by  the  person  who  attaches 
the  higher  value  to  it.  This  brings  us  to  the  fundamental  fact 
in  exchange,  the  fact  which  alone  can  justify  it.  In  normal 
exchange  there  is  a  mutual  gain.  We  are  accustomed  to 
think  of  a  merchant's  profits  as  taken  from  his  customers. 
But  do  not  the  customers  make  a  profit  too  ?  If  not,  why  do 
they  trade?  They  want  the  merchant's  goods  more  than 
they  do  their  money  or  anything  else  their  money  will  buy, 
and  so  they  derive  an  advantage.  Whether  they  derive  as 
great  an  advantage  as  they  might  have  derived  if  they  had 
known  more  about  trade  is  another  question.  But  it  re- 
mains true  that  in  such  exchange  there  is  profit  to  both  par- 
ties. It  follows  naturally  from  this  that  where  there  is  no 
mutual  advantage  the  exchange  is  abnormal  and  unjustifiable. 
All  species  of  gambling  come  under  this  head  and  illustrate 
the  perniciousness  of  the  principle.  There  is  probably  no 
practice  known  to  society  which  more  surely  or  thoroughly 
demoralizes  men  than  this  species  of  abnormal  ti-ansfer  which 
has  not  for  its  object  an  increase  of  service.  We  may  there- 
fore lay  down  the  general  law  that  transfers  of  goods  are 
justifiable  only  when  aggregate  utility  is  thereby  increased. 

The  Development  of  Exchange. — We  have  spoken  of 
exchange  as  originating  in  the  fact  that  each  of  two  men 
possesses  a  good  which  he  values  less  than  that  belonging  to 
the  other.  We  may  assume  that  in  the  most  primitive  ex- 
changes this  unsatisfactory  ownership  is  the  result  of  acci- 
dent. Each  man  does  his  best  to  supply  his  own  wants,  and 
thinks  little  about  other  people's  wants.  Only  rarely  does 
he  find  that  he  can  profit  by  exchange.  At  first,  too,  he 
rarely  thinks  of  exchange.  Inside  the  little  family  or  clan 
of  which  he  is  a  member  property  is  held  in  common,  and 


THE  ORIGIN  AND  ORGANIZATION  OF  EXCHANGE.      129 

there  is  no  question  of  ownership.  Outside  this  group  he  is 
probably  too  much  at  war  to  make  exchanges.  If  another 
clan  has  something  which  he  wants  he  is  more  likely  to 
think  of  getting  it  by  plunder  than  by  exchange.  Only  by 
a  considerable  development  of  society  toward  peace  and  sta- 
bility can  exchange  secure  a  foothold  and  men  add  to  the 
results  of  their  own  labor  the  occasional  advantages  of 
exchange. 

But  when  the  habit  of  exchange  is  once  established  a  com- 
plete transformation  takes  place  in  the  economic  activities 
of  society.  Instead  of  making  the  things  he  wants  and  ex- 
changing an  occasional  article  which  he  does  not  want  for 
one  that  he  does,  man  gradually  learns  to  make  what  other 
people  want  and  to  depend  very  largely  upon  exchange  to 
scrtire  the  things  he  wants  for  himself.  The  reason  is  simple. 
It  is  much  easier  and  more  profitable  to  find,  raise,  or  make 
one  kind  of  good  than  many  kinds.  The  economic  advan- 
tage of  this  process  is  almost  unlimited,  and  the  degree  to 
which  it  is  developed  marks  the  economic  progress  of  society. 
It  is  needless  to  say  that  the  division  of  labor  is  dependent 
upon  exchange,  and  exchange  in  any  highly  developed  form 
likewise  upon  division  of  labor. 

Social  or  Market  Valuations. — We  have  seen  that  the 
values  put  upon  goods  by  human  desires  vary  from  time  to 
time,  and  that  these  fluctuations  are  observable  in  the  mar- 
ket. We  have  noticed  also  that  the  valuations  made  by 
the  individuals  vary  enormously,  and  that  these  variations 
are  the  cause  of  exchange  itself.  But  the  strange  fact  re- 
mains to  be  accounted  for  that  these  immense  variations  in 
individual  valuation  scarcely  appear  at  all  in  exchange. 
Whether  men  want  articles  much  or  little  they  pay  about 
the  same  price  for  them.  There  is  a  ruling  market  value, 
or,  as  we  call  it  in  the  language  of  money,  a  market  price. 
If  a  man  wants  an  article  ever  so  much  he  pays  only  this 
price ;  if  he  wants  it  ever  so  little  he  pays  this  same  price 
or  goes  without  it  altogether,  for  it  cannot  be  had  for  less. 
How,  then,  is  this  leveling  of  valuations  accomplished  ? 


130 


OUTLINES  OF  ECONOMICS. 


It  may  occur  to  us  to  suggest  that  these  various  valuations 
are  averaged  to  form  the  market  price,  but  when  we  stop  to 
think  of  it  there  is  much  in  the  way  of  such  an  explanation. 
Who  knows  what  these  individual  valuations  are  ?  "NY ho 
ever  tried  to  average  them  ?  How  could  such  an  average 
be  enforced?  Above  all,  why  is  it  that  the  average  is  so 
very  low  in  the  case  of  articles  on  which  many  place  a  high 
value,  and  which  all  purchasers  value  at  least  as  high  as  the 
price  asked?  Plainly  the  market  price  is  not  an  average 
price  at  all.  Indeed,  the  principle  of  averages  must  be  ap- 
plied in  economics  with  great  care.  It  is  apt  to  cover  up 
facts  rather  than  to  explain  them. 

Recurring  to  our  illustration  of  water,  we  have  seen  how 
men  arrange  their  wants  in  a  series  beginning  with  the  great- 
est and  so  on  down.  As  water  is  supplied  little  by  little  they 
satisfy  one  want  after  another,  and  value  a  new  supply  of 
water  less  and  less  as  their  unsatisfied  wants  diminish  in  im- 
portance. The  distance  between  the  curve  h  i  and  the  base 
a  g  in  Fig.  1  marks  the  height  of  value  from  point  to  point 
as  the  supply  increases,  and  this  we  may  therefore  call  the 
curve  of  value.  But  what  takes  place  for  society  takes  place 
separately  for  each  individual.  Each  one  makes  out  a  per- 
sonal curve  of  value  for  each  commodity  that  he  cares  for. 


A 


B 


«  1  6  |  c 


a     6    c    cf 


D 


Fig.  2. 

Keeping  to  our  illustration,  let  us  suppose  four  persons,  A, 
B,  C,  and  D,  who  "  want  "  water  about  as  indicated  in  these 
four  diagrams  in  Fig.  2.  We  will  consider  in  each  case 
four  principal  wants,  though  these  four  wants  may  stand  for 
different  uses  in  the  ca^e  of  different  persons.  The  greatest 
want  in  each  case  is  represented  by  the  rectangle  a,  the 


TIIK  ORIGIN  AND  ORGANIZATION  OF  EXCHANGE.      131 

second  by  b,  etc.  A  is  a  person  who  represents  roughly  the 
average  gradation  of  wants.  B  cares  little  for  water.  Even 
for  drinking  purposes  he  will  buy  wine  or  beer  rather  than 
pay  more  than  a  certain  low  price  for  water.  For  other  uses 
he  will  pay  relatively  little,  and  for  fountains,  etc.,  he  cares 
nothing  at  all.  C  is  very  different  from  either  of  them. 
Having  scruples  against  intoxicating  beverages,  he  finds 
drinking  water  indispensable.  Believing,  too,  that  cleanli- 
ness is  next  to  godliness,  he  attaches  great  value  to  bathing, 
washing,  and  street  sprinkling.  D  attaches  much  the  same 
importance  to  these  minor  uses,  but,  like  B,  he  is  easily  per- 
suaded to  substitute  wine  or  beer  for  drinking  water  if  the 
price  of  the  latter  becomes  exorbitant.  It  is  evident  that 
personal  peculiarities  will  present  curves  of  value  of  every 


V 


Fig.  3. 

possible  variety.  Now  suppose  there  is  water  enough  fur- 
nished by  the  water  works  to  satisfy  three  wants  for  each 
man  or  twelve  wants  in  all.  It  is  plain  that  value,  which 
with  an  increasing  supply  always  depends  upon  the  intensity 
of  the  next  unsatisfied  want,  will  be  five  or  six  times  as 
great  in  the  case  of  C  or  D  as  in  the  case  of  B.  Which  per- 
son's demand  will  determine  the  general  price  ?  Neither  one. 
The  fact  is  that,  when  a  good  is  sold  by  measure  and  each 
one  takes  as  much  as  he  pays  for,  wants  are  not  supplied 
for  all  individuals  alike.  In  the  present  case  C  and  D  will 
satisfy  all  four  of  their  wants  and  B  only  one  of  his.  What 
happens  really  amounts  to  a  rearrangement  of  wants  in  a 


132  OUTLINES  OF  ECONOMICS. 

consolidated  schedule  something  like  Fig.  3.  This  gives  a 
new  curve  of  value.*  If  there  is  water  enough  for  only  three 
fourths  of  these  wants,  inasmuch  as  the  furnishers  neither 
know  nor  care  how  much  each  man  uses  if  he  only  pays  for 
it,  the  water  will  go  to  the  larger  wants,  no  matter  whose 
they  are.  It  is  easy  to  see  how  much  each  man  will  get. 
The  value  of  an  additional  supply  will  be  determined  by  the 
largest  unsatisfied  want,  which  in  this  case  happens  to  be  B's 
second  want.  If  more  water  is  supplied  the  value  will  rap- 
idly fall. 

This  may  all  seem  rather  fanciful,  but  something  very  like 
this  is  going  on  all  the  time.  Every  shrewd  manufacturer  is 
asking  questions  like  these :  How  much  of  this  commodity 
do  people  desire  ?  How  strong  is  their  desire  for  an  addi- 
tional amount  ?  How  much  will  the  value  be  reduced  if  we 
increase  the  supply  ten  per  cent  ?  His  whole  skill  in  fore- 
casting the  market  consists  in  his  ability  to  estimate  correctly 
the  amount  and  intensity  of  the  unsatisfied  wants  of  society ; 
for  it  is  upon  these,  as  we  have  said,  that  value  depends  at 
each  point  of  insufficient  supply.  "When  no  wants  remain 
unsatisfied  there  is  no  value,  and  the  good  is  as  "  free  as  air." 
This  social  scale  of  wants,  in  which  are  gathered  not  the 
wants  of  four  persons  but  those  of  millions,  is  formed  nat- 
urally enough  by  the  simple  pressure  of  wants  in  the  market. 
It  is  different  for  different  commodities,  the  curve  some- 
times beginning  very  high  and  descending  along  a  scale  of 
rapidly  diminishing  wants  to  zero,  sometimes  varying  slowly, 
each  new  want  supplied  being  almost  as  strong  as  the  one 
before  it. 

Purchasing  Strength. — A  difficulty  has,  doubtless,  oc- 
curred to  the  thoughtful  reader  ere  this.  If  wants  determine 
value  and  large  wants  take  precedence  of  small  ones,  how  is 
it  that  a  rich  man  may  care  very  little  for  a  thing  and  yet 
have  it,  while  a  poor  man  desires  it  very  much  and  yet  has 
to  do  without  it  ?  The  difficulty  is  due  to  a  change  of  stand- 

*  We  have  a  curve  because  the  number  of  rectangles  is  indefinitely  great, 
and  the  gradations  infinitesimal. 


THE  OKIGIN  AND  ORGANIZATION  OF  EXCHANGE.      133 

point  as  we  pass  from  the  individual  to  society.  So  long  as 
the  individual  is  comparing  his  own  wants,  whether  for  the 
different  uses  of  one  commodity  or  for  different  commodi- 
ties, his  own  feeling  is  the  only  thing  to  guide  him.  He 
will  put  the  larger  satisfaction  first,  and  so  on  down.  But 
when  we  have  a  number  of  personal  scales  of  wants  like 
those  in  Fig.  2  we  cannot  consolidate  them  as  we  did  in 
Fig.  3,  unless  the  men  have  equal  power  over  goods.  The 
reason  is  that  while  a  man  can  compare  his  own  wants  with 
each  other  directly  he  can  assert  them  against  other  men's 
wants  only  by  means  of  his  power  over  goods.  What  each 
man  does  is  to  make  out  a  scale  of  his  wants,  more  or  less 
completely,  and  then  apportion  out  his  spending  money  ac- 
cording to  their  relative  importance.  Of  course  it  makes 
all  the  difference  in  the  world  how  much  money  a  man  has, 
for  his  wants  make  themselves  felt  in  proportion  to  the  pur- 
chasing power  that  is  back  of  them.  If  B,  in  Fig.  2,  happened 
to  be  a  millionaire  his  lawn  might  be  sprinkled  though  he 
personally  cared  nothing  for  such  things,  while  D,  being  a 
laborer,  would  not  get  his  sprinkled  because  his  desire, 
though  much  stronger,  is  backed  up  with  so  little  money. 
A  millionaire's  indifference  is  stronger  than  a  poor  man's 
yearning.  Of  course,  if  the  four  men  in  Fig.  2  are  of  differ- 
ent purchasing  strength  our  scale  in  Fig.  3  would  have  to  be 
entirely  rearranged. 

Limit  of  Supply. — The  supply  of  water  in  the  case  we 
have  considered  was  not  sufficient  to  supply  all  wants.  This 
is  the  case  with  all  economic  goods,  for  as  soon  as  they  are 
abundant  enough  to  supply  all  wants  they  lose  all  value,  and 
are  no  longer  economic  but  free  goods.  In  the  case  of  most 
goods,  however,  the  supply  can  be  increased  by  labor. 
What,  then,  makes  men  stop  at  the  point  where  they  do  ? 
Why  do  they  not  make  more  of  the  goods  in  question  and 
satisfy  the  remaining  wants  ?  This  is  really  a  question  of 
production,  but  we  could  not  consider  it  until  our  ideas  of 
value  were  clear.  What  determines  the  point  at  which  men 

stop  supplying  a  particular  good  ?     It  is  often  said  that  we 
10 


134-  OUTLINES  OF  ECONOMICS. 

stop  when  value  falls  to  the  cost  of  production.  This  is  in 
the  main  true,  but  how  much  does  it  mean  ?  Cost  of  produc- 
tion is  said  to  be  composed  of  wages,  and  profits  with  other 
factors,  all  of  which,  as  we  shall  see  when  we  come  to  dis- 
tribution, are  determined  in  turn  by  very  variable  human 
wants.  So  this  answer  simply  means,  when  analyzed,  that 
we  stop  supplying  wants  when  we  have  to  create  still 
greater  wants  in  order  to  satisfy  them.  This  is  true,  but  it 
is  not  a  very  helpful  way  of  looking  at  the  truth.  Without 
going  into  the  mechanism  of  the  matter,  which  this  is  not 
the  place  to  discuss,  let  us  look  at  the  general  working  of 
the  collective  economic  life. 

We  have  seen  that  various  wants  for  a  given  good  arrange 
themselves  in  a  scale,  as  in  Fig.  3,  and  that  these  are  satis- 
fied up  to  a  certain  point  where  value  is  determined.  At 
this  point  a  day's  labor  or  a  unit  of  other  productive  energy 
furnishes  a  given  amount  of  satisfaction  to  human  wants. 
But  there  is  an  immense  number  of  goods  which  men  are  en- 
gaged in  producing  each  of  which  has  its  own  curve  of  value 
something  like  that  of  Fig.  3.  The  productive  power  of 
society,  as  we  have  said,  is  far  from  sufficient  to  satisfy  all 
these  wants.  How  shall  it  be  distributed  ?  Plainly,  so  as  to 
satisfy  the  larger  wants  in  each  scale.  Thus  labor  is  de- 
voted to  raising  cotton,  so  that  all  the  stronger  wants  for 
cotton  are  satisfied.  Suppose  more  labor  is  devoted  to  rais- 
ing cotton  until  finally  all  wants  are  supplied.  Value  will 
fall  lower  and  lower  till  with  the  disappearance  of  the  last 
want  value  will  disappear  also  and  cotton  will  become  a  free 
good,  to  be  had  for  the  taking.  But  this  plainly  is  an  un- 
wise use  of  productive  energy  so  long  as  we  have  not  enough 
for  our  purpose;  for  while  we  are  satisfying  trivial  wants  for 
cotton  important  wants  for  some  other  commodity,  like 
wheat,  would  be  sacrificed.  This  would  be  discovered  by 
the  fact  that  the  surplus  cotton  would  excite  less  desire,  and 
this  desire  would  of  course  express  itself  in  less  and  less  in- 
ducements. Elsewhere  desire  would  speak  more  loudly,  and 
the  distribution  of  labor  would  be  readjusted.  This  is  just 


THE  ORIGIN  AND  ORGANIZATION  OF  EXCHANGE.      135 

what  happened  in  the  South  in  1891.  The  cotton  crop  of 
that  year  was  enormous,  but  to  the  disappointment  of  the 
producers  the  value  fell  very  low  indeed.  This  simply 
meant  that  the  hitherto  unsupplied  wants  for  cotton  turned 
out  to  be  feeble.  Society  on  the  whole  wanted  things 
which  the  cotton-raisers  wanted,  and  wanted  them  a  good 
deal  more  than  they  wanted  cotton.  So  the  cotton-raisers 
had  to  give  a  great  deal  of  cotton  to  get  a  small  amount  of 
these  things,  which  is  what  we  mean  by  saying  that  the 
price  fell  very  low.  They  therefore  showed  that  part  of  the 
labor  spent  in  raising  cotton  had  been  used  to  satisfy  wants 
which  were  smaller  than  many  others  still  remaining  unsatis- 
fied, which  paid  neither  them  nor  society  as  a  whole.  As  a 
result  they  have  been  trying  ever  since  to  turn  some  of  this 
productive  energy  into  the  raising  of  other  tilings,  and  the 
readjustment,  though  difficult,  is  sure  to  come.  How  plain 
it  is  that  cost  of  production  did  not  determine  the  value  of 
this  great  cotton  crop!  There  had  been  no  material  change 
in  cost  of  production  to  produce  this  fall  in  value.  More 
wants  had  been  supplied  and  feebler  desires  remained;  that 
is  all.  Value  is  determined  by  unsatisfied  wants,  that  is,  by 
limited  supply.  This  limit  is  itself  determined  by  a  balanc- 
ing of  wants  against  each  other  with  a  view  to  satisfying 
the  larger  wants  first,  no  matter  what  or  whose  that  want 
is.  In  bringing  about  this  adjustment  the  individual  seeks 
in  general  his  own  interest,  but  in  the  production  and  trans- 
fer under  strictly  normal  conditions,  which  of  course  nowhere 
exist,  the  interest  of  society  is  usually  the  interest  of  the  in- 
dividual and  vice  versa.  In  distribution,  however,  this  har- 
mony of  interests  is  at  least  subject  to  grave  limitations. 
A  distribution  of  wealth  which  enables  a  man  to  emphasize 
trivial  wants  so  that  they  crowd  out  serious  wants,  a  condi- 
tion  of  things  which  is  the  law  of  luxury,  perverts  this  har- 
mony of  interests. 

Value  and  Cost  of  Production. — The  difference  be- 
t  ween  the  statement  of  value  and  its  relation  to  cost  of 
production  and  that  ordinarily  given,  which  makes  value 


136  OUTLINES  OF  ECONOMICS. 

depend  upon  cost  of  production,  does  not  invalidate  the  cal- 
culations of  the  ordinary  business  man.  There  is  an  approx- 
imation to  equality  between  the  two  in  the  case  of  goods 
which  can  be  freely  produced  ;  but  the  question  is,  which  is 
cause  and  which  is  effect  ?  It  is  the  value  of  the  product 
which  gives  value  to  all  that  goes  into  the  product,  and  men 
will  go  on  producing  so  long  as  the  product  has  a  value 
which  will  give  them  as  high  a  return  for  their  expenditures 
as  they  could  otherwise  obtain  ;  in  other  words,  their  action 
in  seeking  to  use  advantageously  their  economic  forces, 
whatever  they  may  be,  will  bring  about  an  equilibrium  be- 
tween costs  of  production  and  value.  Let  us  take  gold  and 
silver  as  a  good  illustration.  These  have  a  present  value 
with  which  their  average  cost  of  production  in  the  past  has 
next  to  nothing  to  do.  This  value  determines  what  mines  it 
is  profitable  to  work  and  what  it  is  not ;  in  other  words,  es- 
tablishes a  margin  of  production.  All  mines  on  or  above  the 
margin  will  be  worked  ;  all  below  it  will  be  unworked  ;  but 
it  is  the  value  which  determines  the  margin,  and  not  the  cost 
of  production  which  determines  the  value.  There  is  at  the 
same  time  a  coincidence  between  costs  and  value  at  the 
margin. 

General  Increase  of  Productivity — We  have  seen  that 
it  was  necessary  to  call  a  halt  and  even  beat  a  retreat  in  the 
production  of  cotton.  This,  however,  was  not  because  the 
production  was  really  excessive.  Men  still  wanted  cotton, 
and  more  than  was  offered.  But  with  its  insufficient  amount 
of  productivity  society  could  not  then  afford  to  spend  so 
large  a  portion  of  its  productive  energy  on  cotton.  But  if 
there  had  been  an  increase  of  productivity  all  along  the  line 
in  a  like  proportion  this  production  of  cotton  would  have 
been  entirely  proper.  Value  would  fall  as  before  (that  is, 
subjective  valuation),  but  values  would  fall  everywhere  in 
the  same  proportion  and  the  adjustment  would  be  main- 
tained. Relative  values  would  remain  unchanged,  which  is 
the  essential  thing.  This  is  what  really  happens  all  the 
time.  Tho  productivity  of  society  is  constantly  increasing 


THE  ORIGIN  AND  ORGANIZATION  OF  EXCHANGE.     137 

more  rapidly  than  the  population,  and  so  wants  which  are  so 
small  that  they  once  received  no  attention  are  now  regularly 
satisfied.  If  a  laborer  in  the  days  of  Queen  Elizabeth  had 
wanted  a  Bible  to  the  extent  of  being  willing  to  work  two 
hours  for  it  would  his  want  have  been  heeded  ?  But  now 
it  is  satisfied  without  hesitation. 


138  OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Value  fluctuates  from  time  to  time,  and  individual  valuations  also  vary 
widely  at  any  given  time. 

2.  Differences  of  individual  valuation  produce  exchange,  by  which  each 
party  gains  in  utility. 

3.  An  increase  in  aggregate  utility  is  the  condition  of  all  normal  transfers. 

4.  The  possibility  of  exchange   produces  specialized  production,  under 
which  the  producer  becomes  dependent  on  exchange. 

6.  Market  or  social  valuations  are  reached,  not  by  averaging  individual 
valuations,  but  by  arranging  them  in  the  order  of  importance.  The  valu- 
ation of  the  last  portion  supplied  will  be  the  market  or  social  value. 

6.  Wants  of  different  individuals  are  supplied,  however,  not  in  proportion 
to  simple  intensity,  but  in  proportion  to  intensity  multiplied  by  purchasing 
power. 

7.  Value  is  determined  for  any  given  article  by  the  amount  of  productive 
power  devoted  to  its  production,  and  the  limited  productivity  of  society  is 
distributed  with  a  view  to  equalizing  the  value  which  a  unit  of  productive 
power  can  produce  in  each  line. 

8.  General  increase  of  productivity  lowers  values  all  around  if  wants  re- 
main the  same,  and  this  is  a  wholly  desirable  change ;   but  increase   in   a 
single  line  has  to  be  checked,  with  a  view  to  both  individual  and  social 
interests. 

QUESTIONS. 

1.  Why  are  goods  less  valuable  when  "  out  of  style  ?  "     Are  they  equally 
serviceable  ?    Why  ? 

2.  What  other  irregularity  is  there  in  values  besides  that  of  different 
times  ?     Does  this  appear  in  market  values? 

3.  How  do  individual  valuations  combine  to  give  a  market  valuation  ? 

4.  What  is  the  origin  of  exchange?     Why  is  it  profitable ?     To  whom? 
Why  do  people  not  always  see  this  ? 

5.  Why  is  gambling  illegitimate?    Mention  other  cases  of  transfer  which 
are  economically  unjustifiable  ? 

6.  What  is  the  influence  of  exchange  upon  production?     What  are  its 
advantages  ? 

7.  Arc  the  wants  of  all  men  equally  effective  in  determining  market  values  ? 
Why  ?    What  effect  does  this  have  upon  the  total  utility  which  society  de- 
rives from  its  goods  ? 

8.  Why  does  value  fall  when  more  is  produced?     What  do  producers  do 
in  such  cases  ?     Why  ? 

9.  Do  values  change  when  production  increases  all  along  the  line  ?    "How  ? 
Is  it  a  misfortune?    Why? 


THE  ORIGIN  AND  ORGANIZATION  OF  EXCHANGE.     139 

10.  What  other  condition  is  necessary  in  order  that  the  change  in  values 
should  take  place ?     Is  this  other  condition  desirable?     Why? 

LITERATURE. 

See  works  already  cited,  and 

Patten,  S.  N. :  Dynamic  Economics,  a  difficult  but  valuable  study  of  the 
relation  of  changes  in  production  and  consumption  to  prosperity. 


CHAPTER  III. 

MONEY  AND  ITS  VARIETIES. 

HAVIXG  discussed  at  length  those  fundamental  principles 
on  which  exchange  rests,  we  now  proceed  to  consider  its 
mechanism.  The  most  important  instrument  of  exchange  is 
money. 

There  are  three  different  conceptions  of  money,  namely, 
the  popular,  the  legal,  and  the  economic. 

The  Popular  Conception. — What  do  people  mean  in 
everyday  language  when  they  use  the  word  money  ?  This 
question  may  be  answered  in  these  words  :  Money  is  what- 
ever passes  freely  from  hand  to  hand  as  a  medium  of  ex- 
change, and  is  generally  received  in  final  discharge  of  debts. 
It  is  as  a  medium  of  exchange  that  money  first  attracts 
marked  attention,  and  in  this  it  always  performs  a  chief 
function.  Nothing  is  money,  even  in  the  popular  sense, 
which  does  not  perform  this  function.  It  is  in  the  gen- 
eral acceptance  of  money  in  payment  for  commodities  and  • 
services  that  it  performs  this  function.  It  goes  between 
other  commodities.  Wheat  exchanges  for  money,  and  money 
for  shoes,  because  money  is  received  in  payment  both  of 
wheat  and  shoes.  This  is  the  principal  function  of  all 
kinds  of  money.  Commodities  are  not  usually  directly  ex- 
changed for  one  another,  but  indirectly  through  the  me- 
dium of  money.  The  farmer  selling  his  corn  for  money, 
and  with  this  money  buying  sugar,  really  exchanges  corn 
for  sugar,  the  money  serving  merely  as  a  convenient  me- 
dium. It  follows  naturally  from  the  definition  that  the 
credit  of  the  person  offering  money  is  not  a  matter  of  con- 
corn  in  the  transaction,  and  that  his  character  is  not  inquired 
into,  unless  it  is  suspected  that  the  money  is  counterfeit, 


MONEY  AND  ITS  VARIETIES.  141 

that  is,  not  really  money  at  all.  What  is  called  money  in 
the  popular  sense  may  include  more  but  not  fewer  charac- 
teristics. The  definition  shows  the  substance  of  that  which 
men  ordinarily  mean  when  they  use  the  word  money. 

The  Legal  Conception  is  different.  Whatever  the  law 
declares  a  legal  tender  is  money  in  the  legal  sense.  A  legal 
tender  is  that  which  the  law  compels  persons  to  receive  in 
payment  of  debt. 

The  Economic  Conception.* — But  economists  have 
framed  still  a  third  definition  of  money,  which  we  may  for 
lack  of  a  better  term  call  the  economic  conception.  Money 
in  the  economic  conception  must  perform  all  of  the  following 
functions:  First,  it  must  serve  directly  and  immediately  as  a 
measure  of  value;  but  value  measures  value  as  length  meas- 
ures length.  We  must  take  as  a  unit  a  definite  concrete  value 
like  our  gold  dollar,  consisting  of  25 '8  grains  of  gold,  nine 
tenths  fine — that  is,  nine  tenths  pure  gold  and  one  tenth  alloy. 
When  we  say  that  a  commodity  is  worth  nine  dollars  we  mean 
that  its  value  or  quantity  of  utility  is  nine  times  that  of  our 
"unit  of  value-measurement;"  consequently  money  in  this 
sense  must  be  composed  of  a  material  in  itself  valuable. 
Second,  it  must  serve  as  a  medium  of  exchange,  and  it  has 
this  in  common  with  money  in  the  popular  sense.  Third, 
money  in  the  present  sense  must  serve  as  a  means  of  mak- 
ing payments,  and  this  is  facilitated  usually  by  having  a  legal 
tender  quality  attached  to  it.  It  is  then  likewise  money  in 
the  legal  sense.  Payments  are  often  one-sided  transfers  of 
goods,  and  on  that  account  the  third  function  differs  some- 
what from  the  second.  Fourth,  money  in  the  economic  sense 
must  serve  as  a  store  or  receptacle  of  value.  It  must  store 
up  value  so  that  it  can  be  transferred  from  place  to  place 
and  time  to  time.  Roman  gold  money,  preserved  for  two 
thousand  years,  has  brought  value  down  to  our  own  time; 

*It  must  not  be  supposed  that  this  is  the  only  sense  in  which  the  term 
money  can  be  legitimately  employed  in  economic  discussions.  On  the  con- 
trary, popular  meanings  are  often  the  best  for  economic  purposes  if  they  are 
definite. 


142  OUTLINES  OF  ECONOMICS. 

and  gold  money  taken  across  the  Atlantic  bears  with  it 
stored-up  value. 

These  distinctions  render  it  easy  to  answer  otherwise  per- 
plexing questions.  Are  national  bank  notes  money  ?  In  the 
popular  sense,  undoubtedly,  but  not  in  the  legal  sense  nor  in 
the  economic  sense.  Are  national  treasury  notes  money? 
Yes,  in  the  popular  and  legal  sense,  but  not  in  the  third  sense. 
Gold  money  in  the  United  States  is  money  in  every  sense  of 
the  word. 

Functions  of  Money. — Money  has  been  called  one  of 
man's  greatest  inventions,  ranking  with  the  alphabet.  Cer- 
tainly present  civilization  would  be  impossible  without  it. 
Its  services  are  so  obvious,  however,  that  it  is  not  necessary 
to  dwell  upon  them.  The  reader  has  only  "to  look  and  see." 
Exchange  would  be  awkward  and  tedious  without  money, 
and  now  that  labor  is  so  divided  exchanges  form  a  part  of 
our  daily  life.  We  enjoy  few  material  good  things  which 
have  not  been  exchanged  in  one  way  or  another  many  times 
before  they  reach  us.  Without  any  medium  of  exchange 
the  man  with  a  horse  who  wanted  a  coat  instead  would  be 
obliged  to  search  for  a  tailor  who  desired  a  horse,  and  after 
finding  him  the  exchange  would  very  likely  be  defeated 
owing  to  inequality  of  values  of  articles  to  be  exchanged. 
The  coat  desired  might  be  only  half  as  valuable  as  the  horse, 
and  the  tailor  might  have  nothing  else  wanted  by  the  owner 
of  the  horse.  Simple  illustrations  like  this  can  be  continued 
indefinitely.  We  can  also  keep  values  easily  in  mind  and  com- 
pare them  readily  when  we  have  one  common  measure. 
Money  enables  us  to  travel,  carrying  stored-up  value  with  us, 
and  assists  in  the  accumulation  of  capital  by  providing,  as  it 
were,  a  receptacle  for  it.  If  we  raise  more  potatoes  than  we 
need  we  can  keep  them  only  a  short  time,  but  we  can  ex- 
change them  for  money,  which  can  be  kept.  Thus  we  save 
our  surplus.  Money  is  a  form  of  capital  which  has  been 
called  free.  It  can  by  exchange  be  turned  hither  or  thither, 
being  ready  for  the  best  use  which  may  offer. 

Qualities    Desirable    in   Money. — Many  things  have 


MONEY  AND  ITS  VARIETIES.  143 

been  used  as  money  during  the  world's  history.  Among 
them  the  following  may  be  mentioned  :  Cattle  nearly  every- 
where; furs,  especially  in  northern  countries;  oil;  wampum 
among  the  early  New  Englanders;  tea  at  Russian  fairs;  to- 
bacco, as  in  Maryland  and  Virginia  ;  iron  ;  copper ;  all  the 
baser  metals  and  the  two  precious  metals,  gold  and  silver. 
All  civilized  nations  have  finally  found  gold  and  silver  best 
adapted  among  all  the  metals  for  money,  and  they  are  so 
used  to-day  in  every  part  of  the  globe.  The  following  are 
reasons  why  gold  and  silver  are  especially  suitable  for 
money  metals:  They  are  universally  desired,  and  every  one 
is  willing  to  accept  them.  They  can  be  used  not  only  in  the 
arts  but  for  ornaments,  and  this  helps  to  give  them  stability 
of  value ;  for  if  their  value  begins  to  fall  the  demand  for 
them  for  other  purposes  than  money  tends  to  increase,  and 
this  prevents  so  great  a  fall  in  their  value  as  would  other- 
wise take  place.  Gold  and  silver  are  desirable  on  account  of 
the  vast  quantities  already  in  existence.  The  gold  in  coin 
and  bars,  and  silver  in  coin,  are  now  estimated  to  be  worth 
some  six  thousand  millions  of  dollars,  and  compared  with  this 
the  yearly  production  is  small,  its  commercial  value  ranging 
at  present  from  about  two  hundred  and  forty  to  two  hun- 
dred and  seventy  millions  of  dollars.  The  production  of  one 
mine  in  one  year,  even  if  extraordinarily  large,  produces 
a  comparatively  small  effect,  being  like  a  glass  of  water 
thrown  in  a  pond.  It  must  diffuse  itself  over  a  vast  surface. 
Their  high  specific  value — that  is,  high  value  in  proportion 
to  weight — adapts  them  to  use  for  money,  because  easily 
transportable.  Their  value  at  different  places  widely  sepa- 
rated is  more  nearly  equal  than  it  could  otherwise  be. 
Durability  and  indestructibility  are  valuable  qualities,  while 
extreme  divisibility  without  loss  of  value  makes  it  possible 
to  measure  any  desired  value,  great  or  small.  Majleability 
renders  coinage  easy,  and  homogeneity  makes  any  one  ounce 
or  pound  just  as  valuable  as  any  other  pound  or  ounce.  They 
are  readily  recognizable  by  their  color,  their  peculiar  ring, 
and  by  other  attributes,  and  thus  they  are  adapted  to  popu- 


144  OUTLINES  OF  ECONOMICS. 

lar  use.  No  other  metals  seem  in  like  measure  to  combine 
so  many  desirable  qualities. 

Paper  Money  has  been  extensively  used.  Paper  money 
consists  of  promises  to  pay  on  demand  which  people  are 
willing  to  receive  in  place  of  metallic  money.  They  are 
usually  promises  either  of  banks  or  of  governments.  People 
take  them  because  they  believe  the  promise  will  be  kept,  or 
because  they  think  that  others  will  accept  them,  or  because 
they  have  been  made  a  legal  tender  and  people  must  accept 
them  for  debt,  or  because,  as  usually  happens,  they  are  re- 
ceivable for  taxes.  Where  this  confidence  in  paper  money  is 
complete  it  is  preferred  to  precious  metals,  because  more 
convenient.  If  any  one  will  read  all  that  is  engraved  on  the 
paper  money  circulating  in  the  United  States  he  will  per- 
ceive its  nature,  and  he  will  discover  that  it  is  of  two  kinds: 
notes  of  national  banks,  and  notes  or  certificates  of  the 
federal  government.  Adam  Smith  has  compared  paper 
money  to  a  road  through  the  air.  It  saves  the  use  of  the 
precious  metals,  and  capital,  otherwise  employed  as  a 
medium  of  exchange,  can  be  used  for  other  productive  pur- 
poses. It  is  thus,  he  says,  as  real  a  saving  as  if  we  could 
travel  through  the  air  and  use  the  ground  now  occupied  by 
roads  for  agriculture  and  other  purposes.  The  "greenbacks  " 
or  paper  money  of  the  United  States  now  amount  to  a  little 
over  three  hundred  and  forty-six  millions  of  dollars.  They 
perform  the  function  of  gold  and  silver  even  better  than 
gold  and  silver — in  foreign  ports,  like  Hamburg,  often  sell- 
ing for  a  premium — and  this  saves  the  country  this  amount 
of  capital.  To  withdraw  them  from  circulation  would  be 
simply  a  waste.* 

"  Inflation." — -Certain  dangers  connected  with  paper 
money  issued  by  government  must  not  be  overlooked.  It  is 
easy  to  set  the  printing-presses  at  work  and  to  issue  an 

*  The  writer  has  paid  a  premium  for  French  paper  money  in  Geneva, 
Switzerland,  where  lie  could  have  obtained  gold  money  for  par,  and  he  has 
found  American  paper  money  selling  for  more  than  gold  in  Stockholm, 
Sweden. 


MONEY  AND  ITS  VARIETIES.  145 

illimitable  amount  of  money.  This  is  much  easier  than  tax- 
ation, and  has  often  promoted  waste  and  extravagance.  Be- 
sides, only  a  limited  amount  can  be  kept  in  circulation  at  its 
nominal  value,  and  when  this  is  exceeded  it  falls  below 
"par,"  which  means  that  paper  money  will  no  longer  pur- 
chase as  much  as  the  same  amount  of  gold  and  silver  money. 
This  produces  great  inconvenience  and  suffering,  because, 
according  to  what  is  called  Greshani's  laic,  the  inferior  money 
drives  the  better  out  of  circulation,  and  prices  rise  on  ac- 
count of  the  large  supply  of  money.  This  diminishes  the 
value  of  fixed  salaries  and  of  all  fixed  incomes,  of  interest 
payments  on  all  debts  and  of  wages,  until  these  rise  corre- 
spondingly, and  this  takes  a  long  time.  It  is  an  inconven- 
ience in  international  trade,  because  foreign  countries  do 
not  recognize  the  legal  tender  quality  of  paper  money  and 
will  not  receive  it  for  taxes,  and  because  foreigners  lose 
faith  in  a  paper  money  which  is  not  kept  at  par  with  the 
precious  metals. 

Is  Paper  Money  Safe  ? — Some  have  so  keenly  appreci- 
ated the  dangers  of  paper  money  that  they  have  entirely  op- 
posed its  use.  This  does  not  seem  reasonable.  Paper  money, 
like  other  instruments  of  a  high  civilization,  should  be  em- 
ployed with  care;  but  the  damage  which  the  best  instru- 
ments and  appliances  may  do  when  unskillfully  handled 
ought  not  to  induce  us  to  renounce  the  advantages  which 
they  offer.  Rather  we  ought  to  acquire  prudence,  and  this 
is  the  course  which  modern  nations  are  actually  pursuing. 
Several  countries  are  now  using  paper  money,  and  our  own 
among  the  number.  When  Congress  decided  to  leave  three 
hundred  and  forty-six  millions  of  "  greenbacks  "  in  circula- 
tion alarm  was  expressed  in  many  quarters;  but  experience 
has  proved  that  apprehension  was  groundless.  It  may  be 
said  that  paper  money  should  always  be  kept  at  "  par,"  tlfat 
is,  government  should  always  pay  coin  for  paper  on  demand. 
When  this  is  done  paper  money  is  said  to  be  redeemable; 
when  it  is  not,  paper  money  is  said  to  be  irredeemable. 
Irredeemable  paper  money  is  bad;  redeemable  paper  money 


146  OUTLINES  OF  ECONOMICS. 

is  good.  Attention  should  then  be  directed  to  this  consider- 
ation: How  can  paper  money  always  be  redeemed?  or,  how 
much  can  be  issued  with  safety  ?  Possibly  the  amount  the 
people  will  keep  in  circulation  at  par  may  have  some  rela- 
tion to  the  gross  revenues  of  government,  for  these  are  pay- 
able in  paper  money,  and  consequently  in  making  these 
payments  paper  money  is  as  good  as  gold.  The  gross  reve- 
nues of  our  various  governments,  federal,  State,  and  local, 
payable  in  paper  may  be  three  times  the  amount  of  our 
"greenbacks."  Perhaps  we  may  say  that  for  a  prosperous 
community  the  paper  money  which  the  people  will  gladly 
absorb  and  prefer  to  gold  and  silver  is  equal  to  one  half  of 
all  government  revenues  payable  in  this  kind  of  money. 
Possibly,  under  certain  circumstances,  more  can  be  kept  in 
circulation.  Only  careful  experimentation  can  determine, 
and  an  adequate  "  reserve  " — that  is,  supply  of  coin  for  pay- 
ment of  paper  on  demand — should  be  maintained.  Our  ex- 
perience in  the  United  States  is  an  instructive  example  of 
economic  experimentation. 

"Fiat  Money." — A  few  years  ago,  however,  this  country 
was  agitated  by  a  proposal  to  create  a  new  kind  of  paper 
money,  a  money  not  based  on  economic  demand  of  any  sort. 
This  money  was  to  be  of  paper,  but  not  a  promise  to  pay 
gold  or  anything  else.  It  was  to  be  an  irredeemable  paper 
money,  not  of  the  usual  kind  which  is  temporarily  irredeem- 
able, and  was  popularly  called  "fiat  money."  The  paper 
dollar  would  bear  a  legend  something  like  this  :  "  This  shall 
be  received  to  the  amount  of  one  dollar  in  payment  of  all 
debts,  public  and  private;"  and  this  legal  tender  charac- 
ter should  be  enforced  by  appropriate  legislation.  It  was 
argued  that,  every  man  being  obliged  to  accept  this  dollar, 
everyone  would  be  willing  to  do  so,  just  as  our  present  prom- 
ise money  is  now  accepted  by  people  who  do  not  wish  the 
gold  or  silver  which  it  promises,  but  who  simply  want  to 
pass  it  again.  The  only  thing  necessary  would  be  that  men 
should  have  confidence  in  the  power  and  willingness  of  the 
government  to  enforce  its  circulation.  When  this  confidence 


MONEY  AND  ITS  VARIETIES.  147 

existed  no  exercise  of  power  would  be  necessary,  for  every- 
one would  accept  it  freely. 

The  proposition  to  create  this  fiat  money  has  been  unduly 
ridiculed.  There  is  nothing  theoretically  absurd  about  this 
proposition,  provided  the  supply  of  the  fiat  money  be  limited. 
The  possibility  of  the  circulation  of  such  fiat  money  is  con- 
ceded by  economists  generally.  All  that  is  necessary  to  make 
people  accept  money  is  confidence  that  it  can  be  passed  on,  and 
provided  the  supply  is  limited  this  confidence  can  be  based 
on  the  power  of  government  to  enforce  a  legal  tender  act  as 
well  as  on  its  power  to  redeem  a  note  for  dues.  But  while 
the  opponents  of  fiat  money  have  often  been  superficial  in 
their  arguments  they  seem  to  have  reached  right  conclusions. 
The  dangers  which  have  been  mentioned  in  connection  with 
paper  money  in  general  become  intensified  in  the  case  of  irre- 
deemable paper  money,  because  the  safeguards  of  redemption 
are  missing.  If  the  paper  is  always  kept  at  par  there  would 
seem  to  be  nothing  gained  by  the  irredeemable  characteristic; 
if  it  is  not  kept  at  par  inconveniences  at  once  result  and  it 
is  difficult  to  set  a  limit  to  the  issue.  A  general  desire  to 
rob  the  creditor  class  is  likely  to  be  aAvakened. 

Fractional  Paper  Currency. — This  means  paper  money 
of  a  smaller  denomination  than  one  dollar.  During  our  late 
civil  war  and  for  some  time  thereafter  this  was  extensively 
used.  Forty-five  mill  ions  of  dollars  Avas  borrowed  by  Hon. 
B.  H.  Bristow,  Secretary  of  the  Treasury,  1874-76,  to  pur- 
chase silver  to  take  the  place  of  this  paper.  This  with- 
drawal of  fractional  paper  currency  seems  to  have  been  the 
result  of  an  excessive  reaction  against  the  abuses  of  paper 
money.  It  was  extremely  convenient,  especially  for  people 
making  small  purchases  by  mail.  It  is  said  that  the  business 
of  several  large  firms  was  seriously  injured  by  the  removal 
of  this  convenient  kind  of  money.  Postal  notes,  which  lack 
many  of  the  conveniences  of  fractional  paper  money,  and 
which  are  far  more  expensive,  each  one  costing  the  pur- 
chaser three  cents,  have  been  introduced  as  a  substitute. 


OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Money  in  the  popular  sense  is  that  which  passes  freely  from  hand  to 
hand  as  a  medium  of  exchange,  and  is  generally  received  in  final  discharge 
of  debts. 

2.  Money  in  the  legal  sense  is  that  which  has  been  declared  legal  tender. 

3.  Money  in  the  usual  economic  sense  is  anything  which  serves  as  a 
measure  of  value,  a  medium  of  exchange,  a  legal  tender,  and  a  receptacle  of 
value. 

4.  Money  is  the  necessary  condition  of  extensive  exchange. 

5.  Among  many  things  formerly  used  as  money,  gold  and  silver  have 
been  selected  on  account  of  their  universal  value,  their  use  in  the  arts,  their 
large  supply,  their  equable  production,  their  high  specific  value,  and  their 
suitability  for  coining. 

6.  Paper  money  is  a  desirable  money  widely  used,  and  consists  of  promises 
to  pay.     It  may  be  either  government  or  private,  and  may  or  may  not  be 
legal  tender. 

7.  The  great  danger  of  paper  money  is  the  liability  to  inflation  and  the 
consequent  disturbance  of  values. 

8.  A  redeemable  paper  currency  secured  by  deposits  and  guarded  in 
amount  is  safe. 

9.  Paper  currency  for  fractions  of  a  dollar  was  displaced  by  silver  in  this 
country,  apparently  without  advantage  to  the  public. 

10.  Irredeemable  paper  money  or  a  fiat  money  enforced  by  governmental 
authority  is  theoretically  sound  in  principle,  but  liable  to  grave  abuse  in 
practice. 

QUESTIONS. 

1.  Define  money  from  the  popular  standpoint;  from  the  legal  standpoint: 
from  the  economic  standpoint. 

2.  In  what  sense  are  greenbacks  money  ?  banknotes?  silver  certificates  ? 

3.  What  are  the  functions  of  money?     How  many  of  these  functions  are 
performed  by  gold  coin?  by  greenbacks?  by  silver  certificates?  by  bank- 
notes? by  checks  or  drafts? 

4.  "What  are  the  advantages   of  gold  and  silver  for  money  purposes  ? 
What  other  things  have  been  used?     Why  was  their  usa  discontinued? 

5.  What  is  paper  money?     What  varieties  are  there? 

G.  What  are  the  advantages  of   paper  money?   its  dangers?     What  is 
needed  to  make  it  safe  ?     How  much  may  be  safely  employed  ? 

7.  Why  was  our  fractional  paper  currency  replaced  by  silver  ?   What  were 
the  gains  and  the  losses  of  this  change  ? 

8.  What  is  tho  real  basis  of  permanently  irredeemable  paper  money  ?     Is 
it  trustworthy  ?    Why  ? 


MONEY  AND  ITS  VARIETIES.  149 


LITERATURE. 

"Walker,  F.  A. :  Money,  Trade,  and  Industry. 
Nicholson,  J.  S.  :  Money  and  Monetary  Problems. 
Knox,  John  Jay :  American  Notes. 

Laughlin,  J.  L. :   History  of  Bimetallism  in  the  United  States. 
Jcvons,  "W.  S. :  Money  and  the  Mechanism  of  Exchange. 
Horton,  S.  D. :   The  Silver  Pound. 
Sherwood,  S. :   T/ie  History  and  Tfteory  of  Money. 
11 


CHAPTER  IV. 

CHANGES  IN  THE  AMOUNT  OF  MONEY— BIMETALLISM. 

The  Amount  of  Money  Needed. — The  question  lias 
often  been  asked,  How  much  money  does  a  country  need  ? 
It  lias  been  replied,  "  It  makes  no  difference.  If  the  supply 
is  abundant  prices  will  be  high  ;  if  the  supply  is  small 
prices  will  be  low  and  the  same  amount  of  money  will  go 
further.  A  little  money  will  do  the  work  of  money  as  well 
as  a  large  supply."  It  is  true  that  there  is  a  relation  be- 
tween the  supply  of  money  and  its  value,  and  that  large  sup- 
ply means  small  value  and  small  supply  large  value,  but  the 
conclusion  drawn  does  not  follow.  When  the  amount  of 
money  is  small  barter  is  always  extensively  used,  and  this  is 
an  inconvenience,  obstructing  trade  and  causing  loss.  Enoxigh 
money  is  needed  so  that  it  can  be  used  in  all  ordinary  trans- 
actions of  life,  thus  enabling  us  to  avoid  a  too  extensive  em- 
ployment of  barter.  But  one  of  the  most  common  business 
transactions  is  the  payment  of  wages.  We  need  enough 
money  so  that  it  will  not  be  too  valuable  to  use  for  that  pur- 
pose; in  other  words,  the  day's  labor  of  an  ordinary  laborer 
should  not  be  inferior  to  the  value  of  a  piece  of  legal  tender 
coin  which  can  be  conveniently  carried.  We  need,  then, 
enough  money  so  that  the  value  of  a  coin  of  convenient  size 
shall  not  exceed  a  day's  wages  of  an  unskilled  laborer.  But 
it  is  desirable  that  money  should  be  still  cheaper,  so  that 
wages  may  be  divided  into  parts.  It  is  not  necessary  for 
money  to  be  cheap  enough  to  enable  us  to  make  our  smallest 
purchases  with  full  legal  tender  money,  because  in  addition 
to  full  legal  tender  money  all  countries  have  subsidiary  coins, 
like  our  fractional  parts  of  a  dollar,  containing  less  coin  in 
proportion  to  nominal  value  than  full  legal  tender,  and  legal 


CHANGES  IN  THE  AMOUNT  OF  MONEY — BIMETALLISM.  151 

tender  only  for  a  small  amount,  with  us  ten  dollars,  and 
minor  coins  like  "  nickels"  and  "coppers"  legal  tender  for 
still  less,  with  us  for  twenty-five  cents.  Silver  dollars  fulfill  the 
conditions  laid  down,  but  gold  does  not.  Gold  is  more  con- 
venient for  large  payments.  The  two  supplement  each  other. 
Fluctuations  in  the  Volume  of  Money. — The  ground 
just  given  for  the  need  of  a  certain  amount  of  money,  to  be 
determined  by  circumstances,  is  not  the  only  consideration 
to  be  kept  in  mind  in  determining  the  amount  of  money 
required  by  a  country.  After  the  above  requirement  has 
been  satisfied  it  may  make  comparatively  little  difference 
whether  we  have  much  or  little,  but  it  makes  a  great  deal 
of  difference  whether  we  increase  or  decrease  the  amount. 
It  is  not  the  "  much  or  little,"  but  it  is  the  "  more  or  less," 
that  is  of  vital  concern.  Few  things  produce  more  intense 
suffering  than  a  decrease  in  the  amount  of  money,  and  this 
is  on  account  of  the  connection  between  past,  present,  and 
future  in  our  economic  life.  lie  who  treats  every  economic 
question  as  if  every  day  were  a  period  of  time  apart  by 
itself  has  scarcely  taken  the  first  step  toward  the  compre- 
hension of  economic  society.  Obligations  have  been  in- 
curred in  the  past,  and  these  are  payable  in  the  present  or 
in  the  future.  Now,  to  decrease  the  amount  of  money 
raises  the  value  of  every  debt  and  adds  to  the  burden  of 
every  debtor,  public  and  private.  It  increases  the  value  of 
notes,  mortgages,  railway  bonds,  and  local,  State,  and  federal 
bonds.  It  enriches  the  few  at  the  expense  of  the  many. 
An  increase  in  the  amount  of  money  does  not  have  the  re- 
verse effect  if  it  is  small,  because  on  account  of  the  growth 
of  wealth,  the  continually  diminishing  use  of  barter,  and  the 
extension  of  trade  into  countries  formerly  outside  of  inter- 
national commerce,  the  opening  xip  of  new  countries  in 
Africa,  Australia,  and  elsewhere  which  need  a  supply  of 
money,  the  value  of  money  tends  to  augment  unless  there  is 
a  growth  in  the  supply.  If  the  amount  remains  stationary 
the  creditors  are  enriched  at  the  expense  of  the  debtors. 
If  the  amount  of  money  is  arbitrarily  increased,  so  that  the 


152  OUTLINES  OF  ECONOMICS. 

value  of  all  debts  may  fall,  it  amounts  to  virtual  robbery  of 
the  creditors.  When  arbitrarily  the  amount  of  money  is 
decreased  it  amounts  to  virtual  robbery  of  the  debtor  class. 

While  it  may  be  dangerous  to  increase  the  supply  of 
money  arbitrarily,  as  by  the  issue  of  paper,  it  is  a  fortunate 
thing  if  the  amount  of  money  slowly  and  continually  in- 
creases without  direct  government  action,  as  by  the  dis- 
covery of  new  and  more  fruitful  gold  mines.  The  reason 
for  this  is  that  the  business  community  is  always  a  debtor 
community,  while  the  idle  classes  are  creditors,  and  that  a 
slight  depreciation  in  the  value  of  money  brought  about  by 
natural  eaiises,  and  which  consequently  does  not  destroy  con- 
fidence on  the  part  of  capitalists,  gives  a  "fillip"  to  busi- 
ness and  helps  to  make  it  prosperous.  It  may  also  be  urged 
that  with  the  progress  of  improvements  in  industry  prices 
tend  to  fall,  and  that  unless  money  increases  in  amount 
those  who  take  no  active  part  in  these  improvements  never- 
theless gain  the  benefit  of  them. 

Silver  Question  and  Bimetallism. — The  discussion  of 
the  amount  of  money  needed  by  a  country  naturally  brings  us 
to  two  topics,  called  the  silver  question  and  bimetallism.  Silver 
and  gold  are  both  used  as  money,  and  as  government  coins 
them  it  determines  the  ratio  in  which  it  will  do  this.  A  ratio 
which  has  been  commonly  established  has  been  one  to  fifteen 
and  a  half,  which  means  that  in  full  legal  tender  coins  one 
ounce  of  gold  shall  be  equal  to  fifteen  and  a  half  ounces  of 
silver.  This  is  the  European  ratio,  but  the  United  States  has 
established  the  ratio  of  one  to  sixteen.  The  European  ratio 
was  maintained  for  about  seventy  years  during  this  century, 
principally  by  France,  but  during  the  latter  part  of  the  period 
by  the  action  of  a  combination  of  countries  called  the  Latin 
Monetary  Union,  in  which  Belgium,  France,  Switzerland, 
and  Italy  were  most  prominent.  These  countries  opened 
their  mints  for  both  gold  and  silver  to  everyone,  and  coined 
money  in  the  ratio  of  one  to  fifteen  and  a  half.  Everyone 
who  had  gold  or  silver  could  have  it  changed  into  money. 
About  1873,  however,  Germany,  having  formerly  used  silver, 


CHANGES  IN  THE  AMOUNT  OF  MONEY — BIMETALLISM.  153 

determined  to  replace  it  with  gold,  and  thus  threw  an  im- 
mense amount  of  silver  on  the  market,  while  the  demand  for 
gold  was  correspondingly  increased.  Other  countries  pur- 
sued similar  courses,  our  own  country  demonetizing  silver, 
that  is,  stopping  the  coinage  of  silver,  making  it  only  a  sub- 
sidiary coin,  instead  of  a  full  legal  tender,  as  it  had  been. 
Like  Germany,  we  introduced  what  is  called  gold  monometal- 
lism. Gold  alone  was  henceforth  to  be  converted  into  coins 
for  anyone  who  offered  it  to  our  mints.  This  action  alarmed 
the  countries  of  the  Latin  LTnion,  and  they  suspended  the 
coinage  of  silver.  To  add  to  the  confusion,  large  discov- 
eries of  silver  had  increased  considerably  the  supply  of  silver, 
and  the  old  ratio  was  destroyed,  silver  falling  in  a  few  years 
so  much  in  value  as  measured  in  gold  that  it  required  twenty 
ounces  and  more  of  silver  to  purchase  one  ounce  of  gold.  All 
this  naturally  increased  the  value  of  money,  and  so  the  value 
of  all  debts,  producing  great  distress  in  Germany  and  in  all 
other  industrial  lands.  But  the  increase  in  debts  was  only  a 
part  of  the  mischief.  Oriental  and  South  American  coun- 
tries use  silver,  and  trade  was  easily  carried  on  with  those 
countries  so  long  as  gold  and  silver  would  readily  exchange 
at  an  established  ratio,  but  when  the  ratio  began  to  fluctuate 
an  uncertain  and  demoralizing  element  was  introduced  into 
trade,  which  rendered  it  highly  speculative,  and  entailed  loss 
upon  the  business  world.  The  merchant  in  Liverpool  who  sold 
goods  to  a  merchant  in  India  agreed  to  receive  a  fixed  sum  of 
silver  money,  but  in  England  it  was  necessary  to  turn  this  into 
gold,  and  a  fall  in  the  value  of  silver  might  bankrupt  him. 

Bimetallism  has  been  proposed  as  a  remedy.  This  means 
that  at  a  fixed  ratio  government  must  coin  all  gold  and  silver 
which  anybody  desires  to  have  coined.  One  country  alone 
cannot  introduce  bimetallism,  because  other  countries  might 
send  to  it  all  their  silver  and  take  away  its  gold,  just  as 
Germany  evidently  contemplated  draining  France  of  at  least 
a  large  portion  of  her  gold.  Experience  seems  to  demonstrate 
that  national  bimetallism  is  out  of  the  question,  and  no 
scientific  economist  favors  it.  Economists  have,  however, 


154  OUTLINES  OF  ECONOMICS. 

generally  come  to  favor  what  is  called  international  bimet- 
allism. International  bimetallism  means  bimetallism  based 
on  an  international  agreement  like  that  which  obtained  in 
the  case  of  the  Latin  Union  before  1874.  It  is  urged  that 
all  countries  should  agree  to  coin  gold  and  silver  at  the  old 
French  ratio  of  one  to  fifteen  and  a  half,  or  some  new  ratio 
to  be  agreed  upon.  If  the  principal  commercial  countries  of 
the  world,  say  France,  Germany,  England,  and  the  United 
States,  should  enter  into  such  an  agreement,  there  is  no 
doubt  that  the  ratio  could  be  maintained.  Gold  and  silver 
are  used  principally  for  money,  and  owners  of  gold  and  silver 
would  be  obliged  either  to  have  it  coined  at  the  government 
ratio  or  sell  it  on  the  market  for  use  in  the  arts.  The  arts 
absorb  only  a  small  proportion  of  the  annual  product,  to  say 
nothing  of  the  enormous  existing  supply  of  gold  and  silver 
money  in  the  world.  Governments  then  are  in  the  position 
of  monopolists,  and  by  agreement  could  maintain  a  fixed  ratio. 
The  advantages  of  this  would  be  to  insure  a  more  adequate 
supply  of  gold  and  silver  and  to  facilitate  business  transactions 
between  gold-using  and  silver-using  countries. 

A  powerful  creditor  class  in  England,  which  gains  by  an 
appreciation  in  the  value  of  money,  it  has  been  stated,  has 
been  powerful  enough  to  keep  England  from  joining  in  the 
action  proposed  by  the  United  States  and  France  for  the  es- 
tablishment of  international  bimetallism,  and  Germany  lias 
refused  to  cooperate  unless  England's  aid  could  be  secured, 
Consequently  up  to  the  present  it  has  not  been  possible  to 
establish  international  bimetallism. 

Recent  Silver  Legislation  in  the  United  States. — 
Full  bimetallism  now  nowhere  exists,  but  the  government  of 
the  United  States  has  not  discarded  silver  or  entirely  demone- 
tized it.  By  the  "Bland  Bill"  of  1878  the  secretary  of  the 
treasury  was  required  to  coin  not  less  than  two  million  dollars' 
worth  of  silver,  nor  more  than  four  million  dollars'  worth,  per 
month.  This  bill  was  in  force  from  February  28,  1878,  till 
August  12,  1890,  and  under  it  were  coined  378,166,793  silver 
dollars,  or  over  two  and  one  half  millions  per  month.  Two 


CHANGES  IN  THE  AMOUNT  OF  MONEY — BIMETALLISM.  155 

facts,  however,  developed  during  this  twelve  years  of  limited 
silver  coinage.  First  it  became  clear  that  Americans  could 
not  be  persuaded  to  use  silver  as  freely  as  the  people  of  Europe 
do.  The  long  familiarity  with  paper  money  had  accustomed 
us  to  its  use  and  its  greater  convenience.  The  second  was  that 
in  spite  of  this  extensive  coinage  silver  continued  to  fall  in 
value.  The  first  difficulty  was  met  by  the  issue  of  silver 
certificates  or  promises  to  pay  silver  dollars.  These  circu- 
lated among  the  people  while  the  silver  dollars  remained  in 
the  treasury.  Of  380,988,466  dollars  coined  up  to  November 
1,  1890,  only  65,709,664  actually  passed  into  circulation,  while 
$308,206,177  silver  certificates  were  issued  and  7,072,625 
were  not  issued  at  all.  This  suggested  the  uselessness  of 
further  coinage  of  silver  dollars. 

The  depreciation  of  silver  suggested  two  opposite  remedies. 
Some  attributed  it  to  the  limitation  put  upon  the  coinage, 
and  urged  free  coinage  as  a  cure.  Others  thought  it  danger- 
ous to  continue  the  issue,  and  urged  suspension  of  silver  coin- 
age. After  a  protracted  struggle  a  compromise  bill  was 
passed,  known  as  the  Sherman  law,  by  which  the  secretary 
of  the  treasury  was  authorized  to  purchase  four  and  a  half 
million  ounces  of  silver  per  month  at  market  price  not  ex- 
ceeding par  (one  dollar  for  three  hundred  seventy  one  and 
one  fourth  grains  of  pure  silver).  This  was  not  to  be  coined 
but  held  as  bullion,  and  in  payment  for  it  were  to  be  issued 
legal  tender  treasury  notes.  Thus  the  coinage  was  stopped, 
and  the  treasury  notes  issued  were  secured  by  more  silver 
certificates.  Under  this  law  were  purchased  between  August 
13,  1890,  and  November  1, 1892,  120,479,981  ounces  of  silver, 
of  which  practically  none  has  been  coined.*  The  bill  seems 
at  present  to  be  the  object  of  strong  attack  from  many  sides, 
as  a  compromise  measure  is  apt  to  be.  The  two  factions, 
favoring  expansion  on  the  one  hand  and  restriction  on  the 
other,  arc  as  little  reconciled  as  ever,  and  the  "  silver  ques- 
tion "  in  the  United  States  must  be  regarded  as  a  decidedly 
unsettled  question. 

*  4,529,322. 6  ounces  purchased  per  month. 


156  OUTLINES  OF  ECONOMICS. 

SUMMARY. 

1.  The  amount  of  money  is  a  secondary  but  not  unimportant  considera- 
tion ;  scarcity  leads  to  barter  and  inconvenience  prejudicial  to  wage-earners. 

2.  Changes  in  the  amount  of  money  are  far  more  dangerous,  impairing  the 
value  of  contracts  and  injuring  debtor  or  creditor.     A  slow  increase,  how- 
ever, seems  desirable. 

3.  The  fixed  ratios  of  silver  to  gold  (16  or  15|  to  1)  have  been  disturbed 
by  fluctuations  in  production  and  especially  by  demonetization  of  silver. 

4.  The  demonetization  of  silver  begun  by  Germany  and  continued  by 
other  nations  has  produced  much  suffering  and  demoralization  in  inter- 
national trade  by  limiting  the  supply  of  money. 

5.  Bimetallism  by  a  single  nation  would  mean  the  substitution  for  gold 
of  the  cheaper  silver  rather  than  a  restoration  of  the  original  ratios,  and  is 
therefore  impracticable. 

6.  International  bimetallism  is  feasible,  and  would  maintain  the  value  of 
silver. 

7.  The  United  Slates  has  tried  limited  coinage  with  only  partial  success. 
The  silver  coin  does  not  circulate,  but  its  place  is  taken  by  the  more   con- 
venient silver  certificates. 

8.  Purchases  of  silver  bullion  are  now  made,  and  treasury  notes  issued 
in  payment,  no  silver  being  coined.     The  present  policy  gives  little  general 
satisfaction. 

QUESTIONS. 

1.  Does  it  make  any  serious  difference  how  much  money  is  in  use  ?    Why  ? 

2.  "What  happens  if  money  is  increased  in  amount?  if  it  is  decreased  ?   Is 
a  small  change  desirable?     If  so,  in  which  direction?     Why? 

3.  What  is  the  relative  value  of  silver  and  gold  ?     What  causes  have 
changed  this  value  ? 

4.  How  can  government  affect  the  value  of  either  metal?     Why? 

5.  What  do  we  mean  by  demonetization  ?     Which  metal  has  been  de- 
monetized ?     Where  ?     When  ? 

6.  What  has  been  the  result  to  gold?  Why?  To  silver?  Why?  To  gen- 
eral prices?  Why?  To  the  debtor  class  ?  Why?  To  the  creditor  class?  Why? 

7.  What  is  monometallism?   bimetallism?     Which  is   general?     What 
would  happen  if  one  country  tried  bimetallism? 

8.  What  are  the  advantages  of  bimetallism  ?     What  is  the  condition  of 
its  success?    Why  has  it  not  been  adopted? 

9.  What  was  the  " Bland  Act  ?"  its  result?    What  occasioned  its  repeal  ? 

10.  Define  the  "Sherman  Law,"  and  give  the  present  status  of  the  silver 
question  in  the  United  States. 

LITERATURE. 

See  works  already  cited  at  the  close  of  the  previous  chapter ;  also: 
Taussig,  F.  W. :   The  Silver  Situation  in  the  United  States. 


CHAPTER   V. 

CREDIT  AND  THE  MECHANISM  OF  CREDIT. 

WE  have  seen  the  immense  development  afforded  to  ex- 
change by  the  use  of  money,  a  development  resulting  in 
division  and  organization  of  labor  and  a  revolution  of  the 
whole  economic  life.  Money,  however,  is  entirely  inadequate 
to  explain  the  magnitude  of  present  commercial  transactions. 
Great  as  is  the  advantage  of  money  over  barter,  money  is  too 
clumsy  an  instrument  for  modern  purposes.  While  money 
is  by  no  means  dispensed  with  in  our  day  it  is  characteristic 
primarily  of  the  economic  stage  preceding  this,  and  an  ever- 
increasing  amount  of  business  dispenses  with  its  use.  The 
characteristic  instrument  of  exchange  in  our  day  is  not 
money  but  credit,  and  its  development  measures  the  perfec- 
tion of  modern  exchange. 

Like  all  terms  which  economics  borrows  from  practical  life, 
the  word  credit  has  many  meanings.  One  of  the  common- 
est is  indicated  when  we  say  that  a  man  has  good  credit. 
We  mean  that  he  lias  the  reputation  of  paying  his  debts  and 
has  the  ability  to  do  so.  Men  are  therefore  willing  to  sell 
him  goods  and  wait  for  their  pay  until  a  future  period. 
Another  important  meaning  of  the  word  refers,  not  to  the 
character  of  the  man,  but  to  the  transaction  itself.  The 
transfer  of  goods  without  immediate  payment  in  money  or 
other  goods,  but  with  the  expectation  of  future  payment,  is 
credit.  It  is  this  idea  which  we  consider  in  economics  under 
the  name  of  credit.  We  therefore  define  this  much-disputed 
term  as  follows  :  Credit  is  a  transfer  of  goods  for  a  promised 
equivalent.  First,  the  transaction  is  partly  present  and  partly 
future.  Second,  the  transaction  involves  confidence  on  the 
part  of  the  lender,  based  either  on  the  character  and  resources 


158  OUTLINES  OF  ECONOMICS. 

of  the  borrower  or  on  goods  pledged  by  him  for  the  fulfill- 
ment of  his  promise.  A  third  factor  usually  present  is  an 
evidence  of  indebtedness  delivered  to  the  lender.  This 
constitutes  the  instrument  of  credit,  in  its  narrower  sense. 

The  Mechanism  of  Credit  consists  of  two  parts  :  first, 
the  evidences  of  indebtedness  or  instruments  of  credit,  such 
as  checks,  drafts,  notes,  bonds,  etc.  ;  and  second,  the  institu- 
tions of  credit,  consisting  principally  of  banks  and  clearing 
houses. 

The  Instruments  of  Credit. — A  check  is  an  order  given 
by  a  private  individual  or  company  upon  a  bank  ordering  the 
payment  of  a  certain  sum  of  money  to  the  order  of  a  person 
named  or  to  the  bearer  of  the  check.  In  this  form  of  credit 
transaction  the  element  of  time  is  reduced  to  a  minimum. 
If  money  were  paid  the  person  receiving  it  would  very 
likely  carry  it  to  the  bank,  and  as  it  is  he  carries  the  check 
instead.  The  element  of  credit  here  prominent  is  the  trust 
or  confidence  involved.  Until  we  know  that  the  payer 
has  money  in  the  bank  we  do  not  know  whether  we  shall 
get  our  pay  or  not.  The  time  element  is  so  slight  that  it 
is  usually  disregarded.  A  draft  is  a  check  issued  by  a 
bank  upon  another  bank.  A  note  is  a  written  promise  to 
pay.  Here  the  time  element  is  important  and  is  recognized 
by  the  payment  of  interest  according  to  laws  which  we  shall 
consider  later.  A  bond  is  one  form  of  government  note. 
Recalling  what  wras  before  said  as  to  paper  money,  we  see 
that  promise  money  is  only  a  note  issued  by  the  government 
or  by  a  bank  which  for  particular  reasons  does  not  bear  interest. 
The  ordinary  instruments  of  credit  do  not  circulate  freely, 
like  money,  but  are  intended  to  be  used  primarily  in  one 
transaction.  They  are  by  no  means  confined  to  this,  how- 
ever, in  every  case.  Notes  are  very  often  transferred  once, 
twice,  or  many  times,  and  checks  and  drafts  often  pass  through 
many  hands,  but  always  with  reference  to  the  character  and 
credit  of  the  persons  involved.  Their  relationship  to  money 
does  not  occasion  any  practical  difficulty.  Many  things  in- 
dicate that  one  is  intended  for  general  use  and  the  other 


CREDIT  AND  THE  MECHANISM  OF  CREDIT.          159 

for  particular  transactions.  Money  makes  no  mention  of 
any  person  to  whom  payment  is  to  be  made,  and  is  issued 
in  denominations  having  reference  not  to  a  particular  trans- 
action but  to  general  convenience.  Instruments  of  credit 
are  usually  issued  in  amounts  determined  by  particular  trans- 
actions; they  are  issued  to  particular  parties,  and  are  trans- 
ferable usually  only  by  indorsement. 

A  note  may  be  given  in  two  ways.  A  person  who  buys  goods 
for  "  value  received  "  promises  to  pay  the  person  of  whom  the 
goods  are  bought.  But  the  seller  may  also  "  draw  on  "  the 
buyer  by  means  of  a  bill  of  exchange,  also  called  a  draft. 
Let  us  say  A  is  the  seller,  B  the  buyer.  A  then  writes  out  an 
order  to  B  to  pay  to  himself  or  a  third  party,  as  C,  "  for 
value  received,"  the  amount  of  the  debt.  A,  the  creditor, 
signs  the  bill.  If  B  acknowledges  the  debt,  and  is  ready  to 
agree  to  pay  it,  he  writes  on  the  bill  when  presented  "Ac- 
cept "  and  signs  his  name.  It  then  becomes  binding,  and  the 
merchant  who  does  not  pay  his  drafts  when  they  fall  due  be- 
comes bankrupt.  A  check  or  bill  may  be  transferred  by  in- 
dorsement. The  person  to  whom  payment  is  to  be  made,  the 
payee,  writes  his  name  on  the  back  with  an  order  that  the 
money  be  paid  to  a  fourth  party,  D,  the  indorsee.  The  payee 
who  indorses  the  instrument  of  credit  is  the  indorser.  The 
indorsee  may  assign  the  instrument  to  still  another  party,  as 
E,  by  a  new  indorsement,  and  he  then  becomes  indorser.  This 
may  be  continued  indefinitely,  and  thus  the  instrument  may 
pass  from  hand  to  hand  in  place  of  money,  each  one  who  in- 
dorses it  becoming  responsible  provided  that  no  previous  in- 
dorser can  be  made  to  fulfill  his  obligation.  Other  terms  are 
readily  understood,  as  payer,  the  one  who  must  pay  ;  drawer, 
the  one  who  draws  an  instrument  of  credit ;  drawee,  the  one 
on  whom  it  is  drawn. 

Book  credit  is  extensively  used.  When  goods  are  trans- 
ferred a  record  of  it  is  kept,  or,  as  we  ordinarily  say,  the 
goods  are  "charged,"  and  a  bill  is  afterward  sent  for  the 
amount.  A  vast  amount  of  credit  is  granted  in  this  simple, 
old-fashioned  way,  both  in  wholesale  and  retail  trade.  Re- 


160  OUTLINES  OF  ECONOMICS. 

cently  large  mercantile  establishments  have  tried  to  abolish 
book  credits,  and  it  may  not  be  too  much  to  say  I/hat  there 
has  been  a  general  movement  toward  restricting  it  and  defin- 
ing its  limits  more  accurately. 

Advantages  of  Credit. — The  advantages  of  credit  may 
be  thus  summarized  :  1.  Credit  furnishes  a  more  perfect  and 
convenient  means  of  payment  in  large  sums  and  between 
distant  places  than  the  precious  metals,  saving  time  and 
labor.  This  is  effected  by  means  of  notes,  checks,  and  bills 
of  exchange.  It  is  thus  that  only  small  sums  of  money  are 
sent  from  one  country  to  another  in  international  trade. 
Only  balances  are  paid  in  money.  If  some  London  mer- 
chants owe  New  York  merchants  a  million  pounds  and  other 
New  York  merchants  owe  these  London  merchants  a  million 
pounds,  it  is  obvious  that  no  money  need  leave  either  country. 
The  London  merchants  will  send  orders  to  their  New  York 
debtors  to  pay  their  New  York  creditors.  This  is  the  simplest 
kind  of  cancellation  of  indebtedness.  In  actual  life  it  is 
more  complex,  but  the  principle  is  the  same.  If  the  London 
creditors  of  New  York  merchants  are  not  the  same  as  the 
London  debtors,  the  debtors  could  buy  orders  of  the  credi- 
tors and  send  them  to  New  York.  If  New  York  merchants 
owe  London  merchants,  it  is  possible  that  Paris  merchants 
may  owe  New  York  merchants  an  equal  sum,  while  London 
merchants  are  in  debt  to  Paris  merchants  to  the  same  amount. 
By  exchange  of  orders  all  debts  could  be  paid.  This  is 
called  arbitration  of  exchange.  Naturally  a  class  has  arisen 
which  deals  in  these  instruments  of  credit,  and  this  is  the 
class  of  bankers  and  brokers.  Debtors  and  creditors  both 
resort  to  them.  Bankers  and  brokers  are  the  middlemen 
betAveen  debtors  and  creditors. 

2.  Credit   takes  the  place  of    corresponding   amounts  of 
gold  and  silver.     This  is  a  saving,  enabling  us  to  employ  the 
precious  metals  for  other  useful  purposes. 

3.  Capital  is  employed  more  productively.     He  who  pos- 
sesses capital,  but  is  for  any  reason  unable  or  unwilling  to 
use  it,  transfers  it  to  another  for  compensation,  and  thus 


CREDIT  AND  THE  MECHANISM  OF  CREDIT.          161 

both  are  benefited  as  well  as  the  public  economy.  Other 
things  being  equal,  it  is  given  to  him  who  will  pay  the  most 
for  it,  and  in  a  normal  condition  of  things  this  is  the  one 
who  can  employ  it  most  productively. 

4.  Credit  enables  those  who  have  business  qualifications 
and  no  capital,  or  inadequate  capital,  to  engage  in  business 
and  to  employ  their  talents  for  their  own  benefit  and  for  the 
benefit  of  society.     Many  thus  start  without  capital,  and  in 
the  end  become  capitalists  themselves.     Credit  has  been  the 
starting-point  of  many  of  the  large  fortunes  now  existing. 
Credit  brings  together  in  numerous  instances  capital  with- 
out business  qualifications  or  inclination  for  business,  and  tal- 
ent without  capital,  and  thus  may  be  said  to  be  not  without 
influence  in  uniting  capital  and  labor  harmoniously.     This  is 
particularly  the  case  with  those  institutions  which  supply 
capital  to  the  poorer  classes,  like  the  German  cooperative 
credit  unions,  which  furnish  artisans,  mechanics,  and  small 
traders  with  capital,  and  with  American  building  associations, 
which  furnish  the  same  classes  with  capital  for  the  construc- 
tion of  homes. 

5.  Credit  gathers  together  the  smallest  sums,  particularly 
by  means  of  savings  banks,  and  these  small  sums  forming  a 
large  aggregate  are  productively  employed  by  joint-stock 
companies  and  other  concerns.     Capital  is  thus  concentrated, 
but  its  returns  are  scattered  among  the  people.     Credit  en- 
courages capital  accumulation  and  promotes  thrift.     Credit 
in  this  manner  gives  employment  to  small  accumulations  as 
they  are  made,  and  this  helps  men  to  provide  for  emergen- 
cies and  for  old  age.     Other  advantages  of  credit  will  sug- 
gest themselves  to  the  careful  observer. 

Evils  of  Credit. — The  dark  side  of  the  credit  economy 
must  not  be  overlooked.  It  continually  encourages  extrava- 
gance, and  this  is  a  fruitful  source  of  fraud  and  embezzle- 
ment. Credit  promotes  precarious  speculation,  because  those 
who  engage  in  it  have  little  of  their  own  capital  to  lose,  and 
are  over-reckless  with  the  capital  of  other  people.  Our  en- 
tire land  is  strewn  with  the  ruins  of  businesses  wrecked  by 


162  OUTLINES  OF  ECONOMICS. 

men  who  have  mismanaged  the  property  which  unwise  credit 
gave  into  their  hands.  As  credit  sometimes  enables  the  poor 
man  with  gifts  recognized  and  favorably  situated  to  become 
an  independent  producer,  it  frequently  enables  the  one 
already  producing  on  a  vast  scale  to  extend  his  gigantic 
operations  and  crush  out  men  who  have  been  independent 
producers. 

It  has  been  said  that  all  "  consumptive  credit,"  that  is, 
credit  to  enable  one  to  spend  money  for  one's  personal  grati- 
fication, or  for  personal  use  in  any  way,  is  bad,  while  pro- 
ductive credit,  credit  for  carrying  on  a  business,  is  good  ; 
but  the  line  cannot  be  so  sharply  drawn.  Consumptive  credit 
frequently  leads  to  extravagance,  but  it  also  has  enabled 
many  a  young  man  to  develop  personal  powers  and  to  be- 
come a  great  artist  or  scholar,  while,  as  just  seen,  productive 
credit  frequently  causes  loss. 

Institutions  of  Credit. — Bankers  have  already  been 
described  as  men  who  go  between  borrowers  and  lenders,  or 
as  middlemen  in  credit  transactions.  They  are  sometimes 
called  dealers  in  credit,  and  there  is  little  that  they  do  which 
is  not  in  one  way  or  another  connected  with  credit.  But 
banks  are  not  mere  agents.  They  have  a  capital  of  their 
own  which  serves  the  purpose  of  a  guarantee  fund,  and  they 
receive  money  which  their  customers  deposit  with  them,  and 
mingle  this  with  their  own,  gaining  exclusive  control  over 
it  all.  They  become  the  debtors  of  the  depositors  and  the 
creditors  of  those  to  whom  they  lend  money.  Their  source 
of  profit  is  not  chiefly  their  own  capital,  but  the  capital  de- 
posited with  them.  Sometimes  they  pay  no  interest,  and  if 
they  pay  interest  they  charge  more,  the  difference  constitut- 
ing their  profit. 

Formerly  banks  in  the  United  States  nearly  all  issued 
notes  which  circulated  as  money,  and  this  was  regarded  as 
their  principal  business.  Now  only  national  banks  are  al- 
lowed to  issue  notes,  and  they  must  deposit  bonds  at  Wash- 
ington as  security  for  this  circulation. in  addition  to  paying 
a  tax  for  the  privilege.  All  governments  in  civilized  coun- 


CREDIT  AND  THE  MECHANISM  OF  CREDIT.         163 

tries  have  greatly  restricted  the  power  of  banks  to  issue 
circulating  notes  to  serve  as  money,  and  the  number  of  banks 
that  find  a  source  of  profit  in  the  production  of  bank  money 
is  constantly  diminishing.  Perhaps  some  day  all  govern- 
ments will,  as  has  been  advocated  by  many  able  thinkers,  re- 
serve to  themselves  the  exclusive  right  to  issue  paper  money. 

Clearing  houses  are  labor-saving  institutions  originally 
contrived  by  employees  of  banks.  Banks  in  a  city  have  con- 
tinual dealings  with  one  another.  A  customer  of  a  bank  de- 
posits with  it  all  his  checks,  no  matter  on  what  bank  drawn. 
It  consequently  happens  that  a  bank  in  Xew  York,  for  exam- 
ple, will  receive  checks  every  day  on  all  the  other  banks, 
while  all  the  other  banks  receive  checks  drawn  on  it.  For- 
merly there  was  continual  running  back  and  forth.  A  run- 
ner from  each  bank  went  to  all  the  other  banks.  Xow  the 
representatives  of  all  the  banks  meet  in  one  common  place, 
and  exchange  checks,  drafts,  etc.,  and  only  the  differences 
or  balances  between  the  sums  due  and  the  sums  which  a  bank 
owes  are  paid.  If  more  is  owed  to  a  bank  than  is  due  from  it 
to  the  other  banks  it  receives  this  difference  from  the  clear- 
ing house  ;  if  it  owes  more  than  is  due  it,  it  pays  the  dif- 
ference. The  sums  due  the  clearing  house  and  the  -sums 
which  it  must  pay  of  course  balance  perfectly,  and  it  is  left 
without  any  money  on  hand. 

The  clearing  house  statistics  illustrate  the  inadequacy  of 
money  to  do  the  business  of  the  world.  The  total  transactions 
of  the  clearing  houses  in  the  United  States  for  the  year  ending 
September  30,  1888,  amounted  to  over  fifty  thousand  millions 
of  dollars,  or  more  than  thirty  times  all  the  money  in  the  coun- 
try, bank  notes  included  ;  for  the  money  in  the  country  at  the 
time  was  only  about  sixteen  hundred  millions  of  dollars.* 

*The  manager  of  Hie  Xew  York  Clearing  House,  Mr.  "William  Schcrer, 
kindly  furnishes  the  latest  statistics  of  that  institution,  which  are  as  follows : 

Exchanges,  year  ending  December  31,  1892 $36,662,469,201  55 

Balances....' 1,888,087,262  97 

Transactions 38,550,556,464  52 

Average  daily  exchanges 120,600,227  6H 

Average  daily  balances 6,210,813  36 


164  OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Money  has  proved  inadequate  for  modern  exchange,  and  credit  has 
displaced  it  for  ordinary  large  transactions. 

2.  Credit  is  a  transfer  of  goods  for  a  promised  equivalent. 

3.  The  chief  instruments  of  credit  are  checks,  orders  on  a  bank  dru\vu 
by  a  private  person ;  drafts,  checks  drawn  by  a  bank ;  promissory  notes, 
bills  of  exchange,  and  book  credit,  or  "charging." 

4.  Credit  greatly  economizes  money  transactions  and  the  attendant  use 
and  transportation  of  the  precious  metals,  and  aids  in  the  productive  em- 
ployment and  wise  distribution  of  capital. 

5.  Credit  often  results  in  speculation  and  waste  as  well  as  in  destructive 
commercial  warfare,  disastrous  both  to  individual  and  public  welfare. 

6.  Banks  are  institutions  for  facilitating  credit  transactions. 

7.  Clearing  houses  are  institutions  to  facilitate  transfers  of  credit  between 
banks. 

QUESTIONS. 

1.  What  different  meanings  has  the  word  credit?     In  which  sense  is  it 
used  in  economics  ? 

2.  Is  there  always  a  time  advantage  in  credit?     What  other  advantage  is 
there  in  credit  payment? 

3.  What  is  a  check  ?  a  note  ?  a  bill  of  exchange  ?  a  bank  draft  ?     What 
other  kind  of  draft,  and  how  is  it  used? 

4.  What  is  a  note  ?  a  bond  ? 

5.  What  is  the  advantage  of  a  note  ?  of  a  check  ? 

6.  What  is  book  credit  ?     What  is  the  present  tendency  regarding  it  ? 
Why? 

1.  What  effect  does  credit  have  upon  the  productiveness  of  capital,  and 
why?  upon  the  accumulation  of  capital,  and  why?  Have  these  two  re- 
sults any  connection,  and  if  so,  what  ? 

8.  What  are  the  evils  of  credit?     Are  the  evils  to  society  as  serious  as  to 
individual  owners?     Why? 

9.  What  is  a  bank?     Enumerate  all  the  functions  of  a  bank.     How  do 
they  make  their  money?     Is  this  legitimate,  and  why? 

10.  What  are  the  advantages  of  bank  money?  its  dangers?  the  present 
tendency  regarding  it? 

11.  What  is  a  clearinghouse?     What  are  its  functions  ?     About  what 
part  of  the  checks  and  drafts  drawn  on  Xew  York  banks  are  mutually  can- 
celed ?     How  are  the  balances  paid  ? 

LITERATURE. 

Knox,  John  Jay :  Reports  as  Comptroller  of  the  Treasury,  in  United  States 
Finance  Reports  for  1875-76. 


CREDIT  AND  THE  MECHANISM  OF  CREDIT.          165 

Gilbart,  J.  S.  :  Uislnnj,  Prinripks,  and  Practice  of  Banking. 

Dunbar,  C.  F. :   The  Theory  and  History  of  Banking. 

Bagehot,  Walter:  Lombard  Street. 

Morse,  J.  T. :  Banks  and  Banking.     (This  work  presents  the  legal  side  of 
the  subject.) 

Walker,  F.  A.:  Money,  Trade,  and  Industry;  and  Political  Economy. 

Ely,  R.  T. :  "  German  Cooperative  Credit  Unions,"  in  the  Atlantic  Monthly, 
February,  1891. 

See  the  article  "Clearing  System"  in  the  English  Dictionary  of  Political 
Economy.     Edited  by  R.  H.  luglis  Palgrave.     Also  articles  in  other  diction- 
aries and  cyclopedias. 
12 


PART   III. 

DISTRIBUTION. 


CHAPTER  I. 

DEFINITIONS  OF  DISTRIBUTION  AND  RENT. 

IT  has  already  been  remarked  that  the  production  and  the 
distribution  of  the  annual  income  of  society  cannot  be  sharply 
separated,  and  the  reader  must  have  observed  that  more  or 
less  has  been  said  about  the  four  parts  into  which  the  prod- 
ucts of  industry  are  usually  divided,  namely,  wages,  interest, 
profits,  and  rent.  Taxes  may,  perhaps,  be  regarded  as  a  fifth 
part  into  which  the  annual  income  of  society  is  divided,  and 
we  may  treat  taxes  as  the  part  which  society,  organized  as 
the  State,  receives  for  its  participation  in  production.  But, 
if  this  view  is  taken,  we  have  a  fifth  part  peculiar  in  so  many 
respects  that  it  is  desirable  to  treat  it  neither  under  produc- 
tion nor  distribution. 

The  greater  part  of  distribution  might  undoubtedly  be  con- 
sidered under  the  general  heading  "  Production,"  but  on  the 
other  hand  it  is  frequently  asserted  that  distribution  is  "  the 
true  center  of  all  economic  inquiries,"  and  it  would  be  pos- 
sible to  treat  nearly  the  whole  of  production  from  the  stand- 
point of  distribution.  The  truth  is  that  these  old  traditional 
divisions  of  our  subject-matter  indicate  different  points  of 
view,  and  on  this  account  it  seems  desirable  to  retain  them. 
When  we  pass  from  production  to  distribution  we  do  not 
enter  by  any  means  an  entirely  new  field,  but  we  look  at  an 
old  field  of  investigation  from  a  new  point  of  view. 

We  have  to  discuss  under  the  name  distribution  two  dif- 


DEFINITIONS  OF  DISTRIBUTION  AXU  RENT.          167 

ferent  processes.  The  first  and  inclusive  meaning  of  the 
term  is  the  distribution  of  wealth  or  income  of  society  among 
individuals  and  families  ;  in  other  words,  the  question  of  indi- 
vidual fortunes,  poverty  and  wealth.  This  distribution  is 
to  a  large  degree  the  result  of  conscious  effort  on  men's  part 
to  control  it.  The  second  kind  of  distribution  is  the  divi- 
sion of  the  product  among  the  different  factors  of  produc- 
tion. This  is  not  a  question  of  wealth  versus  poverty,  but  of 
wages  versus  interest,  profits,  rent,  etc.  Of  course  this  kind 
of  distribution  affects  the  question  of  private  fortunes  very 
considerably,  but  it  is  by  no  means  the  same  question.  It  is 
not  at  all  clear  that  it  would  not  be  better  to  call  this  kind  of 
distribution  by  a  different  name,  but  here,  as  in  the  case  of 
capital,  usage  is  too  strong  for  us,  and  we  must  consider  two 
things  under  one  name.  There  is  need  of  care,  therefore, 
that  we  know  just  which  idea  is  meant  when  the  word  is 
used. 

There  is  another  sense  in  which  the  word  is  not  used  in 
economics.  We  never  mean  by  distribution  the  moving  of 
goods  about  over  the  country  from  the  point  where  they  are 
manufactured  to  the  place  where  they  are  consumed.  AVhen 
we  hear  of  railways  or  other  concerns  as  "  distributive  agen- 
cies "  we  are  using  the  word  distribution  in  a  sense  wholly 
different  from  that  of  the  economic  term  distribution.  Dis- 
tribution is  a  question  of  ownership,  not  a  question  of  the  lo- 
cation of  goods. 

This  brings  us  to  the  question  of  the  institution  of  private 
property,  and  recalls  the  fact  that  whatever  may  be  the 
origin  of  private  property  its  present  existence  is  due  to 
government.  It  is  not  the  individual  who  maintains  the  in- 
stitution of  private  property,  or  modifies  it  by  conscious  ef- 
fort, but  the  State.  Now,  the  question  of  private  fortunes 
depends  primarily  upon  the  action  of  the  State  regarding 
private  property.  This  general  distribution  is  therefore  a 
question  not  of  private  but  of  public  economics,  and  its  con- 
sideration comes  in  Book  III.  Our  attention  in  this  place 
will,  therefore,  be  confined  to  that  subsidiary  process  of 


168  OUTLINES  OF  ECONOMICS. 

dividing  the  results  of  production  among  the  different  factors 
which  have  combined  to  produce  them.  This  process,  which 
we  may  call  product  distribution,  is  chiefly  controlled  by  un- 
conscious social  forces,  and  the  State  interferes  only  in  a  gen- 
eral way  and  to  a  limited  extent  with  the  workings  of  these 
forces.  Such  conscious  interference  as  there  is  is  largely  the 
work  of  private  organizations. 

Rent. — Rent  is  that  which  is  paid  for  the  use  of  land.  In 
spite  of  sundry  attempts  to  extend  the  meaning  of  the  word 
it  has  remained  one  of  the  best  defined  and  least  ambiguous 
terms  in  economic  science.  But  while  economists  are  nearly 
agreed  in  their  use  of  the  term  the  popular  meaning  of 
the  word  is  much  less  exact.  That  which  is  paid  for  the  use 
of  a  house  or  building  of  any  sort  is  commonly  called  rent. 
We  shall  see  that  this  so-called  rent  really  consists  of  two 
elements,  one  a  ground  rent,  or  rent  proper,  the  other  capi- 
tal rent,  or  what  we  shall  call  gross  interest.  If  this  distinc- 
tion seems  fanciful  it  is  only  because  we  are  accustomed  to 
see  the  two  united  under  one  ownership.  But  in  most  large 
cities  separate  OAvnership  is  common.  Sometimes  one  man 
owns  the  land  and  leases  it  for  a  long  term  of  years  to  an- 
other who  erects  buildings  upon  it,  which  either  with  or  with- 
out payment  become  the  property  of  the  landowner  at  the 
expiration  of  the  lease,  unless  it  is  renewed,  and  if  it  is 
renewed  the  one  who  possesses  the  house  must  frequently 
pay  for  it.  Often,  however,  the  separation  in  ownership  is  a 
permanent  one,  the  houseowner  paying  perpetually  an  an- 
nual sum  for  the  use  of  the  ground.  This  is  the  case  in 
Baltimore,  for  example,  where  ground  rents  are  an  important 
feature  in  the  economic  life  of  the  city. 

In  such  cases  the  two  kinds  of  rent  are  very  clearly  distin- 
guished. AVe  shall  see  later  that  they  are  really  governed 
by  different  laws,  so  that  while  capital  brings  a  less  return  as 
society  develops,  land  brings  an  increasing  return.  Let  us 
remember,  then,  that  in  economic  discussion  generally  the 
term  rent  means  only  an  income  from  land,  and  that  it  is 
used  only  in  this  sense  in  the  following  discussion. 


DEFINITIONS  OF  DISTRIBUTION  AND  RENT.         169 

The  principal  difficulty  connected  with  the  subject  of  rent 
lies  in  determining  the  law  which  governs  its  amount.  As 
has  been  already  said,  the  portion  of  produced  goods  falling 
to  the  share  of  the  different  factors  of  production  is  deter- 
mined in  the  first  instance  by  laws  independent  of  human 
contrivance.  Of  course  men  may  and  do  supplement  or  in- 
terfere with  the  operation  of  these  laws  to  any  extent.  Some 
of  these  efforts  we  shall  consider  in  the  present  book,  others 
in  Book  III,  but  for  the  present  we  shall  confine  ourselves  to 
the  fundamental  laws  already  referred  to. 

The  first  thing  to  be  noted  about  land  is  its  quality.  Dif- 
ferences of  fertility  are  familiar  to  everyone,  and  depend 
upon  what  has  been  known  as  "  the  natural  and  indestructible 
properties  of  the  soil.  "  An  effort  has  been  made  of  late  by 
certain  writers  to  minimize  or  deny  the  significance  of  this 
factor.  It  has  been  said  that  "  soil "  is  not  indestructible, 
that  it  may  be  exhausted  or  removed  from  land  altogether, 
and  that  it  may  in  turn  be  created  by  means  of  fertilization, 
etc.  These  writers  recognize  in  land  no  other  indestructible 
property  than  standing  room.  This  objection  arises  from 
the  use  of  the  word  soil  in  a  narrow  sense.  If  by  "  soil "  we 
mean  only  that  thin  top  layer  of  the  land  containing  some 
elements  necessary  to  plunt  life,  it  is  true  that  this  may  be 
carted  on  or  off  at  pleasure,  that  it  may  be  wasted  or  replen- 
ished. But,  granting  this,  there  still  remain  many  qualities 
of  land  which  are  indestructible  and  unproducible,  and  which 
so  directly  affect  the  productiveness  of  the  land  that  we  may 
not  inappropriately  call  them  "properties  of  the  soil."  Such 
a  property  is  the  conformation  of  the  land.  A  steep  gravelly 
hillside  will  by  no  possible  effort  equal  a  plain  in  fertility. 
The  north  side  of  a  mountain  cannot  be  made  to  produce  the 
same  as  the  south  side.  Climate  is,  to  be  sure,  not  a  "prop- 
erty of  the  soil,"  but  it  is  an  inseparable  appurtenance  of  the 
land,  and  upon  it  the  productiveness  of  the  land  primarily  de- 
pends. It  is  needless  to  say  that  the  ownership  of  a  piece  of 
land  carries  with  it  the  advantage  of  all  the  conditions  which 
attach  to  that  land.  It  is  simply  true,  therefore,  that  the 


1?0  OUTLINES  OF  ECONOMICS;, 

expression  "  natural  and  indestructible  properties  of  the  soil " 
is  an  inadequate  and  misleading  expression  ;  not  that  there  is 
nothing  but  standing-room  to  be  considered  under  such  a 
term.  We  will  therefore  adopt  another  expression  to  ex- 
plain what  we  mean  by  quality  in  land,  namely,  the  irremov- 
able conditions  affecting  its  productiveness.  Of  these  its 
extent  (standing-room),  its  conformation,  and  its  climate  are 
essentially  natural  and  indestructible.  Others,  such  as  are 
connected  with  the  "  soil "  in  the  narrow  sense,  are  not  inde- 
structible nor  necessarily  natural,  but  they  affect  rent  none 
the  less.  In  defining  quality  as  the  conditions  affecting 
productiveness  of  land  we  have  discarded  the  word  "  soil " 
because  it  has  proved  itself  treacherous ;  we  have  omitted 
the  words  "  natural  and  indestructible "  because  fertility 
may  be  artificial  and  is  always  destructible.  On  the  other 
hand,  fertility,  even  when  artificial,  becomes  essentially  a 
part  of  the  land.  Of  course,  it  is  physically  removable  but 
not  economically  so.  From  the  case  where  capital  is  em- 
bodied in  land  and  entirely  assimilated  to  it  in  character  we 
pass  by  insensible  gradations  to  fences,  barns,  houses,  etc., 
which  more  and  more  assume  the  character  of  capital  as  dis- 
tinguished from  land.  It  would,  of  course,  be  possible  to  re- 
strict the  term  land  to  strictly  natural  land  and  apply  the 
term  capital  to  all  products,  including  the  soils  of  old 
land.  This  would  be  a  logical  distinction,  but,  like  so  many 
logical  distinctions,  it  would  be  confusing.  On  the  other 
hand,  if  we  include  under  land  all  capital  that  has  been  in- 
corporated in  it  we  must  recognize  that  there  is  no  absolute 
line  of  division  between  land  and  capital.  Thus  we  are 
again  reminded  that  distinctions  in  economics,  as  well  as  in 
practical  life,  are  questions  of  convenience,  and  are  good  or 
bad  according  as  they  are  more  or  less  useful. 

The  second  great  fact  regarding  land  is  location.  On  one 
side  this  is  closely  connected  with  climate.  Land  situated 
near  a  body  of  water  or  near  a  mountain  range  is  much  af- 
fected by  these  great  controllers  of  climate.  But  a  more 
distinct  meaning  of  the  word  is  location  with  regard  to  the 


DEFINITIONS  OF  DISTRIBUTION  AND  RENT.         171 

consumers  of  products.  Everybody  knows  that  land  a 
hundred  miles  from  market  is  worth  more  than  land  a 
thousand  miles  from  market.  The  difference  is  simply  one 
of  transportation.  This,  however,  is  not  simply  a  question 
of  distance,  but  also  one  of  accessibility.  Land  may  be  far 
away  and  yet  easy  to  reach,  or  near  and  difficult  of  access. 
It  will  be  noted  that  any  change  in  the  cost  of  transportation 
affects  rent.  The  rents  of  England  have  been  revolutionized 
by  cheap  ocean  transportation,  which  has  practically  brought 
distant  land  very  near  to  her  shores. 

To  this  fact  of  location  we  must  ascribe  almost  wholly  the 
enormous  rents  paid  for  city  lots  as  contrasted  with  the 
insignificant  rents  paid  for  lots  in  the  suburbs  or  in  small 
towns.  Here,  again,  transportation  powerfully  affects  rents. 
Good  means  of  rapid  transit  increase  the  value  of  suburban 
lots  and  check  the  rise  of  city  rents.  It  is  believed  by  some 
that  the  development  of  these  means  of  transit  will  not  only 
stop  the  advance,  but  even  bring  about  a  reduction  in  city 
rents,  which  have  been  increasing  for  a  century  or  more. 

Having  noticed  that  land  differs  greatly  in  quality  and 
location,  we  may  now  reduce  these  two  differences  for  pur- 
poses of  convenience  to  one.  Suppose  a  man  in  New  York 
city  owns  two  farms,  one  in  Dakota  and  one  in  New  York. 
If  the  farm  in  Dakota  produces  thirty  bushels  of  wheat  to 
the  acre  and  it  costs  ten  bushels  of  this  to  get  it  to  New 
York  city,  while  the  New  York  farm  raises  twenty-two 
bushels  and  it  costs  two  bushels  of  this  to  get  it  to  market, 
the  farms  are  equally  productive  so  far  as  the  owner  is  con- 
cerned. If  the  other  conditions  of  production  are  the  same 
the  land  is  equally  valuable  to  the  owner.  To  be  short,  we 
may  say  that  the  two  pieces  of  land  are  equally  good  land. 
Whenever  we  speak  of  good  land,  therefore,  in  connection 
with  the  subject  of  rent,  we  mean  land  which  for  all  reasons 
taken  together  is  desirable. 


172  OUTLINES  OF  ECONOMICS. 


STTMMABY. 

1.  "  Distribution  "  may  mean  the  distribution  of  wealth  among  individ- 
uals, or  the  distribution  of  the  product  among  the  factors  of  production. 
The  latter  is  included  under  private  economics. 

2.  Rent  is  that  which  is  paid  for  the  use  of  land.     Capital  invested  in 
houses,  etc.,  is  not  included  in  land  in  this  sense. 

3.  Land  differs  in  quality,  that  is,  in  fertility,  climate,  accessibility,  etc. 
Its  quality  is  to  be  estimated  by  its  net  productivity  or  ability  to  put  prod- 
ucts into  the  market.     "  Good  land  "  means  productive  land  well  located. 

QUESTIONS. 

1.  "What  two  meanings  has  the  word  distribution  in  economics?     What 
third  meaning  not  recognized  in  economics  ? 

2.  In  which  of  the  economic  senses  is  it  used  in  Book  II?     Why  is  the 
other  postponed  to  Book  III  ? 

3.  What  differences  are  there  in  land?     What  is  meant  by  "good  land" 
in  economics? 

4.  What  two  meanings  are  there  for  the  word  "  rent?  "     In  which  sense 
is  it  here  used?     What  is  included  under  land? 

LITEBATTTRE. 

George,  Henry :  Progress  and  Poverty. 
George,  Henry:  Social  Problems. 
Walker,  F.  A. :  Land  and  its  Kent. 
Clark,  J.  B. :   Capital  and  its  Earnings. 


CHAPTER  II. 

RENT  WITH  AND  WITHOUT  FREE  LAND. 

RENT  must  be  considered  in  two  aspects:  first,  rent  while 
free  land  remains;  second,  rent  when  all  land  is  taken.  The 
latter  is  seldom  realized,  but  it  is  the  certain  outcome  if 
population  continues  to  increase  and  private  property  in 
land  is  maintained. 

Rent  with  Free  Land. — Under  these  conditions  there 
is  a  certain  amount  of  land  which  may  be  had  for  nothing. 
Of  this  land  some  is  cultivated  which  pays  no  rent;  other  is 
not  cultivated  at  all.  Why,  then,  will  land  bear  rent  under 
such  circumstances  ?  Obviously,  because  it  is  more  desirable 
than  the  land  which  may  be  had  for  nothing.  How  much 
rent  will  it  bear?  Just  as  much  as  it  is  more  desirable. 


B 

b' 

C 

C' 

D 

j- 

1 

f 

P        /- 

G 

r 

Fig.  4. 

Suppose  Fig.  4  to  represent  the  land  of  a  country  (foreign 
land  being  excluded  from  competition  for  the  sake  of  our 
illustration)  arranged  in  seven  groups,  according  to  desir- 
ability. The  first  group,  deduction  made  of  enough  of  the 
product  to  pay  transportation  on  the  crop,  will  raise  and  send 
to  market  28  bushels  of  wheat  per  acre,  the  second  24, 
the  others  20,  16,  12,  8,  and  4,  respectively.  Now,  if  the 
people  are  few  and  need  but  a  small  part  of  the  land,  they 


174  OUTLINES  OF  ECONOMICS. 

will  naturally  cultivate  A,  or  the  land  which  best  combines 
fertility  and  accessibility.  So  long  as  there  is  enough  of 
this  land  there  cannot  well  be  any  rent,  for  a  man  will  not 
pay  rent  for  what  he  can  get  for  nothing.  But  the  time 
comes  when  more  land  is  needed,  and  cultivation  must  begin 
in  group  B.*  Land  is  still  free  there,  but  all  of  group  A  is 
taken.  If  now  a  man  insists  upon  cultivating  land  in  group 
A  he  must  pay  for  the  privilege,  for  the  owner  will  not  con- 
sent to  move  off  onto  poorer  land  unless  he  can  maintain  his 
advantage.  How  much  is  this  advantage  ?  Four  bushels 
per  acre,  for  labor  alone  working  upon  free  land  can  pro- 
duce only  24  bushels.  The  land  in  B,  which  is  free, 
is  now  the  "margin  of  cultivation,"  that  is,  the  grade  of  land 
which  will  pay  for  cultivation,  and  no  more.  The  natural 
reward  of  labor  in  agriculture  is  the  total  return  to  cultiva- 
tion on  the  margin  of  cultivation,  after  deductions  are  made 
on  account  of  the  returns  to  capital  and  its  replacement. 
This  advantage  which  the  owners  of  A  land  now  have  over 
the  tillers  of  free  land,  whether  they  let  the  land  or  not,  is 
rent.  The  amount  per  acre  at  this  point  will  be  the  market 
price  of  four  bushels  of  wheat. 

With  the  development  of  population  more  land  is  needed, 
the  margin  of  cultivation  descends  to  C  land,  the  reward  of 
simple  labor  is  diminished,  and  rent  increases.  B  land  now 
pays  a  rent  of  four  bushels  and  A  land  a  rent  of  eight 

*  It  of  course  hardly  need  be  said  that  there  is  no  such  gradation  of  land 
as  is  represented  in  Fig.  4.  The  real  variation  would  be  more  nearly  rep- 


Fiff.  5. 

resented  by  a  figure  like  Fig.  5.  If  we  consider  city  lots,  also,  t!ie  extremes 
of  value  would  be  immensely  greater  than  is  here  represented.  These  facts, 
however,  do  not  alter  the  principle. 


BENT  WITH  AND  WITHOUT  FEEE  LAND.          175 

• 

bushels  per  acre.  When  the  margin  of  cultivation  has 
extended  to  E,  rents  on  B  land  equal  one  half  and  on  A  land 
four  sevenths  of  the  entire  product.  It  is  clear  that  at  this 
point  the  productivity  of  groups  E,  F,  and  G  may  be  had  for 
the  taking.  A  moment's  reflection  will  show  that  a  portion 
of  the  productivity  of  the  other  groups  may  also  be  had  free. 
Rent  with  no  Free  Land. — Continuing  the  descent  of 
the  margin  of  cultivation  down  from  E  to  F  and  G,  we  can 
easily  imagine  a  time  when  all  land  should  be  called  for  and 
no  free  land  would  be  left.  Following  the  law  already 
explained,  rent  would  absorb  more  and  more  of  the  product, 
until,  with  the  disappearance  of  free  land,  the  entire  product 
would  be  consumed  as  rent.  This  is  of  course  possible  if  the 
owners  of  the  land  cultivate  it  with  their  own  hands.  In 
this  case  rent  is  indistinguishable  from  return  to  labor,  the 
only  difference  being  that  owners  of  the  best  land  are  better 
rewarded  than  the  others.  But  this  direct  cultivation  by 
owners  is  very  far  from  general.  Long  before  land  is  wholly 
taken  up  in  any  country  a  great  deal  of  it  is  held  by  men 
who  do  not  cultivate  it  with  their  hands  but  who  lease  it  to 
others.  In  this  case  the  owner  or  landlord  appropriates  the 
rent,  leaving  the  free  productivity  to  the  tenant  as  the  reward 
of  his  labor.  As  rent  increases  the  margin  of  free  produc- 
tivity decreases.  But  there  is  clearly  a  limit  to  this,  for 
tenants  cannot  work  for  nothing  and  turn  all  the  product 
over  to  the  landlord.  Rent  may  pass  down  the  scale,  say  to 
E  or  possibly  to  F,  but  it  must  stop  at  a  point  where  the 
tenant  will  have  enough  to  live.  Thus  it  is  that  even  in 
countries  which  long  ago  had  need  of  all  their  land  some  land 
bears  little  or  no  rent.  Under  existing  methods  of  cultiva- 

O 

tion  a  man  cannot  pay  a  rent  for  it  and  live  off  its  produce. 
We  may  thus  picture  to  ourselves  the  law  of  rent  as  an 
advancing  force  which  slowly  but  surely  carries  everything 
before  it  until  it  is  met  by  the  law  of  wages*  which  checks 
and  finally  arrests  its  progress.  This  arrest  of  the  progress 

*  Of  course  there  must,  bo  nt  least  a  minimum  return  to  capital,  but  that 
is  here  neglected  as  a  minor  factor. 


176  OUTLINES  OF  ECONOMICS. 

• 

of  rent  practically  means  that  the  poorest  land,  land  which  will 
not  pay  rent  or  even  repay  cultivation,  is  only  nominally  appro- 
priated or  appropriated  for  other  than  purposes  of  pi'oduction. 
Intensive  Cultivation. — Returning  to  our  figure,  let  us 
place  ourselves  again  at  the  point  where  all  the  A  land  is 
taken  and  new  members  of  society  are  looking  for  more  land. 
We  have  assumed  that  they  will  take  up  land  in  the  second 
group.  This  is  not  necessary,  however.  More  labor  may  be 
put  on  the  land  already  cultivated  and  more  will  be  raised. 
Suppose  that  ten  men  cultivate  100  acres  of  A  land,  raising 
2,800  bushels  of  wheat.  But  the  numbers  increase,  and  to 
each  such  group  one  more  is  added.  As  the  cultivation 
was,  of  course,  imperfect  additional  labor  increases  the  crop. 
The  eleven  men  raise  3,060  bushels;  that  is,  the  eleventh  man 
has  raised  260  bushels;  not  so  much  as  the  others  raise,  but  20 
bushels  more  than  he  could  have  raised  on  B  land.  Of  course 
the  owner  gives  him  only  so  much  as  he  could  get  elsewhere 
and  secures  an  additional  rent  of  20  bushels.  Encouraged 
by  this,  he  hires  a  twelfth  man  and  secures  a  crop  of  3,280 
bushels.  The  two  extra  men  have  raised  480  bushels  by 
their  labor;  but  this  is  just  what  the  landowner  had  to  pay 
them  for  their  labor.  He  therefore  finds  that  while  one 
additional  man  increases  his  rent  two  do  not,  and  discharges 
the  second,  who  takes  up  free  land.  Thus  as  numbers  increase 
a  part  of  the  increase  aids  in  intensifying  the  cultivation  of 
the  old  land,  while  another  part  takes  up  new  land.  With 
each  fall  in  the  margin  of  cultivation  more  labor  may  be 
profitably  employed  on  land  already  cultivated.  Thus  our 
landowner  who  could  not  afford  to  employ  a  twelfth  man  at 
240  bushels  wage  can  employ  a  thirteenth  or  possibly  more 
when  the  return  to  labor  falls  to  200  bushels.  Each  addition 
of  labor  (or  capital)  in  the  cultivation  of  land  increases  the 
return,  but  not  in  the  same  proportion.  This  is  the  law  of 
"  DIMINISHING  RETURNS,"  one  of  the  most  stern-visaged  laws 
in  economics,  which  indicates  that,  other  things  being  equal, 
each  addition  to  the  number  of  human  beings  on  the  earth, 
beyond  a  certain  number  at  least,  makes  harder  the  process 


RENT  WITH  AND  WITHOUT  FREE  LAND.          177 

by  which  man  draws  his  sustenance  from  the  earth.  Before 
this  certain  number  is  reached  the  law  of  diminishing  returns 
does  not  begin  to  operate,  but  one  of  increasing  returns, 
obtains.  We  may  suppose  that  up  to  the  tenth  man  in  the 
example  given  every  man  added  more  than  the  previous  to 
the  product  as  a  certain  number  of  men  is  needed  for  the 
most  effective  organization  of  production.  The  law  of 
increasing  and  diminishing  returns  would  be  represented 
by  a  diagram  somewhat  like  Fig.  6. 

The  inclosed  areas  represent  returns  to  each  unit  of  pro- 
ductive energy,  and  at  E  the  maximum  is  reached  and  the 
lawof  diminishing  returns 
begins  to  operate.  As 
we  shall  see,  however, 
other  things  are  not  equal, 
and  this  law  is  partially 
counteracted  by  another.  Ffy-  6. 

It  is  to  be  noticed  that  the  power  of  rent  to  make  laborers 
work  for  an  ever  smaller  return  is  due,  not  chiefly  to  nature, 
but  rather  to  the  institution  of  private  property.  So  great 
has  the  hardship  of  rent  seemed  to  some  that  it  has  been 
proposed  that  society  should  appropriate  rents  through  the 
mechanism  of  government,  or,  what  amounts  to  the  same 
thing,  that  private  ownership  of  land  should  be  abolished. 
This  proposition  we  shall  consider  later. 

All  improvements  in  the  methods  of  agriculture  increase 
the  product  more  than  they  increase  the  cost.  The  popula- 
tion can  thus  live  on  less  land,  and  poorer  land  is  thrown  out 
of  cultivation,  as  to-day  in  our  New  England  States.  Thus 
the  margin  of  cultivation  is  raised  and  rent  decreases.  As  a 
matter  of  fact,  however,  in  old  countries  this  is  only  a  tem- 
porary result.  The  population  is  sure  to  increase,  and  this 
usually  at  so  rapid  a  rate  as  to  keep  pace  with  improvements. 
Not  only  does  the  margin  of  cultivation  not  rise,  but  it  may 
actually  fall,  because,  with  better  knowledge  and  methods, 
poorer  land  will  repay  cultivation  and  the  additional  cultiva- 
tors are  sure  to  be  forthcoming.  When  land  is  all  taken, 


178  OUTLINES  OF  ECONOMICS. 

rent,  as  we  have  seen,  is  limited  by  the  law  of  wages  only, 
and  if  the  improvement  here  is  less  than  in  methods  of  culti- 
vation, as  has  often  been  the  case,  the  landowner  may  not 
only  have  larger  product,  but  a  larger  percentage  of  the 
product.  If  we  were  dealing  with  the  law  of  rent  as  an  iso- 
lated force,  the  tendency  of  improvements  in  land  cultivation 
would  undoubtedly  be  to  decrease  rent;  but  considering  soci- 
ety as  it  is,  the  tendency  may  be  the  reverse.  All  develop- 
ment of  production  subsequent  to  agriculture,  by  which  raw 
materials  receive  an  increasingly  large  amount  of  labor,  tends 
to  improve  the  lot  of  labor. 

Rent  and  Value  (or  Price). — Rent  has  no  influence 
whatever  on  the  value  of  products,  although  a  large  part 
of  this  value  goes  to  the  landowner.  This  will  be  clear 
when  we  recall  the  nature  of  value  already  explained.  Value 
is  due  to  unsatisfied  wants  or  desires.  It  is  human  desires 
which,  becoming  more  numerous  and  more  clamorous,  force 
cultivation  down  to  poorer  and  poorer  lands.  If  men  do  not 
want  wheat  sufficiently  to  give  a  man  for  twelve  bushels  of 
it  as  much  to  satisfy  his  wants  as  he  could  get  in  the  same 
time  in  some  other  way  he  will  not  cultivate  the  twelve 
bushel  land.  If  they  do  he  will.  Thus  the  extent  of  culti- 
vation measures  the  strength  of  human  desire  in  this  line 
and  determines  value.  When  desire  makes  wheat  valuable 
enough  to  pay  for  cultivating  this  poor  land  it  will  be 
cultivated,  not  before;  but  it  is  desire,  not  the  cultivation, 
which  gives  wheat  its  value.  The  fact  that  some  land  pro- 
duces wheat  easily  and  pays  a  large  rent  to  its  owner  has  no 
effect  on  value.  Men  cannot  be  expected  to  sell  wheat  below 
the  price  fixed  by  human  desires  just  because  they  got  it 
easily,  and  if  they  did  the  millers  would  simply  add  the 
difference  to  their  profits.  The  abolition  of  rent  payment, 
or  the  appropriation  of  rent  by  the  public  instead  of  by  pri- 
vate persons,  might  have  a  great  influence  on  the  economic 
life  of  society,  but  it  would  not  have  any  direct  influence  in 
lowering  the  price  of  agricultural  products. 


RENT  WITH  AND  WITHOUT  FREE  LAND.          179 


SUMMARY. 

1.  Rent  is  that  portion  of  the  product  of  land  which  is  in  excess  of  the 
product  of  the  poorest  land  under  cultivation. 

2.  So  long  as  good  land  exists  in  excess  of  all  demand  (free  land),  rent  is 
determined  by  the  excess  of  product  over  that  of  the  best  free  land. 

3.  When  land  is  all  taken,  and  all  is  cultivated  wliich  will  repay  cost, 
rent  is  determined  by  the  excess  of  product  over  the  necessities  of  laborers 
as  determined  by  the  law  of  wages. 

4.  Increased  demand  for  the  products  of  the  soil  may  result  in  the  culti- 
vation of  more  land  (extensive  cultivation),  or  in  the  application  of  more 
labor  and  capital  to  that  already  in  cultivation  (intensive  cultivation). 

5.  Each  addition  of  labor  or  capital  in  the  cultivation  of  land  beyond  a 
certain  point  increases  the  return,  but  not  in  the  same  proportion  (the  law 
of  "  diminishing  returns  "). 

6.  Improvements -in  agriculture,  with  free  land  and  a  stationary  popula- 
tion, would  decrease  rent,  but  in  old  countries,  and  with  an  increasing  pop- 
ulation the  opposite  result  may  take  place. 

7.  Value  and  price  are  not  affected  by  rent. 

QUESTIONS. 

1.  On  what  is  rent  based?     If  all  land  were  equally  good  would  it  bear 
rent  while  free  land  existed?     Why? 

2.  How  is  the  amount  of  rent  determined  while  free  land  exists  ?    How 
is  the  reward  of  labor  determined? 

3.  What  limits  rent  when  land  is  all  taken  ?     What  would  rent  then  be 
if  the  law  of  rent  operated  unchecked  ? 

4.  What  is  meant  by  intensive  cultivation  ?     What  determines  how  far 
it  will  pay?     What  is  the  law  of  diminishing  returns? 

5.  What  is  the  margin  of  cultivation?     What  effect  does  a  lowering  of 
the  margin  of  cultivation  have  upon  intensivity  of  cultivation?     Why  ? 

6.  What  is  the  effect  of  improvements  in  cultivation,  so  far  as  the  law  of 
rent  alone  is  concerned  ?    What  is  the  effect  in  an  old  country  where  pop- 
ulation is  increasing  ?     Why  ? 

7.  What  is  the  effect  of  the  development  of  production  subsequent  to 
agriculture  ?     Why  ? 

8.  What  effect  has  rent  on  price  or  value  ?     Why? 

LITERATURE. 
See  works  already  cited  at  the  close  of  the  preceding  chapter. 


CHAPTER  III. 

WAGES. 

WE  have  seen  that  of  the  factors  which  contribute  to  pro- 
duction land  and  labor  are  the  two  primary  ones.  Having 
discussed  rent,  or  the  portion  of  the  product  allotted  to  the 
owners  of  land,  we  next  consider  wages,  the  portion  allotted 
to  labor.  In  the  case  of  simple  agriculture,  where  labor  and 
land  are  the  only  factors  (capital  playing  often  an  insignifi- 
cant role),  we  have  seen  that  wages  are  determined  by  the 
productivity  of  free  land  so  long  as  free  land  exists  which 
will  produce  in  excess  of  the  absolute  needs  of  labor.  Work- 
men in  other  industries,  too,  will  have  their  wages  determined 
by  the  same  rule,  for  they  are  not  likely  to  accept  less  than 
they  could  earn  by  working  free  land.  But,  as  we  have 
seen,  there  comes  a  time  when  with  the  increase  of  popula- 
tion the  margin  of  cultivation  drops  to  a  point  where  it  en- 
counters a  definite  resistance  in  the  shape  of  a  law  of  wages 
which  will  not  be  forced  down  beyond  a  certain  point.  It  is 
this  law  of  wages  which  we  have  now  to  consider. 

It  follows  from  the  law  of  value  that  if  wage-earners  did 
and  could  exist  in  excess  of  all  demand,  their  services,  if 
fully  offered,  would  have  no  value,  and  wages  would  be  noth- 
ing. On  the  other  hand,  if  they  were  few  and  much  desired, 
only  the  intenser  wants  could  be  satisfied,  and  the  value  of 
labor  would  be  veiy  high.  We  see,  then,  that  the  value  of 
labor  depends  upon  two  things :  first,  the  number  of  wage- 
earners  ;  second,  the  desire  for  labor.  We  must  consider  the 
forces  which  determine  these  two. 

The  Number  of  Wage-earners. — We  have  already  no- 
ticed the  tendency  of  the  human  race  to  multiply.  Beyond 
all  doubt  the  desire  of  marriage  and  family  is  one  of  the 


WAGES.  181 

strongest  and  most  universal  of  human  desires.  But  over 
against  this  desire  are  offset  many  others,  such  as  the  desire 
of  food,  clothing,  and  a  multitude  of  other  things,  desires  of 
every  variety  of  importance,  which,  of  course,  are  arranged 
and  satisfied  in  the  order  of  their  importance.  No  sane  man 
satisfies  weaker  desires  at  the  expense  of  stronger  ones.  Now, 
in  this  list  of  desires  marriage  must  take  its  place  accord- 
ing to  its  importance.  This  varies  with  individuals.  Food, 
clothing,  and  shelter  almost  necessarily  take  precedence  of 
marriage,  though  with  very  varying  ideas  as  to  the  necessary 
amount.  Some  will  regard  education,  books,  luxuries  in 
dress  and  household  furnishings,  art,  or  even  a  simple  bank 
account,  as  more  important  than  marriage,  and  will  forego 
the  latter  for  the  sake  of  the  former.  The  number  and 
character  of  the  wants  which  a  man  considers  more  important 
tin  in  marriage  and  family  constitute  his  "standard  of  life"  * 
Whenever  on  the  downward  scale  wages  fall  below  the 
point  where  the  standard  of  life  can  be  maintained  for  a 
family,  the  workman  will  do  without  the  family  and  main- 
tain the  standard  of  life  for  himself  alone.  This  fact  of 
everyday  experience  is  observed  especially  among  those 
whose  standard  of  life  is  somewhat  superior  to  that  of 
the  ordinary  wage-earner,  as,  for  instance,  clerks.  It  is 
proverbial  that  they  do  not  marry  as  soon  as  they  would  like 
on  account  of  their  small  income.  In  the  great  shop  in  Paris 
known  as  the  J$on  Marche,  the  widow  of  the  founder  left  at 

*  It  may  bo  objected  that  this  definition  limits  to  a  single  relation  a  fact 
which  affects  human  life  in  many  other  connections.  This  limitation  is, 
however,  intentional.  While  a  man's  wants  may  affect  his  action  in  many 
ways,  it  is  only  as  they  lead  men  to  refuse  to  bring  beings  into  existence 
except  under  certain  conditions  of  subsistence  that  these  wants  become  a 
••  standard  of  life."  The  standard  of  life  thus  constitutes  a  sort  of  "ulti- 
matum "  on  the  part  of  laborers,  a  limit  below  which  they  will  indeed  work 
if  they  must,  but  below  winch  they  will  not,  perhaps  cannot,  maintain  their 
numbers.  Of  course  it  more  often  limits  the  size  of  a  family  than  prevents 
its  formation.  A  general  lowering  of  the  standard  of  life,  nn  increased  in- 
difference as  to  the  fate  of  our  posterity,  is  the  most  appalling  possibility 
suggested  by  our  science. 
13 


182  OUTLINES  OF  ECONOMICS. 

her  death  to  each  of  the  three  thousand  employees  a  sum 
varying  from  $200  to  $2,000,  according  to  their  term  of  serv- 
ice. An  immediate  result  of  the  legacy  was  seventy-nine 
marriages  among  the  employees  of  the  institution.  These 
people,  finding  it  impossible  heretofore  to  marry  without  low- 
ering their  standard  of  life,  remained  single  until  this  legacy 
made  it  possible  to  do  so. 

Economic  Importance  of  the  Standard  of  Life. — It 
is  plain  that  the  standard  of  life  by  restricting  marriage  lim- 
its the  number  of  wage  receivers,  and  so  tends  to  increase 
the  value  of  labor.  If  we  were  to  adopt  the  conception  of 
economics  which  many  writers  have  unconsciously  followed, 
as  the  science  which  treats  of  employers  in  their  relation  to 
wealth,  the  maintenance  of  a  high  standard  of  life  for  work- 
men might  seem  undesirable.  So  long  as  employers  look 
upon  the  rest  of  animate  creation  as  composed  of  varieties  of 
quadruped  and  biped  cattle,  designed  for  their  service,  the 
only  standard  of  life  which  they  will  consider  is  one  which 
will  maintain  a  certain  standard  of  working  efficiency.  The 
distinction  between  biped  and  quadruped  will  hardly  be  con- 
sidered. This  is  the  natural  standard  under  a  system  of 
slavery.  It  shocks  us  to-day  to  hear  the  allegation  that 
slaveowners  *  once  discussed  in  convention  the  expediency 
of  using  a  slave  up  in  six  years  or  four  years  in  a  certain 
occupation,  and  decided  that  it  "  paid  "  to  use  him  up  in 
four.  But  how  much  better  is  it  when  employers  discuss  the 
desirability  and  necessity  of  keeping  an  army  of  men  unem- 
ployed in  America  in  order  to  "keep  down  the  price  of 
labor?"  Whether  these  reported  discussions  ever  occurred 
or  not  it  is  hard  to  determine,  but  there  can  be  no  doubt  that 
they  represent  an  attitude  of  mind  which  has  widely  pre- 
vailed in  human  society.  The  brutality  of  such  propositions 
comes  from  a  false  conception  of  laborers  as  a  class  of  men 
who  have  no  right  to  exist  for  their  own  sake.  It  is  sorne- 

*  It  must  not  be  supposed  that  this  correctly  represented  tlic  ordinary 
slaveowner  in  the  United  Suites.  Most  slaveownern  in  our  South  had  the 
welfare  of  their  slaves  at  heart. 


WAGES.  183 

times  objected  that  economics  should  not  consider  such  ques- 
tions. Why  not  ?  It  is  the  science  of  man  in  his  relations 
to  wealth  ;  not  of  some  men  in  some  of  their  relations  to 
wealth,  but  of  all  men  in  all  their  relations  to  wealth.  It  is 
fundamental  to  an  understanding  of  economic  life,  not  to 
mention  the  solution  of  economic  problems  in  society,  to 
know  whether  all  men  are  men  with  wants  entitled  to  final 
consideration  and  maximum  satisfaction,  or  only  some  men 
are  men  and  the  rest  a  variety  of  cattle  or  productive  ma- 
chine. 

But  even  economic  considerations  from  the  employer's 
standpoint  condemn  the  policy  of  depressing  the  standard  of 
life.  We  now  know  that  in  the  advanced  stnge  of  industrial 
development  slavery  is  unprofitable  even  to  slaveowners. 
This  is  only  a  phase  of  the  larger  truth  that  labor,  to  attain 
its  highest  efficiency,  depends  upon  the  development  of  in- 
telligence and  character  as  well  as  upon  brawn.  Too  much 
emphasis  cannot  be  laid  on  the  phrase  recently  become 
familiar,  that  "cheap  labor  is  dear  labor."  "To  keep  down 
wages"  means  to  decrease  the  efficiency  of  labor  in  the  long 
run  \>\  an  even  greater  amount. 

This  brings  us  to  a  point  suggested  before.  The  value  of 
labor  is  determined  not  only  by  its  amount,  but  also  by  the 
wants  which  it  is  called  upon  to  satisfy.  Now,  who  calls  for 
labor — that  is,  for  the  goods  which  labor  produces  ?  Evi- 
dently society,  in  the  person  of  all  its  members.  The  im- 
mense majority  of  these  are  laborers.  To  keep  down  their 
standard  of  life  means  in  so  far  to  limit  the  amount  of  goods 
they  can  call  for,  and  thus  narrow  the  field  oj:  industrial 
action  and  the  possibility  of  employers'  profits.  It  is  true 
that  by  this  lowering  of  the  standard  of  life  more  laborers 
are  brought  into  existence,  and  labor  partly  makes  up  in 
quantity  what  it  loses  in  quality;  but  it  is  doubtful  if  even 
then  the  employer  is  benefited.  The  policy  of  keeping  down 
the  standard  of  life  is  therefore  economically  false.  It  curtails 
the  means  of  life  and  with  it  the  development  of  life,  and 
results  in  enforced  idleness,  inevitable  inefficiency,  and  neces- 


184  OUTLINES  OF  ECONOMICS. 

sary  poverty.     Its  advantage  is  that  it  temporarily   profits 
individual  employers. 

Social  Importance  of  the  Standard  of  Life. — This 
will  need  but  few  words  after  what  has  been  said.  The 
proper  goal  of  society  in  every  line  is  to  make  life  increas- 
ingly worth  living  for  all  its  members.  We  are  forced  to 
ask  in  such  connections,  In  what  does  national  prosperity  con- 
sist ?  Certainly  not  in  simple  resources.  A  million  dollars 
is  not  necessarily  affluence.  It  depends  upon  the  number 
who  share  it.  Still  less  does  prosperity  depend  on  simple 
numbers.  There  is  no  gain  in  exchanging  happy  fewness 
for  multitudinous  misery.  Least  of  all  can  a  nation's  pros- 
perity be  measured  by  the  affluence  of  a  few  resting  on  a 
substratum  of  general  poverty.  That  nation  is  most  pros- 
perous which  shows  the  highest  average  in  the  ordering  and 
furnishing  of  individual  lives.  To  this  end  it  is  indispen- 
sable that  the  general  standard  of  life  should  be  raised  as 
high  as  possible.  Man  must  have  as  many  wholesome  wants 
as  is  consistent  with  the  existing  possibilities  of  production. 
Such  an  increase  means  an  increase  of  wages,  an  increase  of 
consumption,  an  increase  of  production,  an  increase  of  indi- 
vidual and  social  well-being.  This  is  very  different  from 
saying  that  men  need  simply  an  increase  of  wages.  Only  so 
far  as  there  is  a  developed  set  of  wants  in  a  man  can  he 
spend  wisely  as  regards  himself  or  society.  The  result  of  a 
sudden  increase  means  usually  increased  vice  at  first,  and 
later  simply  a  larger  number  of  beings  living  at  the  old  scale 
of  misery.  Such  a  change  is  a  positive  disastei',  devoting 
the  increased  productivity  of  the  country  to  the  extension  of 
misery  rather  than  to  the  extension  of  well-being.  And  yet 
an  increase  of  wages  is  essential  to  any  Avholesome  develop- 
ment of  wants.  The  only  essential  is  that  education  in 
many  lines  should  accompany  increase  of  wages.  Every 
new  invention,  every  new  discovery  of  resources,  every  pos- 
sible addition  to  our  productivity,  may  be  utilized  for  the  im- 
provement and  not  simply  for  the  multiplication  of  our 
people.  The  course  of  action  to  be  pursued  admits  of  no 


WAGES.  185 

doubt  if  a  man  hopes  or  cares  to  improve  the  condition  of 
men.  Men  (all  men}  must  be  encouraged  to  want  and  en- 
abled to  satisfy  all  wholesome  wants  as  fully  as  the  develop- 
ment of  productivity  will  allow.  We  must  raise  the  standard 
of  life. 

It  must  be  observed  in  conclusion  that  employers  them- 
selves are  the  victims  of  an  attempt  on  the  part  of  society 
to  establish  an  unethical  equilibrium  of  balanced  self-interest, 
an  effort  which  has  given  one  man  in  twenty,  through  the 
power  of  competition,  the  ability  to  dictate  a  code  of  oppres- 
sion to  the  nineteen  employers  who  are  more  humane  than  he. 
That  such  a  system  should  be  disastrous  in  its  working  and 
require  serious  modification  is  the  lesson  both  of  reason  and 
of  modern  experience.  The  problem  of  the  twentieth  man, 
the  mean  man,  who  coerces  nineteen  others  against  their  will 
to  follow  his  meanness,  is  one  of  the  most  serious  problems 
in  the  field  of  applied  economics. 

In  the  next  chapter  we  shall  consider  some  of  the  causes 
which  have  operated  to  raise  the  standard  of  life  of  the 
wage-earning  classes. 


186  OUTLINES  or  ECONOMICS. 


SUMMARY. 

1.  So  long  as  free  land  exists  wages  are  determined  by  the  product  on 
the  best  unappropriated  land. 

2.  Since  the  value  of  labor,  as  of  all  other  goods,  is  determined  by  the 
desire  for  it,  the  amount  offered  is  an  important  factor  in  determining 
wages. 

3.  The  increase  of  the  laboring  population  is  determined  by  its  "  stan- 
dard of  life,"  that  is,  by  the  number  and  character  of  the  wants  which  are 
considered  more  important  than  marriage  and  family. 

4.  An  effort  to  depress  the  standard  of  life  can  bo  of  advantage  only  to 
employers,  and  that  only  temporarily.     It  eventually  diminishes  the  demand 
for  all  goods. 

5.  From  the  standpoint  of  society  it  is  of  the  utmost  importance  that  the 
wants  of  aU  should  be  increased  as  rapidly  as  social  productivity  will  allow. 

QUESTIONS. 

1.  Mention  one  cause  of  high  wages  in  America. 

2.  "Why  do  wages  tend  to  fall  to  the  limit  of  subsistence? 

3.  "What  is  meant  by  the  standard  of  life? 

4.  Why  is  cheap  labor  dear  labor? 

5.  Is  it  for  the  interest  of  employers  to  lower  the  standard  of  life?     In 
what  sense?     Why  do  not  employers  consult  their  general  and  permanent 
interests?     (This  last  needs  a  very  thoughtful  answer.) 

6.  What  is  the  interest  of  society  in  this  matter?     Why  ? 

7.  What  is  meant  by  the  problem  of  the  twentieth  man? 

LITERATURE. 

See  works  already  cited  for  previous  chapters;  also: 

Walker,  F.  A.:   The  Wages  Question. 

Gunton,  G-. :   Wealth  and  Progress. 

Schoenhof,  J. :  Industrial  Situation  and  the  Question  of  Wages. 


CHAPTER  IV. 

THE   LABOR   MOVEMENT. 

IT  is  a  matter  for  regret  that  in  a  book  like  this  so  little 
notice  can  be  taken  of  the  efforts,  often  heroic  and  largely 
successful,  of  individual  employers  to  benefit  workmen.  Such 
efforts,  though  very  important  in  the  aggregate,  are  hard  to 
get  at,  and  so  various  that  the  principles  involved  cannot  be 
analyzed  or  even  mentioned  in  an  elementary  work.  A 
single  important  exception  will  be  considered  later.  It  is 
not  surprising,  however,  that  the  most  important  movement 
to  raise  the  standard  of  life  of  wage-earners  has  originated 
with  workmen  themselves. 

Labor  Organizations. — The  old  mediaeval  guilds  were 
organizations  of  all  the  factors  of  production.  Employ- 
ers and  employed  united  in  one  body  regulated  produc- 
tion, but  the  control  rested  chiefly  with  the  masters.  Mod- 
ern labor  organizations  embrace,  as  a  rule,  only  one  of  the 
factors,  the  employed,  and  their  purpose  is  to  promote  the 
interests  of  this  one  factor  whenever  those  interests  clash 
with  those  of  the  employers. 

Trades  Unions  and  Knights  of  Labor. — Labor  or- 
ganizations may  be  divided  into  two  classes,  and  as  a 
matter  of  fact  they  are  so  divided  to-day  in  the  United 
States.  These  classes  are  the  trades  unions  and  the  Knights 
of  Labor.  The  trades  unions  are  primarily  organizations  of 
skilled  artisans.  According  to  the  old  trades  union  idea,  each 
craft  should  be  organized  by  itself.  The  Knights  of  Labor 
are,  according  to  their  original  idea,  organizations  of  em- 
ployees both  skilled  and  unskilled,  regardless  of  trade.  They 
aim  to  break  down  the  barriers  to  common  action  found 
in  differences  of  occupation.  The  Knights  of  Labor  have 


188  OUTLINES  OF  ECONOMICS. 

also  taken  a  broader  outlook  upon  society,  and  have  sought 
to  accomplish  greater  things  than  the  trades  unions.  The 
trades  unions  presuppose  a  difference  of  interest  between  em- 
ployers and  employed.  They  are,  as  it  were,  a  fighting  body. 
This  divergence  of  interests  exists,  and  fighting  bodies  often 
preserve  peace.  "  If  you  would  have  peace  prepare  for 
war  "  is  an  old  maxim,  and  struggles  between  labor  and  cap- 
ital have  been  most  violent  in  Belgium,  where  no  efficient 
organizations  have  existed.  But  the  Knights  of  Labor  have" 
looked  beyond  a  period  of  conflict  to  a  union  of  productive 
factors  which  should  be  peaceful.  They  hope  in  some  way 
to  see  labor  and  capital  united  in  the  same  hands.  They  de- 
sire to  make  capitalists  of  wage-earners  and  to  organize  pro- 
duction on  a  cooperative  basis.  It  is  doubtless  on  account  of 
this  ultimate  aim  that  they  admit  employers,  of  whom  many 
are  members,  and  also  the  professional  classes,  a  considerable 
number  of  teachers,  journalists,  and  preachers  being  also  mem- 
bers. The  Knights  of  Labor  are  in  so  far  a  return  to  the 
principle  of  the  old  guild  association. 

Knights  of  Labor  and  trades  unions  have  both  modified 
their  original  programs.  The  trades  unions  have  united  in 
larger  federal  organizations,  first  in  the  central  labor  unions 
of  our  cities,  and  later  in  the  national  body,  the  American 
Federation  of  Labor.  This  national  body  has  also  made  pro- 
vision for  the  organization  of  unskilled  workingmen,  and  for 
local  unions  of  workingmen  of  different  trades  where  those 
engaged  in  each  trade  are  too  few  for  separate  organization. 
The  Knights  of  Labor  have,  on  the  other  hand,  organized 
separately  a  considerable  number  of  trades  in  what  are  often 
called  "  district  assemblies,"  and  have  thus  recognized  more 
largely  than  they  were  at  first  inclined  to  do  the  principle  of 
federation  with  separate  crafts  as  a  basis. 

A  bitter  contest  beween  the  Knights  of  Labor  and  trades 
unions  has  been  waged,  but  there  is  now  some  evidence  of  an 
effective  desire  for  harmonious  cooperation  in  the  prosecu- 
tion of  common  aims. 

Growth  of  Labor  Organizations. — It  has  been   esti- 


THE  LABOR  MOVEMENT.  189 

mated  that  at  least  a  million  workingmen  in  the  United 
States  are  members  of  labor  organizations.  The  number,  of 
course,  varies.  A  period  of  prosperity  for  the  organizations 
is  generally  followed  by  one  of  reaction,  and  the  present 
seems  to  be  a  period  of  recovery  from  the  period  of  reaction 
which  began  early  in  1886,  perhaps  in  1885,  and  continued 
for  several  years.  Reaction  always  terminates  in  a  new  ad- 
vance, and  thus  far  in  the  United  States  each  new  advance 
has  carried  the  labor  organizations  farther  forward  than  ever 
before. 

Farmers'  Organizations. — There  are  two  powerful  or- 
ganizations of  farmers,  the  Patrons  of  Husbandry  and  the 
National  Farmers'  Alliance  and  Industrial  Union,  the  latter 
the  more  radical  and  the  more  inclined  to  political  action  out- 
side of  the  two  old  parties,  especially  to  political  action  with 
the  third  party,  called  the  Populist.  These  farmers'  organ- 
izations are  more  like  the  old  guilds  in  this,  that  they  are  or- 
ganizations of  independent  producers  designed  to  protect 
their  interests  against  attacks  from  other  social  classes.  Re- 
cent years  have,  however,  witnessed  an  approach  of  labor  or- 
ganizations and  farmers'  organizations  to  each  other  for  the 
attainment  especially  of  common  political  aims. 

Labor  Organizations  a  Natural  Growth. — Labor  or- 
ganizations are  not  forced  products.  They  have  grown  up 
almost  spontaneously.  They  have  arisen  naturally  out  of 
modern  industrial  conditions.  Wherever  capital  is  a  separate 
factor  in  production,  and  is  organized  on  a  large  scale,  labor 
inevitably  organizes  itself  sooner  or  later  in  order  that  it  may 
stand  on  an  equal  footing  and  make  labor  contracts  advan- 
tageously for  itself.  Let  us  suppose  one  capitalist  employs  a 
thousand  men.  If  these  men  are  not  organized  each  man 
individually  treats  with  all  the  capital  in  the  establishment. 
All  the  capital  is  represented  by  one  man,  but  one  workman 
represents  but  a  thousandth  part  of  the  labor  force,  and  he  is 
not  in  a  position  of  equality.  The  workmen  therefore  unite 
their  labor,  and  speaking  through  one  representative  place 
all  the  labor  against  all  the  capital.  This  is  something  which 


OUTLINES  or  ECONOMICS. 

so  naturally  suggests  itself  that  we  find  labor  organizations 
in  all  modern  lands. 

Opposition  to  Labor  Organizations. — Labor  organiza- 
tions met  at  first  with  violent  opposition,  and  it  cannot  be 
said  that  in  their  earlier  stages  or  even  in  their  later  "growth 
this  opposition  is  by  any  means  groundless.  However,  what- 
ever bad  traits  naturally  characterize  labor  organizations  are 
aggravated  so  long  as  they  are  obliged  to  struggle  for  exist- 
ence. Whenever  the  fact  of  their  right  to  exist  is  frankly 
acknowledged,  and  employers,  ceasing  to  persecute  them  or 
their  officials,  recognize  the  man  who  treats  in  a  representa- 
tive capacity  for  the  sale  of  the  commodity  labor  as  cour- 
teously as  they  would  an  agent  for  the  sale  of  corn  or  wheat ; 
finally,  whenever  courts  cease  to  harass  them  with  legal 
chicanery,  as  courts  long  did  in  England,  they  tend  to  be- 
come strong  and  conservative.  The  fact  is  undoubted  that 
most  serious  abuses  and  outrages  have  attended  the  progress 
of  labor  organizations,  but  they  have  simply  exhibited  weak- 
nesses of  frail  human  nature  and  weaknesses  which  have 
been  observed  in  more  frightful  manifestations  in  those  other 
organizations,  nevertheless  excellent,  which  we  call  Church 
and  State.  The  true  course  is  to  recognize  the  beneficence 
of  the  principle  of  organization  and  to  contend  only  against 
abuses.  It  can  scarcely  be  too  much  to  say  that  this  is  the 
opinion  of  nearly  all  competent  observers  in  England,  Ger- 
many, and  the  United  States.  The  following  quotation  about 
labor  organizations  from  Work  and  Wages,  by  the  late  Pro- 
fessor Thorold  Rogers,  of  Oxford,  not  only  expresses  the 
view  of  many  scholars  and  business  men,  but  illustrates  a 
common  change  of  attitude  on  the  part  of  many  fair-minded 
persons  who  have  seen  previous  prejudices  against  labor  or- 
ganizations displaced  by  a  careful  examination  of  their  claims: 
"These  institutions  were  repressed  with  passionate  violence 
and  malignant  watchfulness  so  long  as  it  was  possible  to  do 
so.  When  it  Avas  necessary  to  relax  the  severities  of  the 
older  laws  they  were  still  persecuted  by  legal  chicanery 
whenever  oppression  could  on  any  pretext  be  justified.  As 


THE  LABOR  MOVEMENT.  191 

they  were  slowly  emancipated  they  have  constantly  been 
the  object  of  alarmist  calumnies  and  sinister  predictions.  I 
do  not  speak  of  the  language  of  newspapers  and  reviewers, 
which  simply  re-echoed  the  passions  of  the  hour  ;  far  graver 
we're  the  allegations  of  Senior  and  Thornton.  ...  I  con- 
less  to  at  one  time  having  viewed  them  suspiciously  ;  but  a 
long  study  of  the  history  of  labor  has  convinced  me  that  they 
are  not  only  the  best  friends  of  the  workman  but  the  best 
agency  for  the  employer  and  the  public  ;  and  that  to  the  ex- 
tension of  these  associations  political  economists  and  states- 
men must  look  for  the  solution  of  some  among  the  most 
pressing  and  difficult  problems  of  our  times." 

It  may  be  proper  to  state  that  while  the  author  does  not 
hope  for  so  much  as  Professor  Rogers  seems  to  from  labor  or- 
ganizations alone,  his  experience  has  in  the  main  been  the  same. 

Space  is  too  limited  to  permit  an  explanation  of  the  im- 
measurable misapprehensions  of  the  general  public  in  regard 
to  labor  organizations.  One  of  them  is  that  innocent  and 
peace-loving  workingmen,  perfectly  contented,  are  misled 
by  agitators  who  have  been  placed  at  the  head  of  labor  or- 
ganizations. Careful  observation  will  show  that  the  influ- 
ence of  labor  leaders  is  conservative  on  the  whole,  and  that 
strikes  originate  among  the  masses  and  are  generally  resisted 
by  the  leaders  so  long  as  it  is  possible.  It  will  also  show 
that  leaders  are  readier  than  a  large  proportion  of  the  "  rank 
and  file  "  in  the  organizations  to  terminate  strikes. 

O 

Success  and  Failure  of  Strikes. — Strikes  produce 
harm,  and  every  effort  should  be  made  to  avoid  them.  They 
are,  however,  successful  in  more  cases  than  is  ordinarily  sup- 
posed, and  when  occasionally  a  decided  victory  is  scored  the 
gain  is  immense.  An  agitation  of  a  few  weeks  and  a  strike 
of  a  few  days,  together  with  an  act  of  legislature,  established 
a  reduction  of  the  hours  of  labor  from  seventeen  to  twelve 
for  the  hundreds  of  street-car  employees  in  Baltimore.  This 
is  probably  an  advantage  permanently  secured.  Other  illus- 
trations might  be  given,  and  nothing  is  gained  by  shutting 
our  eyes  to  such  facts. 


192  OUTLINES  OF  ECONOMICS. 

Violence  is  disastrous,  and  the  welfare  of  the  masses  can 
only  be  secured  by  peaceful  measures.  While  condemning 
in  deserved  terms  violence,  which  too  often  accompanies 
strikes  and  which  reacts  against  workingmen,  it  is  only  fail- 
to  recognize  the  fact  that  this  violence  is  largely  due  to 
criminal  classes  in  cities  which  improve  such  opportunities 
for  disturbance,  and  not  wholly  to  the  workingmen.  It  is 
manifest,  however,  that,  even  so,  it  is  only  another  argument 
against  strikes  wherever  they  can  be  avoided,  and  for  the  set- 
tlement of  differences  between  labor  and  capital  by  peaceful 
arbitration. 

Temperance. — Nearly  all  labor  organizations  are  temper- 
ance societies,  and  many  of  their  officers  are  total  abstainers. 
They  have  greatly  diminished  intemperance  among  those 
who  belong  to  them. 

Educational  Value. — Their  educational  value  is  also 
noteworthy.  The  debates  and  discussions  which  they  foster 
stimulate  the  intellect  and  do  much  to  counteract  the  deaden- 
ing effects  of  a  widely  extended  division  of  labor. 

Labor  organizations  bring  men  and  frequently  also  women 
together  and  furnish  opportunities  for  social  culture.  Temp- 
tations to  coarse  indulgence  are  thereby  lessened,  and  an  im- 
portant side  of  human  nature  receives  better  opportunity  for 
development. 

It  is  here  especially  that  labor  organizations  are  to  find 
their  justification.  It  is  often  objected  that  they  try  to  ex- 
clude worthy  men  from  their  limited  number  and  seek  by 
distressing  a  part  of  their  number  to  raise  the  wages  of  the 
rest.  What  they  are  really  trying  to  do  is  to  raise  the  work- 
man's standard  of  life,  which  implies  that  betterment  shall 
take  the  place  of  multiplication  and  wants  be  allowed  room 
to  increase.  It  is  said  that  the  limitation  of  numbers  in  one 
trade  can  only  overcrowd  others,  and  that  if  all  trades  were 
successfully  organized  nothing  would  be  gained.  Such  an  ob- 
jection overlooks  the  fact  that  the  operation  of  the  union  tends 
to  check  imprudence  and  maintain  a  just  balance  between 
numbers  and  the  means  of  development.  No  purpose  could 


THE  LABOR  MOVEMENT.  193 

be  more  laudable,  though  it  cannot  be  said  that  it  is  always 
wisely  or  successfully  pursued. 

It  may  be  hoped  that  labor  organizations  are  preparing 
the  way  for  a  better  civilization.  Certainly  one  of  the  most 
hopeful  features  of  the  situation  is  the  willingness  of  organ- 
ized workingmen  to  listen  to  strong  and  manly  Avords  from 
those  who  understand  their  real  purposes,  who  go  among 
them  and,  with  sympathy  for  their  just  aspirations,  endeavor 
to  help  them  to  distinguish  between  the  foolish  and  the  wise, 
the  wrong  and  the  right,  to  show  them  how  to  pursue  the 
good,  and  to  inspire  them  witli  faith  in  that  righteousness 
which  alone  can  exalt  the  masses  in  a  nation  ;  that  is,  the 
nation  as  a  whole. 

"Weaknesses  of  Labor  Organizations. — Some  of  the 
weaknesses  of  labor  oi'ganizations  have  already  been  inti- 
mated. These  weaknesses  are  partly  inherent  and  partly  ac- 
cidental, and  it  may  be  well  to  summarize  them. 

1.  Jjitsed  on  /Strife. — They  are  as  a  rule  based  on  strife. 
They  aim  to  prepare  their  members  for  industrial  war.  Xow 
we  must  hope  for  peace  in  society,  and  an  organization  which 
does  not  look  beyond  contention  to  a  cessation  of  strife  has 
inherent  in  it  a  certain  weakness. 

Apart  from  all  other  considerations,  it  should  be  noticed 
that  strife  inconveniences  the  general  public,  and  even  when 
the  real  blame  rests  upon  employers,  as  happens  often  enough, 
the  workmen  appear  before  the  public  as  the  aggressors. 
They  are  the  ones  who  refuse  to  accept  certain  conditions  of 
employment,  and  necessarily  they  try  to  induce  others  to  act 
with  them.  The  general  public  is  not  apt  to  examine  care- 
fully into  the  real  merits  of  the  case  and  to  analyze  conduct 
minutely;  consequently  the  workmen  are  held  responsible.  It 
will  be  noticed  that  if  the  public  is  inconvenienced  seriously 
for  any  length  of  time,  as  happens  particularly  in  the  case 
of  strikes  on  railways,  gas  works,  and  the  like,  although 
sympathy  may  have  been  at  first  with  the  workmen,  the 
public  at  large  soon  grows  weary  and  impatient  and  shifts 
its  sympathy  to  the  employers.  Public  opinion  can  make 


OUTLINES  OF  ECONOMICS. 

itself  felt  through  legislative  acts  and  judicial  decisions  and 
thus  hurt  organized  labor. 

It  may  be  admitted,  on  the  other  hand,  that  there  has 
been  a  gratifying  growth  of  other  features  than  war  features 
in  labor  organizations  generally,  both  in  other  countries  and 
our  own.  The  Knights  of  Labor,  as  already  mentioned,  in 
their  declaration  of  principles  at  least,  emphasize  the  desira- 
bility of  measures  designed  to  secure  social  harmony. 

2.  Limitation  of  their  Benefits. — They  have  been,  partic- 
ularly in  the  past,  at  least,  partial  monopolies.     Not  infre- 
quently have  they  sought  to  gain  benefits  by  an  exclusive 
policy.     It  is  only  recently  that  attention  has  been  given  to 
the  organization  of  unskilled  laborers,  and  for  this  extension 
credit  is  due  in  England  to  the  "new  trades-unionism,"  as  it 
is  called,  and  in  this  country  especially  to  the  Knights  of 
Labor.      It  has  been  well  said  by  John  Stuart  Mill  that  in 
earlier  times  partial  monopoly  in  trades  unions  might  be  jus- 
tified as  a  policy,  because  it  might  then  have  been  possible  to 
elevate  only  a  few  out  of  the  great  mass  ;  but  that  now  the 
time  had  come  for  broader  measures.     While  there  has  been 
improvement,  it  must  be  admitted  also  that  there  is  a  reason 
for  limitation  of  numbers  which  is  not  always  apparent  at 
once.     Unscrupulous  employers  have  at  times  sought  to  in- 
crease unduly  the  number  in  a  single  occupation  in  order  to 
have  a  reserve  force  of  unemployed  workmen  from  whom 
to  draw  in  time  of  need  and  thus  to  keep  down  wages. 

3.  Production  Not   Directly   Increased, — It  is  to  be  no- 
ticed furthermore  that  labor  organizations  as  such  do  not 
directly  increase  production,  nor  do  they  as  such  diminish 
the  wastes  of  competition.     What  must  be  desired  is  not 
merely  that  a  greater  proportion  of  Avealth  should  fall  to  the 
wage-earning  classes,  but  that  the  total  national  dividend  to 
be  distributed  among  all  should  be  increased. 

4.  Their  Ultra-conservatism. —  This  is  an  objection  which 
will   sound  strange  to  many,  yet  it  has   often  been   found 
that  these  organizations  have  clung  to  old  methods  and  have 
been  disinclined  to  favor  progress  which  has  not  immediately 


THE  LABOR  MOVEMENT.  195 

benefited  them  as  labor  organizations.     This    weakness   is 
closely  related  to  that  which  follows. 

5.  They  often  Take  Narrow  and  Short-sighted  View.s. — It 
has  been   one  of  thu  weaknesses  of  labor  organizations  in 
general   that   they  have   not  been  sufficiently  interested  in 
public  measures  and  in  reforms  designed  to  benefit  society 
;i<  a  whole,  the   wage-earners   included.      They   have   not 
given  sufficient  attention,  for  example,  to  sanitary  measures, 
and  have  not  supported  adequately  public  health  authorities 
in  their  efforts  to  benefit  especially  the  poorer  classes  in  the 
community.      It   has  been   frequently   observed  that   they 
underestimate  the  importance  of  pure  politics  and  a  highly 
trained  stable  civil  service,  although  they  are  the  ones  above 
all  others  to  gain  from  such  measures.     At  times  they  have 
favored  measures  ultimately  injurious  because  such  measures 
have  increased  temporarily  the  supply  of  work.     This,  for 
example,    was  the  case   with   those   labor  organizations  in 
Baltimore  which  petitioned  the  municipal  authorities  to  grant 
a  franchise  to  a  competing  gas  company  because  it  would 
give  them  work.     The  opposition  to  labor-saving  machinery 
also  falls  under  this  head.     It  may  be  wise  for  labor  organi- 
zations to  attempt  to  gain  greater  benefits  from  such  mechan- 
ical improvements  and   to  minimize  the  evils,  but  not  to 
oppose  improvements. 

6.  Lack  of  Flexibility. — Labor   organizations   share   the 
weakness  which  is  common  to  all  great  political  and  social 
organizations.     It  is  necessary  to  act  according  to  general 
rules  for  the  most  part,  and  it  is  difficult  to  take  account 
of   individual   cases.      One.  who  examines  into  the   nature 
of   labor   organizations   can    see   many  reasons   why  union 
men  refuse  to  work  with  non-union  men.     The  union  entails 
certain   expenses,    and    it    is   claimed   that   non-union   men 
receive   the   benefit   of   organization    without   bearing   any 
part  of  the  burden.     More  serious,  however,  is  the  danger 
that  unscrupulous  employers  Avill  gradually  substitute  non- 
union men  for  men  who  are  strong  in  the  organizations,  and 
thus  break  down  the  organizations  before  the  workmen  really 


196  OUTLINES  OF  ECONOMICS. 

perceive  what  is  going  on.  Pretext  can  easily  be  found  to 
discharge  an  obnoxious  workman,  however  faithful  and 
efficient  he  may  be.  Yet  it  must  be  admitted  that  sometimes 
wrong  is  done  to  workmen  who  have  the  best  intentions 
with  respect  to  their  fellow-workmen  and  are  entirely 
willing  to  bear  their  share  of  the  burdens  of  common  action. 
There  are  workmen  who,  on  account  of  their  religious  views 
or  for  other  reasons,  have  conscientious  scruples  against 
membership  in  one  or  another  organization,  or  perhaps  all 
labor  organizations.  Employers  have  refused  to  recognize 
unions  because  it  would  compel  them  to  discharge  efficient 
workmen.  While  recognizing  the  difficulties  in  the  situa- 
tion, it  would  seem  that  it  ought  to  be  possible  to  devise 
plans  which  would  take  account  of  exceptional  but,  after  all, 
frequently  recurring  cases. 

7.  Not  Capable  of  Political  Government. — Labor  organ- 
izations have  at  times  conveyed  the  impression  that  gov- 
ernment ought  to  belong  to  them.  It  would  seem  that  their 
best  friend  ought  in  all  sincerity  to  oounsel  them  that  what- 
ever the  cause  may  be,  and  however  much  the  fact  may  be 
regretted,  they  have  not  the  trained  intelligence  and  the 
moral  strength  to  govern  the  country.  The  labor  organiza- 
tions are  useful,  and  they  give  us  the  standpoint  from  which 
to  judge  public  measures.  "Whatever  benefits  the  wage- 
earner  truly  and  permanently  is  likely  to  benefit  the  coun- 
try as  a  whole ;  but  the  tendency  to  favor  workingmen 
for  office  is  not  one  which  can  be  encouraged  as  a  reform. 
The  appointment  of  workingmen  to  office  is  often  used  by 
demagogues  in  power  to  turn  attention  away  from  genuine 
reforms.  The  appointment  of  one  workingman  out  of  a 
thousand  to  a  political  office  does  not  help  the  remainder. 
What  the  workingmen  need  is  the  best  men  possible  in 
office. 

It  should  be  said  in  conclusion  that  the  election  of  thought- 
ful and  intelligent  workmen  to  legislative  bodies,  whether 
local,  State,  or  national,  is  to  be  viewed  differently  from  the 
appointment  to  administrative  office.  Legislative  bodies 


THE  LABOR  MOVEMENT.  197 

should  include  representatives  of  all  social  and   industrial 

classes,   and   highly   trained   administrative  officers  should 

carry  out  their  behests.     Do  the  workmen  desire  inferior 
public   servants — public  servants  whom  great  corporations 
would  not  employ? 
14 


198  OUTLINES  OF  ECONOMICS. 

SUMMABY. 

1.  Modern  labor  organizations  embrace  generally  a  single  factor  of  pro- 
duction  rather  than  a  trade  like  the  ancient  guilds. 

2.  The  Knights  of  Labor,  however,  in  contrast  with  the  federated  labor 
unions,  admit  others  than  wage-earners,  and  partly  ignore  trade  lines. 

3.  Farmers'  organizations  have  rapidly  developed  of  late,  and  have  be- 
come a  powerful  political  factor. 

4.  Labor  organizations  are  a  natural  outgrowth  of  our  industrial  system 
with  its  centralized  capital. 

5.  Labor  organizations  were  first  subject  to  violent  opposition  with  an 
emphasis  of  their  obnoxious  features.     With  a  partial  removal  of  opposition 
they  have  become  more  conservative  and  helpful. 

6.  Strikes  are  an  expensive  but  often  successful  means  of  advancing 
labor  interests. 

7.  The  principal  value  of  labor  organizations  is  that  of  education  and  the 
promotion  of  temperance. 

8.  The  weakness  of  labor  organizations  consists  in  their  hostile  attitude, 
their  exclusiveness,  their  unproductive  character,  their  ultra-conservatism, 
their  short-sightedness,  their  lack  of  flexibility,  and  their  indifference  to 
political  reform  in  the  larger  sense. 

QUESTIONS. 

1.  What  two  kinds  of  labor  organizations  have  wo  to-day?     How  does 
each  differ  from  the  ancient  guild  ? 

2.  "What  changes  are  going  on  in  both  kinds  of  labor   organizations  ? 
What  seems  likely  to  be  the  eventual  basis  of  labor  organization  ? 

3.  What  two  principal  farmers'  organizations  have  been  developed,  and 
what  are  the  characteristics  of  each? 

4.  What  has  been  the  political  outcome  of  these  organizations  ?     What 
organizations  have  contributed  to  this? 

5.  Why  have  labor  organizations  developed  so  rapidly  ?     Why  have  they 
developed  so  spasmodically  ? 

6.  What   i<  a   strike?    What  are   its  advantages?     its   disadvantages? 
What  is  the  attitude  of  labor  leaders  toward  it? 

•    7.  What  was  the  attitude  of  the  public  toward   labor  organizations  at 
first?     What  was  the  result?     Why? 

8.  What  are  the  weaknesses  of  labor  organizations? 

LITEKATTJKE. 

Clark,  J.  B. :   The  Philosophy  of  Wealth.     Chapter  VIII. 
McNeill,  Geo.  E. :   The  Labor  Movement,  the  Problem  of  To-day. 
Jevons,  W.  S. :   The  State  in  Relation  to  Labor,  especially  Chapters  IV,  V, 
and  VII. 

Rogers,  Thorold :    Work  and  Wages. 
Ely,  R.  T. :  Labor  Movement  in  America. 


CHAPTER  V. 

PROFIT  SHARING  AND  COOPERATION. 

Profit  Sharing  in  the  United  States. — Labor  organi- 
zations strive  to  secure  higher  wages  for  workingmen  than 
they  would  otherwise  obtain,  and  thus  to  increase  their  share 
of  the  products  of  industry.  Profit  sharing  goes  a  step  fur- 
ther than  labor  organizations.  Those  who  advocate  profit 
sharing  wish  wage-earners  to  secure  a  portion  of  profits  in 
addition  to  ordinary  wages.  It  is  held  that  this  arrange- 
ment promotes  economical  use  of  material  and  machinery  by 
employees,  and  generally  increases  their  zeal  and  efficiency. 
The  result  is  a  larger  total  product  and  a  larger  revenue  for 
the  wage-receivers.  Profit  sharing  has  been  extensively 
tried  in  the  United  States,  and  it  has  been  successfully  intro- 
duced by  some  of  the  largest  productive  establishments  in 
the  country.  Recent  testimony  of  American  employers  who 
have  tried  it  is  very  generally  in  its  favor,  although  one 
prominent  manufacturer  abandoned  it,  and  one  or  two  have 
not  found  that  it  quite  realized  their  expectations.  Some 
influential  employers  appear  to  be  enthusiastic  in  their  praise 
of  its  practical  working,  and  a  member  of  a  firm  which  has 
distributed  over  one  hundred  thousand  dollars  of  profits  to 
its  employees  writes  to  the  author  that  he  and  his  partners 
consider  it  the  best  investment  that  they  ever  made.  lie 
thinks  that  they  have  the  most  loyal  set  of  workingmen  in 
the  world.  Instances  recorded  in  three  months  showed  that 
at  least  ten  thousand  workingmen  had  in  that  period  been 
admitted  to  a  share  in  profits  in  the  United  States. 

Profit  sharing  may  be  extended  to  capital  sharing — partial 
ownership  of  capital  by  workingmen  and  participation  in 
management.  The  large  manufacturing  establishment  of 


200  OUTLINES  OF  ECONOMICS. 

Godin,  in  Guise,  France,  serves  as  the  best  example  which 
occurs  to  the  author.  H.  Godin  gradually  educated  a  large 
body  of  working-people  to  that  point  where  they  could  take 
a  part  in  the  management  of  his  large  business,  and  at  the 
same  time  encouraged  them  to  acquire  a  part  of  the  capital. 
If  recent  reports  are  trustworthy  the  workingmen  have 
finally  acquired  and  now  manage  the  entire  business. 

If  we  call  industry,  as  ordinarily  organized  in  our  great 
mercantile  and  manufacturing  establishments,  despotism,  we 
may  call  an  establishment  where  laborers  participate  in  cap- 
ital ownership  and  management,  under  the  chief  control  of 
some  one  "\vho  is  recognized  as  an  industrial  superior,  a  con- 
stitutional monarchy.  These  terms,  although  indicative  of 
mere  analogies,  are,  after  all,  instructive.  The  despotic  prin- 
ciple, the  one-man  power,  both  in  politics  and  in  industry, 
is  an  excellent  thing  in  its  own  time  and  place,  and  in  in- 
dustry it  has  necessarily  continued  longer  than  in  the  po- 
litical sphere.  It  is  a  phase  of  development,  but  it  ought 
not  to  be  regarded  as  final.  A  large  part  of  the  indus- 
trial troubles  of  modern  society  undoubtedly  find  their 
origin  in  the  fact  that  development  of  the  economic  depart- 
ment of  social  life  has  proceeded  more  slowly  than  the  de- 
velopment of  other  departments.  Elsewhere  the  despotic 
principle  has  been  softened  or  displaced,  but  continuing  in 
the  economic  sphere  it  is  a  discordant  element;  yet  it  is  dif- 
ficult for  most  of  us  to  see  how  for  a  long  time  to  come  we- 
can  wholly  dispense  with  the  one-man  principle  in  industry. 
It  should,  however,  be  softened  as  far  as  practicable,  and 
men  should  be  gradually  trained  to  understand  industrial 
republicanism  or  democracy.  M.  Godin  has  set  a  noble  ex- 
ample. 

Industrial  democracy  means  self-rule,  self-control,  the  self- 
direction  of  the  masses  in  their  efforts  to  gain  a  livelihood. 
Industrial  democracy  is  industrial  self-government,  and  this 
is  found  in  pure  cooperation. 

Cooperation  is  of  two  kinds:  coercive,  which  means 
governmental  action,  and  voluntary.  We  have  here  to  do 


PROFIT  SHAKING  AND  COOPERATION.  201 

with  voluntary  cooperation,  and  this  is  what  is  usually  meant 
when  cooperation  is  spoken  of.  Workingmen  combine  their 
own  capital,  purchase  their  own  plant,  manage  their  own  af- 
fairs in  their  own  way,  at  their  own  risk,  sharing  profit 
or  loss  as  the  case  may  be.  This  is  called  productive  co- 
operation. But  we  have  also  what  is  called  distributive  co- 
operation. Distributive  cooperation  means  cooperation  in 
distribution,  not  in  the  sense  in  which  the  word  is  used  ordi- 
narily in  economics,  but  rather  in  the  sense  in  which  we 
might  speak  of  a  merchant's  activity  in  distribution.  He 
distributes  wares.  Distributive  cooperation  refers  to  retail 
and  wholesale  trade,  and  is  only  an  imperfect  form  of  co- 
operation. Purchasers  of  wares,  groceries,  dry  goods,  etc., 
combine  together  to  purchase  what  they  need,  and  thus  save 
profits.  They  form  a  stock  company,  subscribe  for  shares, 
employ  a  manager  and  clerks  who  often  do  not  even  share 
in  profits,  and  start  a  business.  Profits  are  sometimes  di- 
vided only  on  shares,  but  the  approved  way  is  to  pay  a 
moderate  interest  on  capital  and  to  divide  profits  between 
stockholders  and  customers  in  proportion  to  purchases,  the 
division  being  made  at  the  end  of  stated  intervals.  Some 
establishments  in  Great  Britain,  and  doubtless  elsewhere, 
carry  £>ut  the  full  program,  and  give  employees  a  share  of 
profits.  Profits  are  thus  said  to  be  divided  among  capital, 
custom,  and  labor. 

Distributive  cooperation  has  in  England  and  Scotland 
succeeded  better  than  productive  cooperation,  which  has, 
however,  met  with  some  success.  France  appears  to  have 
succeeded  better  than  England  in  productive  cooperation. 
Some  instances  of  success  in  the  United  States  are  recorded, 
and  many  undertakings  have  been  partially  successful;  by 
which  it  is  meant  that  they  have  succeeded  as  business 
undertakings,  but  .have  abandoned  wholly  or  in  part  the  co- 
operative principle.  This  is  the  case  with  a  large  stove 
foundry  started  as  a  cooperative  foundry,  and  in  which 
some  workingmen  or  their  heirs  still  own  stock.  One  of  the 
strikers  among  the  workingmen  in  this  establishment,  in  a 


202  OUTLINES  OF  ECONOMICS. 

difficulty  which  arose  a  few  years  since,  owned  seven  thou- 
sand dollars'  worth  of  stock.  The  managers  seemed  to  take 
it  much  to  heart  that  he  should  strike,  but  it  is  hard  not  to 
feel  a  certain  admiration  for  him,  as  he  placed  the  union  of 
his  fellow-employees  above  his  interests  as  a  capitalist.  A 
good  example  of  pure  cooperation  is  afforded  by  the  cooper- 
ative coopers  of  Minneapolis,  who  have  nearly  absorbed  the 
business  of  making  flour  barrels  in  that  milling  center.  The 
superiority  of  cooperation  as  a  business  principle  has  in  this 
case  been  demonstrated.  Pure  cooperation,  when  well  es- 
tablished, prevents  strikes  by  completely  identifying  the 
interests  of  labor  and  capital.  It  stimulates  energy  and  en- 
courages thrift.  The  self-interest  which  usually  animates 
the  employer  alone  animates  all  cooperators.  No  slighting 
of  work  can  be  tolerated,  and,  eye-service  vanishing,  much 
labor  of  supervision  is  done  away  with.  On  the  other  hand, 
divided  councils  often  render  the  movements  of  a  business 
clumsy,  and  action  cannot  be  so  quick  and  decisive  as  when 
one  man  acts  on  his  own  responsibility.  Failures  of  co- 
operation have  generally  been  due  to  moral  defects  on  the 
part  of  workingmen.  It  has  been  difficult  for  them  to  act 
harmoniously  together,  and  prosperity  has  often  produced 
disintegration.  Wherever  cooperation  has  succeeded,  how- 
ever, it  has  produced  excellent  effects  on  character.  It  is  a 
test,  but  when  the  test  is  stood  it  reacts  beneficially  on  the 
cooperators.  It  makes  men  diligent,  frugal,  intelligent, 
considerate  of  the  rights  pf  others,  as  well  as  their  own. 
Cooperation  and  temperance  go  hand  in  hand,  as  has  been 
universally  observed  by  students  of  cooperation. 

Dr.  Albert  Shaw,  American  editor  of  the  JReview  of  He- 
views,  gives  this  testimony  in  regard  to  the  cooperative 
coopers  of  Minneapolis  :  "  The  coopers  are  emphatic  in  saying 
that  the  moral  effect  of  their  cooperative  movement  con- 
stitutes its  highest  success.  It  has  unquestionably  wrought 
a  transformation  in  the  habits  of  these  craftsmen.  They  are 
no  longer  a  drunken,  disreputable  guild,  figuring  in  the 
police  courts  and  deserving  the  disfavor  of  the  community. 


PROFIT  SHAKING  AND  COOPERATION.  203 

They  have  become  a  responsible  and  respectable  class  of 
citizens." 

It  was  once  thought  that  corporations  could  not  succeed, 
but  the  inherent  advantages  of  corporate  industry  after  a 
long  struggle  have  made  themselves  manifest,  and  corpora- 
tions are  crushing  out  the  individual.  It  is  believed  by  some 
that  the  inherent  advantages  of  cooperation  will  sooner  or 
later  make  themselves  felt,  and  that  after  a  period  of  ad- 
versity, of  struggle,  and  of  slowly  increasing  success  coop- 
eration will  finally  gain  industrial  supremacy,  thus  uniting 
harmoniously  labor  and  capital  and  ushering  in  an  era  of 
industrial  democracy. 

The  Sliding  Scale. — A  sliding  scale  of  wages  has  been 
introduced  by  a  powerful  trades  union,  the  "Amalgamated 
Association  of  Iron  and  Steel  Workers,"  chiefly  in  Pennsyl- 
vania, and  it  appears,  until  lately,  to  have  given  general 
satisfaction  and  to  have  kept  the  industrial  peace  better 
than  the  ordinary  wages  system.  Wages  vary  with  selling 
price  of  the  product,  and  thus  labor  shares  to  some  extent  in 
the  prosperity  of  capital.  The  sliding  scale  is  also  known 
elsewhere  in  this  country  and  in  England,  and  it  has  met 
with  a  good  deal  of  favor  from  economic  writers. 

Piecework. — This  is  a  modification  of  the  wage  system, 
which  has  in  it  at  least  a  suggestion  of  profit  sharing,  as  the 
wage-earner  receives  in  proportion  to  what  he  does,  not  in 
proportion  to  time  spent.  Payment  by  the  piece  would  seem 
to  be  fairer  for  all  parties,  but  abuses  have  in  manufactures 
so  generally  been  connected  with  it  that  it  is  opposed  by 
many  intelligent  artisans,  and  careful  political  economists 
will  be  slow  to  give  piecework  unqualified  approval.  Physi- 
cians testify  that  by  producing  feverish  overexertion  it  has 
in  certain  quarters  shortened  average  life  materially,  and 
there  is  a  proverb  in  Saxony,  Germany,  to  the  effect  that 
piecework  is  work  that  murders.  Piecework  has  frequently 
been  used  to  break  down  regulations  and  laws  limiting  the 
time  of  work,  and  more  frequently  still  to  bring  about  a 
reduction  of  wages.  The  workers  strain  every  muscle  and 


204  OUTLINES  OF  ECONOMICS. 

nerve  to  earn  high  wages,  and  after  a  high  rate  of  speed  has 
been  secured  the  price  per  piece  is  reduced,  occasionally  time 
and  time  again.  Peculiarly  cruel  and  aggravating  cases  of 
this  kind  have  come  under  the  writer's  observation.  When 
not  connected  with  abuses  payment  by  piece  has  many  advan- 
tages, and  is  at  times  preferable  for  all  parties. 

Arbitration  and  Conciliation. — These  have  accom- 
plished much  for  the  preservation  of  industrial  peace  wher- 
ever thoroughly  and  honestly  tried.  Sometimes  voluntary 
boards  are  appointed  by  employers  and  employees  to  adjust 
differences,  and  sometimes  they  are  appointed  by  public 
authorities.  The  movement  for  governmental  and  compul- 
sory arbitration  will  be  considered  in  Book  III. 

Differences  of  "Wages. — We  have  different  standards 
of  life  in  different  occupations,  consequently  differences  of 
remuneration  whether  paid  as  wages  or  salaries.  What  de- 
termines differences  of  wages  of  various  occupations?  All 
sorts  of  fanciful  replies  have  been  given.  The  differences 
are  largely  historical.  We  must  go  back  to  a  man's  grand- 
father or  great-grandfather.  Occupations  where  remunera- 
tion is  high  are  so  difficult  to  enter  that  few  are  able  to 
surmount  the  difficulties.  Peculiar  and  rare  qualities  are  re- 
quired ;  opportunities  which  come  from  favorable  environ- 
ment ;  an  expensive  training,  which  few  parents  are  able  and 
at  the  same  time  willing  to  give.  What  one  is  depends 
chiefly  on  one's  parents,  and,  as  has  been  often  said,  one  has 
no  voice  in  the  selection  of  one's  parents.  We  who  have 
been  blessed  in  this  respect  ought  to  feel  that  we  owe  a 
special  duty  to  humanity. 

Adam  Smith  enumerated  the  following  five  causes  for  the 
differences  of  wages  in  different  employments  :  First,  the 
agreeableness  or  disagreeableness  of  the  employments  them- 
selves; secondly,  the  costliness  or  cheapness  or  the  difficulty 
and  expense  of  learning  them;  thirdly,  the  constancy  or 
inconstancy  of  employment  in  them ;  fourthly,  the  small 
or  great  trust  which  must  be  reposed  in  those  who  exer- 
cise them;  and  fifthly,  the  probability  or  improbability  of 


PROFIT  SHAKING  AND  COOPERATION.  205 

success  in  them.  All  this  presupposes  that  grown  men,  per- 
fectly free  to  select  their  occupations — free  not  merely  so 
far  as  the  law  is  concerned,  but  free  so  far  as  their  command 
of  resources  is  concerned — look  over  the  entire  industrial 
field  and  choose  their  employment.  A  recent  English  writer, 
pointing  out  that  occupations  are  selected  by  parents  very 
generally,  adds  :  "When  a  person  is  one  of  the  large  number 
who  have  been  in  childhood  badly  nourished,  badly  housed, 
badly  clothed,  badly  educated,  and  not  at  all  trained  to  any 
particular  occupation,  let  no  one  prate  to  him  of  his  freedom 
to  choose  what  occupation  he  thinks  proper.  His  legal  free- 
dom to  choose  many  occupations  is  about  as  much  use  to  him 
as  his  legal  freedom  to  fly  with  wings  in  the  air."  Never- 
theless, with  proper  qualifications,  what  Adam  Smith  says 
explains  many  differences  in  wages.  It  is  left  as  an  exercise 
to  readers  and  students  of  this  book  to  discover  by  observa- 
tion, careful  and  long-continued,  the  real  amount  of  truth  in 
Adam  Smith's  causes  for  differences  of  wages  in  different 
employments. 

"Wages  and  Salaries. — The  law  of  wages  assumes  a 
better  form  in  the  case  of  salaries  where  payments  by  the 
month  or  year  take  the  place  of  payments  by  the  day.  In- 
cidental advantages  of  this  system  of  payment  are  :  first, 
greater  regularity  of  income,  the  less  productive  portion  of 
the  year  being  equalized  with  the  more  productive,  a  fact 
which,  taking  men  as  they  are,  is  often  of  even  more  impor- 
tance than  an  increase  of  income  ;  and  second,  constancy  of 
income,  no  deduction  being  made  ordinarily  for  interrup- 
tions caused  by  sickness  and  other  inevitable  misfortunes,  and 
vacations  being  often  allowed.  The  nature  of  the  service 
performed  by  salary-earners  also  gives  them  in  general  a 
much  more  favorable  social  position  as  regards  their  em- 
ployers. It  is  plain,  however,  that  these  are  incidental  rather 
than  fundamental  differences. 

Turning  to  the  essence  of  the  salary  system  in  its  highly 
developed  form,  we  notice  a  marked  tendency  to  regulate 
salaries  not  by  the  value  of  the  service  rendered,  which  is 


206  OUTLINES  OF  ECONOMICS. 

often  incalculable,  as  in  the  case  of  an  efficient  public  officer 
or  clergyman,  but  by  the  needs  of  the  individual.  A  college 
professor,  a  judge,  a  president,  all  are  paid  with  almost  no 
reference  to  the  benefit  they  confer  upon  society.  A  man 
who  enters  these  callings  does  so  with  the  distinct  under- 
standing that  they  will  not  allow  him  to  accumulate  wealth, 
but  that  if  he  succeeds  they  will  provide  for  his  reasonable 
wants.  If  we  pay  the  .President  of  the  United  States 
$50,000  per  year,  it  means  that  we  consider  that  the  nature  of 
his  function  requires  him  to  spend  about  that  amount.  Many 
a  judge  receives  only  a  third  or  fourth  of  what  he  received 
while  practicing  at  the  bar.  This  tendency  to  regulate  com- 
pensation by  needs  rather  than  by  simple  capacity  is  in- 
creasing and  is  wholly  good.  Only  so  can  individual  genius 
be  made  a  benefit  rather  than  a  burden  to  society. 

Is  this  principle  of  compensation  a  new  law  of  wages  ?  It 
would  seem,  on  the  contrary,  to  be  an  application  of  the  regu- 
lar law  in  the  strictest  sense,  but  under  conditions  which 
show  its  real  character  and  possibilities.  These  wants  which 
society  more  or  less  carefully  considers  in  estimating  salaries, 
what  are  they  but  the  "  standard  of  life  "  which  is  appropri- 
ate to  the  function  in  question  ?  Only  here  society  does  not 
so  generally  unite  in  an  effort  to  "  keep  down  wages  "  as  in 
the  case  of  the  wage-earner.  It  recognizes,  at  least  partially, 
that  to  "keep  down"  the  standard  of  life  of  its  important 
servants  is  to  "  keep  down  "  the  quality  of  their  services  in 
an  even  greater  degree.  It  is  in  the  increased  recognition  of 
this  principle  that  the  hope  of  the  wage  system  lies.  The 
principle  is  right.  Men  should  receive  according  to  their 
wholesome  wants,  not  according  to  their  strength.  The 
latter  is  the  law  among  swine.  But  the  most  indubitable 
right  we  possess  is  the  right  to  develop  our  wants,  for  this  is 
the  development  of  our  life.  A  maximum  of  wholesome 
wants,  with  a  distribution  of  goods  in  proportion  to  those 
wants  is  the  economic  goal  of  society. 


PROFIT  SHAKING  AND  COOPERATION.  207 


SUMMARY. 

1.  Profit  sharing  is  a  growing  and  apparently  feasible  means  of  improving 
the  industrial  situation. 

2.  A  natural  development  leads  from  profit  sharing  to  capital  sharing,  a 
preparation  for  industrial  democracy. 

3.  Cooperation  may  be  compulsory  by  government  authority,  or  voluntary. 

4.  Voluntary  cooperation  may  be  distributive  (that  is,  commercial)  or  pro- 
ductive. 

5.  Distributive  cooperation  has  been  especially  successful  in  Great  Britain, 
(j.  Productive  cooperation  has  succeeded  better  in  France,  and  has  had 

some  success  in  the  United  States. 

7.  Cooperation  requires  and  tends  to  develop  high  moral  qualities  on  the 
part  of  cooperators.     Failures  are  usually  traceable  to  a  lack  of  those  quali- 
ties. 

8.  The  sliding  scale  of  wages  adopted  by  Pennsylvania  iron  workers  regu- 
lates wages  according  to  the  selling  price  of  the  product. 

9.  Piecework  in  itself  is  a  just  method  of  paying  wages,  but  has  been  lia- 
ble to  grave  abuse. 

10.  Arbitration  and  conciliation  have  been  helpful  in  adjusting  differences 
whenever  honestly  tried. 

11.  Differences  in  wages  are  due  to  many  causes,  largely  historical,  all  of 
which  may  be  summed  up  under  the  social  obstructions  of  the  wage-earn- 
er's environment. 

12.  Salaries  are  the  best  form  of  wages  and  the  application  of  the  princi- 
ple of  the  standard  of  life. 

QUESTIONS. 

1.  What  is  cooperation ?     How  does  it  differ  from  profit  sharing?     What 
are  the  advantages  of  each  system  ? 

2.  What  is  capital  sharing?     How  does  it  grow  out  of  profit  sharing  ? 
What  is  its  outcome? 

3.  What  are  the  advantages  of  industrial  democracy?  the  disadvantages  ? 
(Answer  as  thoughtfully  as  possible.) 

4.  What  kinds  of  cooperation  are  there?     Which  is  easier?     Where  has 
each  been  most  successful  ? 

5.  Why  does  cooperation  so  often  fail  ?     Is  it  likely  to  fail  continually 
for  these  reasons  ?     Why  ? 

6.  What  is  the  sliding  scale?  its  advantages?  its  disadvantages? 

7.  Why  is  piecework  fair  to  both  parties  ?     Why  do  economists  and  labor 
organizations  oppose  it  ? 

8.  What  is  the  advantage,  and  what  the  weakness,  of  arbitration  ?    What 
conditions  are  needed  to  make  it  a  success? 


208  OUTLINES  OF  ECONOMICS. 

9.  What  is  the  general  reason  for  the  differences  of  wages  in  different 
occupations?     What  was  Adam  Smith's  explanation?     How  far  was  it  cor- 
rect? 

10.  Tn  what  ways  do  salaries  differ  from  wages?     In  what  ways    are 
they  identical  ?     What  are  the  advantages  of  each? 

LITERATTJBE. 

Gilman,  N.  P. :  Profit  Sharing  between  Employer  and  Employee. 
Gilman,  N.  P. :   Socialism  and  the  American  Spirit.     Chapter  IX. 
Johns  Hopkins  University:  Studies  in  Historical  and  Political  Science, 
Sixth  Series,  Cooperation  in  the  United  States. 

Jevons,  W.  S. :   Tlie  State  in  Relation  to  Labor.     Chapters  Y  and  YI. 
Ely,  R.  T.:  The  Labor  Movement  in  America.     Chapter  YII. 


CHAPTER  VI. 

INTEREST  AND  PROFITS. 

WE  have  considered  the  return  which  under  the  present 
system  of  distribution  accrues  to  laud  and  labor.  These, 
taken  in  their  broadest  sense,  are  the  only  original  elements 
in  production.  Of  course,  land  includes  not  only  building 
lots  and  farming  land,  but  mines  and  rivers  and  fisheries  and, 
in  short,  all  portions  of  the  earth  which  contribute  to  pro- 
duction. Labor,  too,  is  to  be  taken  quite  inclusively.  We 
now  come  to  the  third  element  in  production,  capital,  which 
is  not  an  original  but  a  derivative  element.  Capital,  like 
other  goods,  is  produced,  but  it  is  produced  for  the  purpose 
of  production  in  turn.  We  are  concerned  here  only  with 
social  capital,  the  treatment  of  individual  capital,  when  it  is 
not  at  the  same  time  social  capital,  coming  later,  as  it  is  then 
not  a  factor  of  production.  Now,  although  capital  is  pro- 
duced, and  not  original,  when  it  has  once  been  produced  and 
lodged  in  the  hands  of  owners  it  acts  exactly  like  a  natural 
element  having  a  power  of  its  own  to  exact  a  return  accord- 
ing to  its  own  law.  This  return  is  variously  known  as  inter- 
est, profit,  and,  in  some  languages,  as  rent,  a  term  which  we 
have  confined  to  land.*  Common  usage  calls  the  return  to 
productive  capital  in  the  hands  of  an  entrepreneur  profit, 
while  interest  is  the  return  on  capital  lent.  This  usage  is 
thoroughly  inaccurate,  as  each  term  partially  includes  the 
other,  as  well  as  one  or  two  more  elements  of  an  entirely 
different  nature  ;  but  here,  as  elsewhere,  it  is  usually  easier 
to  redefine  old  terms  than  to  adopt  new  ones.  We  must 

*  Sometimes  the  return  to  capital  is  called  capital-rent. 


210  OUTLINES  OF  ECONOMICS. 

therefore  notice  two  or  three  distinct  ideas  commonly  in- 
cluded under  profits. 

There  is  first  the  pure  return  to  capital,  a  return  which  is 
paid  to  the  owner  of  capital  who  lends  it  without  any  accom- 
panying labor. or  risk.  This  is  interest,  and  it  is  obvious  that 
it  is  precisely  the  same  whether  a  man  lends  capital  or  uses 
it  himself  in  business.  The  return  on  the  capital  is  interest, 
whether  there  is  any  loan  or  not.  We  shall  consider  it 
under  that  head,  though  it  is  usually  called  profit  when  the 
capital  is  owned  by  the  entrepreneur,  and  even  the  older 
economists  so  considered  it.  The  second  element  under  tins 
name  is  the  payment  for  risk.  Every  one  knows  that  the 
revenue  from  a  given  business  varies  much  from  year  to 
year.  Some  years  it  is  very  high,  and  then  again  there  is 
little,  nothing  at  all,  or  even  a  loss.  The  return  for  a  given 
year  may  be  entirely  abnormal.  If  the  business  is  to  suc- 
ceed the  large  revenue  of  one  year  must  help  out  the  small 
revenue  of  another.  So  from  the  profits  of  any  good  year 
must  be  taken  a  sum  to  help  cover  past  or  future  losses. 
This  deduction  from  "profits"  we  call,  for  lack  of  a  better 
word,  insurance.  This  is  exactly  the  right  word  except  that 
it  must  not  be  confounded  with  fire  insurance,  etc.,  in  which 
a  policy  is  taken  out  and  a  definite  premium  paid.  A  third 
element  in  what  is  commonly  called  profits  is  really  counter- 
balanced by  wear  and  tear.  The  capital  used  has  lost  in 
value,  and  of  course  the  loss  must  be  made  good  by  a  fund 
for  the  replacement  of  capital.  But  the  analysis  may  be 
carried  still  further,  and  for  practical  purposes  is  at  times 
carried  further.  The  entrepreneur  may  be  paid  a  salary 
or  allow  himself  a  salary  as  wages  of  superintendence.  This 
is,  then,  a  fourth  element.  The  fifth  element  is  the  entrepre- 
neur's profit,  a  profit  due  to  wisdom  and  productiveness  of 
management.  This  we  shall  call  pure  profit.  Sometimes 
four  and  five  are  classed  together  as  pure  profit.  It  is  not, 
strictly  speaking,  a  return  upon  capital  as  such,  but  it  is  con- 
sidered here  because  it  is  conventional!}'  included  under 
profit.  This  vague  term  profit,  which  includes  these  five 


INTEREST  AND  PROFITS.  211 

elements,  we  may  better  designate  as  gross  profit.*  We 
have,  then, 

f  Replacement, 

Insurance, 
Gross  Profit :  4  Interest, 

I   Wages  of  Superintendence, 
I  Pure  Profit. 

These  five  elements  are  perfectly  distinguished  in  the  book- 
keeping of  many  large  business  concerns,  and  in  such  estab- 
lishments the  first  three  at  least  are  kept  distinct  from  four 
and  five,  if  no  separate  account  is  kept  for  wages  of  superin- 
tendence. The  first  two  obviously  are  not  profit  in  any  true 
sense.  They  represent  no  permanent  productive  increase. 
We  shall  therefore  consider  only  interest  and  pure  profit,  as 
the  wages  of  superintendence  would  fall  under  wages  or 
salaries. 

Interest. — This  is  the  real  return  to  capital.  By  what 
law  is  its  amount  determined?  This  question  has  been  as 
much  discussed  as  any  question  in  economics,  and  it  is  still  a 
question  which  to  many  appears  as  an  unsettled  problem  in 
economics.  Perhaps  few  would  like  to  pronounce  any  one  of 
the  various  theories  under  discussion  a  perfect  explanation. 
The  ancients  in  general  denied  that  interest  rested  on  any 
justifiable  law.  Aristotle  thought  it  unjust,  and  Cicero 
classed  it  with  murder.  Throughout  the  Middle  Ages  it  was 

o  o 

both  condemned  by  the  Church  and  prohibited  by  law. 
Nevertheless  it  continued  to  be  a  custom  wherever  commerce 
was  developed,  and  with  the  industrial  awakening  of  the 
modern  period  it  was  allowed  of  necessity.  But,  being 
allowed,  it  must  needs  be  justified,  and  the  explanations  and 
justifications  offered  have  been  various  as  they  have  been 
unsatisfactory.  Of  course,  these  explanations  have  usually 

*  Professor  W.  W.  Folwcll,  of  the  University  of  Minnesota,  in  his  val- 
uable syllabus  of  lectures  entitled  "  Principles  of  Political  Economy,"  uses 
"profit"  in  the  sense  of  gross  profit  and  defines  it  as  follows:  "Profit  is  the 
unascertained  share  of  distributed  produce  obtained  by  the  managing  capi- 
talist for  his  investment  of  capital,  services,  risk,  and  responsibility." 


212  OUTLINES  OF  ECONOMICS. 

concerned  themselves  simply  with  loan  interest,  which  is  ob- 
viously only  an  outgrowth  of  natural  interest  or  return  on 
capital  employed  in  production.  This  interest-profit  is  what 
needs  explanation.  The  earlier  economists  explained  the 
laws  of  rent  and  wages,  and  concluded  that  capital  had  what 
was  left,  which  became  thus  a  "residual  product."  Others 
have  concluded  that  capital  and  land  exacted  returns  accord- 
ing to  fixed  laws,  and  wages  was  the  residual  product.  The 
truth  seems  to  be  that  no  one  of  the  three  is  a  residual 
product.  A  return  is  demanded  -by  each  according  to  fixed 
laws,  and  if  there  is  not  an  assurance  of  such  a  return  they 
will  not  join  in  production.  The  true  residual  product  is 
the  economic  surplus  which  accrues  to  monopoly  of  any  sort. 
What  is  the  law  of  interest-profit?  Among  many  answers 
two  must  be  considered,  on  account  of  their  importance,  be- 
fore the  more  recent  and,  to  the  present  writer,  on  the  whole, 
more  satisfactory  theory,  namely,  that  of  Dr.  von  Bohm- 
Bawerk,  is  presented. 

Productivity. — It  is  often  said  that  capital  in  production 
is  productive,  and  so  calls  for  interest.  Obviously,  capital  is 
productive  in  the  sense  that  production  is  greater  with  than 
without  capital  ;  but  does  this  explain  interest  ?  Without 
considering  many  minor  difficulties,  such  as  the  fact  that 
capital  draws  less  interest  as  it  becomes  more  productive,  we 
pass  at  once  to  the  fundamental  difficulty  of  this  theory. 
Capital  does  not  generally  produce  goods  like  itself.  It 
produces  goods  eventually  which  satisfy  human  wants. 
We  know  why  these  ultimate  goods  have  value — simply 
because  they  satisfy  human  wants.  But  what  gives  value  to 
capital,  which  by  very  definition  cannot  satisfy  human 
wants  ?  For  instance,  why  should  any  one  care  for  a  plow, 
which  one  cannot  eat,  wear,  or  play  with?  The  reason  is 
clear :  because  it  produces  things  which  we  can  eat,  etc. 
Their  value  gives  value  to  the  plow.  Thus  we  have  the 
principle  that  the  value  of  capital  is  a  reflected  value;  that  is, 
the  value  of  the  means  of  production  is  derived  from  the 
product.  But  how  much  value  will  the  plow  have  ?  Sup- 


INTEREST  AND  PROFITS.  213 

pose  it  lasts  ten  years,  and  with  it  are  produced  crops  worth 
one  thousand  dollars.  Paying  all  the  rent,  wages,  etc.,  fifty 
dollars  is  left  at  the  end  of  the  ten  years.  Now,  men  learn  to 
foretell  these  results  very  closely,  and  from  their  estimate  of 
what  a  machine  will  produce  they  determine  its  value.  If  it 
will  produce  a  great  deal  they  value  it  very  highly;  if  only  a 
little,  they  will  give  only  a  little  for  it,  no  matter  how  much 
or  little  it  cost.  So  it  does  not  do  to  say  that  capital  draws 
interest  because  it  produces  more  than  its  own  value,  for,  as 
we  have  seen,  it  is  valued  according  to  what  it  produces. 

Abstinence. — It  is  also  said  that  interest  is  the  wage  of 
abstinence.  As  we  have  seen,  capital  is  the  result  of  a  special 
production  made  possible  by  saving.  Men  cannot  have  cap- 
ital if  they  consume  all  the  goods  they  get  hold  of.  It  is  said 
that  men  must  be  paid  a  certain  amount  to  induce  them  to 
save,  and  that  this  is  interest.  This  is  true  in  a  way,  but  it 
is  perhaps  not  the  best  way  to  state  the  truth.  Let  us  return 
to  our  illustration  of  the  plow.  We  are  convinced  that  it 
will  bring  us  in  at  the  end  of  ten  years  a  clear  surplus  of 
goods  worth  fifty  dollars.  According  to  the  law  of  reflected 
value  it  ought  to  be  valued  at  fifty  dollars,  and  we  ought  to 
be  willing  to  forego  fifty  dollars'  worth  of  satisfaction  in 
order  to  secure  it.  But,  as  a  matter  of  fact,  we  will  not  do  so. 
Probably  thirty  dollars'  worth  of  goods  is  all  we  will  give  for 
fifty  dollars'  worth  of  goods  ten  years  hence.  Now,  to  call 
the  remaining  twenty  dollars  a  payment  for  abstinence  is  mis- 
leading; for,  as  a  matter  of  fact,  the  abstinence  involved  is  a 
very  variable  thing,  and  often  there  is  none  at  all.  Besides, 
we  do  not  pay  for  abstinence  but  for  results. 

Bbhm-Bawerk's  Theory  of  Interest. — Why  will  not 
nu'ii  give  fifty  dollars  for  fifty  dollars  ten  years  hence  (all 
risk,  etc.,  being  covered  by  insurance)  ?  Simply  because  de- 
sire, the  source  of  value,  is  stronger  for  things  near  than  for 
things  far  away.  Human  experience  in  a  thousand  lines 
proves  this.  The  wants  of  men  are  like  Esau's  hunger.  He 
would  rather  have  (that  is,  he  values,  higher) a  mess  of  pottage 

now  than  a  whole  inheritance  in  the  future.     Distant  enjoy- 
15 


214  OUTLINES  OF  ECONOMICS. 

ments  are  vague  to  men's  minds,  while  near  ones  are  vivid 
and  tempting.  Think  of  this  as  we  will,  it  is  a  universal  fact. 
Thus  it  is  that  a  man  will  not  give  present  goods  for  future 
goods  in  like  amount,  because  future  goods  are  less  valuable 
than  present  goods.  Fifty  dollars  now  is  worth  perhaps 
fifty-three  dollars  a  year  hence,  and  eighty  dollars  ten  years 
hence. 

When  we  consider  interest  in  its  ethical  aspects  much 
more  can  be  said  than  the  limits  of  the  present  work  will 
permit.  It  must  not  be  supposed  that  an  absolutely  correct 
theoretical  explanation  of  interest  would  have  changed  the 
attitude  of  Moses,  Aristotle,  Cicero,  and  the  sages  of  the 
past  with  respect  to  it.  They  seem  to  have  desired  certain 
things  with  which  the  receipt  of  interest  was  calculated 
to  interfere.  One  of  them  was  mutual  helpfulness.  Loans 
were  desired  in  the  past  preceding  the  era  of  capitalistic  pro- 
duction chiefly  to  relieve  distress,  or  possibly  to  purchase 
tools  for  an  artisan.  They  were  not  then  designed  to  in- 
crease the  earnings  of  great  entrepreneurs  or  captains  of 
industry,  as  is  now  often  the  case.  It  appears  also  to  have 
been  the  desire  of  many  of  these  wise  men  of  old  that  oppor- 
tunities to  gain  a  livelihood  without  personal  exertion  should 
be  reduced  to  a  minimum,  and  private  receipt  of  interest 
undoubtedly  makes  it  possible  to  enjoy  an  income  without 
personal  exertion.  Ethically  all  that  we  have,  as  well  as  all 
that  we  are,  must  be  used  for  the  benefit  of  society  as  a 
Avhole,  ourselves  included ;  and  all  this  introduces  further 
considerations.  There  is  on  the  part  of  some  an  effort  to 
make  a  distinction  between  loans  to  relieve  distress  or  to 
help  the  young  to  get  a  start  in  life,  and  loans  to  be  used  in 
productive  enterprises  like  manufactories  or  railways,  and  to 
lend  money  without  interest  in  cases  of  the  first  kind,  but  to 
take  interest  in  cases  of  the  second  kind.  This  would  seem 
to  accord  with  the  spirit  of  the  teachings  of  the  Bible  and 
of  the  older  philosophers. 

The  Rate  of  Interest. — There  is  a  real  and  an  apparent 
fluctuation  in  the  rate  of  interest.  The  apparent  fluctuation 


INTEREST  AND  PROFITS.  215 

is  due  to  the  inclusion  of  insurance  with  interest  in  a  single 
rate.  All  are  familiar  with  the  fact  that  loans  on  good 
security  can  be  had  at  a  lower  rate  than  others.  This  simply 
means  that  a  man  who  takes  some  risks  as  to  getting  his 
money  back  adds  to  the  interest  a  premium  to  cover  this 
risk.  Loans  for  long  time  are  also  cheaper  because  the 
h-nder  runs  less  risk  of  having  his  money  lie  idle  than  if  he 
makes  frequent  short  loans,  and  saves  himself  the  trouble  of 
reinvestment.  Aside  from  these  changes  a  steady  diminution 
of  interest  occurs  in  most  civilized  countries.  This  change, 
which  is  not  due  to  lessened  risk,  marks  a  change  in  men's 
valuations  of  future  goods.  Present  wants,  being  better 
satisfied,  are  less  clamorous  and  contrast  less  vividly  with 
remoter  wants.  Men  gain  confidence  in  the  future  and  esti- 
mate its  possibilities  more  justly,  or  at  least  more  favorably. 
The  lowering  of  the  interest  means  that  men  are  less  needy 
in  the  present  or  more  appreciative  of  the  future,  than  before. 
Pure  Profits. — In  contrast  with  tlie  routine  of  system- 
atized industry  where  all  returns  are  paid  out  to  landlord, 
laborer,  and  capitalist,  and  just  suffice  to  secure  their  partici- 
pation, we  see  concerns  here  and  there  which  accumulate  a 
surplus  over  and  above  the  profits  of  their  rivals  in  the  same 
lines  of  business.  They  do  business  under  the  same  condi- 
tions, make  the  same  goods,  and  sell  to  the  same  public  as  the 
other  firms;  yet  they  have  a  surplus  profit,  while  the  others 
have  none.  Every  one  knows  that  such  things  happen. 
Thus,  the  so-called  "merchant  prince,"  A.  T.  Stewart, 
maintained  a  business  which  distanced  all  competitors  and 
which  could  not  be  maintained  after  his  death.  Not  un- 
frequently  a  business  depends  so  entirely  on  exceptional 
abilities  for  its  surplus  profit  that  when  these  abilities 
disappear  business  relapses  to  its  former  level  of  ordinary 
returns.  In  other  cases  the  improved  management  is  con- 
tinued until  rival  concerns  learn  the  secret,  competition  low- 
ers prices,  and  the  surplus  disappears  in  a  cheapening  of  eco- 
nomic service  to  society.  Thus  the  achievements  of  genius 
constantly  tend  to  become  an  addition  to  social  skill.  But 


21G  OUTLINES  or  ECONOMICS. 

until  they  have  become  so  special  abilities  command  a  rent 
precisely  as  does  special  productivity  in  land.  We  may  call 
this  surplus  of  pure  profit  a  brain  rent  as  the  other  is  a  land 
rent.  They  are  governed  by  the  same  law  except  that 
genius  is  not  fixed  in  amount,  like  land.  Added  to  these 
rent-producing  powers  of  productivity  and  ability  is  a  certain 
element  of  chance  (conjuncture)  which  affects  incalculably 
the  result  in  particular  cases,  such  as  the  accidental  discov- 
ery of  a  mine  or  a  process  which  equally  enriches  their  lucky 
possessor;  the  outbreak  of  war  and  any  combination  of 
events  fortunate  for  the  individual  fall  under  this  head. 
Such  elements  can  be  enumerated  and  described  only  so  far 
as  the  individual  is  concerned.  They  cannot  be  reduced  to 
any  assignable  principle  and  interfere  as  disturbing  elements 
with  the  operation  of  general  principles.  They  are,  however, 
of  great  importance  in  the  distribution  of  wealth,  making 
many  rich  and  also  impoverishing  others.  The  broad  social 
standpoint  reduces  chance  to  a  minimum,  for  irregularities 
counterbalance  each  other  when  we  consider  great  masses  of 
facts  or  large  areas.  The  poor  wheat  crop  of  one  section  is 
accompanied  with  an  unusually  large  yield  elsewhere,  etc. 

Monopoly  Profits. — "VVe  have  seen  that  under  competi- 
tion pure  profits  rest  upon  a  precarious  foundation.  If  the 
special  abilities  on  which  they  rest  are  such  as  cannot  be 
duplicated  they  perish  with  their  single  possessor  ;  if  they 
can  be  duplicated  rival  concerns  are  sure  to  duplicate  them, 
and  the  special  advantage  is  lost  through  competition.  But 
there  are  advantages  entirely  equivalent  to  these  which  may 
become  the  exclusive  property  of  a  concern  and  make  com- 
petition impossible.  Such  are  the  possession  of  those  par- 
ticular locations  or  privileges  upon  which  a  business  depends, 
the  right  of  way  of  a  railway,  the  privilege  of  supplying  a 
city  with  gas,  electricity,  water,  transportation,  etc.  Under 
such  circumstances  competition  is  usually  not  possible,  and 
never  permanently  successful.  The  business  becomes  a 
monopoly  by  its  very  nature  if  not  by  distinct  legal  privilege. 
The  restrictive  power  of  competition  over  price  is  removed, 


INTEREST  AND  PROFITS.  217 

and  a  surplus  over  rent,  wages,  and  interest,  and  profit,  in  the 
true  sense  of  the  word,  is  now  a  regular  result.  Unless 
interfered  with  by  legislation  there  would  seem  to  be  nothing 
to  prevent  a  monopoly  asking  any  price  it  pleases.  It  is  a 
mistake,  however,  to  suppose  that  a  monopoly  price  has  no 
economic  limits  ;  for  increase  of  price  tends  to  lessen  con- 
sumption, and  a  point  is  soon  reached  where  an  increase  of 
price  is  more  than  compensated  by  a  decreased  sale.  This 
point  is  the  natural  limit  of  monopoly  price,  and  gives  us  its 
law.  Monopoly  price  is  that  price  which  yields  the  greatest 
surplus.  This  will  vary  very  much  with  the  article.  Some 
will  bear  raising  the  price  much  more  than  others  without 
serious  decrease  of  sale.  TJie  monopoly  price  will  rise  and 
the  monopoly  siirplus  increase  as  wealth  and  willingness  to 
spend  increase  in  the  community.  It  is  thus  that  monopoly, 
without  any  effort  on  its  own  part,  shares  in  the  increasing 
wealth  of  the  country  and  absorbs  a  large  part  of  it.  It  is, 
for  example,  among  other  things,  the  larger  wealth  and 
greater  willingness  to  spend  freely  which  make  monopoly 
more  profitable  in  the  United  States  than  in  Germany. 

It  is  to  be  noted  that  while  pure  profit,  apart  from  the 
gains  due  to  a  happy  combination  of  affairs  (conjuncture), 
is  largely  a  surplus  produced  by  genius,  and  is  in  so  far  no 
burden  to  the  community  which  tends  to  profit  by  it  even- 
tually, monopoly  profit  is  a  surplus  extorted  by  power  and 
privilege,  and  invariably  a  loss  to  the  community.  Distri- 
bution of  wealth  comes  increasingly  under  the  influence  of 
monopoly.  The  economic  surplus  yielded  by  monopoly  is 
the  source  of  many  of  the  largest  fortunes  of  our  day,  and  is 
the  prime  cause  of  the  growth  of  inequalities  of  fortune 
during  the  present  century.  "While  in  general  competition 
increases  in  severity,  an  increasing  proportion  of  the  industrial 
field  is  withdrawn  from  competition  and  falls  under  the  con- 
trol of  monopoly.  There  is  thus  a  growing  class  enjoying 
special  economic  privileges. 

Monopolies  will  be  further  considered  in  Book  III. 


218  OUTLINES  OF  ECONOMICS. 


SUMMABY. 

1.  Capital  is  the  third  factor  in  production,  a  derivative  element   but 
wholly  comparable  in  its  action  to  natural  elements  when  once  produced. 

2.  The  return  to  capital  is  usually  known  as  interest  or  profit. 

3.  The  total  surplus  left  in  the  employer's  hands  after  wages  and  rent, 
are  paid  must  include:   1.)  Replacement  of  capital;  2.)  Insurance  against 
loss;  3.)  Wages  of  superintendence ;  4.)  Interest  on  capital;  5.)  Pure  profit. 

4.  Interest  has  been  explained  as  due  to  the  productivity  of  capital — in 
oversight  of  the  fact  that  capital  derives  its  value  from  what  it  produces. 

5.  The  explanation  of  interest  as  a  payment  for  abstinence  is  inadequate. 

6.  Interest  is   the  result  of   the  fact  that  future  goods,  on  account   of 
their  present  inaccessibility,  have  a  lower  value  than  present  goods. 

7.  The  former  condemnations  of  interest  arose  partly  from  a  misconcep- 
tion of  its  nature,  partly  from  a  difference  of  conditions. 

8.  The  rate  of  interest  tends  to  fall  as  affluence  and  intelligence  lessen 
the  disparagement  of  future  wants. 

9.  Pure  profit  is  a  rent,  usually  temporary,  paid  to  managing  ability. 

10.  Monopoly  profit  is  a  rent  paid  to  advantages  of  opportunity,  as  loca- 
tion, privilege,  etc.,  when  exclusively  controlled  by  individuals. 

QUESTIONS. 

1.  What  is  the  difference  between  capital  and  the  other  factors  of  pro- 
duction?.   Does  this  materially  affect  its  operation  ? 

2.  What  is  usually  included  under  "  profits?  "     Define  each.     How  many 
of  these  elements  may  be  properly  called  profit  or  increase  of  wealth  ? 

3.  What  is  the  productivity  theory  of  interest?  its  error?  the  abstinence 
theory?  its  defects?  the  theory  of  Bohm-Bawerk?     Does  a  man  pay  more 
tyalue  than  he  receives  when  he  returns  a  loan  with  interest?     Why? 

4.  What  two  changes  are  there  in  the  rate  of  interest  ?  the  cause  of  each  ? 

5.  Why  was  interest  once  condemned  ?   Is  it  always  right  to-day?  Why  ? 

6.  What  is  pure  profit?     Why  unstable?     Does  it  become  more  stable? 

7.  What  is  monopoly  profit?    What  are  its  limits?     Has  it  any  connec- 
tion with  pure  profit?    What  is  its  character  as  regards  social  welfare? 

LITEBATURE. 

Bohm-Bawerk,  E.  von :  Capital  and  Interest,  for  a  criticism  of  former  in- 
terest theories  is  an  ideal  of  logical  and  judicial  criticism.  Positive  Theory  of 
Capital  by  the  same  writer  presents  his  own  theory. 

Walker,  F.  A. :  Political  Economy. 

Mill,  J.  S. :  Principles  of  Political  Economy. 

Clark,  J.  B. :  Philosophy  of  Wealth. 

All  standard  works  on  Political  Economy  treat  these  topics. 


PART  IV. 

CONSUMPTI  ON, 


CHAPTER  I. 

INTRODUCTORY. 

CONSUMPTION  is  the  correlate  of  production.  As  we  said, 
man  creates  no  new  matter  ;  lie  also  destroys  no  matter. 
Matter  constitutes  things.  By  man's  activity,  and  sometimes 
without  it,  things  acquire  the  power  to  satisfy  human  wants 
0  and  become  goods.  By  man's  activity,  and  sometimes  with- 
\  out  it,  goods  lose  their  power  to  satisfy  wants  and  become 
things.  To  make  things  into  goods  with  a  view  to  satisfying 
wants  is  production  ;  to  make  goods  into  things  by  satisfying 
^  wants  is  consumption. 

It  is  easy  to  distinguish  production  from  the  mere  hap- 
penings due  to  human  caprice  on  the  one  hand,  and  from 
the  unaided  workings  of  nature  on  the  other;  neither  of 
which  can  be  called  production.  But  it  is  necessary  to  use 
more  care  in  defining  consumption.  The  term  is  one  of  that 
unfortunate  class  which  is  used  loosely  in  ordinary  speech, 
and  must  be  made  exact  for  scientific  purposes. 

In  the  first  place,  consumption  does  not  include  the  passage 
of  goods  back  into  things  by  the  simple  action  of  nature, 
such  as  the  rotting  of  apples,  the  dying  of  timber,  animals, 
etc.  Such  goods  perish,  but  they  are  not  consumed  in 
the  economic  sense.  A  more  difficult  distinction  is  that  be- 
tween consumption  and  destruction,  both  of  them  the  result 
of  human  activity.  All  difficulties  are  solved,  however,  if 
we  keep  in  mind  the  simple  fact  that  the  satisfaction  of 


220  OUTLINES  OF  ECONOMICS. 

human  wants  is  the  purpose  and  the  measure  of  all  economic 
activities.  Wood  burned  in  a  stove  is  consumed,  because  it 
satisfies  wants  ;  burned  in  a  conflagration,  it  is  only  destroyed. 
Moreover,  a  good  may  satisfy  certain  wants  and  still  be 
destroyed,  as  when  we  warm  a  house  by  burning  furniture. 
This  satisfies  wants,  to  be  sure,  but  wants  which  are  less  than 
those  which  furniture  may  satisfy.  If  we  break  up  a  stove 
into  old  iron  we  still  have  a  good,  but  one  farther  removed 
from  the  satisfaction  of  wants  than  the  good  from  which  it 
was  made.  All  processes  which  destroy  or  diminish  possible 
utilities  are  destruction,  not  consumption. 

On  the  other  hand,  we  must  guard  against  an  opposite 
error.  We  are  apt  to  have  certain  personal  notions  of  the 
desirability  of  certain  wants,  and  to  say  that  goods  are 
destroyed  or  wasted  when  devoted  to  uses  which  we  do  not 
approve.  Thus  we  say  that  corn  used  for  food  is  consumed, 
while  corn  used  for  whisky  is  destroyed.  Such  a  judgment 
may  be  morally  right,  but  it  is  wrOng  economically.  A 
want  is  a  want,  and  in  economics  wants  are  measured  only 
by  their  intensity  as  regards  their  economic  validity.  The 
very  fact  that  whisky  is  made  indicates  that  a  certain  num- 
ber of  "  wants  "  can  be  better  satisfied  by  corn  whisky  than 
by  corn  bread.  It  is  undoubtedly  better  for  a  man  to  burn 
his  furniture  to  warm  his  house  than  to  sell  it  to  buy  drink, 
but  economically  the  one  is  destruction  and  the  other  con- 
sumption. All  of  this  merely  means  that  man  is  more  than 
a  wealth-getting  animal.  Economic  interests  are  not  his 
only  interests,  nor  always  compatible  with  his  other  interests. 
The  economist  by  no  means  claims  that  economic  considera- 
tions should  always  be  followed.  He  knows  full  well  that 
economic  wisdom  may  be  human  folly,  and  that  life  is  con- 
tinually neglected  in  order  to  get  a  living.  Economics  must, 
however,  consider  the  reactions  of  wants  and  their  satisfac- 
tion upon  economic  activities.  We  must  also  avoid  the  error 
of  supposing  that  consumption  means  the  rapid  using  up  of 
things.  We  often  think  that  some  goods  are  consumed  while 
others  are  only  used.  The  distinction  is  one  of  degree  only 


INTRODUCTORY.  221 

All  products  are  used  up  at  last,  and  whether  soon  or  late 
makes  no  essential  difference  for  present  purposes.  Houses 
are  consumed  as  truly  as  food.  Consumption  means  nothing 
more  than  using  things  in  the  way  they  were  economically 
intended  to  be  used.  The  using  up  or  wearing  out  is  merely 
an  inevitable  incident  of  this  use  or  consumption. 

Productive  and  Final  Consumption. —  Having  de- 
fined consumption,  we  have  now  to  notice  two  kinds  of  con- 
sumption, or,  more  exactly,  the  consumption  of  two  kinds  of 
goods.  These  are  capital  and  consumption  goods,  or  goods 
designed  to  satisfy  wants  directly.  Machines  and  raw  mate- 
rials are  consumed  as  truly  as  finished  articles.  The  differ- 
ence is  that  they  are  consumed  to  produce,  while  the  others 
are  consumed  to  satisfy  wants.  Hence  we  call  this  produc- 
tive consumption,  while  that  consumption  which  attains  the 
ultimate  goal  of  economic  activity  in  the  satisfaction  of 
wants  is  final  consumption. 

It  is  necessary  again  to  guard  against  the  idea  that  food 
consumed  by  laborers  is  productive  consumption.  All  such 
questions  are  to  be  settled  by  the  consumer  himself,  who  has 
final  rights  in  the  matter.  He  consumed  not  for  the  sake  of 

O 

production,  but  for  the  sake  of  satisfaction,  and  produces 
only  that  he  may  consume.  Man  is  our  final  term. 

It  goes  without  saying  that  only  final  consumption  is  of 
any  real  importance  to  life.  This  is  the  goal  of  our  effort, 
the  measure  of  our  success.  Heterogeneous  estimates  of  un- 
consumed  wealth  mean  little  or  nothing  as  to  a  nation's  well- 
being.  How  much  is  the  final  consumption  of  the  nation  in 
a  year?  This  is  the  important  question  in  this  connection.  , 

Alleged  Present  Consumption  of  Future  Products. 
—We  often  hear  of  consumption  in  advance  of  production. 
It  is  said  people  live  on  the  future.  It  is  frequently  argued 
that  during  our  late  war  we  were  consuming  faster  than  we 
were  pi-oducing.  It  is  alleged  that  the  federal  bonds  repre- 
sented the  consumption  of  future  earnings.  Those  who  talk 
thus  appear  to  have  no  clear  notions.  It  is  impossible  to 
consume  faster  than  we  produce  unless  we  consume  past 


222  OUTLINES  OF  ECONOMICS. 

savings.  We  cannot  eat  to-day  the  wheat  or  potatoes  of 
to-morrow,  nor  can  we  wear  coats  before  they  are  made. 
What  is  alleged  can  only  be  true  in  case  the  capital  or  other 
wealth  of  the  country  is  diminishing,  whereas  during  our  late 
civil  war  it  increased.  What  really  happened  was  this  :  We 
as  a  nation  became  indebted  to  some  extent  to  foreigners,  and 
within  the  nation  some  of  us  gained  while  the  rest  of  us  were 
losing.  Bonds  do  not  represent  a  present  consumption  of  fu- 
ture wealth,  but  a  consumption  of  existing  wealth  for  which  a 
government  agrees  to  remunerate  its  owners  in  the  future. 
If  war  can  be  carried  on  with  the  aid  of  bonds  it  can — leav- 
ing out  of  consideration  what  foreigners  send  us — with  a 
sufficiently  perfect  taxing  machinery,  conceivably  always 
and  practically  sometimes,  be  carried  on  without  bonds.  It 
is  only  a  question  of  how  to  get  hold  of  existing  wealth. 
War  was  formerly  carried  on  without  bonds,  because  they 
are  a  comparatively  recent  contrivance.  Consumption  can 
never  anticipate  future  production  ;  it  can  only  anticipate 
future  ownership. 


INTRODUCTORY.  223 


SUMMARY. 

1.  Consumption  is  the  correlate  of  production,   the  change  of  goods  into 
things  through  the  satisfaction  of  wants. 

2.  Consumption  is  to  be  distinguished  from  destruction  which  changes 
goods  into  things  with  a  partial  or  complete  failure  to  satisfy  wants. 

3.  Consumption  is  not  to  be  restricted  to  the  satisfaction  of  morally  justi- 
fiable wants. 

4.  Consumption  is  either  productive  or  final,  according  as  it  results  in  the 
production  of  more  goods  or  in  the  satisfaction  of  wants. 

5.  There  is  no  such  thing  as  present  consumption  of  future  goods,  though 
future  ownership  may  be  anticipated  in  consumption. 

QUESTIONS. 

1.  Define  consumption.     What  is  the  difference  between  consumption  and 
production?  between  consumption  and  destruction? 

2.  What  is  the  difference  between  using  things  and  using  them  up?     Is 
the  question  involved  in  consumption,  and  if  so,  how  ? 

::.  What  is  the  relation  of  consumption  to  the  problem  of  good  and  bad 
wui  its? 

4.  Define  production  and  final  consumption. 

5.  What  is  meant  by  the  present  consumption  of  future  goods  ? 

LITERATURE. 

Patten,  S.  N. :   Theory  of  Dynamic  Economics ;  Tlie  Consumption  of  Wealth ; 
Premises  of  Political  Economy,  and  numerous  articles  and  monographs. 
Roscher,  Wilhelm  :  Political  Economy.     English  translation.     Book  IV. 


CHAPTER  II. 

CONSUMPTION  AND  SAVING. 

WHAT  has  been  said  in  no  way  invalidates,  but  rather 
emphasizes,  the  importance  of  saving  in  connection  with  con- 
sumption. To  be  sure,  we  save  only  in  order  that  we  may 
have  more  to  consume.  Saving  as  a  mere  end  in  itself  is 
penuriousness,  a  most  degrading  and  demoralizing  passion. 
But  the  efforts  of  man  to  produce  goods  are  so  inefficient  un- 
less he  is  aided  by  capital,  which  is  impossible  without  pre- 
vious saving,  that  he  who  does  not  save  consumes  his  seed- 
corn,  which  is  his  hope  of  next  year's  harvest.  It  is  difficult 
to  say  at  what  point  consumption  should  stop  and  saving 
begin.  The  rule  will  vary  for  individuals  and  nations.  Un- 
doubtedly both  persons  and  peoples  have  erred  on  either  side 
at  various  times,  now  living  in  squalor  to  accumulate  wealth, 
now  spending  their  substance  in  riotous  living  until  there  is 
a  famine  in  the  land.  There  is  not  much  to  choose  between 
these  two  vices.  They  both  amount  to  the  same  thing  in 
the  long  run,  namely,  a  low  average  consumption  and  repre- 
hensible poverty  of  life.  Difficult  as  it  is  in  practice  to 
settle  this  question,  the  principle  itself  is  very  clear.  /So 
much,  and  only  so  much,  should  be  saved  as  will  maintain  a 
maximum  final  consumption  over  long  periods  of  time. 

Inducements  to  Saving. — We  have  seen  that  men  in 
general  prefer  a  future  good  to  a  present  one  only  when  it  is 
larger  in  amount.  To  provide  for  old  age  or  for  possible 
accidents  may  be  a  sufficient  motive  for  saving  in  some  cases, 
but  most  men  will  not  save  unless  the  goods  saved  will  bring 
an  increase.  It  is,  therefore,  necessary  to  an  extensive  sav- 
ing that  the  conditions  of  profitable  investment  should  be 
provided;  and  if  wealth  is  to  be  widely  diffused  opportuni- 


CONSUMPTION  AND  SAVING.  225 

ties  for  investment  must  be  readily  accessible.  It  is  a  per- 
ceived opportunity  to  make  an  investment  with  probability 
of  increase  which  stimulates  saving  above  everything  else. 
Such  an  opportunity  is  often  the  beginning  of  individual 
accumulation.  Some  of  these  conditions  we  have  now  to 
consider.  They  may  be  grouped  under  two  heads,  security 
and  productiveness.  If  the  investments  of  a  country  pro- 
duce well  on  an  average,  but  fluctuate  between  loss  of  prin- 
cipal on  the  one  hand  and  unreasonable  profit  on  the  other, 
the  condition  is  one  to  encourage  speculation  rather  than 
saving.  On  the  other  hand,  general  security  of  investment 
will  promote  saving  with  a  very  low  profit  and  of  course  in- 
creasingly as  profit  increases.  Among  the  institutions  to  be 
considered  are: 

Private  Property. — The  abuse  of  the  system  of  private 
property  by  those  who  use  it  selfishly  and  oppressively  is  so 
common  that  if  we  look  only  at  that  side  we  may  be  tempted 
to  conclude  that  it  should  be  abolished.  But  over  against 
the  abuse  must  be  set  the  advantages  of  the  system  of  which 
the  foremost  is  the  encouragement  it  gives  to  saving. 

Stock  Companies. — These  are  but  an  extension  of  the 
principle  of  division  of  labor.  How  much  better  it  is  for 
each  man  to  do  the  thing  he  can  do  best  and  leave  other 
functions  to  others  is  clear  in  connection  with  labor.  Our 
experience  has  made  it  clear  in  connection  with  management 
as  well.  How  few  men  know  how  or  could  ever  learn  how 
to  manage  a  railway  !  On  the  other  hand,  there  are  multi- 
tudes who  could  contribute  something  tOAvard  building  one. 
Stock  companies  combine  those  two  powers,  the  power  of 
saved-up  wealth  and  the  power  of  exceptional  ability  in 
management.  Few  institutions  of  our  day  offer  greater 
possibilities  in  the  way  of  encouraging  saving  than  these 
companies.  It  must  be  said,  however,  that  these  possibilities 
have  as  yet  been  only  imperfectly  realized.  These  invest- 
ments have  in  general  been  profitable,  but  by  the  speculative 
nature  of  their  management  the  security  of  such  investments 
1ms  been  almost  destroyed.  No  severer  indictment  can  be 


226  OUTLINES  OF  ECONOMICS. 

brought  against  the  stock  gambling  of  our  day  than  the  fact 
that  it  has  destroyed  one  of  the  most  efficient  incentives 
which  society  possesses  for  the  general  saving  of  wealth. 
Who  would  dare  advise  a  poor  widow  to  invest  her  savings 
in  railway  securities  ?  Yet  no  property  in  the  country  is 
more  evenly  or  certainly  productive  than  many  of  our  rail- 
ways. The  difficulty  is  due  to  a  lax  sentiment  and  lax  legis- 
lation affecting  all  stock  companies  alike,  which  permits  a 
kind  of  management  little  superior  to  piracy.  Such  robbery 
does  not  simply  steal  the  golden  egg  ;  it  kills  the  hen  that 
lays  it. 

Savings  JJanks. — These  have  a  noteworthy  influence  upon 
saving,  especially  among  the  poor.  It  is  here  especially 
that  encouragement  to  saving  is  needed.  The  rich,  who  least 
need  to  save,  are  most  apt  to  do  so,  not  simply  because  they 
have  most  to  save  from,  but  because  they  have  most  induce- 
ment to  do  so.  The  poor,  on  the  other  hand,  as  we  all  know, 
and  as  we  are  over-fond  of  asserting,  are  poor  in  large  part 
because  they  are  thriftless.  With  weak  wills  and  clamorous 
wants  they  know  poorly  how  to  keep  money  in  the  house 
unspent.  So  "  flush  "  times  bring  reckless  expenditure,  and 
hard  times  bring  distress.  Savings  banks,  especially  in 
Europe,  have  done  much  to  promote  thrift  among  the  poor. 

Insurance. — This  relatively  modern  institution  is  already 
one  of  the  most  valuable  factors  in  our  economic  civilization. 
It  has  the  great  merit  of  providing  in  varying  proportions 
for  both  security  and  profit  of  investment.  The  provision 
for  security  is  especially  prominent  in  the  case  of  fire  insur- 
ance. It  is  often  said  that  such  an  insurance  is  simply  an 
equalization  of  losses,  or  a  distribution  of  a  heavy  sudden 
loss  over  a  long  period  of  time.  In  fact,  it  is  much  more 
than  that.  It  is  important  to  take  the  amount  of  a  loss  from 
a  business  in  such  amounts  and  at  such  times  that  no  vital 
want  is  left  unsatisfied,  and  this  is  done  by  insurance.  Thus 
perpetuity  and  equality  of  conditions  is  guaranteed  to  a  busi- 
ness in  such  a  way  as  to  greatly  encourage  investment.  The 
same  principle  applies  to  life  insurance.  The  death  of  a 


CONSUMPTION  AND  SAVING.  227 

business  man  is  often  a  more  serious  shock  to  a  business  than 
a  conflagration.  The  payment  of  a  life  insurance  policy  is 
often  a  very  great  relief  to  the  financial  embarrassments  in 
which  such  a  business  is  left. 

But  the  addition  of  the  endowment  feature  by  which  a 
policy  becomes  payable  at  the  end  of  a  stated  period  greatly 
adds  to  the  other  feature  of  life  insurance,  namely,  the  profit 
of  investment.  An  able  business  man  who  devotes  his  time 
to  the  management  of  his  investments  will  find  in  the  low 
rate  of  interest  guaranteed  a  small  inducement,  and  will 
probably  insure  simply  to  guard  against  risk.  But  there  are 
multitudes  who  are  not  able  business  men — professional  men 
and  others  who  do  not  spend  their  time  in  making  and  manag- 
ing investments.  To  such  it  is  easy  to  save  the  amount  of  a 
year's  premium.  It  is  difficult  or  impossible  to  invest  that 
small  amount  profitably  or  to  avoid  spending  it  during  a 
long  period  of  years.  The  insurance  company  collects  these 
myriad  trifles,  and  by  the  employment  of  able  investors 
profitably  invests  them.  We  can  scarcely  overestimate  the 
importance  to  society  of  an  institution  which  equalizes  the 
shocks  and  multiplies  the  incentives  to  thrift  and  whole- 
some economic  activity. 

Some  idea  of  the  magnitude  of  the  insurance  business  may 
be  obtained  from  the  fact  that  there  were  in  1887  in  the 
United  States  532  life  insurance  companies  with  5,383,050 
policies  in  force,  $630,913,768  gross  assets,  and  insuring  lives 
to  the  amount  of  $7,506,027,211,  or  nearly  13  times  our  in- 
terest-bearing national  debt.  This,  it  must  be  remembered, 
includes  only  a  single  branch  of  the  complex  insurance  busi- 
ness.* 

Cooperation. — Cooperation  in  all  its  forms  is  an  incentive, 
not  only  to  industry  and  good  work,  but  also  to  saving. 
The  principal  difficulty  with  it  is  that  it  requires  some  saving 
before  it  can  be  started  ;  but  once  in  operation  its  incentives 
arc  increasingly  felt  and  appreciated.  Nothing  is  so  neces- 
sary to  the  development  of  thrift  as  a  flexible  element  in  a 

*  Publications  of  the  American  Statistical  Association.     Vol.  i,  p.  146. 


22?  OUTLINES  OF  ECONOMICS. 

man's  income  varying  with  thrift.  Perhaps  cooperation  bet- 
ter than  any  other  agency  makes  a  man  feel  the  immediate 
results  of  saving.  This  is  especially  true  when  the  necessary 
capital  is  in  the  form  of  stock  which  can  be  owned  in  large 
or  small  amounts,  according  to  savings  invested.  Coopera- 
tive stores  have  been  especially  successful  in  England,  and 
while  cooperation  has  been  found  more  difficult  in  produc- 
tive industries,  there  are  numerous  examples  of  its  successful 
application. 

Governments  and  Capital  Formation. — It  is  to  be 
noticed  that  governments  are  more  or  less  prominent  in 
capital  formation.  When  our  federal  government  pays  off 
the  national  debt  it  forms  capital.  The  means  to  pay  the 
debt  are  collected  in  small  sums  from  millions  of  people  who 
would  not  have  used  them  for  purposes  of  production,  and 
then  the  aggregate  is  handed  over  to  the  owner  of  a  written 
obligation,  a  bond,  who  uses  them  as  capital.  These  means 
in  the  pockets  of  the  people  were  not  capital,  and  only  a 
small  proportion  would  have  been  turned  into  capital. 
There  can  be  no  doubt  that  debt  payment  by  the  United 
States  has  increased  the  actual  capital  of  the  country.  A 
part  of  this  new  capital,  it  is  true,  simply  restored  capital 
that  hnd  once  existed  and  had  been  sacrificed  years  before. 
Similarly,  when  the  United  States  expends  its  revenues  for 
post  office  and  other  federal  buildings,  and  for  wise  internal 
improvements,  it  increases  capital.  It  is  a  consumption 
which  is  at  the  same  time  a  capital  formation.  When  mu- 
nicipalities establish  gas  works,  electric  lighting  works,  and 
pay  for  them  by  taxes  or  by  loans  repaid  by  taxation,  the 
capital  of  the  country  is  increased.  The  people  save  a  por- 
tion of  their  income  through  the  agency  of  government,  and 
it  is  the  only  way  a  large  proportion  of  them  can  ever  be 
made  to  save  anything. 


CONSUMPTION  AND  SAVING.  229 


SUMMARY. 

1.  Saving  should  be  so  proportioned  to  final  consumption  as  to  maintain 
a  maximum  final  consumption  over  long  periods  of  time. 

2.  The  inducements  to  saving  are  primarily  security  and  productivenes3 
of  property. 

3.  Stock  companies  combine  managing  ability  and  saving  ability,  which 
are  not  naturally  united  to  a  large  extent. 

4.  This  system  has  offered  the  inducement  of  productiveness,  but  has  de- 
stroyed that  of  security  through  speculative  management. 

5.  Savings  banks  greatly  increase  saving  among  the  poor. 

6.  Insurance  offers  both  inducements  in  a  high  degree  and  is  the  great 
modern  capital  creator. 

7.  Cooperation  is  highly  productive  of  incentives  to  saving. 

8.  Through  taxation  and  wise  investment  government  contributes  largely 
to  the  formation  of  capital. 

QUESTIONS. 

1.  Is  saving  always  a  virtue  ?     If  not,  what  are  its  limits?     What  is  the 
difference  between  saving  and  penuriousncss? 

2.  What  two  inducements  are  necessary  to  saving? 

3.  What  are  the  advantages  of  stock  companies?  their  disadvantages? 
Are  the  disadvantages  inherent? 

4.  What  are  the  advantages  and  disadvantages  of  private  property  as  re- 
gards saving  ?    (Note  both  sides ) 

5.  WTiatis  the  effect  of  savings  banks  upon  saving? 

6.  Why  does  insurance  promote  saving?  What  is  the  advantage  of  equal- 
izing losses?     Is  life  insurance  a  good  investment,  and  why? 

7.  What  is  the  effect  of  cooperation  and  capital  sharing  upon  saving? 

8.  Are  we  always  "out  of  pocket"  as  a  result  of  government  expendi- 
ture?    Why? 

LITERATURE. 

See  works  already  cited. 
16 


CHAPTER  III. 

LUXURY. 

LUXURY  is  the  name  of  a  vague  something  which  society 
has  always  viewed  with  a  sense  of  mingled  tolerance  and 
condemnation.  We  must  know  what  is  signified  by  the  term 
before  we  know  what  to  think  about  it.  Many  and  various 
definitions  have  been  offered  not  wholly  satisfactory.  With- 
out decrying  these  definitions  we  will  try  to  get  at  the  popular 
conception  underlying  the  word.  In  the  first  place,  it  is 
clear  that  people  ordinarily  consider  as  luxuries  many  things 
in  themselves  innocent  and  desirable,  silk  dresses,  jewels, 
pictures,  etc.  No  one  but  an  ascetic  will  condemn  as  wrong 
in  themselves  things  that  appeal  to  taste  and  the  finer  appre- 
ciations, and  yet  we  feel  that  the  use  of  such  things  is  often 
unjustifiable.  Second,  the  popular  idea  of  luxury  recognizes 
a  difference  in  persons.  We  cannot  help  condemning  in  one 
person  what  we  approve  in  another.  Third,  we  judge  luxury 
differently  at  different  times.  There  is  a  continual  transfer 
of  articles  from  the  list  of  luxuries  into  that  of  comforts  and 
necessities.  This  transfer  is  brought  about  by  the  consensus 
of  social  judgment,  and  is  increasingly  acquiesced  in  by  all. 
So  we  see  that  the  term  luxury  does  not  apply  to  goods  of  a 
certain  character,  but  to  certain  goods  in  their  relation  to 
time  and  person.  We  may  define  luxury  simply  as  excessive 
consumption.  But  what  determines  whether  consumption  is 
excessive  or  not?  The  answer  to  this  question  is  connected 
with  the  problem  of  the  distribution  of  wealth. 

Two  facts  are  prominent.  First,  the  distribution  of  wealth 
is  enoi-mously  unequal.  This  needs  neither  proof  nor  elabora- 
tion. Second,  the  ability  of  men  to  use  wealth  profitably 
is  enormously  unequal  also.  There  is  not  the  remotest  proba- 


LUXURY.  231 

bility  that  the  latter  inequality  can  ever  be  removed.  Men 
must  ever  differ,  not  only  in  the  nature  of  their  wants  and 
appreciations,  but  also  in  their  aggregate  amount.  Should 
wealth  be  equally  distributed  ?  Remembering  that  owner- 
ship means  simply  control  over  goods,  let  us  put  this  question 
in  a  simpler  form.  Should  the  wealth  of  a  family  be  owned 
or  controlled  in  equal  shares  by  its  different  members  ?  Be- 
fore we  hastily  answer  yes  let  us  ask  what  this  would  mean. 
Can  the  two-year-old  control  his  part  of  the  family  fortune 
as  well  as  his  father  ?  Can  he  appreciate  or  profitably  use 
rare  books,  pictures,  and  fine  furniture,  to  say  nothing  of 
capital,  to  anything  like  his  numerical  proportion  ?  Plainly 
not.  How  much  may  he  claim?  First,  he  may  claim  as 
fall  a  satisfaction  of  his  ivants  as  is  accorded  to  the  rest; 
second,  he  may  claim  as  good  an  opportunity  to  develop  his 
wants  as  is  accorded  to  the  rest.  So  much  he  may  indubitably 
claim  by  the  law  of  the  solidarity  of  the  family,  which  is  the 
epitome  and  type  of  the  solidarity  of  society — a  law  which 
lies  far  deeper  and  broader  than  all  other  laws,  at  the  very 
bottom  and  foundation  of  things. 

Returning  to  our  larger  problem,  we  ask,  How  much  may 
a  man  consume  ?  As  much  as  he  can  lay  hold  of  ?  We 
must  again  remind  the  reader  that  this  is  the  law  among 
swine.  As  much  as  every  other  man  ?  The  result  would  be 
an  immediate  and  disastrous  impoverishment  of  society. 
How  much,  then?  The  only  justifiable  law  is  that  already 
enunciated  for  the  family.  He  may  consume  in  proportion 
to  his  power  to  appreciate  and  utilize.  To  consume  more 
is  to  limit  correspondingly  the  right  of  some  other  man. 
There  is  no  possible  reason  why  goods  should  be  distributed 
alike  to  every  man.  To  do  so  would  be  to  nse  goods  where 
they  satisfied  trifling  wants  or  none  at  all — a  use  which,  as 
we  have  said,  is  not  consumption,  but  destruction. 

But,  while  such  a  form  of  injustice  has  never  been  perpe- 
trated, an  opposite  form  is  exceedingly  common.  An  ine- 
quality of  consumption  is  demanded  on  the  basis  of  simple 
justice,  but  not  the  inequality  which  exists.  To  consume  dis- 


232  OUTLINES  OF  ECONOMICS. 

proportionately  to  one's  wants  or  one's  likelihood  of  devel- 
opment is  to  destroy  or  to  consume  with  relatively  small 
returns,  and  is  a  wrong  to  society.  The  excessive  consump- 
tion which  constitutes  luxury  is  therefore  a  consumption  in 
excess  of  man's  fundamental  claims,  which  are  in  general, 
first,  the  right  to  as  fall  a  satisfaction  of  wants  as  can  be  ac- 
corded to  all ;  second,  the  right  to  as  free  a  development  of 
his  wants  as  can  be  enjoyed  by  all. 

Greater  inequalities  are  admitted  than  would  seem  to  be 
the  case  on  first  thought.  The  wants  of  a  king  are  very 
great,  and  these  wants  are  true,  legitimate  wants,  upon  the 
satisfaction  of  which  depends  the  welfare  of  society.  The 
wants  of  those  engaged  in  the  learned  professions  are  greater 
than  are  ordinarily  understood.  The  higher  scholarly,  lit- 
erary, or  artistic  work  often  involves  large  expenditures. 
Travel  is  important  for  those  doing  this  kind  of  work,  and 
books  are  indispensable.  What  is  often  thought  of  as 
luxurious  expenditure  is  simply  an  outlay  which  is  an  in- 
dispensable part  of  the  price  society  pays  for  the  product. 
Professors  in  American  universities,  for  example,  frequently 
are  not  able  to  satisfy  their  wants  sufficiently  to  give  society 
work  of  the  highest  sort  of  which  they  are  capable. 

The  rule  given  is  one  which  looks  at  consumption  largely 
from  the  standpoint  of  individual  enjoyment  as  the  result  of 
consumption.  When  we  view  the  consumption  of  the  indi- 
vidual as  a  condition  of  social  service  a  certain  modification 
may  be  necessary,  especially  if  the  entire  social  product  is 
not  great  enough  to  allow  all  to  develop  their  faculties  com- 
pletely. It  is  unquestionably  in  the  interest  of  society  that 
those  with  the  highest  capacities  should  be  allowed  to  attain 
the  fullest  development  of  all  their  powers,  provided  these 
powers  are  used  in  the  service  of  humanity.  A  dispropor- 
tionately large  consumption  of  the  individual  may  be  praise- 
worthy, provided  this  consumption  is  for  the  real  develop- 
ment of  powers  designed  to  be  used  "  for  the  glory  of  God 
and  the  good  of  man." 

While  then  justifiable  consumption  will,  according  to  these 


LUXURY.  233 

principles,  be  exceedingly  variable,  can  anyone  for  a  mo- 
ment claim  that  such  principles  now  govern  social  con- 
sumption ?  Immense  sums  are  squandered  on  passing  caprices 
which  do  not  correspond  to  any  really  felt  want.  On  the 
other  hand,  multitudes  of  fine  natures  with  keen  apprecia- 
tions and  large  capacities  for  development  and  present  enjoy- 
ment are  left  without  the  means  for  either.  So  long  as 
these  things  exist,  so  long  as  a  vast  amount  of  the  world's 
wealth  is  destroyed  by  vulgar  and  incompetent  consumption 
which  might  impart  satisfactions  of  a  high  order  if  consumed 
otherwise,  and  by  others,  the  moral  sense  of  the  world  will 
condemn  luxury  as  a  social  wrong. 

And  what  is  the  excuse  for  this  abuse?  Usually  the 
simple  fact  of  ownership.  "It  is  ours,"  they  say.  But  for 
what  ?  Simply  because  the  interests  of  production  require 
capital  Jk>  be  massed  under  specialized  control.  The  few 
who  are  able  to  manage  capital  must  be  allowed  to  mansige 
it ;  and  management  means  control.  But  the  many  who  have 
wants  must  have  those  wants  satisfied,  and  that  satisfaction 
means  the  right  of  consumption,  a  right  proportioned  to 
those  wants.  There  is  no  more  reason  why  a  millionaire 
should  consume  all  the  wealth  he  controls  than  there  is  why 
a  philosopher  or  an  artist  should  withhold  from  society  the 
satisfactions  afforded  by  his  genius.  A  successful  manu- 
facturer once  expressed  the  opinion  that  a  man  had  a  right 
to  put  down  silk  velvet  on  a  muddy  crossing  to  walk  on  if  he 
were  rich  enough  to  afford  it.  When  a  man  tramples  in  the 
mire  the  fruit  of  human  industry  he  tramples  with  it  human 
rights  and  humanity,  and  should  expect  humanity  to  avenge 
the  affront.  It  needs  no  prophet  to  foresee  that  men  must 
learn  to  own  their  property  for  the  good  of  society,  or  society 
will  own  it  for  them.  The  right  of  private  property,  like 
other  social  institutions,  is  ever  on  trial.  The  obsolete  objec- 
tion is  still  sometimes  urged  that  luxury  gives  employment 
to  labor.  Does  not  philanthropic  and  productive  expendi- 
ture do  the  same  ?  But  that  is  not  the  question.  What 
comes  of  the  employment  ?  The  payment  of  wages  only 


234  OUTLINES  OF  ECONOMICS. 

helps  men  to  get  more  of  existing  goods — at  the  expense  of 
others  among  whom  the  goods  are  divided.  It  may  help 
workmen  to  get  goods  away  from  others,  to  give  them  em- 
ployment ;  but  the  only  way  to  help  society  is  to  give  work- 
men useful  employment,  to  aid  and  encourage  them  to  pro- 
duce needful  goods.  Every  employment  of  labor  which 
encourages  the  production  of  luxuries  is  a  misdirection  of 
social  energy,  an  encouragement  to  society  to  spend  its 
money  for  that  which  is  not  bread  and  its  labor  for  that 
which  satisfieth  not.  Excessive  consumption  is  necessarily 
wasteful  consumption,  and  as  such  is  necessarily  reprehen- 
sible. There  can  be  no  kind  of  doubt  as  to  the  teaching  of 
Christianity  on  this  subject. 


LUXURY.  235 


SUMMARY. 

1.  Luxury  is  a  vague  conception,  differently  applied  according  to  timo 
mid  person.     It  is  the  excessive  consumption  of  wealth. 

2.  Consumption  should  be  proportioned  wants  and  capacity  for  develop- 
ment.    Consumption  beyond  this  is  excessive  and  unjustifiable. 

3.  Equal  distribution  of  wealth  would  result  in  a  most  unwise  consump- 
tion of  goods. 

4.  Ownership  and  the  necessary  centralization  of  capitalistic  control  are 
no  measure  of  the  right  to  consume. 

5.  Luxury  cannot  enrich  a  community  by  giving  employment  to  labor  be- 
cause it  misdirects  productivity. 

QUESTIONS. 

1.  What  is  luxury?     What  is  the  popular  idea?     How  does  it  vary ? 

2.  What  may  each  man  justly  claim  as  a  consumer?     Why  may  he  not 
justly  consume  all  he  can  get  ?     May  he  justly  consume  all  he  can  produce  ? 
Why? 

3.  What  would  be  the  result  of  an  equal  distribution  of  wealth?    Why? 

4.  What  objection  can  be  raised  to  our  present  distribution  of  wealth  ? 
Why? 

5.  Should  capital  and  consumption  goods  be  distributed  according  to  the 
same  rules?    Why? 

LITERATURE. 

Ely,  R.  T. :  Social  Aspects  of  Christianity. 


CHAPTER  IV. 

HARMFUL  CONSUMPTION. 

WE  have  been  careful  to  avoid  the  impression  that  luxury 
consists  in  the  use  of  pernicious  goods.  It  is  a  common 
query,  "  Why  should  I  not  have  this  if  it  does  me  no  harm  ?  " 
This  we  have  tried  to  answer  in  the  previous  chapter.  It 
amounts  to  the  same  thing  as  harm  if  an  innocent  but  insig- 
nificant satisfaction  prevents  the  accomplishment  of  a  greater 
good.  A  luxury  may  be  a  positive  good  in  itself,  a  satisfac- 
tion which  society  may  well  hope  to  make  general,  but  it  is 
a  good  which  society  cannot  yet  afford  because  other  and 
greater  wants  are  yet  unsatisfied.  It  is  a  satisfaction  per- 
mitted ahead  of  its  time. 

But  we  have  to  consider  a  kind  of  consumption  which  is 
objectionable  in  an  entirely  different  way,  not  because  it  is 
excessive  or  premature,  but  because  it  is  intrinsically  harmful. 
It  would  be  a  violation  of  all  language  to  call  the  use  of  in- 
toxicating liquors  a  luxury  in  general,  but  it  is  certainly  on 
the  whole  harmful.  As  we  have  said  before,  these  wants 
are  as  really  economic  as  any  other,  and  we  have  no  intention 
of  assuming  the  function  of  the  physiologist  or  the  moralist 
in  enumerating  the  evils  which  come  from  the  consumption 
of  certain  goods.  But  in  one  respect  we  have  a  distinct  part 
in  this  discussion.  All  production  is  for  the  sake  of  man, 
and  consumption  is  its  final  term.  But  in  turn  man  is  the 
principal  factor  in  production,  and  as  the  consumption  of  cer- 
tain goods  affects  him  the  result  is  necessarily  transmitted 
to  the  productive  process.  We  have  anticipated  this  prin- 
ciple in  speaking  of  the  influence  of  the  standard  of  life  on 
the  efficiency  of  labor.  Now,  experience  clearly  demonstrates 
that  the  consumption  of  certain  goods  unfits  men  for  efficient 
production.  This  is,  therefore,  an  economically  harmful  con- 


HARMFUL  CONSUMPTION.  237 

sumption.  Whatever  may  be  said  for  this  consumption  from 
other  standpoints,  the  economist  must  deprecate  it.  All  such 
consumption  as  lessens  bodily  vigor,  blunts  the  perception,  and 
in  any  way  detracts  from  the  delicacy  of  the  human  organism 
is  of  this  sort.  Of  course,  no  complete  enumeration  is  possible, 
but  certain  cases  readily  suggest  themselves.  The  magnitude 
of  this  harmful  consumption,  however,  is  enormous. 

First  in  the  list,  of  course,  comes  intoxicating  beverages, 
especially  distilled  liquors.  According  to  government  reports 
there  were  consumed  in  the  United  States  in  the  year  ending 
June  30,  1890,  of  distilled  spirits  87,829,562  gallons  ;  of  wines 
28,956,981  gallons,  and  of  malt  liquors  855,792,335  gallons,  a 
total  of  972,578,878  gallons.  This  was  an  average  of  15.53 
gallons  for  every  man,  woman,  and  child  in  the  country. 
The  increase  in  amount  is  not  less  striking.  In  1875  the 
amount  per  inhabitant  was  only  6.86  gallons.  Since  1886 
the  amount  per  inhabitant  has  increased  almost  exactly  one 
gallon  per  year.  The  number  of  men  engaged  in  the  business 
of  manufacturing  these  liquors,  not  including,  of  course,  those 
who  produce  the  raw  materials,  is  stated  by  the  same  report 
to  be  900,808. 

Of  course  we  cannot  tell  just  how  much  wras  paid  by  the 
consumers  for  this  immense  flood  of  intoxicants,  which,  if 
poured  together,  would  fill  a  channel  twenty  feet  in  depth, 
twenty  feet  in  width,  and  fifty-four  and  one  half  miles  long; 
but  many  estimates  have  been  made  b.oth  by  those  who  de- 
fend and  those  who  oppose  the  use  of  alcoholic  liquors. 
They  place  the  cost  at  from  $700,000,000  to  $1,000,000,000. 
If  we  deduct  that  part  used  in  the  arts,  and  for  other  pur- 
poses besides  that  of  drinking,  it  is  probable  that  the  first 
estimate,  namely,  $700,000,000,  is  not  too  high  a  figure  to 
represent  the  amount  of  money  that  is  yearly  paid  for  in- 
toxicants which  are  used  ns  beverages.  This  is  equal  to 
an  expenditure  of  about  $11  for  every  man,  woman,  and 
child  in  our  country. 

In  comparing  the  amounts  expended  for  these  liquors  with 
what  our  people  expend  for  other  purposes  there  have  been 


238  OUTLINES  OF  ECONOMICS. 

many  misleading  estimates  made  which  in  the  long  run  can 
be  of  no  real  service  to  the  cause  of  temperance.  For  instance, 
some  persons  in  comparing  the  cost  of  drinks  with  the  cost 
of  all  the  food  consumed  in  the  United  States  have  placed 
the  former  at  the  not  extravagant  amount  of  about 
$900,000,000,  but  the  cost  of  food  they  find  to  be  only 
$963,000,000.  At  this  estimate  the  cost  of  liquors  would 
be  $15  per  capita,  while  the  cost  of  food  would  be  only 
$16  for  every  man,  woman,  and  child  in  the  United  States. 
There  is  an  important  difference  overlooked,  namely,  that 
nearly  all  of  the  liquor  consumed  comes  on  the  market  and 
is  there  estimated  in  dollars  and  cents,  while  perhaps  less 
than  one  fourth  the  food  consumed  is  brought  under  the 
conditions  necessary  for  a  money  valuation. 

It  is  important  to  note  that  if  the  $700,000,000  now 
spent  for  grain  in  the  form  of  liquors  were  expended  for 
food  and  other  farm  products  to  satisfy  the  rational 
wants  of  the  thousands  of  families  who  are  rendered  desti- 
tute by  intemperance  it  would  purchase  at  least  seven 
times  as  much  grain  in  the  form  of  flour  as  it  does  in  that  of 
liquor  ;  because  it  is  true  with  regard  to  liquors,  as  wTith  all 
luxuries,  that  the  amount  of  raw  material  used  in  their  pro- 
duction is  far  less,  compared  with  their  cost  to  the  consumers, 
than  it  is  in  any  of  the  other  products  that  satisfy  human 
wants.  Thus  we  can  see  that  those  farmers  who  think  that 
the  liquor  industry  creates  a  demand  for  their  commodities, 
and  those  brewers  and  distillers  who  endeavor  to  instill  this 
belief,  are  both  deceived  and  deceivers.  How  much  better 
it  would  be  if  farmers  could  secure  high  prices  for  their  grain 
and  other  products  by  ministering  to  those  rational  and 
higher  wants  which  strengthen  human  nature  and  enable  the 
consumers  to  produce  in  turn  a  greater  abundance  of  wealth, 
rather  than  by  satisfying  the  demands  of  base  appetites  that 
degrade  men  and  lessen  the  community's  wealth-producing 
power !  It  is,  of  course,  obvious  that  if  men  spend  less  for 
liquors,  tobacco,  opium,  and  the  like,  they  will  have  so  much 
more  to  spend  for  other  things,  and  the  opportunities  for 


HARMFUL  CONSUMPTION.  239 

employment  will  not  be  at  all  lessened.  On  the  contrary,  as 
other  expenditures  are  more  likely  to  be  productive,  oppor- 
tunities for  employment  will  inevitably  be  multiplied. 

The  indirect  cost  of  intoxicating  beverages  to  the  commu- 
nity at  large  is  far  more  tremendous  and  impossible  of  esti- 
mation than  the  direct  cost.  We  all  have  to  pay  for  the 
support  of  the  armies  of  policemen,  detectives,  lawyers,  judges, 
whose  chief  occupation  grows  from  the  use  of  intoxicants  ; 
for  prisons,  penitentiaries,  insane  asylums,  almshouses,  fifty 
to  eighty  per  cent  of  whose  occupants  are  the  victims,  direct 
or  indirect,  of  intemperance  ;  while  all  share  in  the  loss  of  in- 
dustrial power  that  comes  from  weakened  contentions,  dizzy 
heads,  and  extravagance.  Many  books  and  articles  have 
been  written  and  many  public  speeches  have  been  made  upon 
these  manifold  and  visible  evils.  Those  who  suffer  the  most 
from  drink  are  the  working  classes,  and  they  are  also  those 
who  cannot  conceal  their  excesses  and  misfortunes.  But  it 
is  a  mistake  to  suppose  that  workingmen  alone  furnish  the 
drunkards,  or  that  there  are  not  great  numbers  of  earnest 
temperance  men  among  them.  The  rich  have  their  social  clubs 
where  intoxicants  perform  their  work  as  heinously  as  they  do 
in  the  gutters,  but  less  publicly.  Almost  the  only  social 
men's  clubs  in  the  United  States  without  a  bar  attached  are, 
so  far  as  the  writer  has  observed,  workingmen's  clubs.  These 
appear  to  be  generally  devoid  of  that  institution.  There  are 
few  fashionable  club  houses  in  the  United  States  where  intoxi- 
cating beverages  are  not  sold.  While  intemperance  is  a 
monstrous  evil,  and  cannot  be  too  earnestly  fought  against, 
we  should  not  fail  to  see  that  it  is  at  the  same  time  both  an 
effect  and  a  cause.  When  we  look  for  the  worst  effects  of 
intemperance  we  go  to  our  crowded  cities  and  great  indus- 
trial centers.  But  here  we  find  industrial  and  social  con- 
ditions which  force  us  to  believe  that,  until  they  are  remedied, 
we  can  look  for  no  lasting  growth  of  temperance  or  strengthen- 
ing of  character:  on  the  one  side,  immense  wealth,  with  its 
temptations  of  pride  and  luxury  ;  on  the  other,  crowded 
tenements,  hot  and  noxious  in  summer,  always  loathsome  and 


240  OUTLINES  OF  ECONOMICS. 

repulsive,  occupied  by  those  who  do  not  know  whether  they 
will  find  work  that  day  or  not.  Their  condition  is  often  the 
effect  of  their  former  intemperate  habits,  and  in  turn  it  drives 
them  and  their  children  into  further  depths  of  inebriety. 
An  important  reason  for  the  craving  for  intoxicants,  as  is 
shown  by  one  of  the  foremost  of  American  physiologists,  is 
the  lack  of  sufficient  food  or  of  a  sufficient  variety  of  whole- 
some food,  and  especially  poorly  cooked  food.  These  and 
many  other  facts  with  regard  to  the  economic  conditions  of 
our  day  admonish  us  that  the  thoughtful  temperance  advocate 
must  embrace  in  his  efforts  both  temperance  and  industrial 
reforms. 

Another  serious  waste  of  wealth  results  from  the  use  of 
tobacco.  In  1886  there  were  743,460  acres  of  land  devoted 
to  the  production  of  this  weed,  and  the  quantity  of  cigars, 
cigarettes,  and  cheroots  consumed  by  the  American  people  in 
the  year  1880  reached  the  enormous  number  of  2,821,776,282. 
In  the  year  1892  (fiscal  year  ending  June  30)  there  were 
put  upon  the  market  for  consumption  4,601,525,650  cigars 
and  cheroots,  and  2,896,4.07,763  cigarettes,  a  total  of 
7,497,933,413.  The  tobacco  that  was  consumed  by  chewing 
and  in  the  form  of  snuff  was,  in  1880,  136,275,835  pounds, 
and  in  1892  the  amount  put  on  the  market  in  the  United 
States  was  265,522,329  pounds.  The  indirect  loss  resulting 
from  the  use  of  tobacco  is  not  so  great,  nor  are  its  effects 
upon  the  consumers  so  disastrous  as  is  the  case  in  the  con- 
sumption of  intoxicating  drinks,  but  it  is  at  least  doubtful 
whether  the  enormous  outlay  shown  by  the  above  figures  is 
compensated  by  any  increased  happiness  of  the  people. 

The  opium  habit  is  said  to  be  rapidly  growing  in  America. 
Its  effects  are  even  worse  than  those  of  alcoholic  intemper- 
ance, destroying  both  the  mind  and  body  and  transforming 
its  victims  from  productive  members  of  the  community  into 
a  public  burden. 

There  are  other  objects  of  foolish  and  harmful  consump- 
tion which  will  suggest  themselves  to  any  thoughtful  per- 
son. 


HARMFUL  CONSUMPTION.  2-il 


STJMMABY. 

1.  Harmful  consumption  is  that  which  demoralizes  the  consumer  and 
lessens  bis  economic  efficiency. 

2.  The  principal  harmful  consumption  is  that  of  intoxicating  beverages 
and  tobacco. 

3.  The^er  capita  consumption  of  each  is  increasing  in  the  United  States. 

4.  In  comparing  this  consumption  with  that  of  food  it  must  be  remem- 
bered that  a  large  part  of  the  latter  does  not  come  on  to  the  market. 

5.  The  indirect'cost  to  the  community  is  greater  than  the  direct  cost. 

QUESTIONS. 

1.  Is  luxury  harmful  consumption?     Why? 

2.  Is  all  harmful  consumption  luxury?     Why? 

3.  What  is  the  ultimate  destiny  of  the  two? 

4.  What  is  the  amount  of  intoxicants  sold  in  the  United  States?     Of 
tobacco?     The  value  of  each? 

5.  How  does  it  compare  with  food  consumed?     What  is  the  difficulty  of 
comparison  ? 

6.  What  is  the  indirect  cost  of  this  pernicious  consumption? 

LITERATTJBE. 

Mitchell,  Kate,  M.D. :   T}it  Drink  Question. 

Richardson,  B.  W.,  M.D. :   Ten  Lectures  on  Alcohol. 

Kerr,  Norman,  M.D.:  Inebriety,  its  Etiology,  Pathology,  Treatment,  and 
Jurisprudence. 

Glum,  Franklin  D.,  M.D. :  Inebriety,  it*  Causes,  it's  Results,  its  Remedy. 

Cyclopedia  of  Temperance  and  Prohibition. 

The  Voice,  of  New  York.     An  organ  of  prohibition. 

The  Union  Signal,  of  Chicago.  The  organ  of  the  National  Women's 
Christian  Temperance  Union. 


CHAPTER  V. 

CRISES  AND  ANALYSIS  OF  CONSUMPTION. 

Crises. — Crises  are  attended  with  a  glut  in  the  market, 
and  it  is  said  that  they  are  caused  by  overproduction.  A 
French  economist,  M.  Jean-Baptiste  Say,  however,  has  de- 
veloped what  is  called  a  theory  of  the  market,  which  has 
quite  generally  been  accepted  by  economists.  It  is  that 
there  is  no  such  thing  as  overproduction,  and  never  can  be 
until  all  wants  are  satisfied.  He  says  that  the  remedy  for 
apparent  overproduction  is  more  production.  Men  bring 
commodities  to  the  market.  What  do  they  desire?  Not 
money,  says  Say,  but  commodities,  money  being  a  mere 
medium  of  exchange.  Now  we  have  already  seen  that  a 
consumer  is  a  producer.  If  there  is  a  deficiency  of  con- 
sumers it  must  be  because  those  who  would  like  to  consume 
have  not  produced  economic  goods  for  exchange.  Overpro- 
duction, so  called,  is  really  underproduction,  according  to  this 
theory.  There  is  a  large  measure  of  truth  in  this  theory. 
When  are  we  most  troubled  with  a  glut  in  the  market  ? 
Undoubtedly  when  least  is  produced.  When  is  there  the 
most  ready  sale  for  commodities  ?  Undoubtedly  when  every- 
body is  at  work,  or  when  most  is  being  produced. 

There  is,  however,  another  sid-e  to  the  question.  It  is 
quite  possible  to  produce  a  larger  quantity  of  some  com- 
modities, as  potatoes,  cotton,  cloth,  etc.,  than  people  need. 
More  railways  are  often  produced  than  the  people  need  at 
the  time.  The  effect  of  disproportionate  production  is  that 
some  commodities  cannot  be  exchanged.  Those  who  have 
produced  them  do  not  make  their  normal  purchases.  There 
is  a  falling  off  in  sales  of  some  other  commodities,  and 
among  those  engaged  in  producing  these  other  wares  some 


CRISES  AND  ANALYSIS  OF  CONSUMPTION.          243 

cease  to  produce.  Demand  again  falls  off,  and  still  others 
cease  to  work,  as  already  explained.  There  is  dispropor- 
tionate production  and  overproduction  of  some  things,  and 
finally  general  overproduction,  owing  to  underconsumption, 
due  in  turn  to  lack  of  purchasing  power. 

The  intervention  of  money  is  an  important  factor.  Un- 
dou'itedly  commodities  are  in  the  end  exchanged  for  com- 
modities, but  the  intervention  of  a  medium  of  exchange 
produces  weighty  consequences.  Commodities  are  in  the 
first  instance  exchanged  for  money,  and  all  liabilities  must 
be  met  in  money.  Houses,  lands,  etc.,  can  only  indirectly 
pay  debts,  and  at  times  cannot  rescue  one  from  bankruptcy. 
Changes  in  money  supply,  especially  a  contraction  of  the 
volume  of  money,  will  render  it  impossibel  for  producers  to 
meet  their  engagements;  production  will  begin  to  diminish, 
demand  will  begin  to  decrease,  and  the  result  is  apparent 
general  overproduction. 

Remedies  for  overproduction  or  underconsumption,  which- 
ever one  may  choose  to  call  it,  are  many.  Whatever  im- 
proves industrial  society  in  any  respect  is  a  partial  remedy. 
It  is  especially  desirable,  however,  to  bring  producer  and 
consumer  as  near  together  as  possible,  because  it  often  hap- 
pens that  mutually  desired  products  cannot,  as  a  matter  of 
fact,  be  exchanged.  Obstructions  to  trade  should  be  re- 
duced to  a  minimum  where  they  cannot  altogether  be 
removed. 

Analysis  of  Consumption. — An  analysis  of  the  con- 
sumption of  individuals,  families,  and  societies  is  most  in- 
structive. An  analysis  of  the  expenditures  of  a  family  is 
called  a  family  budget.  Dr.  Ernst  Engel,  the  former  dis- 
tinguished head  of  the  Prussian  Statistical  Bureau,  has 
advanced  the  theory  that  it  might  be  possible  by  a  careful 
study  of  a  sufficient  number  of  family  budgets  for  a  period 
of  years  to  construct  a  sort  of  social  signal  service.  His 
idea  is  that  changes  in  total  expenditure  and  in  expenditures 
for  various  items  in  a  sufficient  number  of  typical  families 
could  enable  us  to  predict  the  coming  of  industrial  storms. 


244 


OUTLINES  OF  ECONOMICS. 


The  theory  has  not,  so  far  as  the  writer  is  aware,  ever  been 
fully  worked  out,  bnt  the  thought  is  suggestive. 

The  following  tables,  copied  from  the  Report  of  the  Massa- 
chusetts Bureau  of  Statistics  of  Labor  for  1885,  are  worthy  of 
careful  examination  : 


ENGEL'S  LAW.— PRUSSIA. 


ITEMS  or  EXPENDITURE. 

PERCENTAGE  OF  THE  EXPENDITURE  OF  THE 
FAMILY  OF 

A  workingman  with 
an  income  of  from 
$225  to  $300  a  year. 

A  man  of  the  Inter- 
mediate Class  (  "Mit- 
telstandes  ")  with  an 
income  of  from  $450 
to  $600  a  year. 

A  person  in  easy  cir- 
cumstances ("des 
Wohlstandes  ")  with 
an  income  of  from 
$750  to  $1,100  a  year. 

1.  Subsistence  

Per  cent. 
62.0  ] 

5.0  \ 
2.0  1 
1.0   j 
1.0   V   5.0 

1.0  J 

Per  cent. 
55.0" 

18'°      90  0 
12.0      JU'U 

5.0 
3.5  ' 
2.0 
2.0  V  10.0 

2.5  J   * 

Per  cent. 
50.0] 

12;0  y  85.o 

5.0  J 
5.5] 
3.0  1 
3.0  I  15.0 

3.5  J 

2.  Clothing  

3.  Lodging  

4.  Firing  and  Lighting  

5.  Education,  Public  Worship,  etc.  . 
6.  Legal  Protection  

7.  Care  of  Health.  

8.  Comfort,  mental  and  bodily  recre- 
ation   

Total  

100.0 

100.0 

100.0 

"  The  foregoing  table  demonstrates  the  points  upon  the 
strength  of  which  Dr._Engel  propounds  an  economic  law.XW 

"The  distinct  propositions  are: 

"  First.  That  the  greater  the  income  the  smaller  the  rela- 
tive percentage  of  outlay  for  subsistence. 

"  Second.  That  the  percentage  of  outlay  for  clothing  is 
approximately  the  same,  whatever  the  income. 

"Third.  That  the  percentage  of  the  outlay  for  lodging  or 
rent,  and  for  fuel  and  light,  is  invariably  the  same,  whatever 
the  income. 

*  In  the  original  table  this  item  was  1.5.  The  present  chief  of  the  Bureau, 
Hon.  Horace  G.  Wadlin,  kindly  writes  to  the  author  that  in  his  opinion  it 
should  be  as  given  above,  which  makes  the  total  correct,  and  this  preserves 
'•  the  regular  progression  of  item  8  in  the  three  columns."  , 


CRISES  AND  ANALYSIS  OF  CONSUMPTION. 


245 


"  Fourth.  That  as  the  income  increases  in  amount  the  per- 
centage of  outlay  for  sundries  becomes  greater." 

MASSACHUSETTS.-PERCENTAGES  OF  EXPENDITURES.— AMOUNT,  $754.42. 


ITEMS  OF  EXPENDITURE. 

Mass.  Budgets, 
1883. 

Engel'sPrussian 
Law. 

Mass.  Bureau 
Table,  1875. 

Average. 

Subsistence  
Clothing  

49.28 
15.95 

50.00 
18.00 

56.00 
15.00 

51.76 
16  32 

Rent  

19.74 

12.00 

17  00 

16  25 

Fuel  

4.30 

5.00 

6.00 

5  10 

Sundry  expenses.  .  .  . 

10.73 

15.00 

6.00 

10.57 

Totals  

100.00 

100.00 

100.00 

100.00 

COMPARATIVE  PERCENTAGES  OF  EXPENDITURES  BY  THE  FAMILIES  OF 
WORKINGMEN  IN  ILLINOIS,  MASSACHUSETTS,  GREAT  BRITAIN,  AND 
PRUSSIA. 


ITEMS  OF 
EXPENDITURE. 

Illinois. 

Massachu- 
setts. 

Great  Britain. 

Prussia.* 

Average. 

Subsistence.  .  . 
Clothing  

41.38 
21.00 

49.28 
15.95 

51.36 

18.12 

55.00 
18.00 

49.25 
18.27 

Bent  

17.42 

19.74 

13.48 

12.00 

15.66 

Fuel  

5.63 

4.30 

3.50 

5.00 

4.61 

Sundries  

14.57 

10.73 

13.54 

10.00 

12.21 

Totals  

100.00 

100.00 

100.00 

100.00 

100.00 

These  tables  will  help  us  to  understand  the  social  troubles 
of  our  time.  They  show  that  the  amount  which  workingmen 
have  for  all  the  higher  wants  and  for  health  and  recreation 
is  still  extremely  small.  Civilization  develops  the  higher 
wants,  but  the  improvements  of  the  distributive  processes  of 
industrial  society  have  not  kept  pace  with  the  developmemt 
of  these  wants. 

*  It  is  to  be  noted  that  for  Prussia  a  family  of  the  intermediate  class  is 
taken. 

17 


246  OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Crises  are  periods  of  arrested  industry  attended  by  gluts  and  apparent 
overproduction. 

2.  Overproduction  means  really  uneven  production  resulting  in  impeded 
exchange. 

3.  The  remedy  is  to  remove  the  obstacles  to  trade. 

ENGEL'S  LAW  (FOR  PRUSSIA). 

4.  The  greater  the  income  the  smaller  the  relative  percentage  of  outlay 
for  subsistence. 

5.  The  percentage  of  outlay  for  clothing  is  approximately  the  same, 
whatever  the  income. 

6.  The  percentage  of  outlay  for  lodging  and  rent,  fuel  and  light,  is  in- 
variably the  same,  whatever  the  income. 

7.  As  the  income  increases  in  amount  the  perceutage  of  outlay  for  sun- 
dries becomes  greater. 

QUESTIONS. 

1.  What  is  a  crisis  ?     A  glut  ?     What  is  the  popular  explanation  of  the 
latter? 

2.  What  facts  are  opposed  to  this  explanation  ?     What  kind  of  over- 
production is  possible  ?     Why  ? 

3.  What  is  the  remedy  for  a  crisis  ? 

4.  What  is  meant  by  Dr.  Engel's  theory  of  a  social  signal  service? 

5.  What  are  his  four  laws ?     Do  they  apply  universally? 

6.  Compare  in  detail  the  expenditures  of  Prussian  and  American  families 
as  given  in  the  tables. 

LITERATURE. 

Say,  J.  B. :  Political  Economy,  American  edition,  Book  I,  Chapter  XV, 
"  On  the  Demand  or  Market  for  Commodities." 


BOOK   III. 


PUBLIC  ECONOMICS. 


PART  I. 

PUBLIC    INDUSTRY   AND    THE    RELATION    OF 
THE   STATE    TO    PRIVATE    ENTERPRISE. 


CHAPTER  I. 

INTRODUCTORY. 

WE  said  in  the  opening  of  Book  II  that  the  difference 
between  public  and  private  economics  was  not  wholly  a  dif- 
ference between  enterprises,  but  very  largely  a  difference 
between  parts  of  the  same  enterprise.  There  is  no  such 
thing  as  a  purely  private  enterprise,  and  we  may  perhaps  say, 
also,  that  there  is  no  such  thing  as  a  purely  public  enter- 
prise. Certainly  in  the  vast  majority  of  the  enterprises  with 
which  we  are  familiar  private  and  public  activities  are  com- 
bined in  varying  proportions.  Let  us  take  the  case  of  an 
industry  which  is  as  nearly  private,  perhaps,  as  any  we  can 
find — that  of  agriculture — and  notice  the  part  which  public 
activities  play  in  securing  the  farmer's  result.  First,  we  say 
that  the  farmer  owns  his  own  farm  ;  this  is  private  property. 
But  how  comes  it  that  the  farm  is  his  ?  Why  does  not  a 
stronger  man  drive  him  off  and  take  the  farm  himself  ? 
Plainly  because  the  State,  which  is  the  organ  of  public 
activity,  protects  him  in  the  possession  of  his  farm.  When 
he  bought  the  farm  he  took  his  bill  of  sale  or  deed  to  a 
government  official,  who  recorded  it  and  thus  gave  him  an 
official  guarantee  of  possession.  A  neighbor's  dog  kills  his 
sheep,  and  an  appeal  to  the  State  compels  the  neighbor  to 
redress  the  grievance.  Another,  far  below,  dams  a  river  and 
backs  the  water  up  so  that  it  overflows  his  land.  Another 
appeal  to  the  State  removes  the  dam  or  secures  damages. 


250  OUTLINES  OF  ECONOMICS. 

When  wheat  is  raised  the  farmer  hauls  it  to  market ;  but 
how  is  this  made  possible  ?  By  a  road  built,  not  by  private 
but  by  public  activity.  The  railway  lowers  the  price  of  his 
wheat  by  a  discriminating  rate,  and  again  government  inter- 
feres in  his  behalf. 

So  much  for  the  protections  of  government,  the  list  of 
which  could  be  greatly  extended.  But  there  are  exactions 
as  well  which  profoundly  affect  the  farmer's  economic  activ- 
ity. He  has  mortgaged  his  farm  and  does  not  pay.  The 
sheriff  appears  and  sells  it  to  another  man.  Taxes  are  levied, 
and  again  if  he  does  not  pay  his  property  is  sold  and  the 
amount  of  the  tax  appropriated  by  government.  An  infec- 
tious disease,  breaks  out  among  his  cattle,  and  in  spite  of  his 
protest  they  are  slaughtered  under  public  authority,  and  he  is 
paid,  not  his  own  but  an  appraiser's  price.  A  railway  is 
built  across  his  farm  and,  unwilling  though  he  be,  his  land  is 
taken  and  an  appraiser  fixes  the  price.  This  list,  too,  might 
be  greatly  extended,  but  enough  has  been  said  to  show  that  in 
a  highly  organized  State  public  activities  are  inextricably  in- 
terwoven with  private  activities,  and  that  any  such  thing  as 
independent  and  unlimited  private  control  is  out  of  the  ques- 
tion. The  industry  of  agriculture,  which  we  have  seen  to  be  so 
largely  dependent  on  government  for  its  benefits,  and  respon- 
sible to  it  for  its  obligations,  is  after  all  one  of  the  most  thor- 
oughly private  industries  in  existence.  The  farmer  is  free  to 
make  any  bargain  he  pleases  with  his  laborers,  the  manufac- 
turer often  is  not.  He  can  build  as  he  pleases  ;  the  dweller 
in  the  city  cannot.  If  he  hauls  a  neighbor's  wheat,  he  can 
charge  what  he  pleases,  the  railway  cannot ;  and  so  on  indefi- 
nitely. 

Thus  we  see  that  all  enterprises  are  the  result  in  part  of 
public  activity,  and  also  that  the  part  played  by  this  public 
activity  is  different  in  different  industries.  We  may  lay  it 
down  as  a  general  principle  that,  as  society  becomes  depend- 
ent upon  the  individuals  in  control  of  an  industry,  it  pro- 
tects itself  by  State  activity.  The  different  forms  of  State 
activity  will  be  examined  later. 


INTRODUCTORY.  251 

It  is  important  for  us  to  conceive  clearly  at  the  outset  the 
exact  subject  of  our  inquiry.  We  are  not  concerned 
merely  with  State  revenues  or  with  the  few  industries  which 
the  State  has  taken  entirely  under  its  control,  but  with  the 
partial  control  which  the  State  exercises  over  all  industries. 
Considered  thus,  public  economics  covers  all  the  ground 
which  we  have  examined  under  private  economics.  It 
concerns  rent,  wages,  interest,  etc.,  because  it  has  a  part  in 
determining  all  these  things.  It  affects  profoundly  all  the 
fundamental  economic  processes  of  production,  exchange, 
distribution,  and  consumption,  which  we  studied  under  pri- 
vate economics.  We  study  the  same  facts  as  before,  but 
we  study  a  different  set  of  causes. 

The  State. — Without  going  into  the  question  of  what 
constitutes  a  State  it  will  answer  our  purpose  here  to  notice 
the  extent  of  the  conception  as  we  use  it.  We  in  the  United 
States  are  familiar  with  many  kinds  of  government.  When 
we  speak  of  "the  government,"  we  generally  mean  the 
federal  government,  with  its  seat  at  Washington.  Then 
comes  the  State  government,  then  the  city,  the  county,  the 
township,  and  the  school  district.  Each  of  these  has  its  own 
governing  to  do,  and  is  backed  up  in  the  doing  of  it  by  all 
the  governments  superior  to  it.  Now,  it  is  entirely  an  acci- 
dent with  us  that  out  of  these  half  dozen  forms  of  govern- 
ment only  one,  and  that  not  the  highest,  is  known  as  the 
State.  In  nearly  every  other  country  the  governmental 
divisions  most  nearly  corresponding  to  our  States  are  known 
by  some  other  name — departments,  provinces,  etc.  When  we 
use  the  term  in  the  present  work  we  never  mean  a  State  in 
our  American  sense  unless  that  meaning  is  specified,  but 
any  society  acting  through  government.  Local  governments 
are,  of  course,  only  branches  of  the  main  government.  So, 
when  a  school  district  hires  a  school-teacher,  or  a  township 
mends  a  road,  or  a  city  builds  water  works,  or  a  "State" 
builds  a  penitentiary,  or  the  federal  government  builds  a 
post  office,  all  these  are  State  activities  in  the  scientific  sense 
of  the  word.  So,  too,  when  we  speak  of  State  intervention 


252  OUTLINES  OF  ECONOMICS. 

we  may  be  talking  about  the  township  or  the  city  or  the 
general  government.  These  are  only  different  ways  of  exer- 
cising one  and  the  same  kind  of  power — that  of  organized 
government. 

The  Nature  of  State  or  Public  Activity. — The  laws 
which  we  have  considered  under  private  economics  operate 
for  the  most  part  unconsciously.  A  law  regulates  with  force 
the  wages  of  workmen,  but  neither  workmen  nor  employer 
in  general  know  why  wages  are  as  they  are.  Men  loud 
money  or  goods,  now  for  one  price,  now  for  another,  but 
few  know  why  they  demand  interest  or  why  the  rate 
changes.  .  These  processes  go  on  visibly  before  us,  but  the 
governing  laws  are  hidden  except  to  the  careful  investi- 
gator. In  this  respect  they  are  like  the  laws  of  physiology. 
We  all  eat  and  digest  our  food,  but  how  many  people  know 
how  or  why  digestion  takes  place  ?  The  laws  of  this  private 
social  economic  activity  are  largely  of  this  sort,  spontaneous 
and  unconscious. 

The  laws  of  public  activity  are,  on  the  contrary,  conscious 
and  volitional.  When  we  decide  to  make  a  law  or  levy  a 
tax  we  do  it  consciously,  considering  arguments,  and  finally 
will  the  thing  in  question.  Individual  citizens  may  not  real- 
ize what  is  going  on,  but  the  men  composing  the  govern- 
ment know  what  they  are  doing  and  why  they  are  doing 
it.  Some  people  are  inclined  to  call  those  spontaneous  and 
unconscious  forces  which  we  have  compared  to  digestion 
natural,  as  contrasted  with  these  efforts  to  modify  results 
consciously,  which  they  would  call  artificial  or  even  unnat- 
ural. One  objection  to  this  is  that  unobserved  it  prejudices 
all  our  conclusions.  It  is  of  the  utmost  importance  that  we 
should  understand  what  is  natural  to  man. 

We  are  all  aware  that  nature  and  natural  are  vari- 
able terms.  Is  it  natural  for  animals  to  swim?  That  de- 
pends on  the  animal  ;  for  beavers,  yes;  for  cats,  no.  Is  it 
natural  for  beings  to  be  governed  by  unconscious  laws  or 
instincts?  That  depends  on  the  being;  for  cattle,  yes;  for 
men,  no.  Is  it  natural  for  men  to  divide  goods  on  the  basis 


INTRODUCTORY.  253 

of  selfishness,  or  "grab  what  you  can?"  For  some  men, 
yes,  but  not  for  all;  in  some  stages  of  development,  yes,  but 
not  in  all.  Plainly,  that  is  natural  in  human  conduct  which 
is  in  accordance  with  the  nature  of  man.  What  kind  of  a 
nature  has  man  ?  We  can  answer  at  least  in  part.  Is  man 
a  selfish  animal  ?  Certainly.  Is  he  a  social  animal  ?  Un- 
doubtedly. Is  he  a  thinking  animal?  Unquestionably.  Is 
he  a  moral  animal  ?  Beyond  a  doubt.  Few  will  question 
that  all  these  elements  are  contained  in  human  nature  and 
that  their  diversity  explains  the  perpetual  warfare  in  the  in- 
dividual life.  If  selfishness  is  necessary  to  the  beginning 
of  life  it  is  inadequate  to  its  completion.  Selfishness  never 
makes  a  man.  We  must  add  the  social  nature,  teaching  men 
to  act  in  concert;  the  intellectual  nature,  teaching  them  to 
act  consciously;  the  moral  nature,  teaching  them  to  act~ 
rightly.  When  a  man  defends  his  greed  on  the  ground  that 
it  is  "  human  nature  "  all  he  means  is  that  it  is-  his  nature, 
that  greed  is  natural  to  those  who  have  not  developed  be- 
yond the  barbarian  stage.  Concert,  consciousness,  and  con- 
science are  as  natural  to  the  ultimate  man  as  greed  is  to  the 
primitive  man.  It  was  the  mistake  of  Rousseau  and  his 
school  to  confound  the  primitive  with  the  natural.  They 
said,  "  Back  to  nature."  They  should  have  said,  "  Forward 
to  nature."  We  have  noted  a  tendency  to  increase  public 
activities  as  civilization  develops.  This  may  now  be  stated 
in  another  way.  As  men  come  into  closer  and  more  vital 
contact  with  each  other  their  activities  tend  to  become  social, 
conscious,  and  ethical.  By  no  means  all  of  this  tendency  cul- 
minates in  governmental  action,  but  much  of  it  does  so,  and 
whatever  we  may  conclude  as  to  the  wisdom  of  such  action 
Ave  must  not  beg  the  question  by  calling  it  unnatural. 

We  have  dwelt  thus  at  length  upon  this  point  because 
while  no  one  urges  that  the  long-established  activities  of 
government  are  unnatural  or  artificial  every  proposal  to  ex- 
tend these  activities  is  tacitly  or  openly  opposed  on  these 
grounds.  It  is  generally  objected  to  a  law  limiting  the 
hours  of  labor  that  it  is  unnatural,  as  if  a  free  scramble  were 


254:  OUTLINES  or  ECONOMICS. 

the  natural  condition  of  society.  Whether  such  a  law  be 
wise  or  not  we  shall  consider  later;  but  one  thing  is  certain, 
it  is  not  unnatural.  If  the  social  and  ethical  elements  in 
human  nature  are  to  dominate  more  and  more  the  isolating 
instinct  of  selfishness,  we  must  certainly  expect  as  a  natural 
result  more  associated  action,  more  thoughtful  action,  more 
action  for  the  common  welfare. 

The  State  as  an  Instrument  of  Associated  Activ- 
ity.— It  must  be  remembered  that  associated  activity,  far 
from  being  confined  to  government,  is  rather  the  rule  than 
the  exception  in  private  enterprise.  We  have  now  corpora- 
tions for  railways,  for  commerce,  for  manufacture,  for  educa- 
tion, for  evangelization,  for  charity,  for  almost  every  under- 
taking known  to  modern  life.  As  these  corporations  increase 
in  permanency,  magnitude,  and  power  to  accomplish  their 
purpose  they  approach  increasingly  to  the  character  of  in- 
dependent governments.  The  question  to-day  is  not  between 
individual  action  and  associated  action,  but  between  differ- 
ent kinds  of  associated  action;  that  of  the  corporation  and 
that  of  the  State.  Without  anticipating  here  a  discussion 
which  must  receive  our  careful  attention  later,  we  may  notice 
briefly  certain  characteristics  of  the  State  which  distinguish 
it  from  private  corporations. 

1.  The  scope  of  State  action  is  necessarily  great.    A  private 
society  may  in  some  respects  do  better  charity  work  than 
the  State,  but  nothing  in  its  nature  guarantees  that  it  will 
cover  the  whole  field.     That  which   is  undertaken  by  the 
State    must    usually   be   undertaken    comprehensively    and 
apply  equally  to  all  parts  of  its  territory. 

2.  The  power  of  the  State  far  exceeds  that  of  any  corpora- 
tion acting  under  its  authority.     Great    corporations  some- 
times seem  omnipotent,  and  they  exercise  an  enormous  and 
pernicious  influence  over  legislation  itself,  but  they  can   by 
no  means  command  the  resources  and  power  of  the   State 
under  which  they  operate. 

3.  The  State    acts  for  all  citizens,  Avhilc  corporations  in 
general  act  for   a    few  and  not  {infrequently   sacrifice  the 


INTRODUCTORY.  255 

interests  of  the  rest.  It  must  be  remembered,  however,  in 
limitation  of  this  statement  that  the  disinterestedness  and 
impartiality  of  State  action  is  by  no  means  what  it  should  be. 
There  is  a  constant  tendency  on  the  part  of  the  governing 
class  to  manage  government  in  the  spirit  of  private  enter- 
prise, for  their  own  sake  and  the  sake  of  personal  favorites. 
Under  despotic  government  the  "  divine  right  of  kings," 
which,  properly  interpreted,  conveyed  a  correct  idea,  some- 
times degenerated  into  the  "  divine  right "  of  private  owner- 
ship on  the  part  of  the  monarch.  Louis  XIV  of  France, 
who  better  than  any  other  monarch  of  recent  times  repre- 
sented this  despotic  principle,  said  on  an  important  occasion, 
"lam  the  State;"  and  he  carried  out  his  theory.  Govern- 
ment under  such  a  theory  is  an  entirely  untrustwoi-thy 
instrument  of  social  action.  Unfortunately,  however,  under 
such  circumstances  private  enterprise  is  apt  to  be  equally 
corrupt.  Its  only  advantage  is  that  it  is  usually  much  less 
powerful  for  mischief.  This  private  ownership  idea  is  now 
thoroughly  discredited  in  theory,  though  the  spoils  system  in 
American  politics  shows  its  tenacious  survival  in  practice. 
Its  presence  unquestionably  greatly  reduces  confidence  in  the 
State  and  efficiency  in  State  activity.  Few  will  doubt,  how- 
ever, that  public  enterprise  is  conducted  far  more  with  a 
view  to  the  welfare  of  all  than  private  enterprise  which  is 
confessedly  managed  in  the  interest  of  a  few. 

4.  The  State  in  its  activity  may  enlist  private  services.  The 
private  citizens  in  cooperation  with  public  servants  in  various 
branches  of  the  public  service  is  one  of  the  distinguishing 
characteristics  of  excellent  administration  in  modern  times. 

It  follows  from  the  foregoing  that  the  State  is  most  effi- 
cient in  the  management  of  interests  that  are  general,  exten- 
sive, slow  in  bringing  returns,  and  dangerous  as  tools  of 
private  interest.  It  is  least  efficient  in  the  management  of 
interests  that  are  special  and  sectional,  and  of  those  which 
require  minute  supervision  but  do  not  convey  dangerous 
power  to  private  hands. 


256  OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Public  industry  includes  the  part  played  by  the  State  in  private  in- 
dustry as  well  as  the  entirely  public  industries. 

2.  All  private  industries  are  largely  dependent  upon  public  activity. 

3.  All  private  industries  are  subject  to  demands  on  the  part  of  the  State. 

4.  The  State  is  society  acting  through  government. 

5.  State  activity  is  conscious  and  volitional  in  its  laws,  while  private 
activity  is  governed  by  laws  which  are  largely  unconscious. 

6.  State  activity  is  as  natural,  though  not  as  primitive,  as  private  activity. 

7.  Associated  activity  is  displacing  individual  activity,  leaving  us  only 
the  choice  between  the  State  and  private  corporations. 

8.  The  State  has  greater  scope,  greater  power,  greater  impartiality,  and 
can  more  readily  enlist  private  activities  than  any  private  agency. 

9.  The  State  is  fitted  for  the  management  of  interests  that  are  general, 
extensive,  slow  in  bringing  returns,  and  dangerous  as  tools  of  private  in- 
terests. 

1 0.  The  State  is  ill  fitted  for  the  management  of  interests  that  are  sec- 
tional and  special  and  which  require  minute  supervision. 

QUESTIONS. 

1.  Define  public  industry ;  private  industry.     Do  they  involve  different 
phenomena  ? 

2.  In  what  two  ways  are  private  industries  dependent  upon  the  State? 

3.  Define  the  State;  its  two  meanings;  which  meaning  is  intended  here? 

4.  Is  public  activity  natural  or  artificial?     Explain  fully. 

5.  What  choice  is  open  as  to  means  and  methods  of  industry  ? 

6.  What  are  the  advantages  and  disadvantages  of  the  corporation  as  con- 
trasted with  the  State?     Of  the  State  as  contrasted  with  the  corporation? 

7.  What  interests  are  adapted  to  State  management?     To  private  man- 
agement?    Why? 

LITERATURE . 

Adams,  H.  C. :  Relation  of  the  State  to  Industrial  Action. 
Ely,  11.  T. :  Problems  of  To-day,  Chapter  XVII  to  the  close.- 


CHAPTER  II. 

FUNDAMENTALS— THE  RIGHT  OF  PRIVATE  PROPERTY. 

BY  far  the  most  important  economic  function  of  the  State 
is  the  establishment  and  maintenance  of  those  fundamental 
laws  which  underlie  all  private  economic  activity.  Only  the 
briefest  statement  of  these  is  possible  within  the  limits  of  an 
elementary  work. 

Private  Property. — This  is  a  right  so  fundamental  in 
our  modern  life  that  we  scarcely  think  of  it  as  a  creation  of 
man  maintained  by  constant  vigilance  on  the  part  of  the 
State  and  subject  to  human  modification.  Still  less,  perhaps, 
does  it  seem  to  us  a  right  open  to  question.  It  seems  like 
bed  rock,  an  ultimate  right,  needing  no  other  justification 
than  its  own  obviousness.  If  Ave  feel  thus,  however,  about 
the  right  of  private  property  or  ownership  it  is  only  because 
\ve  are  dominated  by  present  and  local  customs  rather  than 
by  the  facts  of  history  or  reason.  We  do  not  intend  to  im- 
peach the  right  of  private  ownership,  but  it  is  a  right  which 
may  as  fairly  be  called  in  question  as  any  other  and  must 
justify  itself  in  the  same  manner.  When  a  custom  has  ob- 
tained very  widely  and  is  deeply  rooted  in  human  life  there 
is  often  a  tendency  to  claim  it  as  a  "  natural  right."  By  a 
natural  right  men  usually  mean  a  right  which  is  arbitrary, 
which  is  a  right  because  it  is  a  right,  and  "  that's  all  there  is 
about  it."  There  are  no  such  rights.  All  true  rights  are 
rational  rights,  rights  which  can  show  good  reason  for  their 
claims  and  can  justify  their  existence  on  the  ground  that 
they  promote  human  welfare. 

T/icre  is  no  jyossible  basis  of  human  right  except  human 
welfare.  To  claim  that  certain  rights  are  ultimate  without 
reference  to  their  effect  on  society  is  to  beg  the  question,  and 


258  OUTLINES  OF  ECONOMICS. 

has  been  well  characterized  as  "  dogmatism  in  disguise."  It 
is  characteristic  of  unscientific  and  superficial  thought  to  talk 
much  of  natural  rights,  and  it  is  an  encouraging  sign  that  in 
our  day  such  rights  are  subjected  more  and  more  to  searching 
scrutiny.  It  is,  therefore,  as  scientists  rather  than  as  icono- 
clasts that  we  should  inquire  into  this  time-honored  right  of 
private  property. 

1.  Beginning  of  the  Right.     Looking  back  into  history  we 
discover  first  that  private   property  did    not  always  exist. 
The  savage  at  first  owned  nothing.     Doubtless  when  he  had 
caught  or  killed  an  animal  he  considered  it  more  or  less  his, 
though  even  here  it  was  the  common  property  of  the  family 
or  tribe  rather  than  his  own.     Beyond  this  there  were  no 
property  rights  as  we  now    understand  them.      Doubtless 
there  were  struggles  for  the  possession  of  hunting  grounds, 
but  the  victor's  sense  of  ownership  or  right  was  little  better 
developed  than  that  of  a  victorious  lion  or  buffalo.     From 
these  insignificant  beginnings  the  right  or  sense  of  ownership 
has  grown,  including  more  and  more  articles  and  dividing  up 
the  ownership  more  and  more,  until  at  last  nearly  everything 
is  owned  and  nearly  everybody  owns  something.     Not  until 
the  agricultural  stage  did  land   become  property,  and  the 
last  forms  of  tribal  ownership  have  not  yet  everywhere  dis- 
appeared before  individual  ownership. 

2.  Strengthening  of  the  Right.     The  next  thing  that  im- 
presses us  is  that  private  ownership  has  not  always  been 
so  extensive   or  so  exclusive  as  at  present.     We  have  seen 
already  that  the  institution  of  private  property  has  been  ex- 
tended to  many  things  which  were  at  first  free  goods.     It  is 
equally  noticeable  that  the  right  of  ownership  has  grown  in 
intensity   and   exclusiveness.     This  is  especially  marked  in 
the  case  of  individuals  whose  claims  as  opposed  to  those  of 
the  tribe  were  at  first  slight  and  vague ;  but  they  gradually 
grew,  especially  in  the  case  of  the  chieftain,  until  tribal  or 
communal  rights  broke  down  before  them.     The  time  was 
when  a  Scottish  clan  had  absolute  right  to  the  territory  they 
occupied,  and  no  chieftain,  however  powerful,  could  have 


FUNDAMENTALS— RIGHT  OF  PRIVATE  PROPERTY.     259 

abridged  that  right.  Now  there  are  beautiful  tracts  of  coun- 
try in  Scotland  which  are  almost  denuded  of  their  agricul- 
tural population  because  the  owners,  the  descendants  of  these 
same  chieftains,  have  preferred  to  raise  game  rather  than 
men  on  their  estates.  All  are  familiar  with  the  general  lib- 
erty allowed  in  this  country  of  hunting  and  fishing  on  pri- 
vate estates,  which  in  Europe  is  unheard  of.  Slowly,  how- 
ever, we  are  beginning  to  extend  our  claim  to  game  and  fish 
also,  and  this  leniency  of  ownership  is  disappearing. 

Limitations  of  the  Bight  by  and  in  Behalf  of  the 
State. — 1.  Taxation.  We  next  notice  that  the  right  of 
ownership,  though  tending  toward  absolutism  as  between 
individuals,  yet  never  reaching  absolutism  even  as  between 
•private  persons,  has  never  been  anything  like  an  absolute 
right  as  regards  the  guarantee  of  the  State.  The  State  has 
always  reserved  certain  rights  over  private  property,  and 
while  owners  have  gotten  increasing  guarantees  of  protection 
against  other  individuals  they  have  been 'obliged  to  make 
increasing  concessions  to  the  State.  Taxation,  for  instance, 
as  understood  to-day  is  a  comparatively  recent  right.  Dur- 
ing the  Middle  Ages  the  right  to  take  private  property  for 
the  support  of  the  State  was  stoutly  resisted,  and  there  was 
a  strong  tendency  to  regard  taxation  in  the  modern  sense  as 
extortion.  It  was  in  part  a  survival  of  this  mediaeval  spirit, 
which  made  our  forefathers  so  averse  to  British  taxation  and, 
later,  to  taxation  by  their  own  government.  Now  the  right 
of  taxation  is  universally  admitted.  This  is  the  first,  the 
most  universal  and  the  most  serious  limitation  imposed  upon 
the  right  of  private  property  by  and  in  behalf  of  the  State. 

2.  Eminent  Domain  and  Requisitions.  The  next  limita- 
tion is  the  right  of  the  State  to  appropriate  specific  pieces  of 
property  with  direct  compensation  to  the  owner.  This  is 
done  especially  in  time  of  war,  when  all  kinds  of  supplies 
are  seized  and  payment  made  as  government  sees  fit,  regard- 
less of  the  owner's  wishes.  In  time  of  peace  such  purchases 
are  seldom  necessary,  though  the  right  always  remains.  In 
one  most  important  particular,  however,  this  right  is  in  almost 


260  OUTLINES  or  ECONOMICS. 

constant  exercise,  that  is,  in  regard  to  land.  As  applied  to 
the  purchase  of  land  this  is  known  as  the  right  of  "emi- 
nent domain,"  which  simply  means  that  the  State's  claim 
to  land  is  paramount.  Transactions  involving  the  exer- 
cise of  this  right  are  not  simple  seizure,  as  is  the  case  with 
taxation,  but  genuine  sales,  with  this  important  difference, 
that  they  are  compulsory.  These  two  rights  are  exceedingly 
comprehensive.  The  State  may  appropriate  any  portion  of 
the  property  of  its  citizens  without  compensation,  so  long  as 
it  takes  from  all  alike.  It  may  farther  buy  any  man's  prop- 
erty to  any  extent  at  an  appraised  valuation  and  without  his 
consent. 

Limitations  of  the  Right  by  the  State  in  Behalf  of 
Individuals. — We  have  now  to  notice  still  farther  limita- 
tions placed  by  the  State  upon  the  right  of  property  not  now 
in  its  own  behalf  but  in  behalf  of  individuals.  The  first  is 
the  right  of  eminent  domain  exercised  in  behalf  of  individ- 
uals or  private  corporations.  We  have  seen  that  private 
property  has  been  more  and  more  guaranteed  against  private 
trespass,  but  while  the  individual  is  thus  prohibited  from 
seizing  another's  property  he  may  in  certain  cases  get  the 
State  to  seize  it  for  him.  This  is  illustrated  in  the  building 
of  railways.  Railways  in  this  country  are  built  by  private 
enterprise,  but  their  right  of  way  is  secured  by  the  right  of 
eminent  domain.  This  is  simply  a  necessity,  as  no  railway 
could  be  built  without  it.  Added  to  this  is  the  vast  system 
of  legal  limitations  to  the  use  of  private  property  with  which 
we  are  familiar.  Nothing  is  more  fallacious  than  the  notion 
that  the  right  of  ownership  allows  a  person  to  do  as  he  pleases 
with  his  property.  Undoubtedly  a  man's  property  rights 
have  often  been  so  defined  as  to  admit  of  much  abuse,  but  it 
has  been  the  tendency  of  the  State  to  so  limit  the  right  as 
to  exclude  abuses,  and  such  limitation  is  necessary  to  secure 
private  property  against  attacks.  Whenever  a  given  right 
of  property  has  proved  to  be  generally  unfavorable  to  the 
welfare  of  society  government  has  modified  or  abolished  the 
right  or  jeopardized  its  own  stability  by  a  failure  to  do  so. 


FUNDAMENTALS — EIGHT  OF  PRIVATE  PROPERTY.    261 

Historical  Cause  of  Private  Property. — If  we  ask  the 
reason  of  private  property  we  must  distinguish  between  two 
things,  the  cause  of  private  property  in  the  past  and  the 
justification  of  it  in  the  present.  We  will  first  consider  the 
cause  of  private  ownership.  If  we  take  the  case  of  the  sav- 
age who  captures  an  animal,  the  chieftain  who  appropriates 
the  land  occupied  by  his  tribe,  the  nation  which  dispossesses 
another  nation,  and  ask  the  origin  of  ownership  in  each 
case  we  shall  find  it  to  consist  in  conquest  or  force.  Prop- 
erty was  owned  simply  because  those  who  held  it  had  the 
power  to  exclude  others  from  the  enjoyment  of  it.  But  how 
does  this  ownership  come  to  be  right?  Simply  by  long 
continuance.  The  Normans  held  northern  France  at  first 
by  the  most  unjust  force  ;  afterward  by  the  justest  of  rights. 
Hardly  anyone  will  deny  that  the  original  wanton  seizure 
was  unjustified  ;  but  surely  all  will  admit  that  after  the 
lapse  of  centuries  any  attempt  to  expel  the  descendants  of 
the  invaders  would  be  the  grossest  of  wrongs.  But  how  can 
a  wrong  become  the  basis  of  a  right  ?  Simply  by  a  change 
in  the  conditions  of  human  well-being.  This  brings  us  to 

The  Justification  of  Private  Property. — It  is  not  cor- 
rect to  say  that  a  wrong  ever  becomes  the  basis  of  a  right. 
A  violent  seizure  never  in  itself  justifies  ownership.  Noth- 
ing can  be  more  perilous  than  for  the  owners  of  hereditary 
rights  to  rest  the  justice  of  their  claim  upon  its  past  origin. 
Few  titles  of  long  standing  could  be  traced  back  very  far 
Avithout  disclosing  at  some  point  violence  or  craft  or  fraud 
which  the  moral  sense  of  the  community  would  condemn. 
The  dead  past  should  not  be  urged  either  in  justification  or 
condemnation  of  existing  institutions.  They  must  be  judged 
by  their  relation  to  present  and  future  well-being,  and  by  that 
only.  Thus  the  seizure  of  Normandy  was  a  wrong.  It 
rudely  disturbed  the  conditions  of  social  well-being.  For 
a  similar  reason  the  later  retention  of  Normandy  was  right. 
Human  life  had  adjusted  itself  to  the  conditions  resulting 
from  former  wrong,  and  any  disturbance  of  these  conditions 
for  the  sake  of  old  scores  would  have  been  a  sacrifice  of 
18 


262  OUTLINES  OF  ECONOMICS. 

human  well-being  and  a  wrong.  Any  attempt  to  rectify 
past  wrongs  when  the  disturbed  equilibrium  has  been  re- 
stored is  an  attempt  to  gather  up  spilled  milk. 

Should  Private  Property  be  Retained?  —  Those 
familiar  with  socialist  doctrines  are  prepared  for  such  a 
question,  although  the  modern  socialist  does  not  propose  to 
abolish  private  property  altogether,  but  only  in  the  instru- 
ments of  production,  as  we  shall  presently  see  when  we  come 
to  discuss  socialism.  In  view  of  what  has  been  said  the 
question  may  be  put  in  another  way  :  Does  private  owner- 
ship promote  the  welfare  of  society — not  the  welfare  of  the 
owner  simply,  but  the  welfare  of  society  as  a  whole  ?  If  it 
does  not,  then  there  can  be  no  question  ;  private  property 
should  cease.  The  fact  that  I  have  long  owned  a  thing,  and 
that  my  father  and  grandfather  owned  it  before  me,  is  no 
reason  why  I  should  continue  to  own  it.  Of  course  we 
should  make  no  changes  for  uncertain  reasons,  but  if  it  is 
clearly  proved  that  my  ownership  is  an  injury  to  society  I 
ought  to  renounce  my  title  and  society  ought  to  annul  it. 
This  is  no  place  to  discuss  at  length  so  great  a  question, 
but  we  may  mention  some  considerations  of  importance. 
First,  there  can  be  no  doubt  that  at  present  the  ownership 
of  property  is  the  greatest  incentive  offered  to  private  en- 
terprise. It  is  by  no  means  the  only  incentive,  nor  need  it 
perhaps  always  be  the  greatest,  but  that  it  now  is  the  great- 
est can  hardly  be  doubted.  The  greatest  thing  in  human 
life  is  its  incentives,  and  while  some  incentives  may,  and 
naturally  do,  diminish  in  importance  as  new  ones  develop,  to 
destroy  a  powerful  incentive  is  a  certain  disaster.  This 
single  consideration,  to  which  many  others  might  be  added, 
is  in  itself  sufficient  to  justify  the  institution  of  private  prop- 
erty. 

But,  inasmuch  as  private  property  has  always  been  and 
must  of  necessity  be  limited,  the  question  assumes  another 
form  :  JIow  much  private  ownership  should  be  retained  ? 
We  may  lay  it  down  as  a  general  principle,  making  at  pres- 
ent no  application  of  it  to  details,  that  as  private  property 


FUNDAMENTALS — RIGHT  OF  PRIVATE  PROPERTY.    263 

is  a  social  institution  it  finds  its  limitations  in  the  wel- 
fare of  society.  As  soon  as  any  of  its  forms  or  extensions 
become  anti-social  these  should  be  suppressed.  Private 
property  is  in  general  specially  beneficial  as  tending  to  in- 
creased production,  although  some  forms  of  it  decrease  pro- 
duction, owing  to  large  waste  involved.  The  disadvantage 
of  private  property  appears  particularly  in  distribution, 
although  here  its  effects  are  partially  beneficial.  We  must 
never  forget  that  abundance  of  goods  does  not  necessarily 
make  a  people  prosperous.  If  they  are  so  distributed  that 
great  goods  are  devoted  to  the  satisfaction  of  little  wants, 
and  little  goods  to  great  wants,  then  certain  individuals 
may  be  prosperous;  but  the  majority  of  men  will  be  miser- 
able in  the  midst  of  abundance.  That  private  ownership  in 
some  cases  tends  to  this  result  can  hardly  be  doubted,  and  in 
such  cases  no  justification  for  it  seems  possible. 

Influence  of  Private  Property  on  Individual  "Wealth. 
— As  private  property  lies  at  the  basis  of  the  existing  eco- 
nomic order  it  is  the  institution  which,  above  everything  else, 
determines  what  share  of  the  total  income  of  society  each  one 
shall  enjoy,  and  every  modification  of  the  institution  changes 
the  distribiition  of  wealth.  Private  property  in  railways  ex- 
plains a  large  proportion  of  the  mammoth  fortunes  in  the 
United  States.  Whether  public  ownership  of  railways  would 
have  been  desirable  or  not,  it  is  certain  that  it  would  have 
brought  with  it  no  such  inequalities  as  private  ownership. 
Even  a  change  in  the  laws  governing  the  transmission  of 
property  from  the  dead  to  the  living  in  France  brought  with 
it  a  modification  in  distribution  decreasing  the  number  of 
those  owning  vast  fortunes,  and  adding  to  the  number  of 
those  enjoying  a  competence.  Private  property  must  be  then 
remembered  as  the  greatest  force  in  the  distribution  of 
wealth. 


264  OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Private  property  is  the  most  important  condition  of  private  industry 
furnished  by  the  State. 

2.  Like  all  other  human  institutions,  it  is  subject  to  examination  and 
change. 

3.  Human  welfare  is  the  only  possible  basis  of  human  rights. 

4.  Private  property  originated  in  conquest  and  force,  a  fact  which  neither 
justifies  nor  condemns  it. 

5.  The  right  of  ownership  was  formerly  less  extensive  and  less  absolute 
than  now. 

6.  The  State  has  increased  the  guarantees  of  private  property  as  between 
man  and  man  while  asserting  more  extensively  its  own  rights  of  taxation, 
requisition,  and  eminent  domain. 

7.  The  latter  right  is  now  frequently  exercised  in  behalf  of  private  inter- 
ests. 

8.  Extension  of  private  ownership  tends  to  stimulate  production  and  to 
concentrate  wealth  in  large  fortunes. 

QUESTIONS. 

1.  Why  is  private  property  often  held  to  be  a  natural  right  not  open  to 
discussion ?     What  is  a  "  natural  right?  " 

2.  What  is  the  basis  of  human  rights  ?     Are  they  subject  to  examination  ? 

3.  What  is  the  origin  of  private  property?     Does  this  justify  it?    Why? 

4.  What  change  has  taken  place  in  the  extent  of  the  property  right  ?     In 
its  absoluteness  ? 

5.  Has  the  State  increased  or  decreased  its  guarantees  of  private  owner- 
ship as  regnrds  other  private  parties ?     As  regards  its  own  claim?     Why? 
What  farther  extension  of  State  limitations  in  recent  times? 

6.  Should  private  property  be  retained  ?     If  so,  how  far  ?     Why  ? 

7.  What  is  the  effect  of  private  property  on  production?  On  distribution  ? 
How  far  is  the  effect  in  either  case  beneficial?     Why? 

LITERATURE. 

The  subject  of  private  property  in  its  economic  and  social  aspects  is 
one  which  lias  been  singularly  neglected  by  English  and  American  writers. 
John  Stuart  Mill  treats  it  briefly  in  his  Political  Economy,  Book  II, 
Chapters  I  and  II.  The  most  satisfactory  treatment  found  in  economic 
literature  is  that  given  by  Professor  Adolph  Wagner  in  his  Grundlegung 
der  Politischen  Oekonomie.  By  far  the  best  treatment  of  private  property 
from  the  legal  standpoint  with  which  the  present  writer  is  acquainted  is 
given  by  the  distinguished  German  jurist,  the  late  Professor  Rudolph  von 
Ihering,  in  the  first  volume  of  his  Zweck  im  Recht.  No  one  who  would  be 
well  informed  on  this  subject  should  neglect  to  read  his  masterly  exposition. 


CHAPTER  III. 

FUNDAMENTALS— GUARANTEED  PRIVILEGES. 

Trade-marks,  Copyrights,  and  Patents.  —  Closely 
connected  with  the  general  subject  of  property  is  a  legal 
arrangement  whereby  exclusive  privileges  are  awarded  in 
return  for  services  to  society.  These  privileges  become  a 
special  form  of  private  property,  and  have  particular  signifi- 
cance in  the  distribution  of  wealth,  although  they  are  not 
without  importance  in  the  production  of  wealth  on  account 
of  the  stimulus  which  they  give  to  improvement. 

Trade-marks  come  under  this  head.  They  give  property 
in  a  design  which  characterizes  the  product  of  a  single 
undertaking,  as  an  individual  manufacturer,  a  firm,  or  a  com- 
pany. It  is  altogether  desirable  that  those  who,  by  the 
superiority  of  their  wares,  establish  a  reputation  should  be 
protected  from  that  contemptible  class  who,  without  energy 
or  initiative  of  their  own,  attempt  to  steal  the  fruits  of  the 
exertions  of  others.  It  encourages  a  producer  to  establish  a 
reputation  to  know  that  he  can  distinguish  his  goods  by  a 
design  which  others  may  not  imitate. 

Copyrights  and  Patents. — Government  creates  exclusive 
privileges  by  copyright  and  patent  laws;  but  this  is  done 
professedly  in  the  interest  of  the  general  public,  and  not  of 
any  favored  class.  Authors  and  inventors  are  granted  ex- 
clusive rights  in  their  productions  for  a  limited  period. 
This  monopoly  is  considered  a  fit  reward  for  valuable  public 
services.  Copyrights  and  patents  have  been  objected  to  as 
interferences  with  natural  liberty,  but  they  appear  to  have 
justified  themselves  in  the  stimulus  which  they  have  given 
to  authorship  and  invention.  It  must,  however,  be  remem- 
bered that  all  intellectual  effort  is  an  historical  product. 


266  OUTLINES  OB'  ECONOMICS. 

The  telephone,  for  example,  did  not  spring  from  the  mind  of 
one  man,  as  Minerva  from  the  head  of  Jupiter.  The  tele- 
phone was  preceded  by  a  century  of  scientific  invention 
and  discovery,  most  of  it  poorly  enough  remunerated.  The 
telegraph  was,  similarly,  the  result  of  generations  of  careful, 
plodding  industry  of  scores  of  men.  Professor  Henry,  of 
Princeton  College,  whose  services  in  connection  with  the 
completion  of  the  telegraph  were  most  distinguished,  con- 
scientiously refused  to  take  out  any  patent.  It  also  happens 
that  several  persons  almost  simultaneously  and  independ- 
ently make  the  same  discoveries  and  inventions.  Now,  if 
the  man  who  makes  the  finishing  touches  which  lead  to  utili- 
zation of  a  long  line  of  work  alone  is  rewarded,  it  is  like 
paying  only  the  workman  who  put  the  roof  on  the  house. 
It  is  not  generally  understood  how  serious  an  interference 
with  liberty  patents  are.  A  man  who  has  a  patent  is  al- 
lowed to  say  to  all  the  rest  of  the  world,  "  Because  I  have 
first  done  such  and  such  things  you  must  not  do  them." 
Yet  there  may  be  those  who  about  the  same  time,  without 
any  knowledge  of  him,  had  found  out  how  to  do  them. 
When  a  principle  existing  in  nature  is  allowed  to  be 
patented,  and  not  merely  the  application  of  the  principle, 
the  interference  with  liberty  becomes  still  stronger.  The 
practical  conclusion  is  somewhat  like  this  :  Patents,  like 
copyrights,  are  beneficial.  Experience  seems  to  warrant 
this  assertion.  Patents  do  not,  however,  rest  on  so  strong  a 
basis  as  copyrights,  because  no  two  persons  could  ever  write 
precisely  the  same  book,  and  the  fact  that  I  have  written  a 
book  in  no  wise  keeps  you  from  writing  any  book  you 
please.  Yet  even  intellectual  effort  is  largely  a  social  product. 
No  great  author  gives  the  world  what  was  merely  evolved 
out  of  himself.  On  the  contrary,  such  a  one  lets  an  age 
speak  through  him.  The  principle  which  should  govern 
copyrights  is  a  clear  one.  It  is  to  give  an  author  reward 
for  his  services,  not  to  give  persons  a  reward  for  services 
which  others  have  performed.  As  has  been  well  said,  were 
not  copyrights  limited  we  might  now  have  a  "  Duke  of 


FUNDAMENTALS — GUARANTEED  PRIVILEGES.        267 

Shakespeare,"  deriving  a  large  income  from  the  services  of 
a  man  who  lived  three  hundred  years  ago. 

Patents  should  not  be  granted  on  light  and  trivial 
grounds,  and  the  period  for  which  they  are  granted  ought 
to  be  strictly  limited,  and  subterfuges  for  the  evasion  of 
this  limitation  ought  not  to  be  suffered  to  succeed  as  at 
present.  Moreover,  owners  of  patents  ought  to  receive  their 
patents  on  conditions  which  will  compel  them  to  use  them 
or  allow  them  to  lapse  ;  also,  to  grant  to  others  the  right  to 
use  the  patent  on  payment  of  a  reasonable  royalty.  It  has 
also  been  found  beneficial  in  some  countries  to  lay  an  annual 
and  perhaps  slightly  progressive  tax  on  patents,  so  that 
those  which  are  not  important  or  not  used  may  not  interfere 
with  industrial  progress,  for  it  is  a  condition  that  non-pay- 
ment of  the  tax  works  forfeiture  of  the  patent.  Laws  ought 
also  to  be  changed  so  as  to  prevent  such  an  abuse  of  patents 
as  ^ye  have  frequently  witnessed  in  our  rural  districts,  where 
farmers  have  been  induced  to  infringe  patents  unwittingly 
in  order  that  damages  might  be  collected  from  them.  The 
suggestion  of  a  former  commissioner  of  patents,  that  the 
right  of  purchase  of  a  patent  be  reserved  by  the  United 
States,  is  to  be  commended.  Our  patents  at  the  present  time 
promote  monopoly,  and  in  some  cases  interfere  senselessly, 
it  is  to  be  feared,  with  manufactures.  The  patent  laws  re- 
quire to  be  simplified  and  amended  and  their  abuses  removed. 
At  the  same  time  reward  should  in  some  way  always  be  pro- 
vided for  those  who  make  valuable  inventions. 

The  Right  of  Contract. — Scarcely  second  to  the  right 
of  private  property  is  the  right  of  contract  for  the  mainte- 
nance and  value  of  which  we  are  equally  dependent  upon 
the  State.  Some  sort  of  contract  lies  at  the  basis  of  all  asso- 
ciated activity.  To  secure  the  conditions  of  such  activity  two 
things  are  necessary:  First,  that  men  should  be  allowed  to 
bind  themselves;  and,  second,  that  they  should  be  compelled 
to  respect  the  agreement  thus  entered  into.  Both  these  are 
secured  by  the  activity  of  the  State.  That  such  a  condition 
of  associated  activity  among  men  should  be  maintained  can 


268  OUTLINES  OF  ECONOMICS. 

hardly  be  doubted,  but  it  too  has  its  limitations,  limitations 
resting  here,  as  everywhere,  upon  human  well-being.  Limi- 
tations upon  this  right  have  been  known  in  varying  degrees 
and  different  forms  from  the  earliest  times.  Legislation 
prescribes  under  what  forms  and  conditions  contracts  shall 
be  valid,  and  declares  that  under  certain  circumstances  con- 
tracts shall  be  null  and  void.  Experience  has  shown  the 
necessity  of  this.  Children,  for  example,  cannot  make  valid 
contracts,  for  they  are  not  presumed  to  have  the  requisite 
knowledge  and  judgment  to  protect  themselves.  Contracts 
which  are  clearly  opposed  to  public  policy  are  invalid.  A  con- 
tract whereby  a  person  should  sell  himself  into  slavery  would 
not  be  binding,  yet  the  rule  is  the  validity  of  contracts. 

The  Right  to  the  Establishment  of  Private  Enter- 
prises is  closely  allied  to  the  foregoing.  This  right  to  man- 
ufacture or  sell  what  and  when  one  pleases  is  a  compara- 
tively recent  one.  It  has  usually  been  greatly  limited  by 
despotic  governments,  and  the  right  has  been  made  a  matter 
of  sale  for  the  purpose  of  raising  revenue.  Most  such  limi- 
tations have  been  of  the  nature  of  abuses,  and  our  own  time 
has  seen  the  abolition  of  an  immense  number  of  hamper- 
ing and  vexatious  restrictions  designed  for  the  plunder  rather 
than  for  the  promotion  of  private  enterprise.  Restrictions 
still  exist,  however,  especially  on  the  liquor  traffic,  which  is 
subject  to  severe  limitations.  In  this  case  there  is  of  course 
a  special  reason  for  it.  There  is  room  for  question  whether 
entire  freedom  in  the  establishment  of  private  enterprises  is 
wholly  profitable  even  in  other  cases.  The  tendency  is  often 
to  multiply  the  number  of  competing  concerns  far  beyond  the 
point  of  greatest  efficiency,  and  so  to  maintain  a  numerous 
body  of  poorly  paid  toilers  and  an  expensive  service  for  society. 

Personal  Liberty,  including  the  right  of  movement 
and  acquisition,  is  a  right  slowly  acquired  by  society.  It  is 
not  and  never  was  and  never  can  be  an  unlimited  right.  So 
long  as  men  touch  each  other  in  society  they  must  limit  each 
other,  or  the  liberty  of  one  becomes  the  slavery  of  another. 
It  is  the  endeavor  of  the  State  to  equalize  human  liberty,  not 


FUNDAMENTALS — GUARANTEED  PRIVILEGES.       269 

to  make  it  absolute,  for  this  is  impossible.  The  question  is 
not  whether  we  shall  limit  liberty,  but  how  we  can  so  limit 
it  in  each  as  to  secure  a  maximum  of  liberty  to  all.  Here 
most  of  all  we  hear  men  talk  of  "  natural  rights."  When 
it  is  proposed  to  abolish  the  sale  of  intoxicating  liquors  it  is 
urged  that  men  have  a  right  to  drink  what  they  please. 
When  a  man  becomes  a  pauper  through  drink  he  claims 
that  he  has  a  natural  right  to  live  and  that  society  owes  him 
a  living.  If  he  leaves  a  helpless  family  at  death  the  same 
claim  is  made  for  them.  Strange  that  men  so  seldom  think 
that  society  has  "  natural  rights "  of  self-protection  against 
those  who  prey  upon  it.  Liberty  is  indeed  a  great  good,  but 
we  must  freely  submit  to  restrictions  upon  our  liberty — even 
for  the  sake  of  liberty. 

For  the  maintenance  of  these  fundamental  conditions  of 
private  enterprise,  namely,  private  property,  liberty  of  con- 
tract, liberty  in  the  establishment  of  enterprises,  and  liberty 
of  person,  we  are  dependent  upon  the  State.  No  other  in- 
strument of  society  is  adequate  to  this  task.  Self-help  in 
these  matters,  in  a  narrow  sense  of  self-help,  opposing  self- 
help  to  government  activity,  is  not  only  insufficient  for  most 
of  us,  but  when  exercised  by  the  powerful,  who  prefer  it,  is 
pernicious.  There  is  a  tendency  of  vast  corporations  in  the 
United  States  to  use  self-help  in  protection  of  property,  sup- 
porting armed  forces  to  this  end.  This  sort  of  self-help  is 
the  beginning  of  anarchy,  and  tends  to  bring  us  back  to  a 
condition  of  semi-civilization.  Fortunately,  legislation  is  re- 
stricting the  right  of  self-help  in  these  cases.  This  is  a  point 
on  which  there  is  virtually  no  disagreement.  The  mainte- 
nance of  these  fundamentals,  if  they  are  to  be  maintained  at 
all,  can  be  accomplished  in  no  other  way.  When  the  State 
attempts  this  and  little  more  its  policy  is  said  to  be  passive. 
Without  its  activity  production,  in  its  present  form,  would 
be  utterly  impossible.  And  yet  when  its  sphere  is  so  re- 
stricted we  cannot  say  that  the  State  participates  actively  in 
production,  as  this  word  is  generally  used.  This  passive 
policy  is  also  called  the  laissez-faire,  or  let-alone  policy. 


270  OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Trade-marks,  copyrights,  and  patents  are  privileges  guaranteed  to  in- 
ventors, authors,  and  reliable  manufacturers  to  reward  and  stimulate  their 
efforts. 

2.  All  such  efforts  are  largely  social,  however,  and  rights  conferred  should 
be  compatible  with  social  interests. 

3.  Patents   should  be  more  stringently  limited  than  now  on  account  of 
their  exclusive  and  largely  fortuitous  character. 

4.  The  right  of  contract  is  a  condition  of  private  enterprise  furnished  by 
the  State.     Like  the  right  of  property,  it  should  be  preserved  and  limited. 

5.  The  right  to  establish  private  enterprises,  formerly  much  limited,  is 
now  approximately  free;  it  may  require  some  limitation. 

6.  Personal  liberty,  including  freedom  of  movement,  is  a  right  slowly  ac- 
quired and  subject  to  some  inherent  limitations. 

QUESTIONS. 

1.  What  is  a  trade-mark?     A  copyright?     A  patent?    "Which  is  most 
clearly  justifiable  ? 

2.  What  dangers  attend  the  issue  of  patents  ?    Do  they  apply  to  copy- 
rights as  well  ?     Why  ? 

3.  What  element  of  injustice  is  involved  in  these  privileges? 

4.  What  two  elements  are  involved  in  the  right  of  contract?  Under  what 
conditions  is  this  right  safe  ? 

5.  What  dangers  attend  freedom  in  the  establishment  of  private  enter- 
prises? 

6.  What  natural  limitations  are  there  to  the  right  of  personal  liberty? 

• 

LITERATURE. 

Annual   Reports  of  the  United  States  Commissioners  of  Patents,  espe- 
cially the  Reports  for  1 888. 


CHAPTER  IV. 

STATE  PARTICIPATION  IN  INDUSTRY. 

WE  have  seen  that  the  State's  first  service  to  economic 
activity  is  the  maintenance  of  certain  fundamental  condi- 
tions which  are  the  necessary  conditions  of  that  activity. 
We  have  now  to  consider  another  set  of  conditions  furnished 
by  the  State,  conditions  less  fundamental  and  more  nearly 
allied  to  the  private  factors  of  production,  but  of  such  a 
nature  that  only  the  State  can  furnish  them  efficiently. 

Industrial  Facilities. — Under  this  head  may  be  placed 
roads,  river  and  harbor  improvements,  lighthouses,  and  other 
public  works  whose  purpose  is  primarily  to  facilitate  industry. 
These  are  closely  allied  to  capital  invested  in  private  plants, 
but  they  are  works  of  such  general  utility,  and  their  service 
to  individual  industries  is  so  indefinite  and  difficult  of  calcu- 
lation, that  only  the  State  can  or  will  undertake  them.  To  a 
limited  extent  roads  may  be  built  by  private  individuals  and 
the  cost  be  defrayed  by  charging  toll,  but  this  never  pro- 
duces a  satisfactory  and  adequate  road  system.  To  a  still 
more  limited  extent  private  contributions  may  aid  the  con- 
struction of  works  of  general  utility;  but  the  experience  of 
all  nations  has  shown  that  undertakings  which  require  great 
outlay,  and  promise  only  vague  and  remote  returns  difficult 
of  collection,  will  not  usually  attract  private  enterprise,  and 
the  service,  when  rendered  by  private  enterprise,  is  not  satis- 
factory if  we  view  its  results  from  a  broad  social  stand- 
point. 

The  only  questions,  therefore,  are  as  to  which  department 
of  government  should  be  intrusted  with  this  economic  func- 
tion and  how  much  should  be  done.  On  both  these  ques- 
tions there  has  been  much  debate  and  much  unsatisfactory 


272  OUTLINES  OF  ECONOMICS. 

experimentation.  In  the  case  of  roads  the  policy  has  pre- 
vailed of  leaving  their  construction  and  maintenance  to 'the 
city,  village,  or  township.  This  policy,  combined  in  the  rural 
districts  with  an  antiquated  and  vicious  system  of  taxation, 
has  resulted  in  a  system  of  roads  which  are  a  national  dis- 
grace. This  extreme  localization  of  responsibility  has  fos- 
tered  narrow  views  and  niggardliness  which  has  brought  as 
a  result  impeded  and  impoverished  rural  industry.  This 
mistaken  policy  is  largely  due  to  a  reaction  against  unwise 
outlays  made  at  an.  early  date  in  many  States  at  a  time  when 
resources  were  meager.  The  result  was  burdensome  debts 
which  some  of  the  States  repudiated,  and  in  some  States 
clauses  were  inserted  in  the  constitution  prohibiting  expendi- 
ture by  the  State  for  roads  and  similar  improvements.  This 
explains  the  policy  but  does  not  justify  it,  and  it  is  encour- 
aging to  note  that  an  agitation  in  favor  of  roa'd  improve- 
ment has  begun  which  promises  substantial  results.  The 
mistake  seems  to  have  been  in  defining  local  interests.  Be- 
cause a  mile  of  road  is  in  a  township  it  does  not  follow  that 
it  is  a  township  interest.  It  may  and  often  does  form  a  part 
of  a  far-reaching  and  important  system,  and  represents  inter- 
ests which  the  town  will  quite  fail  to  appreciate.  A  post 
office  is  local  in  situation ;  but  suppose  townships  were  left  to 
operate  their  own  post  offices;  would  they  do  it  adequately, 
and  if  not,  would  none  but  local  interests  suffer  ?  In  sharp  con- 
trast to  our  road  system*stand  our  river  and  harbor  improve- 
ments, in  connection  with  which  the  policy  of  national  main- 
tenance has  prevailed.  Whatever  may  be  said  of  jobbery  and 
mismanagement  in  connection  with  these  improvements, 
their  record  has  been  economy  and  efficiency  itself  compared 
with  the  wasteful  and  shiftless  management  of  our  roads. 

Bounties,  Subsidies,  and  Franchises. — Under  this 
head  are  included  a  great  number  of  tangible  encourage- 
ments, not  to  private  enterprises  in  general,  but  to  particu- 
lar enterprises.  They  differ  from  industrial  facilities,  which 
we  have  just  discussed,  in  that  they  are  not  public  works 
opened  to  private  use,  but  transfers  of  goods  to  particular 


STATE  PARTICIPATION  IN  INDUSTRY.  273 

individuals  or  private  corporations  to  encourage  their  under- 
taking. 

Bounties  are  sums  of  money  offered  as    inducements  to 
private  parties.     During  the  late  war  they  were  offered  to 
induce  men  to  enlist  in  the  army.     As  their  use  in  such  cases 
is  exceptional  and  due  to  emergencies  which  do  not  ordina- 
rily arise  and  do  not  directly  concern  industry,  we  may  omit 
this  part  from  our  discussion.     Bounties  are,  however,    paid 
by  many  governments  for  producing  certain  goods,  which  for 
various  reasons  it  is   deemed"  wise  to  encourage.     The   ex- 
x  ample  familiar  to  us  is   that  of   the  sugar  bounty   of  two 
3  cents  per  pound  on  sugar  raised  within  the  United  States. 
~  Canada  offers  bounties  on  iron  ore  mined,  etc. 

Subsidies  are  closely  allied  in  principle  to  bounties.     They 

are  payments  to  those  undertaking  enterprises  of  importance 

',.'  to  the  public  but  too  extensive  to  be  directly  remunerative. 

They  are  usually  in  the  form  of  annual  payments  of  a  fixed 

I    sum.     Money  subsidies  are  common.     Such  are  the  subsidies 

5    to  steamship  companies  which  have  been  voted  at  one   time 

£    and   another  by  nearly   all    powerful    nations.*     Subsidies 

have  been  granted  to  many  other  objects.     In  some  of  the 

countries  of    Europe  theaters  and  operas    received   annual 

subsidies. 

Land  Grants. — Subsidies  are  not  always  in  money.  A 
frequent  form  of  subsidy  to  railways  and  canals  in  this  coun- 
try is  known  as  the  land  grant.  Railways  built  through 
unsettled  territory  have  often  received  grants  from  govern- 
ment of  alternate  sections  of  the  government  land  for  a  dis- 

*  Steamship  subsidies  liave  several  times  been  granted  by  our  federal 
government.  A  subsidy  of  $350,000  per  annum  was  granted  to  a  line  run- 
ning to  Germany  in  1847,  and  others  soon  after,  and  in  1852  our  government 
paid  $1,946,686  in  subsidies  to  encourage  the  development  of  an  American 
merchant  marine.  The  system  was  discontinued  in  1 858,  but  resumed  in 
1865.  It  developed  extensive  scandals,  and  was  abolished  again  in  1875. 
The  policy  has  seemingly  been  resumed  by  the  last  Congress  in  the  mail 
contract  granted  to  the  "American  Line"  of  steamships  by  the  conditions 
of  which  the  Paris  and  the  New  York  were  registered  as  American 
vessels. 


274:  OUTLINES  OF  ECONOMICS. 

tance  of  some  miles  on  each  side  of  the  railway.  These  grants, 
which  might  perhaps  better  be  classed  as  bounties  than  as 
subsidies,  have  been  the  subject  of  much  dispute  and  the  oc- 
casion of  great  abuses.  Railways  which  have  failed  to  com- 
ply with  the  conditions  of  their  grants  have  not  unf  requently 
managed  to  keep  possession  of  them  in  defiance  of  obvious 
justice. 

Loans  of  public  credit  are  another  kind  of  subsidy.  They 
are  in  principle  a  guarantee  of  private  indebtedness  by 
government.  The  most  prominent  example  of  this  in  our 
history  is  the  so-called  Credit  Mobilier  Company,  organized 
for  the  building  of  the  Union  Pacific  Railway.  The  federal 
government,  in  addition  to  an  imperial  land  grant  aggregat- 
ing over  thirty  million  acres  for  the  Union  and  Central  Pa- 
cific Railways,  guaranteed  the  indebtedness  of  the  company 
for  $25,000  per  mile  of  road  in  addition.  This  remarkable 
subsidy,  almost  sufficient  to  build  the  road,  was  secured  by 
extensive  bribery  in  which  many  members  of  Congress  were 
implicated.  This  has  been  pronounced  by  a  recent  writer 
to  be  "  probably  the  most  extensive  legislative  scandal  ever 
known  in  the  United  States."  The  uselessness  of  the  assist- 
ance is  seen  in  the  fact  that  the  money  was  virtually  "  ab- 
sorbed "  by  the  construction  company  which  had  corrupted 
Congress  to  secure  it,  and  added  practically  nothing  to  the 
value  of  the  road. 

Franchises  may  for  our  purposes  be  distinguished  into  two 
classes,  namely,  franchises  in  a  broader  and  franchises  in  a 
narrower  sense.  Franchises  in  the  broader  sense  are  special 
rights  and  privileges  conferred  by  a  legislative  body  which 
could  not  be  exercised  otherwise.  The  power  granted  to  a 
number  of  men  to  act  as  a  corporation  is  itself  a  franchise,  and 
the  various  attributes  of  the  corporation  are  its  franchises. 

Franchises  in  a  narrower  sense  are  grants  of  the  use  of 
public  property  for  private  enterprises.  Such  is  the  right 
granted  a  street  railway  or  gas  company  to  lay  its  tracks  or 
its  mains  in  the  streets.  A  franchise  may  be  granted  for  a 
term  of  years  or  forever  ;  it  may  be  granted  free  or  sold  for 


STATE  PARTICIPATION  IN  INDUSTRY.  275 

a  specified  amount  or  for  a  percentage  of  receipts  ;  it  may  be 
granted  unconditionally  or  conditionally.  But  however  it 
be  granted  it  maintains  one  character  at  the  bottom;  it  is 
a  bargain  between  private  parties  and  public  officials  for  val- 
uable public  property.  In  general  the  interests  are  great, 
the  officials  few,  and  the  private  parties  wealthy.  If  corrup- 
tion is  possible  these  are  the  conditions  to  produce  it.  It 
will  not  surprise  us,  therefore,  to  find  that  after  the  Credit 
Mobilier,  perhaps  the  next  greatest  scandal  in  the  United 
States  of  recent  years  is  connected  with  the  granting  of 
franchises.  In  1884  thirteen  out  of  twenty-four  aldermen  in 
New  York  formed  an  organization  for  the  purpose  of  selling 
franchises  and  agreed  to  vote  together  on  all  "business 
transactions."  They  held  frequent  meetings,  at  which  they 
debated  offers  from  private  corporations.  The  Broadway 
Surface  Company  offered  them  $500,000  for  a  street-car 
franchise,  which  was  granted  free.  Being  vetoed  by  the 
mayor,  it  became  necessary  to  enlarge  their  "  organization," 
and  before  it  was  finally  passed  over  the  mayor's  veto 
twenty-two  aldermen  were  implicated.  The  fraud  was  for- 
tunately discovered  and  some  of  its  perpetrators  punished, 
but  none  of  the  immense  value  of  the  property  thus  lost  to 
the  city  was  recovered. 

It  is  useless  to  reproach  those  men.  Culpable  as  they 
certainly  are,  they  are  in  no  small  degree  the  victims  of  a 
system  which  corrupts  private  parties  as  surely  and  effectu- 
ally as  it  does  the  State,  and  for  which  society  as  a  whole 
is  responsible.  It  is  surely  desirable  that  good  men  be 
chosen  to  office,  but  as  surely  as  carrion  attracts  vultures, 
rather  than  doves,  so  surely  will  a  system  which  holds  out 
special  possibilities  to  rascality  attract  men  who  will  profit 
by  these  opportunities.  It  is  doubtful  if  a  government  ever 
existed  in  a  developed  country  which  could  safely  trust 
itself  with  the  management  of  the  vast  private  interests 
which  our  civilization  has  developed.  Certain  it  is,  no  so- 
ciety ever  before  asked  of  its  officials  such  impossible  vir- 
tues, or  obtained  them  if  it  did. 


276  OUTLINES  OF  ECONOMICS. 

We  have  said  already  in  speaking  of  the  functions  of  the 
State  that  it  is  ill  adapted  to  enterprises  of  a  special  nature, 
that  is,  enterprises  which  profit  a  part  of  its  citizens  rather 
than  the  whole.  We  might  expect,  then,  that  the  history  of 
State  aid  to  the  special  industries  would  not  be  wholly  flat- 
tering, and  we  shall  not  be  disappointed  in  this  expectation. 
Much  is  said  about  corruption  in  public  undertakings.  There 
is  relatively  little  such  corruption,  as  we  shall  see  later. 
Corruption  occurs  in  mixed  undertakings,  in  which  part  of 
the  transactions  are  secret  and  irresponsible  and  bribery  is 
made  both  lucrative  and  safe.  While  an  occasional  public 
enterprise,  like  the  building  of  the  Capitol  at  Albany,  has 
been  characterized  by  extravagance  and  inefficiency,  and 
perhaps  gross  frauds,  such  cases  are  the  exception.  On  the 
other  hand,  the  history  of  government  aid  to  private  corpo- 
rations has  scarcely  a  clean  page.  The  reason  is  not  far  to 
seek.  A  public  transaction  is  wholly  public.  Every  step 
in  it  is  open,  not  only  to  the  inspection  of  officials,  but  often 
to  that  of  private  individuals  as  well.  Even  when  officials 
are  lenient  and  the  public  negligent  the  opportunities  of 
embezzlement  are  comparatively  few.  There  is  always  a 
chance,  and  generally  a  likelihood,  of  detection.  A  private 
corporation,  on  the  other  hand,  is  private.  It  can  conceal 
profits,  falsify  accounts,  water  stock,  and  in  a  thousand  ways 
conceal  the  nature  of  its  transactions.  If  it  spends  money 
to  buy  up  a  legislature  the  public  frequently  does  not  find  it 
out.  This  power  is  bad  enough  when  there  is  no  question 
of  government  aid,  but  when  private  interests  are  enlisted 
to  secure  subsidies,  land  grants,  franchises,  etc.,  their  power 
is  a  menace  to  the  very  existence  of  liberty. 

Another  difference  between  public  and  mixed  enterprises 
is  that  the  former  are  much  more  readily  changed.  When  the 
State  decides  upon  a  public  undertaking,  it  does  so  by  statute, 
which  can  be  amended  or  repealed  as  need  requires.  But 
corporations  are  organized  under  charter,  and,  however  in- 
jurious to  society,  these  charters,  having  been  declared  con- 
tracts by  our  courts,  are  made  inviolable  by  our  federal  con- 


STATE  PARTICIPATION  IN  INDUSTRY.  277 

stitution.  Mistakes  thus  made  by  the  government  in  these 
mixed  undertakings  cannot  be  remedied,  as  in  the  case  of 
strictly  public  enterprises.  This  branch  of  our  history  is 
full  of  instances  of  exaggei'ated  privileges  conferred  on 
private  corporations  for  long  terms  or  in  perpetuity,  and 
which  simply  had  to  be  endured. 

It  is  hardly  too  much  to  say  that  the  principle  of  State  aid 
to  special  enterprises  is  the  most  vicious  and  uncontrollable 
of  all  forms  of  State  activity.  While  it  may  be  and  doubt- 
less is  justifiable  in  certain  cases,  all  experience  points  to  a 
reduction  rather  than  an  increase  of  the  number  of  mixed 
enterprises.  It  is  no  implication  that  legislators  are  worse 
than  other  men,  to  say  that  their  integrity  should  not  be  ex- 
posed to  the  extreme  test  which  it  has  so  often  and  so  sig- 
nally failed  to  bear.  Where  in  the  annals  of  contemporary 
public  enterprise  can  we  find  a  parallel  to  the  Credit  Mobi- 
lier  in  America,  or  the  Panama  Canal  scandal  in  France  ? 
The  corruption  of  government  is  a  sad  fact,  but  it  is  largely 
a  corruption  by  private  interests.  This  leads  us  to  the 
second  objection.  There  is  no  necessity  for  it.  Private  en- 
terprises which,  because  of  their  magnitude  or  because  they 
are  undertaken  for  the  general  interest,  cannot  succeed  with- 
out public  aid  are  unfit  for  private  management. 
19 


278  OUTLINES  OF  ECONOMICS. 


SUMMABY. 

1.  State  participation  in  industry  in  its  simplest  form  consists  in  the  fur- 
nishing of  free  industrial  facilities,  roads,  harbors,  etc. 

2.  The  public  roads  in  the  United  States  have  been  generally  left  to  units 
more  local  than  the  interests  involved,  and  have  been  neglected  in  conse- 
quence. 

3.  River  and  harbor  improvements  have  been  committed  to  the  central 
government  with  better,  though  not  ideal,  results. 

4.  Bounties  and  subsidies  are  payments  of  money  to  encourage  private 
enterprises. 

5.  Land  grants  are  a  form  of  subsidy  to  railways  and  canals. 

6.  Loans  of  public  credit  are  public  guarantees  of  private  indebtedness. 

7.  Franchises  are  grants  of  privilege,  or,  more  narrowly,  grants  of  public 
property  for  temporary  or  permanent  use  by  private  parties. 

8.  All  these  forms  of  public  aid  to  individual  enterprises  have  been  more 
or  less  productive  of  corruption  wherever  adopted. 

9.  Mixed  enterprises  are  less  responsible  to  the  public  than  public  enter- 
prises. 

10.  Mismanagement  of  mixed  enterprises  is  more  difficult  of  correction 
than1  of  public  enterprise,  being  protected  by  charter  rights. 

11.  Private  enterprises  requiring  extensive  public  control  are  safer  in  the 
hands  of  the  State. 

QUESTIONS. 

1.  Why  should  the  State  build  roads?    If  left  to  private  enterprise  what 
would  be  the  result  ? 

2.  What  is  the   advantage  of  the  county  or  State  over  the  township  in 
road  building,  and  vice  versa  ? 

3.  What  policy  has  prevailed  in  the  United  States  in  road  building?  in 
harbor  improvement  ?     What  are  present  tendencies? 

4.  What   is  a   bounty?    a   subsidy?   a  land    grant?   a   loan  of  public 
credit?  a  franchise?     What  is  the  danger  of  each?     Why? 

5.  What  are  the  objections  to  State  participation  in  individual  private 
enterprises?     What  other  policy  is  possible? 

LITERATURE. 
Hudson,  J.  F. :   The  Raihvays  and  the 


CHAPTER  V. 

STATE  REGULATION  OF  INDUSTRY  BY  TAXATION. 

Wi:  have  to  do,  not  with  taxation  as  a  means  of  raising 
revenue,  the  consideration  of  which  conies  later,  but  with 
taxation  as  a  measure  of  repression  or  encouragement.  Such 
taxation  is  of  two  kinds,  taxation  on  domestic  products  and 
taxation  on  imports. 

Tax  on  Domestic  Products. — When  duties  are  laid  on 
a  great  variety  of  manufactured  domestic  products,  most  of 
them  are  purely  revenue  duties.  Such  was  the  case  during  our 
last  war  with  our  "  internal  revenue,"  and  often  in  the  history 
of  many  European  countries.  Such  duties  are  also  frequently 
called  excise  duties.  No  government  lays  duties  in  general 
for  the  purpose  of  restricting  or  repressing  the  development 
of  its  own  industries.  To  this  rule,  however,  England  and 
America  have  made  a  few  undoubted  exceptions.  The  to- 
bacco and  liquor  industries  need  limitation  of  the  most 
stringent  character,  as  many  people  believe,  and  this  senti- 
ment expresses  itself  in  these  countries  by  restrictive  taxa- 
tion. In  England  this  restrictive  character  of  the  tax  is  less 
marked,  and  the  need  of  revenue  would  probably  keep  the 
tax  in  force  even  if  the  theory  of  restriction  were  not  held  ; 
but  in  the  United  States  this  purpose  of  the  tax  is  so  strongly 
marked  that  at  a  time  when  our  revenues  were  excessive  and 
a  means  of  reducing  them  was  earnestly  sought  the  senti- 
ment in  favor  of  those  taxes  was  strong  enough  to  prevent 
their  repeal. 

The  history  of  our  internal  repressive  taxation  has  at  least 
two  lessons.  In  the  first  place,  the  tax  must  not  be  too  high. 
Beyond  a  certain  point  it  fails  to  repress  and  results  in 
evasion  and  corruption  of  officials.  During  the  period  when 


280  OUTLINES  OF  ECONOMICS. 

whisky  was  overtaxed  in  our  country  it  was  constantly  sold 
in  our  markets  at  less  than  the  amount  of  the  tax.  What 
clearer  proof  could  there  be  that  the  law  was  evaded  ? 
Another  tendency  was  developed  at  the  same  time,  perhaps 
even  more  pernicious,  namely,  the  adulteration  of  liquors 
with  poisonous  ingredients.  The  fearful  character  of  the 
intoxicating  liquors  sold  here  at  and  since  that  time  is  in  large 
part  due  to  habits  fostered  by  injudicious  efforts  at  repress- 
ive taxation. 

The  second  lesson  is  that  repressive  taxation  on  industries 
of  this  character  exercises  but  a  feeble  influence  in  the  direc- 
tion of  repression.  Probably  the  most  efficient  service  such 
a  tax  renders  is  to  shift  consumption  from  a  heavily  taxed 
and  supposedly  more  injurious  liquor  to  a  more  lightly  taxed 
and  presumably  more  innocent  one.  This  result  has  some- 
times followed  in  a  marked  degree,  but  beyond  this  a  princi-  ^ 
pal  argument  for  such  taxes  must  be  the  revenue  they  produce. 

Protective  Duties. — These  are  duties  levied  on  imports 
with  a  view  to  increase  the  price  of  goods  brought  from 
abroad  and  so  "  protect "  the  home  producer  against  foreign 
competitors,  and  thus  regulate  commerce  in  his  favor.  This 
regulation  is  called  protectionism,  and  it  will  at  once  be  rec- 
ognized as  a  vast  subject  which  could  easily  be  made  to 
fill  several  volumes  like  the  present.  It  will  here  be  possible 
merely  to  mention  the  main  points  in  the  controversy  be- 
tween those  who  believe  in  this  kind  of  regulation — protec- 
tionists— and  those  who  do  not — free  traders. 

Arguments  of  Protectionists.— It  is  argued  in  favor  of 
protectionism  that  it  promotes  nationalism,  and  this  is  held 
to  be  a  good  thing.  It  is  urged  that  domestic  trade  draws 
the  citizens  of  a  country  together,  while  international  trade  is 
cosmopolitan  and  tends  to  their  separation.  Protectionists 
maintain  further  that  protective  tariffs  are  necessary  in  order 
to  build  up  a  diversified  national  industrial  life.  They  claim 
that  there  exist  in  a  new  country  like  the  United  States 
many  natural  industrial  advantages  of  which  the  inhabitants 
cannot  avail  themselves  unless  they  are  at  least  temporarily 


STATE  REGULATION  OF  INDUSTRY  BY  TAXATION.    281 

protected.  Government  should,  they  say,  foster  infant  in- 
dustries, in  order  to  develop  our  natural  resources  and  to 
produce  diversity  in  industrial  pursuits.  The  diversified- 
national-industry  argument  and  the  protection-to-infant-indus- 
tries  argument  are  thus  supplementary.  It  is  held  that  older 
nations,  with  their  superior  capital  and  acquired  skill,  will 
break  down  new  pursuits  in  their  infancy  in  order  thereafter 
to  have  the  market  to  themselves.  Closely  connected  with 
this  is  an  argument  based  on  military  grounds.  It  is  often 
thought  by  protectionists  that  industrial  national  independ- 
ence prepares  a  nation  better  for  international  war.  The 
home-market  argument  for  protection  naturally  follows.  A 
home  market  is  claimed  to  be  superior  because  it  is  alleged 
to  be  a  surer  market.  Producers  are  less  likely  to  be  de- 
prived of  it  by  war  and  other  emergencies.  It  is,  moreover, 
urged  that  it  is  beneficial  especially  to  the  farmer,  because 
it  saves  the  expenses  of  transportation  of  products  to  foreign 
lands.  It  has  also  been  maintained  by  the  distinguished 
American  economist,  Mr.  Henry  C.  Carey,  that  a  country 
can  remain  permanently  prosperous  only  on  condition  that 
what  is  taken  from  the  soil  should  be  returned  in  manure 
and  other  kinds  of  fertilizers,  and  that  this  will  be  accom- 
plished only  when  products  are  consumed  at  home. 

Finally,  protection  has  been  advocated  in  the  United  States, 
especially  since  about  1840,  when  the  labor  movement  began 
to  assume  prominence,  on  the  ground  that  it  has  been  the 
cause  of  higher  wages  in  the  United  States  than  in  European 
countries,  and  that  it  is  necessary  to  maintain  these  high 
wages,  which  are  said  to  be  one  main  cause  of  our  higher 
civilization. 

Arguments  of  Free  Traders. — It  is  frequently  alleged 
that  protective  tariffs  are  a  violation  of  an  assumed  natural 
right  of  every  man  to  buy  his  goods  where  lie  will  and  to 
sell  his  products  wherever  he  sees  fit,  untrammeled  by  hu- 
man laws.  The  question  of  natural  right  has  been  sufficiently 
considered  elsewhere.  It  is  much  to  be  desired  that  argu- 
ments of  this  sort  should  cease  to  be  heard  so  frequently. 


282  OUTLINES  OF  ECONOMICS. 

It  has  been  claimed  that  the  protective  tariffs  in  the  United 
States  are  unconstitutional.  It  would  be  most  unfortunate 
and  anomalous  if  nowhere  in  our  country  were  lodged  the 
power  to  pass  such  regulations  regarding  international  com- 
merce as  might  appear  to  be  required  for  the  promotion  of 
the  public  welfare.  But  this  argument  is  idle.  It  does  not 
correspond  to  the  opinion  of  our  best  jurists,  and  it  is  very 
certain  that  we  shall  never  see  a  supreme  court  in  the  United 
States  which  will  venture  to  pronounce  protectionism  uncon- 
stitutional. Protectionism  has  been  called  socialism,  but  this 
epithet  of  malignity  is  so  generally  applied  to  whatever  a 
person  incompetent  to  argue  a  cause  does  not  like  that  it 
will  scarcely  terrify  any  one. 

The  really  able  arguments  of  free  traders  are  those  which 
aim  to  show  that  protectionism  on  the  one  hand  fails  to  ac- 
complish its  ends,  or  is  needless  for  the  accomplishment  of 
the  ends  it  contemplates ;  on  the  other  hand,  actually  does 
accomplish  positive  harm.  It  is  denied  that  protectionism 
is  necessary  to  foster  nationalism,  and  modern  experience 
presents  strong  testimony  to  support  this  denial.  During  the 
past  fifty  years  international  commerce  has  expanded  mar- 
velously,  and  international  communication  has  been  in  every 
way  facilitated,  while  at  the  same  time  we  have  witnessed  a  re- 
markable growth  of  national  feeling  all  over  the  civilized  world. 

It  is  not  clear  that  protective  tariffs  are  necessary  to  pro- 
duce a  diversity  of  pursuits  in  a  great  country  like  the  United 
States.  It  is  admitted  that  a  purely  agricultural  nation  is 
not  likely  to  progress  rapidly  ;  but  it  would  seem  that  our 
enormous  extent  of  country,  our  varied  climate,  our  natural 
gifts  of  all  sorts,  had  in  themselves  amply  provided  for  suffi- 
cient diversity,  and  it  can  scarcely  be  maintained  that  one  or 
two  pursuits,  more  or  fewer,  can  be  of  importance.  A  vast 
number  of  pursuits  means  widely  extended  division  of  labor, 
and  this  is  by  no  means  an  unqualified  blessing. 

The  argument  for  protection  on  the  ground  that  it  is  a 
benefit  to  the  wage-earner  does  not  seem  to  the  writer  con- 
clusive. When  this  argument  is  analyzed  and  answered  in 


STATE  REGULATION  OF  INDUSTRY  BY  TAXATION.    283 

detail  it  is  seen  to  involve  a  discussion  of  many  complex 
economic  problems.  One  consideration  only  will  be  suggested 
in  this  place.  Labor  comes  in  competition  with  labor,  not 
directly  with  commodities.  Labor  desires  commodities,  and 
the  more  commodities  it  receives  the  better.  Now,  if  it  is 
desired  to  protect  labor,  a  tax  ought  to  be  put  on  imported 
labor,  and  labor  ought  thus  to  be  rendered  scarce.  If  this 
were  done,  then  those  who  desire  labor  would  be  obliged  to 
pay  heavily  for  it,  as  actually  happened  in  England  after 
'  3  *fj .  the  "Black  Peath"  in  the  fourteenth  century  had  killed  off  a 
large  part  of  the  laboring  population.  If  it  is  desired  to 
.  benefit  labor  it  would  seem  to  the  author  that  after  importa- 
1^,  c^^tion  of  labor  has  been  taxed,  and  labor  thus  rendered  scarce 
and  dear,  the  importation  of  such  commodities  as  are  con- 
sumed by  wage-earners  primarily  should  be  encourriged  in 
order  that  labor  might  secure  an  abundance  of  them  cheaply. 

It  is  maintained  by  free  traders  that  protectionism  is  espe- 
cially injurious  because  it  diverts  industry  from  a  more  to  a 
less  productive  channel.  It  is  held  that  industrial  forces,  if 
let  alone,  will  seek  those  fields  which  yield  largest  returns, 
and  that  if  government  artificially  induces  them  to  take  an- 
other direction  the  factors  of  production  become  less  fruitful 
and  the  national  economy  suffers. 

It  is,  moreover,  alleged  that  protectionism  fostei-s  monop- 
olies because  it  shuts  off  international  competition.  Recent 
combinations  of  domestic  producers,  as  seen  in  trusts,  which 
control  so  large  a  portion  of  the  industrial  field,  would  seem 
to  support  this  allegation.  It  is  certainly  taken  for  granted 
that  if  foreign  competition  is  shut  off  or  lessened  home  pro- 
ducers will  still  compete.  That  has  been  one  of  the  funda- 
mental arguments  of  protectionists,  but  now  we  find  home 
producers  combining  to  put  an  end  to  home  competition.  It 
is  scarcely  too  much  to  call  this  an  abuse  of  the  principle  of 
protection. 

Some  General  Considerations  ought  to  be  kept  in 
mind  in  tariff  discussions.  First,  its  importance  is  exagger- 
ated. "NVe  find  a  country  like  England  prosperous  under 


284  OUTLINES  OF  ECONOMICS. 

free  trade;  we  find  countries  like  France  and  the  United 
States  prosperous  under  protection.  It  is  of  real  but  not  of 
vital  importance.  Domestic  trade  exceeds  in  its  aggregate 
amount  in  the  United  States  almost  immeasurably  foreign 
trade.  The  domestic  trade  of  the  Mississippi  valley  alone 
is  far  greater  than  our  entire  foreign  commerce.  It  is  much 
to  be  desired  that  other  economic  questions  should  be  more 
discussed. 

Second,  statistics  about  a  country's  prosperity,  urged  either 
for  or  against  protection,  are,  as  usually  presented,  of  no 
value.  The  tariff  policy  of  modern  countries  has  been  a 
minor  factor  in  their  industrial  life.  Inventions  and  discov- 
eries, especially  the  application  of  steam  to  industry,  and  the 
growth  of  intelligence,  have  been  the  chief  forces  which 
have  made  such  astounding  additions  to  the  wealth  of  the 
world  during  the  nineteenth  century. 

Third,  bad  as  it  may  be  in  many  respects,  the  American 
tariff  is  an  historical  growth,  and  during  the  century  of  our 
national  existence  it  has  taken  deep  root.  It  has  become 
part  of  our  life,  and  it  cannot  be  suddenly  eradicated  with 
impunity.  If  it  is  true  that  American  labor  would  be  better 
off  without  it,  it  does  not  follow  that  it  ought  to  be  removed 
suddenly  in  the  interests  of  American  labor.  If  an  indus- 
trial growth  is  abnormal  it  is  none  the  less  true  that  adjust- 
ment to  normal  conditions  is  a  painful  process  and  should  be 
conducted  cautiously.  Displacements  of  labor  and  capital 
cause  suffering  and  loss.  At  the  same  time,  it  is  impossible 
to  tolerate  permanently  a  bad  condition  of  things,  and  while 
rashness  is  to  be  deprecated  progress  should  be  insisted  on. 

Our  capital  has  become  enormous.  Skill  has  been  devel- 
oped in  our  country,  and  it  is  not  clear  that  our  industrial 
leaders  are  not  quite  capable  of  holding  their  own  with  the 
world  in  a  free  market.  The  fact  that  labor  receives  a  large 
share  of  the  product,  if  such  is  the  case,  does  'not  render 
labor  and  the  other  factors  of  production  less  fruitful.  Does 
the  American  farmer  abandon  the  cultivation  of  land  be- 
cause out  of  a  hundred  bushels  of  wheat  grown  he  must 


STATE  REGULATION  OF  INDUSTRY  BY  TAXATION.    285 

give  the  American  laborer,  say,  fifty,  while  his  European 
rival  gives  only  thirty  bushels  out  of  a  hundred  ?  He  still 
has  fifty  bushels  left. 

This  is  only  a  small  part  of  the  subject  of  protectionism 
and  free  trade,  a  very  small  part,  but  it  is  trusted  that  it  will 
prove  suggestive,  and  that  no  one  will  terminate  with  this 
his  tariff  studies. 

It  may  be  said  in  conclusion  that  reform  of  the  tariff  is 
possible  both  from  a  protectionist  and  from  a  free  trade 
standpoint.  One  thing  desired  is  simplicity  in  our  tariff 
system,  which  is  now  complex.  No  article  should  be  taxed 
unless  there  is  some  good  reason  for  it.  Other  things  being 
equal,  the  fewer  articles  taxed  the  better.  Reductions  in 
duties  wherever  practicable  should  be  made.  Specific  duties, 
that  is,  duties  which  are  calculated  by  weight,  measurement, 
or  count,  as  simple  and  less  provocative  of  temptation,  are 
from  the  standpoint  of  honest  administration  preferable  to 
ad  valorem  duties,  that  is,  duties  which  are  a  percentage  on 
value,  a  thing  so  hard  to  be  determined. 

The  main  disadvantages  of  specific  duties  are  two,  namely  : 
In  the  first  place,  they  frequently  conceal  the  real  amount  of 
the  tax.  Five  cents  on  an  article  does  not  seem  a  high  tax 
when  mentioned,  but  if  the  price  of  the  article  is  only  five 
cents  it  is  a  tax  of  one  hundred  per  cent,  which  has  a  very 
different  sound.  In  the  second  place,  it  is  not  easy  in  a  sys- 
tem of  specific  duties  to  tax  articles  consumed  by  the  rich 
more  heavily  than  those  consumed  by  the  poor.  A  tax  on 
cloth  of  five  cents  a  yard  makes  no  distinction  between 
cheap  and  expensive  cloth.  Of  course,  silk  goods  may  be 
taxed  more  heavily  per  yard  than  cotton  goods,  wine  more 
heavily  per  gallon  than  beer,  and  so  on  indefinitely.  But 
this  is  otily  an  approximation  to  proportionality.  We  can 
only  say  that  specific  duties  are  to  be  preferred  when  their 
peculiar  disadvantages  do  not  more  than  counterbalance 
their  obvious  advantages. 


286  OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Taxes  on  domestic  products  are  laid  usually  to  raise  revenue;  rarely, 
as  in  the  case  of  liquors  and  tobacco,  to  restrict  consumption. 

2.  Such  taxes,  if  too  high,  produce  evasion  and  adulteration,  each  more 
objectionable  than  the  normal  consumption. 

3.  Taxes  on  imports  are  for  revenue  or  to  "protect"  home  production. 

4.  Protection  is  defended  as  encouraging  nationalism,  diversification  of 
industries,  and  industrial  independence,  saving  transportation,  keeping  up 
the  soil,  and  maintaining  high  wages. 

5.  It  is  attacked  as  contrary  to  natural  right,  unconstitutional  and  unnec- 
essary either  to  develop  industries  or  national  sentiment. 

6.  A  tax  on  laborers  imported  would  seem  to  be  a  better  protection  for 
American  labor  than  a  tax  on  goods. 

7.  Protection  is  said  to  foster  monopoly  and  pervert  the  natural  course  of 
industrial  development. 

8.  Present  tendencies  to  monopoly  indicate  an  abuse  of  protectionism. 

9.  The  tariff  has  been  intentionally  exaggerated  in  political  discussions. 

10.  It  is  deeply  rooted  here,  and  must  be  corrected  or  removed  slowly. 

1 1.  A  reform  in  the  details  of  our  tariff  system  is  needed  from  the  stand- 
point of  either  protectionism  or  free  trade. 

QUESTIONS. 

1.  "What  two  purposes  may  justify  an  excise  tax?  an  import  tax? 

2.  What  difficulties  are  there  in  the  way  of  an  excise  for  restricting  con- 
sumption ?     What  results  are  actually  accomplished  ? 

3.  What  is  protection?  What  arguments  favor  it?   How  far  is  each  valid  ? 

4.  What  arguments  are  urged  for  free  trade  ?     How  far  is  each  valid  ? 

5.  What  is  the  relative  importance  of  the  tariff  controversy  in  politics? 

6.  What  is  the  value  of  statistics  in  tariff  arguments?     Why? 

7.  What  objection  is  there  to  a  sudden  change  in  the  tariff  system  ? 

8.  What  possible  ways  are  there  of  protecting  labor  by  taxation  ? 

9.  What  are  the  advantages  of  ad  valorem  duties?     Of  specific  duties? 
The  disadvantages  of  each  ? 

LITERATURE. 

List,  F. :  National  System  of  Political  Economy ;  an  able  protection  work. 

Taussig,  F.  W. :  Tariff  History  of  tiie  United  States ;  the  work  of  a  fair- 
minded  free  trader. 

Patten,  S.  N.  :  Premises  of  Political  Economy;  new  view  of  protection. 

Thompson,  R.  E. :  Protection  to  Home  Industry ;  a  popular  presentation. 

Ely,  R.  T.  :  Problems  of  To -Day.  Chapters  I-XV.  Argument  for  tariff  re- 
form. 


CHAPTER   VI. 

STATE  REGULATION  OP  INDUSTRY  BY  POSITIVE  STATUTE. 

WE  meet  here  a  mass  of  legislation  which  it  is  impossible 
to  examine  or  even  to  mention  in  detail  in  the  short  space 
available.  It  is  the  result  of  one  of  the  most  stubbornly  con- 
tested battles  in  all  economic  history,  but  a  battle  now 
decided  so  far  as  the  principle  is  concerned.  We  have 
touched  briefly  upon  this  struggle  in  Book  I  in  speaking  of 
the  non-interference  theory  promulgated  so  vigorously  by 
Adam  Smith  and  his  followers.  The  essence  of  this  was 
that  the  State  should  let  industry  alone  ;  that  beyond  pro- 
viding the  fundamentals  and  the  most  general  industrial 
facilities  any  interference  on  the  part  of  the  State  is  pro- 
ductive of  more  harm  than  good.  There  was  a  profound  re- 
liance on  the  regulative  power  of  competition,  which  is  the 
balanced  equilibrium  of  self-interest.  The  mistake  of  the 
older  economists  lay  in  treating  it  as  though  it  were  the  only 
regulative  force.  The  fact  is  that  competition  is  only  one  of  . 
a  number  of  forces  which  balance  each  other,  and  if  the 
other  forces  are  removed  competition  itself  soon  disap- 
pears. Now,  one  of  the  most  fundamental  and  natural 
of  these  forces  is  law,  the  expression  of  the  ethical  sense  of 
society  through  the  organ  of  government.  It  is  as  natural 
for  men  to  make  laAvs  as  to  try  to  "buy  cheap  and  sell 
dear."  The  attempt  to  regulate  industry  by  competition 
alone  was  an  attempt  to  travel  on  one  leg.  At  the  first 
jostle  it  was  necessary  to  call  the  other  leg  into  service  or 
tip  over. 

Labor  Legislation. — Legislation  in  behalf  of  labor  was 
soon  found  necessary.  It  became  evident  that  workmen  did 
not  by  any  means  move  about  sufficiently  to  secure  the  high- 


288  OUTLINES  or  ECONOMICS. 

est  wages,  that  they  did  not  quit  the  employer  who  was 
careless  of  their  lives  and  safety,  above  all  that  they  did  not 
limit  their  numbers  in  a  way  to  prevent  a  fall  of  wages. 
The  reason  is  plain  when  we  stop  to  think  of  it.  Wage- 
earners  have  families  and  are  attached  by  many  ties  to  the 
places  where  they  live  ;  they  are  poor  and  cannot  move  to 
distant  localities  ;  they  are  ignorant  and  do  not  know  where 
better  wages  are  to  be  had ;  they  are  improvident  and  do 
not  prepare  for  the  future  wisely,  especially  for  a  future 
which  mostly  concerns  posterity.  In  a  word,  they  are  inca- 
pable of  competition  on  equal  terms.  Employers,  too,  do  not 
do  as  they  were  expected  to  do.  It  is  for  their  interest  to 
develop  a  strong  and  efficient  class  of  workmen,  but  they 
sadly  neglect  their  interest  in  this  regard.  It  cannot  be 
claimed  that  employers  as  a  class  have  taken  any  consider- 
able precautions  to  maintain  a  high  standard  of  efficiency 
and  well-being  in  Avorkmen,  though  they  would  be  better  off 
as  a  class  if  they  did  so.  The  reason  is  that  their  immediate 
interest  is  in  lowering  wages,  and  they  cannot  under  a  sys- 
tem of  fierce  competition  ignore  their  immediate  interest 
while  seeking  to  promote  ^tlt^mate  interests,  for  those  who 
did  so  would  be  speedily  driven  to  the  wall  by  those  who 
did  not.  It  is  just  here  that  the  necessity  for  law  or  collect- 
ive social  action  appears,  namely,  to  enable  men  to  substitute 
large  and  ultimate  interests  for  immediate  and  destructive 
ones.  It  would  be  unjust  to  employers  to  assume  that  they 
do  not  care  for  their  employees.  The  most  would  be  glad  to 
deal  more  liberally  with  their  men,  but  a  few  will  not,  and  by 
their  competition  they  compel  the  rest  to  do  as  they  do  or 
leave  the  business.  This  gives  us  a  fundamental  principle 
of  the  utmost  importance.  Under  pure  competition  the  least 
scrupulous  competitor  tends  to  impose  Ms  moral  standard 
ttj)on  the  rest.  An  instance  of  this  is  found  in  the  case  of 
barbers  who  on  different  occasions  in  large  cities  and  recently 
in  national  convention  have  resolved  to  agitate  for  a  law 
closing  barber  shops  on  Sunday.  As  a  class  they  desire  this, 
but  a  few  will  keep  their  shops  open,  thus  compelling  the 


STATE  REGULATION  OF  INDUSTRY  BY  STATUTE.     289 

rest  to  do  so  or  lose  their  regular  customers  upon  whom 
their  business  depends. 

Exactly  the  same  need  of  law  appears  in  connection  with 
wage-earners.  Without  legal  regulation  we  may  expect  as 
a  certain  result,  first,  a  lowering  of  wages  through  competi- 
tion (or  what  amounts  to  much  the  same,  a  keeping  down  of 
wages  when  general  prosperity  is  increasing);  second,  a  sub- 
stitution of  women  and  children  for  men  in  easy  employments 
with  a  lower  wage  and  a  farther  ultimate  reduction  in  the 
wages  of  men,  so  that  not  infrequently  after  women  and 
children  arc  employed  the  wages  of  a  whole  family  are  no 
more  than  the  wage  of  a  man  before  ;  third,  the  destruction 
of  home  life  and  hoinc  economy  and  the  great  extension  of 
immorality  ;  finally  a  permanent  reduction  in  the  standard 
of  life.  This  progression  is  the  chief  disaster  which  can  be- 
fall any  people. 

1.  Laws  JRestrictinff  the  Employment  of  Women  and  Chil- 
dren. We  must  insist  upon  a  limitation  of  labor  for  children 
which  will  allow  a  sound  physical  and  mental  development. 
Not  only  are  most  employments  injurious  to  the  health  of 
children,  but  they  all  interfere  with  education.  Even  if  we 
gained  in  goods  by  child  labor  (which  on  the  whole  we  do  not 
do)  we  should  and  must  sacrifice  this  advantage  rather  than 
wrong  the  future  citizen  and  jeopardize  the  republic  by  neg- 
lecting his  education. 

The  case  of  women  is  equally  imperative.  As  mothers 
they  must  neglect  their  children  if  they  work  in  factories. 
Infant  mortality  and  disease  are  the  certain  result.  This  is 
by  no  means  all.  It  is  a  mistake  to  suppose  that  we  are  rich 
simply  in  proportion  to  our  goods.  We  are  rich  also  in  pro- 
portion to  the  use  we  make  of  them.  What  can  we  expect  in 
homes  where  parents  and  children  simply  come  home  to 
sleep  ?  Thrift,  neatness,  comfort,  to  sny  nothing  of  affection 
and  the  thousand  elements  of  value  in  home  life  and  associ- 
ations, can  scarcely  exist.  This  is  emphatically  a  case  where 
the  wage-earning  classes  would  be  richer  with  fewer  goods, 
with  time  left  to  attend  to  the  problem  of  consumption  of 


290  OUTLINES  OF  ECONOMICS. 

their  income.  But  goods  would  not  be  less.  Of  course  legis- 
lation cannot  prohibit  female  and  child  labor,  but  it  can  and 
should  limit  it  strictly  with  a  view  to  the  facts  here  con- 
sidered. 

2.  J5(Mcs  Limiting  the  Hours  and  Days  of  Labor. — Nothing 
at  first  seems  more  unnatural  than  to  forbid  a  man's  working 
as  long  as  he  likes.  This  would  actually  be  the  case,  if  he 
worked  for  himself,  but  "  no  man  liveth  unto  himself."  It  is 
a  demonstrable  fact  that  if  a  small  minority  of  workmen  in 
a  community  are  willing  to  work  twelve  hours  per  day  un- 
der the  competitive  system  the  rest  will  have  to  do  so.  They 
probably  get  no  more  wages  and  produce  no  more  goods  ; 
they  simply  live  so  much  less  and  retard  human  progress. 
It  is  the  same  as  with  the  barbers.  Without  law  it  takes 
practical  unanimity  to  carry  a  point ;  with  law  a  majority 
can  do  so.  The  unanimity  is  impossible.  When  a  large 
majority  of  society  favors  a  change,  which  should  rule,  it  or 
the  minority  ?  We  may  lay  down  the  following  principles 
in  confidence  : 

First,  the  working  days  should  be  limited,  with  different 
limits  for  men,  women,  and  children.  Sometimes  the  limit 
can  be  established  by  private  combination,  and  legal  limita- 
tion is  not  required.  It  has  been  observed  that  in  the  ab- 
sence of  well-enforced  legislation  the  working  day  is  apt  to 
be  longer  in  those  manufacturing  establishments  in  which 
women  and  children  are  employed  .than  in  those  in  which 
men  are  employed,  because  the  latter  can  combine  more 
effectively.  Private  combination  to  effect  a  reduction  of 
working  hours  has  both  limitations  and  disadvantages.  It  is 
not  likely  to  be  effective  in  an  occupation  unless  a  considera- 
ble degree  of  skill  is  required  in  it,  because  otherwise  it  is 
not  possible  to  bring  about  common  action  among  nearly  all 
competitors  for  employment,  and,  as  just  stated,  a  small  mi- 
nority can  defeat  the  wishes  of  a  vast  majority.  It  is  to  be 
remembered  that  industrial  invention  and  progress  have  bro- 
ken down  the  barriers  between  occupations  and  made  it  com- 
paratively easy  to  learn  to  do  new  work  in  a  manufactory. 


STATE  REGULATION  OF  INDUSTRY  BY  STATUTE.     291 

Private  combination  is,  therefore,  less  effective  than  formerly, 
and  this  may  explain  the  favor  with  which  legal  regulation  of 
the  length  of  the  working  day  is  received  in  a  country  like 
England  by  the  very  classes  which  a  few  years  since  rejected 
it.  Private  combination  would,  in  the  light  of  recent  strikes 
in  the  United  States,  not  seem  to  be  sufficient  for  employees 
of  vast  corporations  like  our  American  railway  companies. 
Private  combination  has  its  disadvantages,  because  it  causes 
serious  loss  in  strikes  which  attend  it  and  because  it  incon- 
veniences and  injures  innocent  third  parties,  namely,  the  gen- 
eral public.  When  the  public  interest  is  so  great,  as  in  rail- 
ways, it  would  seem  the  only  rational  course  to  have  public 
regulation  of  the  hours  of  labor,  establishing  a  normal  work- 
ing day,  and,  with  this,  public  preservation  of  the  peace. 

It  is  to  be  noticed  finally  that  in  ordinary  manufactories 
it  often  appears  to  be  sufficient  to  establish  a  normal  work 
day  for  women,  children,  and  young  persons,  as  when  these 
stop  in  establishments  in  which  their  work  is  essential  the  en- 
tire working  force  must  also  quit  work.  It  is  customary  in 
England  at  present  to  limit  the  day  only  for  these  three 
classes  named. 

Second,  Sunday  labor  should  be  limited  to  the  real  needs 
of  society.  The  day  is  needed  for  something  else  than  get- 
ting a  living. 

Third,  employers  should  be  compelled  to  take  due  precau- 
tions for  the  safety  and  health  of  employees. 

Fourth,  law  should  be  invoked  in  those  cases  where  a 
minority  can  thwart  the  purpose  of  the  majority  or  other- 
wise seriously  injure  society. 

Just  how  long  a  working  day  should  be  we  cannot  here 
discuss.  Ten  hours  is  doubtless  a  maximum,  and  there  is 
some  reason  to  believe  that  an  eight-hour  day  in  manufactures 
would  prove  equally  productive  and  be  of  immense  gain  to 
society.  Instead  of  so  short  a  day  of  labor  a  shorter  week, 
allowing  a  Saturday  half  holiday,  has  some  decided  advan- 
tages. This  system,  which  is  in  vogue  in  England,  is  at  least 
worthy  of  careful  consideration  in  this  country. 


292  OUTLINES  OF  ECONOMICS. 

3.  Laws  Regulating  Labor  Contracts. — These  have  been 
found  necessary  almost  everywhere.  Laborers  are  notori- 
ously unable  to  make  prudent  contracts,  and  the  courts  are 
frequently  given  power  to  set  aside  such  contracts  and  sub- 
stitute more  equitable  ones.  A  law  of  the  most  sweeping 
character  has  often  been  urged,  establishing  a  minimum  rate 
below  which  wages  could  not  go.  There  is  something  to  be 
said  in  favor  of  such  a  law,  but  unfortunately  one  serious 
objection  to  it  aside  from  the  very  great  difficulties  of 
carrying  out  its  provisions.  While  laws  limiting  the  hours 
and  establishing  the  conditions  of  labor  all  tend  to  develop 
and  uplift  the  workmen,  this  simply  tends  to  give  him  more 
goods.  As  we  have  said,  this  alone  cannot  help  him.  If  it 
resulted  in  wastefulness  or  simply  in  increase  of  numbers,  as 
might  be  the  case,  such  a  law  would  enlarge  society  without 
benefiting  it.  It  is  doubtless  better  to  enact  laws  affecting 
the  wage-earner  indirectly,  and,  by  making  him  more  intel- 
ligent and  capable,  to  try  to  enable  him  not  only  to  secure 
but  to  profit  by  a  larger  income. 

Laws  Regulating  Monopolies  and  Trusts. — The  leg- 
islation we  have  been  considering  has  been  developed  mostly 
in  England,  and  grew  out  of  the  inability  of  employees  to  com- 
pete with  their  employers.  Different  conditions  in  America 
have  shown  the  inadequacy  of  competition  more  especially  on 
another  side.  Competition  is  as  unable  to  protect  the  con- 
sumer as  the  wage-earner.  The  breakdown  of  competition  has 
in  many  cases  been  complete,  and  society  has  found  itself  face 
to  face  not  with  rivals  who  vied  with  one  another  in  offers  of 
cheap  service,  but  with  monopolists  who  exacted  what  they 
could.  Of  late  law  has  been  freely  invoked  to  protect  society 
from  their  extortion.  The  justice  of  such  laws  can  hardly 
be  doubted,  but  their  expediency  and  efficiency  is  by  no 
means  so  clear.  The  case  is  simply  the  converse  of  what  we 
considered  under  subsidies.  The  private  interest  which  will 
use  its  resources  to  secure  a  vote  of  land  or  money  or  other 
advantage  will  do  the  same  thing  to  ward  off  a  threatened 
tax  or  vexatious  regulation.  Railways  furnish  a  familiar 


STATE  REGULATION  OF  INDUSTRY  BY  STATUTE.     293 

illustration.  In  every  legislature  they  keep  a  powerful  lobby 
which  often  dictates  all  important  legislation.  Not  to  men- 
tion other  forms  of  bribery,  which,  of  course,  are  private,  a 
most  demoralizing  species  familiar  to  everyone  is  the  giving 
of  passes.  In  the  legislature  of  a  Western  State  a  number 
of  railway  lobbies  keep  clerks  writing  passes  all  the  time.  A 
single  State  legislator  is  said  to  have  received  and  distributed 
a  thousand  passes  in  one  session.  These  passes  are  even  sent 
to  people  who  do  not  ask  for  them,  in  the  hope  of  winning 
their  political  support.  In  this  State  alone  the  fares  repre- 
sented by  these  passes  amount  to  hundreds  of  thousands  of 
dollars.  It  is  needless  to  say  that  the  people  pay  for  these 
free  rides,  but  this  is  not  the  worst.  It  is  a  species  of  brib- 
ery by  which  the  State  is  plundered,  its  government  demoral- 
ized, and  its  citizens  corrupted.  It  is  astonishing  that  consci- 
entious people  are  so  slow  to  recognize  the  nature  of  the  crime 
in  which  they  thus  participate. 

When  public  clamor  at  last  secures  the  passage  of  a  law 
the  same  corrupting  agencies  are  turned  against  the  officers 
charged  with  its  execution.  It  would  be  hasty  to  conclude 
that  anti-monopoly  laws  cannot  succeed,  but  it  surely  cannot 
be  claimed  that  they  have  so  far  succeeded.  The  lesson  of 
State  assistance,  tax  regulation,  and  statutory  regulation  is 
the  same.  When  private  interests  become  monopolistic  and 
powerful  they  not  only  do  not  serve  society  reasonably,  but 
all  efforts  to  compel  them  to  do  so  result  in  the  corruption  of 
government  and  in  ignominious  failure.  Laws  regulating 
labor  are  feasible  and  just  because,  laborers  having  little  power 
to  lobby  and  corrupt  legislatures  in  their  behalf,  such  laws 
are  the  concession  of  humanity,  while  laws  favoring  powerful 
monopolies  are  usually  the  price  of  a  bribe.  Laws  opposing 
such  monopolies  are  too  often  in  turn  only  an  occasion — per- 
haps even  a  bid — for  bribes  in  their  application.  Would  it 
be  strange  if  a  person  unbiased  by  prejudice  or  self-interest 
should  conclude  that  private  interests  which  have  grown 
powerful  enough  to  deny  responsibilities  and  defy  regulation 
should  pass  ivholly  under  public  control  ? 
20 


204:  OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Statutes  regulating  industry  were  generally  abolished  early  iu  the  pres- 
ent century,  owing  to  reliance  on  competition. 

2.  Legislation  protecting  labor  was  soon  found  necessary,  however. 

3.  Under  pure  competition  the  least  scrupulous  competitor  tends  to  im- 
pose his  moral  standard  upon  the  rest. 

4.  Women  and  children  especially  require  protective  legislation. 

5.  Law  can  feasibly  limit  the  hours  and  days  of  labor,  which  can  other- 
wise be  limited  only  by  unanimous  agreement. 

6.  Labor  contracts  can  be  somewhat,  though  not  extensively,  regulated 
by  law. 

7.  Legal  regulation  of  monopolies  and  trusts  has  been  extensively  tried, 
with  most  unsatisfactory  results. 

QUESTIONS. 

1.  What  was  relied  on  to  regulate  industry  during  the  Middle  Ages?  dur- 
ing the  first  part  of  this  century?  With  what  result? 

2.  What   classes   have  proved  unable  to  do  without   legal  protection  ? 
Why? 

3.  What  kind  of  a  competitor  has  the  advantage  under  pure  competition  ? 
Why? 

4.  What  should  the  law  aim  to  secure  for  women?  for  children?    Why? 
What  is  the  result  of  their  extensive  employment  iu  industry  ? 

5.  How  should  days  and  hours  of  labor  be  regulated?     Why?     Labor 
contracts  ?     Why  ? 

6.  What  is  the  result  of  attempts  to  regulate  monopolies  bylaw?    Why? 

LITERATURE. 

See  works  already  cited,  and 

Jevons,  W.  S.  :  The  State  in  its  Relation  to  Labor. 


CHAPTER  VII. 

STATE  MANAGEMENT  OF  INDUSTRY. 

Ix  the  preceding  chapters  we  have  considered  the  relations 
of  government  to  private  industry,  and  have  discovered  two 
connections  in  which  our  history  has  been  a  disastrous  fail- 
ure. These  are,  first,  assistance  in  enterprises  which  are 
too  great  or  too  general  in  the  benefits  they  confer  to  make 
private  enterprise  adequate;  and,  second,  the  regulation  of 
private  enterprises  which  have  become  so  powerful  and  des- 
potic as  to  be  a  menace  to  society.  If  we  examine  closely 
into  those  cases  of  corruption  which  we  have  considered  we 
shall  find  one  characteristic  pervading  all.  The -enterprises 
in  question  are  in  their  nature  monopolies,  or  they  are  made 
so  by  the  action  of  government.  By  a  monopoly  is  meant  a 
business  which  is  not  limited  by  competition.  It  may  con- 
sist of  a  single  firm  or  of  many  firms  bound  by  an  agreement 
not  to  compete.  If  this  agreement  is  definite  and  formal  it 
is  called  a  pool  or  combine  ;  if  the  parties  merge  their  sepa- 
rate existence  in  that  of  a  single  larger  corporation  this  is 
called  a  trust.  The  principle  is  the  same  in  any  case.  The 
monopolistic  concern,  the  pool  and  the  trust,  all  agree  in 
this,  that  they  charge  what  they  please.  The  limitations  to 
this  principle  we  have  already  considered.  But  while  mo- 
nopoly price  has  a  natural  limit  it  is  a  limit  much  less  favor- 
able to  the  public  than  tliat  set  by  competition.  The  result 
is  that  monopoly  business  creates  increasing  inequalities  in 
the  distribution  of  wealth  and  corresponding  suffering  on 
the  part  of  the  poor.  Monopoly  is  inherently  objectionable. 
Even  if  its  owners  are  magnanimous  and  unselfish,  which  has 
hardly  been  true  up  to  date,  the  centralization  of  the  power 
of  industry  in  a  few  hands,  with  its  enormous  resulting 


296  OUTLINES  OF  ECONOMICS. 

wealth,  is  undemocratic,  and  makes  the  many  dependent  upon 
the  few.  Such  a  dependence,  not  of  man  upon  society,  but 
of  society  upon  a  despot,  would  be  a  paternalism  more  odious 
than  any  that  a  government  has  ever  offered.  The  reaction 
against  the  mediaeval  system  which  we  have  before  consid- 
ered was  due  in  no  small  degree  to  the  monopolies  estab- 
lished by  royal  grant,  which  were  one  of  its  most  hateful 
features.  The  experience  of  all  the  past  teaches  one  lesson: 
private  monopolies  are  intolerable  in  a  free  country. 

There  is  a  group  of  industi'ies  which  we  may  call  natural 
monopolies,  because  they  are  monopolies  by  virtue  of  their 
own  inherent  properties.  They  are  of  vast  importance,  and 
the  property  which  they  own  is  in  value  a  considerable  pro- 
portion of  the  property  of  the  United  States,  and,  in  fact,  of 
any  modern  country.  The  monopolistic  character  of  these 
enterprises  can  be  plainly  seen  by  reference  to  their  chief 
characteristics :  1.  They  occupy  peculiarly  desirable  spots 
or  lines  of  land.  2.  They  can  increase  the  service  or 
commodity  which  they  supply  without  a  corresponding  in- 
crease in  capital.  3.  The  service  or  commodity  which  they 
supply  must  be  used  in  connection  with  the  plant  which  sup- 
plies it. 

We  will  examine  briefly  these  characteristics.  If  there  is 
only  one  spot  or  line  of  land  for  the  business  it  is  manifest 
that  the  enterprise  having  the  position  must  be  a  monopoly; 
but  when  there  are  several  spots  or  lines  of  land  one  may  be 
much  better  than  another.  Usually  there  is  room  for  onlv 
one  street-car  company  in  a  street,  or  one  elevated  rail- 
way over  a  street,  and  the  company  having  the  possession 
has,  so  far  as  that  street  is  concerned  at  least,  a  complete 
monopoly.  Often  the  possession  of  a  few  streets  gives  con- 
trol of  an  entire  section  of  a  city,  or,  indeed,  the  whole  city, 
so  that  any  extension  of  the  service  must  come  from  the  com- 
pany already  in  possession.  This  is,  for  example,  very  nearly 
the  position  of  New  York  city  with  respect  to  the  elevated 
railways.  The  great  steam  railways  occupy  peculiarly  favored 
spots  or  lines  of  land  to  an  extent  which  is  not  generally 


STATE  MANAGEMENT  OF  INDUSTRY.  297 

appreciated.  Of  course  along  a  considerable  distance  of  their 
line  duplication,  so  far  as  land  is  concerned,  seems  easy  enough ; 
but  there  are  certain  very  important  points  at  which  such  is 
not  the  case,  as  a  pass  through  a  mountain  which  may  be  very 
narrow.  It  frequently  happens  that  a  railway  which  passes 
between  a  mountain  and  a  river  occupies  the  only  line  which 
is  available  without  enormous  cost;  in  cities,  too,  a  company 
early  in  the  field  often  secures  a  valuable  line  or  tract  of  land 
which  cannot  be  duplicated.  This  is  the  case  with  the  New 
York  Central  and  Hudson  River  Railway,  in  New  York  city, 
and  with  the  Pennsylvania  system  in  Philadelphia,  and  to 
some  extent  also  in  Baltimore  and  in  Washington. 

The  fact  that  the  industry  can  be  increased  without  a  pro- 
portionate increase  of  capital  makes  it,  of  course,  cheaper  for 
one  company  to  do  a  given  amount  of  business  than  for  two 
or  more.  It  is  on  this  account  that  monopolies  have  been 
called  industries  of  increasing  returns.  To  what  extent 
economy  is  secured  by  increasing  the  magnitude  of  a  business 
is  in  many  branches  of  industry  more  or  less  open  to  question, 
but  in  the  case  of  the  industries  under  consideration  it  is  not 
only  cheaper  to  manage  a  business  as  one  whole,  but  very 
muc'i  cheaper  ;  consequently  there  is  always  an  inducement 
held  out  to  various  companies  or  persons  engaged  in  a  busi- 
ness which  is  a  monopoly  in  its  own  nature  to  effect  a  combi- 
nation. The  result  of  a  combination  is  increased  gains,  and 
as  the  purpose  for  which  the  business  is  followed  is  gain  there 
is  a  constant  force  contending  to  bring  all  those  together  who 
are  in  this  business,  and  this  force  ultimately  overcomes  the 
most  serious  obstacles. 

If  the  commodity  could  be  separated  from  the  plant 
furnishing  it  the  monopoly  would  be  far  more  difficult  and 
perhaps  impossible.  If  the  German  telegraph  service  could 
furnish  us  with  telegrams  in  the  United  States,  as  a  German 
manufacturing  establishment  can  send  us  its  products,  we 
would  of  course  use  the  German  service,  and  in  the  United 
States  often  save  seventy-five  per  cent ;  but  telegraphic  service 
can  be  only  furnished  where  the  plant  is.  The  service  which 


298  OUTLINES  OF  ECONOMICS. 

a  railway  furnishes  must  be  used  in  connection  with  the  rail- 
way itself. 

The  monopolistic  character  of  these  enterprises  is  further 
demonstrated  by  experience.  Competition  has  been  tried  in 
all  these  branches  of  business  and  has  never  been  permanently 
successful.  If  we  see  a  given  experiment  tried  a  thousand 
times  by  different  persons  under  every  conceivable  circum- 
stance and  find  that  it  never  succeeds  we  naturally  draw 
the  conclusion  that  the  effort  is  a  hopeless  one.  This  de- 
scribes the  situation  with  respect  to  the  gas  supply.  It  has 
been  tried  in  certain  cities  a  half  a  dozen  times,  and  it  is 
probably  an  underestimate  to  say  that  altogether  the  experi- 
ment in  various  countries  has  been  tried  a  thousand  times, 
and  no  one  can  point  to  an  instance  of  successful  perma- 
nent competition.  The  experiment  has  been  tried  over  a 
hundred  times  in  the  telegraph  business,  but  has  had  the 
same  outcome,  namely,  monopoly.  In  France  and  England 
the  outcome  of  attempted  competition  among  railways  has 
been  monopoly,  and  the  reason  why  many  people  in  the 
United  States  still  believe  in  the  possibility  of  competition 
among  railways  is  because  the  development  of  the  railway 
business  is  not  yet  complete,  and  it  is  not  generally  appreci- 
ated to  what  extent  the  railway  business  is  conducted  even 
now  by  agreement.  A  striking  instance  was  recently  afforded, 
however,  when  it  transpired  that  certain  railways  in  the 
Northwest  had  agreed  not  to  exceed  a  given  rate  of  speed 
between  Chicago  and  Minneapolis. 

It  is  perfectly  plain  that  monopolies  cannot  be  left  to 
manage  themselves.  What  shall  be  done?  Two  answers, 
and  only  two,  are  possible.  Such  enterprises  must  be  regu- 
lated by  the  State  or  they  must  be  owned  by  the  State.  State 
regulation  we  have  already  considered  at  length.  Its  object 
is  to  secure  a  safe,  efficient,  and  inexpensive  service  of  the 
public.  What  has  been  the  result?  Last  year  7,029  persons 
were  killed  and  33,800  injured  by  our  railways.  Such  a  record 
would  appall  the  least  civilized  State  of  Europe.  It  has  been 
claimed  that  it  is  more  dangerous  to  be  an  employee  on  an 


STATE  MANAGEMENT  OF  INDUSTRY.  291) 

American  railway  than  to  he  a  soldier  in  the  Prussian  army 
in  time  of  war.  All  this,  too,  in  face  of  the  fact  that  safety 
appliances  are  well  known  which  would  save  nearly  all  of 
this  destruction.  But  to  adopt  these  would  cost  money. 
Electric  wires  are  exceedingly  dangerous  and  should  be  run 
underground,  but  companies,  with  few  exceptions,  have  suc- 
cessfully resisted  this  improvement.  It  would  cost  money. 
It  is  idle  to  say  that  society  does  not  desire  these  improve- 
ments. It  does  desire  them,  and  our  legislators  desire  them, 
but  they  are  at  the  mercy  of  the  lobby.  This  is  a  principal 
point  under  the  head  of  safety.  Is  it  safe  to  have  railway 
lobbies  in  our  State  and  national  legislatures  which  con- 
trol legislation,  not  only  affecting  railways,  but  legislation 
of  every  kind,  and  make  legislators  their  servants  ?  Such  a 
despotism  is  a  danger  to  society  compared  with  which  the 
killing  of  a  few  thousand  innocent  citizens  each  year  may  be 
held  to  be  a  small  affair,  serious  as  the  latter  is. 

In  the  matter  of  efficiency,  again,  AVC  cannot  view  the  results 
of  State  legislation  with  complacency.  Our  railways,  to  be 
sure,  where  competition  has  not  been  suppressed  on  through 
lines,  have  in  some  particulars  shown  great  enterprise;  but 
this  is  in  part  the  result  of  a  competition  now  fast  dis- 
appearing, not  the  result  of  State  regulation  which  must  take 
its  place  as  monopoly  is  established  ;  in  part,  also,  the  result 
of  the  fact  that  many  Americans  have  means  sufficient  to 
enable  them  to  pay  for  comforts  and  conveniences  greater 
than  those  to  which  an  ordinary  ticket  entitles  the  holder, 
and  these  conveniences  and  comforts  are  of  special  importance 
where  distances  are  so  great  as  in  the  United  States.  A  con- 
siderable proportion  of  the  lauded  enterprise  in  American 
railways  is  seen  in  the  provision  of  services  and  accommoda- 
tions for  which  an  extra  charge  is  made.  The  telegraph, 
which  has  become  fully  monopolized,  has  persistently  refused 
to  adopt  improvements  which  are  continually  introduced  into 
the  English  service.  This  is  the  invariable  spirit  of  monop- 
oly. We  hear  much  about  destroying  private  initiative  and 
individual  incentive.  Private  enterprise  when  it  becomes 


300  OUTLINES  or  ECONOMICS. 

monopolistic  ceases  to  be  enterprising,  and  cannot  be  made  so 
by  regulation. 

It  is  in  the  mattei1  of  expense  that  our  judgment  of  regu- 
lated private  monopoly  must  be  most  severe.  Our  telegraph 
service  costs  twice  what  it  ought,  and  is,  of  course,  less  pa- 
tronized and  less  serviceable  for  that  reason.  Our  railway 
rates  are  needlessly  high,  according  to  the  confession  of  prom- 
inent railway  officials.  Our  municipal  street-car  service  is  a 
scandal  and  an  oppression.  Why  do  we  not  regulate  prices 
as  they  should  be  ?  Because  government  is  "influenced,"  and 
the  continuance  of  private  monopolies  will  make  this  "influ- 
ence" ever  more  powerful  and  subtle.  Added  to  all  this 
overcharge  there  is  the  enormous  waste  of  millions  of  capital, 
which  has  been  sunk,  and  is  still  being  sunk,  in  efforts  at 
hopeless  competition,  which  has  been  a  favorite  means  of 
"  regulating  "  monopoly. 

The  other  resource  is  State  ownership  and  direct  manage- 
ment. The  applications  of  this  principle  are  numerous  in 
Europe  and  are  increasing  rapidly  in  America.  In  most 
countries  in  Europe  the  State  owns  the  railways  and  all  own 
the  telegraph. 

Our  cities  long  ago  discovered  that  the  water  supply  was 
so  essential  that  it  could  not  be  intrusted  to  private  enter- 
prise, and  while  private  ownership  of  water  works  is  not  un- 
known it  is  distinctly  a  discarded  policy.*  Municipal  owner- 
ship of  lighting  plants  is  rapidly  increasing,  and  municipal 
ownership  of  street  railways  has  begun.  What  are  the  re- 
sults of  this  policy  ?  It  must  be  remembered  that  we  are 
comparing  a  young  policy  with  an  old  one,  and  that  a  policy 
in  the  experimental  stage  is  usually  more  expensive  than  in 
that  of  full  development.  We  must  consider,  again,  the  three 
points  of  safety,  efficiency,  and  expense. 

The  Prussian  railway  statistics  show  that  in  1888-89  one 
sixth  as  many  persons  were  killed  and  one  thirteenth  as  many 

*  Irrigation  works  are  indispensable  in  many  parts  of  the  United  States, 
and  it  is  especially  important  that  they  should  be  public  property.  To  in- 
trust them  to  private  enterprises  is  to  disregard  the  teachings  of  history. 


STATE  MANAGEMENT  OF  INDUSTRY.  301 

injured  in  proportion  to  the  number  of  passengers  as  in  the 
United  States.  It  has  been  objected  that  the  average  pas- 
senger in  the  United  States  travels  much  farther  than  in 
Prussia,  and  so  the  chances  of  accident  are  increased  ;  but,  on 
the  other  hand,  it  must  be  remembered  that  the  population 
in  Prussia  is  much  denser,  and  that  the  number  of  crossings  per 
mile  and  possible  casualties  is  therefore  much  greater.  The 
greater  safety  is  due  simply  to  greater  care,  which  character- 
izes all  branches  of  State  industrial  activity.  The  reason  is 
clear:  the  private  owner  naturally  considers  immediate  in- 
terests ;  the  State,  from  its  greater  perpetuity,  is  less  con- 
cerned in  an  immediate  advantage  ;  the  individual,  again, 
has  little  interest  in  the  general  safety ;  this,  however,  pro- 
foundly interests  the  State.  * 

Under  the  head  of  safety  must  also  be  considered  the  re- 
lation of  these  great  enterprises  to  social  order.  The  ob- 
viously unfriendly  relations  between  these  corporations  and 
their  numerous  and  well-organized  employees  is  a  constant 
menace  to  the  order  of  society.  Strikes  suspend  traffic  vital 
to  public  interest,  and  when  prolonged  and  bitter, result  in  riots 
and  train  wrecking,  imperiling  the  most  important  interests. 
Under  State  management  such  dangers  are  minimized.  Gov- 
ernment employees  do  not  strike  or  use  dynamite.  They  are 
usually  reasonably  though  not  exorbitantly  paid,  and  are  not 
irritated  by  excessive  toil,  by  oppressive  conditions  of  service, 
or  by  the  thought  that  unreasonable  incomes  are  accruing, 
through  their  efforts,  to  private  individuals. 

The  question  of  efficiency  is  a  much  more  disputed  one. 
We  are  told  that  government  enterprise  is  wasteful  and  un- 
enterprising, and  that  private  enterprise  under  the  spur  of 

*  Were  not  space  too  limited  the  many  devices  to  insure  safety  of  railway 
passengers  in  Prussia  would  be  described.  Some  of  them  are  quite  un- 
known in  the  United  States.  Probably  no  observant  traveler  in  that  State 
fails  to  notice  the  great  ingenuity  displayed  in  securing  safety.  That  greater 
regard  for  human  life  is  displayed  by  government  than  by  private  corpora- 
tions is  unquestionable,  and,  although  little  discussed,  is  one  of  the  weightier 
considerations  in  the  controversy  of  public  versus  private  enterprise. 


302  OUTLINES  OF  ECONOMICS. 

competition  is  the  condition  of  efficiency.  We  have  seen  that 
in  the  cases  under  consideration  competition  is  but  partial 
and  temporary,  and  that  where  it  is  absent  private  enterprise 
regularly  takes  as  much  and  gives  as  little  as  it  can.  But, 
on  the  other  hand,  experience  does  not  seem  to  bear  out  the 
charge  made  against  government  enterprise.  The  Prussian 
railways  have  constantly  and  rapidly  improved  their  service 
since  they  were  purchased  by  the  government.  It  is  claimed 
that  on  the  whole  trains  are  run  faster  and  that  fewer  changes 
of  cars  are  required  for  holders  of  ordinary  first  or  second 
class  tickets  than  on  American  railways,  and  this  seems  to  be 
substantiated  by  a  comparison  of  time-tables  in  the  two  coun- 
tries, with  the  added  advantage  that  the  Prussian  trains  are 
on  time,  as  ours  frequently  are  not.  Of  course  German  rail- 
ways, either  under  private  or  public  control,  will  show  Ger- 
man peculiarities,  and  the  main  question  is  whether,  take 
it  all  in  all,  improvement  has  been  as  great  under  govern- 
ment as  could  have  been  anticipated  under  private  enterprise. 
There  seems  room  for  little  doubt  on  this  point. 

Our  post  office  is  a  more  efficient  service  by  far  than  any 
private  service  in  the  country.  It  must  be  remembered  in 
such  comparisons  that  any  private  company  charged  with 
such  service  would  cut  off  many  routes  which,  in  themselves, 
do  not  pay,  and  would  be  exceedingly  loath  to  extend  or  im- 
prove the  non-paying  but  important  parts  of  the  service. 
Compare  the  routes  chosen  by  express  companies  with  those 
followed  by  our  postal  service.  The  individual  initiative 
which  is  so  much  urged  in  favor  of  private  enterprise  seems 
to  have  been  far  less  active  in  the  introduction  of  improve- 
ments in  the  case  of  express  companies  than  in  that  of  the 
post  office.  The  management  of  municipal  service  in  the 
lighting,  etc.,  has  proved  more  efficient  than  that  of  private 
companies,  if  we  may  judge  from  the  testimony  of  those 
cities  which  have  tried  both  methods  and  have  almost,  if  not 
quite,  uniformly  preferred  public  ownership.  This  argument 
is  made  more  conclusive  when  we  consider  the  situation  in 
which  a  managing  official  is  placed.  Under  private  manage- 


STATE  MANAGEMENT  OF  INDUSTRY.  303 

merit  he  is  expected  to  make  the  largest  possible  amount  of 
money  for  the  stockholders;  in  the  other  case  he  must  secure 
the  most  satisfactory  service  for  the  public.  Which  system 
will  naturally  defer  most  to  public  demands  ?  As  a  matter  of 
fact,  the  prejudice  against  government  management  comes 
largely  from  experience  with  mixed  enterprises,  not  with  pub- 
lic enterprises. 

In  the  matter  of  expense  we  can  consider  only  certain 
cases  where  both  systems  have  been  tried  and  made  compar- 
isons possible.  This  we  find  especially  in  municipal  service. 
In  nearly  every  case  on  record  in  which  the  two  systems 
have  been  successively  tried  there  has  been  a  saving  of  ex- 
pense under  public  ownership,  sometimes  a  very  great  sav- 
ing, and  that,  too,  without  reduced  efficiency.  More  often, 
especially  in  the  case  of  electric  lighting  plants,  municipal 
ownership  has  been  tried  at  the  outset,  and  comparisons 
made  with  towns  similarly  situated  show  an  almost  invari- 
able advantage,  usually  very  great,  in  favor  of  the  city 
plants.  It  is  astonishing  how  cheaply  these  services  can  be 
rendered  when  the  issue  of  fictitious  stock  is  prevented  and 
profits  are  paid  only  on  cost.  A  committee  in  Ilaverhill, 
Mass.,  report  that  in  that  State  62  cities  having  electric  light 
plants  under  private  ownership  pay  on  an  average  $105.13 
per  year  for  each  lamp  of  2,000  candle  power.  In  the  same 
State  14  cities  operate  plants  of  their  own  at  $55.12  per 
lamp.  In  1892  Kansas  City  paid  $200  per  light ;  Rutland, 
Vt.,  paid  $280  ;  San  Francisco,  $440.67.  Many  private  com- 
panies, of  course,  work  more  reasonably.  Brown's  Directory 
of  American  Gas  Companies  for  1892  reports  224  companies 
which  furnish  lamps  at  an  average  cost  of  $102.40,  while  39 
cities  Avidely  distributed  (all  from  which  returns  could  be 
obtained)  furnished  their  own  lamps  at  an  average  cost,  in- 
cluding interest,  taxes,  and  depreciation,  of  $77.68.  The 
lamps  in  the  former  case  burned  on  an  average  6.84  hours, 
and  the  latter,  7.9  hours  per  night.  Allowing  for  this  differ- 
ence, public  lighting  secured  a  saving  of  over  thirty  per  cent 
as  compared  with  private  lighting. 


304  OUTLINES  OF  ECONOMICS. 

Where  railways  have  become  public  property  not  only 
facilities  have  been  improved,  but  rates  have  been  reduced 
and  revenues  retained.  In  some  cases  reduced  rates  have 
resulted  in  large  increase  of  revenues,  as  in  Hungary. 

It  is  sometimes  said  that  this  country  will  never  consent 
to  raise  by  taxation  the  enormous  sum  necessary  to  buy  the 
railways.  No  taxes  are  needed.  If  the  government  can 
secure  the  money  at  three  per  cent  while  railways  pay  six 
per  cent  or  more  the  railways  bought  on  credit  would  pay 
for  themselves  in  less  than  a  generation.  Much  the  same 
would  be  true  of  the  other  monopolies  we  have  considered. 
Very  often,  too,  it  is  urged  that  public  enterprise  of  this 
sort  is  contrary  to  the  traditions  of  our  government,  which, 
it  is  asserted,  was  founded  on  the  principle  of  unmolested 
private  enterprise.  But  why  was  it  so  founded?  Simply 
because  there  were  then  no  monopolies,  no  collective  and 
non-competitive  services  where  private  ownership  was  danger- 
ous and  public  ownership  a  necessary  safeguard.  Enter- 
prises such  as  then  existed  were  naturally  private.  How 
were  houses  supplied  with  w  ter  and  light?  How  were 
goods  transported?  And  yeu  there  was  one  collective 
service,  the  post  office.  Why  was  that  not  made  private 
property  ? 

It  is  in  harmony  with  the  principles  of  our  institutions 
that  there  is  a  rapidly  developing  sentiment  in  favor  of  pub- 
lic ownership  of  those  enterprises  which  from  their  nature 
cannot  be  subject  to  competition.  These  become  more 
numerous  and  important  and  more  dangerous  in  private 
hands  as  civilization  advances.  Public  industry  in  the  mo- 
nopolistic and  private  industry  in  the  conyietitive  fitld  seems 
to  be  the  only  feasible  or  natural  law. 

Forestry. — There  are  some  other  enterprises  which,  for 
various  reasons,  it  is  desirable  that  government  should  as- 
sume. In  different  countries  the  State  is  furnishing  insur- 
ance of  various  kinds,  and  that  successfully.  Strong  argu- 
ments, based  both  upon  the  nature  of  the  industry  and 
actual  experience,  can  be  adduced  for  the  assumption  of  in- 


STATE  MANAGEMENT  OF  INDUSTRY.  305 

surance  by  the  State.  The  limited  space  of  the  present  book 
will  allow  us,  however,  to  discuss  in  this  chapter  only  one  of 
these  other  industries,  and  that  one  which  has  immediate 
practical  importance  in  the  United  States,  namely,  forestry. 
All  governments  are  taking  upon  themselves  the  owner- 
ship and  management  of  forests,  but  for  reasons  of  a  differ- 
ent nature  from  those  which  lead  to  ownership  and  manage- 
ment of  businesses  which  are  monopolistic.  New  York  State 
has  acquired  forests  in  the  Adirondacks  and  has  entered 
upon  forestry,  having  in  her  employ  foresters.  Bills  have 
been  brought  before  Congress  which  look  to  management  of 
forests  as  a  permanent  function  of  our  national  government. 
Switzerland,  France,  and  Germany  are  increasing  the  area 
of  governmental  forests.  The  reasons  are  very  obvious 
when  the  conditions  of  successful  forestry  are  examined. 
First  of  all,  it  may  be  said  that  rational  forestry  requires 
plans  to  be  made  for  one  hundred  and  twenty  years  in  ad- 
vance. Trees  must  be  planted  to  be  felled  at  the  expiration 
of  that  long  period,  for  it  takes  that  length  of  time  for  them 
to  grow  to  their  full  size,  and  when  they  are  allowed  to 
grow  to  full  size  the  amount  of  timber  needed  can  be  grown 
on  the  smallest  amount  of  land.  Private  individuals  will  not, 
however,  invest  money  from  which  they  expect  to  receive  no 
return  for  over  a  century.  Second,  forests  ought  to  be  cul- 
tivated on  a  vast  scale  on  land  especially  adapted  for  forests 
— land  often  good  for  nothing  else — and  certain  great  regions, 
like  steep  mountain  sides  and  sources  of  streams,  ought  to  be 
entirely  covered  with  forests.  Their  climatic  influences  are 
generally  believed  to  be  important,  and  forests  with  their 
leaves  and  undergrowth  certainly  prevent  rainfall  from 
rapidly  rushing  down  mountain  sides  and  deluging  the  coun- 
try below.  Forests  prevent  a  waste  of  soil.  It  is  said  that 
where  forests  have  been  rashly  removed  from  mountain  sides 
in  Baden,  Germany,  and  in  Switzerland  it  will  take  three 
hundred  years  to  repair  the  damage.  Soil  must  be  slowly 
formed  again.  Private  individuals  will  not  select  for  forestry 
vast  tracts  of  land  properly  situated.  In  America  farmers 


OUTLINES  OF  ECONOMICS. 

have  quite  generally  kept  a  few  isolated  acres  in  woodland, 
but  this  is  not  what  is  wanted.  Very  likely  the  land  kept  in 
trees  is  better  adapted  for  something  else,  and  forests  may 
not  be  needed  at  this  particular  point.  Third,  it  requires 
highly  trained  scientific  men  to  take  care  of  a  forest.  It  is 
necessary  to  go  through  high  schools,  to  follow  a  course  for 
several  years  in  a  forestry  academy,  and  then  to  supplement 
this  by  an  apprenticeship  of  several  years  in  practical  work 
in  forests.  Only  a  State  owning  tens  of  thousands  or  hun- 
dreds of  thousands  of  acres  can  train  and  organize  a  properly 
qualified  body  of  scientific  foresters.  The  difference  between 
a  forest  which  grows  up  wild  and  one  which  is  developed  under 
a  proper  system  of  culture  is  so  great  that  the  trained  eye  can 
detect  the  difference  nearly  as  far  as  sight  can  reach,  and  it 
is  probably  safe  to  say  that  it  takes  twice  as  much  land  to 
supply  a  given  need  when  forests  grow  up  ,of  themselves  as 
where  a  rational  system  of  forest  culture  obtains.  Fourth, 
when  forests  are  cultivated  in  large  tracts,  as  they  should 
be,  covering  perhaps  an  entire  mountain,  very  considerable 
quantities  of  game  can  be  grown,  and  this  forms  an  impor- 
tant element  in  the  food  of  a  people.  Our  private  system  of 
forests  in  America  results  in  an  almost  total  destruction  of 
game  in  the  settled  parts  of  the  country.  Fifth,  although 
forests  do  not  pay  private  individuals,  the  profits  of  Belgian 
forests,  for  example,  not  exceeding,  it  is  said,  one  per  cent 
on  their  selling  value,  they  do  pay  the  people  as  a  whole,  on 
account  of  their  general  beneficial  effects. 

More  might  be  said  on  this  topic  were  not  space  too 
limited.  It  is  manifest  from  this  that  petty  measures  which 
some  of  our  States  are  introducing,  like  tax  exemption  for 
planting  a  few  trees  or  covering  even  a  few  acres  with  trees, 
will  never  accomplish  anything  of  economic  significance. 
Even  "arbor  days"  are  of  little  account  save  for  their  edu- 
cational value.  On  that  account,  and  on  that  account  alone, 
unless  it  be  perhaps  for  the  sake  of  another  holiday,  they 
should  be  encouraged. 


STATE  MANAGEMENT  OF  INDUSTRY.  307 


SUMMARY. 

1.  Private  monopolies  are  inherently  objectionable  and  are  intolerable  in 
a  free  country. 

2.  A  business  which  controls  a  peculiarly  desirable  location,  which  can 
increase  its  service  without  corresponding  cost,  and  which  supplies  a  service 
available  only  in  connection  with  its  plant,  is  inherently  a  monopoly. 

:i.  Railways,  gas  works,  etc.,  have  proved  incapable  of  control  by  com- 
petition. 

4.  Under  private  ownership   they  have  not  secured  the  maximum  of 
safety,  efficiency,  or  economy. 

5.  Private  enterprise  when  it  becomes  monopolistic  ceases  to  be  enter- 
prising, and  cannot  be  made  so  by  regulation. 

6.  Public  management  of  railways  in   some  countries,  and  of  municipal 
monopolies  in  American  cities,  has  proved  more  satisfactory  in  all  respects. 

QUESTIONS. 

1.  Why  are  private  monopolies  objectionable? 

2.  What  is  a  monopoly  ?     What  conditions  are  necessary  to  constitute  a 
monopoly?     What  industries  especially  present  these  conditions? 

3.  What  has  been  the  result  of  private  ownership  in  these  industries  as 
regards  safety?  efficiency?  economy? 

4.  What  has  been  the  result  of  public  ownership  in  each  case?    Where 
has  it  been  tried  ? 

5.  What  is  the  necessary  condition  of  enterprise  under  private  owner- 
ship? 

6.  What  is  the  proper  field  of  private  enterprise?  of  public  enterprise? 

7.  What  special  reasons  exist  for  government  forestry? 

LITERATURE. 
Works  already  cited,  and 
Adams,  H.  C. :  Relation  of  the  Stute  to  Industrial  Action. 


CHAPTER  VIII. 

SOCIALISM. 

The  Elements  of  Socialism. — Those  who  desire  indus- 
trial democracy — not  prematurely,  but  in  its  own  time — are 
many,  and  they  include  perhaps  most  of  the  best  economists. 
There  are,  however,  different  ways  by  which  it  is  proposed 
to  attain  the  desired  goal.  One  of  these  ways  is  voluntary 
cooperation  for  all  competitive  pursuits  and  governmental 
activity  for  monopolistic  undertakings.  Another  one  of  these 
ways  is  called  socialism.  Socialism  means  coercive  cooper- 
ation, not  merely  for  undertakings  of  a  monopolistic  nature, 
but  for  all  productive  enterprises.  Socialists  seek  the  establish- 
ment of  industrial  democracy  through  the  instrumentality  of 
the  State,  which  they  hold  to  be  the  only  way  whereby  it  can 
be  attained.  Socialism  contemplates  an  expansion  of  the 
business  functions  of  government  until  all  business  is  ab- 
sorbed. All  business  is  then  to  be  regulated  by  the  people 
in  their  organic  capacity,  each  man  and  each  woman  having 
the  same  rights  which  any  other  man  or  any  other  woman 
lias.  Our  political  organization  is  to  become  an  economic 
industrial  organization.  Private  property  in  profit-produc- 
ing capital  and  rent-producing  land  is  to  be  abolished,  and 
private  property  in  income  is  to  be  retained,  but  with  this 
restriction,  that  it  shall  not  be  employed  in  productive  en- 
terprises. What  is  desired,  then,  is  not,  as  is  supposed  by 
the  uninformed,  a  division  of  property,  but  a  concentra- 
tion of  property.  The  socialists  do  not  complain  because 
productive  property  is  too  much  concentrated,  but  because 
it  is  not  sufficiently  so. 

There  are  four  elements  in  socialism,  namely,  first,  the 
common  ownership  of  the  means  of  production  ;  second,  the 


SOCIALISM.  309 

common  management  of  these  means  of  production  ;  third, 
the  distribution  of  annual  produets  of  industry  by  common 
authority  ;  fourth,  private  property  in  the  greater  portion  of 
income.  Socialists  make  no  war  on  capital,  strictly  speak- 
ing. What  socialists  object  to  is  the  private  capitalist.  They 
desire  to  nationalize  capital  and  to  abolish  capitalists  as  a  dis- 
tinct class  by  making  everybody,  as  a  member  of  the  com- 
munity, a  capitalist ;  that  is,  a  partial  owner  of  all  the  capi- 
tal in  the  country. 

Socialists  say  that  labor  creates  all  wealth.  N"o  rational 
socialist  means  thereby  to  deny  that  land  and  capital  are  fac- 
tors of  production,  but  as  they  are  passive  factors  they  hold 
that  their  owners  ought  not  to  receive  a  share  of  the  product 
unless  they  personally  are  useful  members  of  the  community. 
Labor  is  the  active  factor,  and  all  production  is  carried  on 
for  the  sake  of  man.  Land  and  labor  are  simply  the  tools  of 
man.  Socialists  admit  that  the  owners  of  these  tools  must 
receive  a  return  for  them  when  industry  is  organized  as  it  is 
now  ;  hence  they  desire  that  these  tools  should  become  com- 
mon property.  They  wish  to  make  of  universal  application 
the  command  of  the  apostle  Paul,  "If  a  man  will  not  work, 
neither  let  him  eat." 

Distributive  Justice. — The  central  aim  of  socialism,  the 
pivotal  point,  is  distributive  justice.  It  proposes  to  distrib- 
ute products  justly.  The  ideas  of  socialists  are,  however, 
not  harmonious  as  to  what  constitutes  justice.  Some  say 
equality  is  justice;  others,  distribution  in  proportion  to  real 
needs,  so  that  each  may  have  the  economic  means  for  his 
completest  development.  Still  others  say  justice  means  dis- 
tribution in  proportion  to  merit  or  service  rendered,  but  the 
service  of  the  individual,  not  of  his  ancestors.  Bequest  and 
inheritance,  except  of  articles  of  enjoyment,  like  pictures,  old 
family  plate,  books,  household  furniture,  possibly  also  the  use 
of  a  house  as  a  home,  must  be  abolished.  Socialism  allows 
no  inheritance  which  renders  labor  needless. 

Socialism  an  Extension  of  Existing  Institutions. — 
Our  government  owns  the  post  office ;  most  governments  own 
21 


310  OUTLINES  OF  ECONOMICS. 

the  telegraph.  Nearly  all  own  the  wagon  roads.  Some  own 
the  canals  and  railways.  Many  governments  own  factories. 
Probably  every  national  government  does  at  least  a  little 
manufacturing.  Most  governments  cultivate  forests,  and 
some  cultivate  more  or  less  arable  land.  We  have  only  to 
imagine  an  extension  of  what  already  exists  until  govern- 
ment cultivates  all  land,  manufactures  all  goods,  conducts  all 
exchanges,  and  carries  on,  in  short,  every  productive  enter- 
prise, and  we  have  socialism  pure  and  simple. 

At  the  present  time  we  have  private  property  in  nearly  all 
the  income  of  society,  or  the  national  dividend,  as  it  is  called. 
But  some  things  are  used  in  common,  and  afford  what  may  be 
called  a  common  income.  Public  parks,  public  schools,  public 
galleries,  and  the  like  are  of  this  character.  Private  property 
in  income  would  continue  under  socialism,  and  there  would 
be  provision  of  private  property  for  everyone,  so  that  in  this 
respect  socialism  emphasizes  and  extends  the  idea  of  private 
property.  On  the  other  hand,  socialism  would  naturally 
continue  and  intensify  the  tendency  to  enjoy  things  in  com- 
mon. This  is  what  is  meant  by  saying  that  socialism  signi- 
fies private  property  in  the  greater  proportion  but  not  all  of 
income. 

The  Strength  of  Socialism. — Socialism  makes  perhaps 
its  strongest  claim  in  its  plea,  first,  for  a  scientific  organiza- 
tion of  the  productive  forces  of  society,  and,  second,  for  a 
just  distribution  of  annual  social  income.  It  is  said  that  the 
present  production  of  economic  goods  is  small  in  proportion 
to  population,  but  socialism  replies  :  "  Naturally  enough. 
Competition  is  wasteful.  Two  railways  are  built  where  one 
would  suffice.  Two  trains  run  parallel  between  two  cities 
where  one  would  serve  the  public  equally  well.  Three  times 
as  many  milk  wagons,  horses,  and  drivers  are  required  to 
serve  the  people  with  milk  as  would  suffice  if  the  milk  busi- 
ness were  organized  like  the  mail  distribution  business  in 
cities.  Look  at  the  shops,  wholesale  and  retail,  and  see  the 
waste  of  human  force!  Without  competition  the  whole  dry 
goods'  and  grocery  business  could  be  carried  on  with  a  third 


SOCIALISM.  311 

of  the  present  economic  expenditure  of  force.  Reflect  on  all 
the  idle  classes  in  modern  society.  Socialism  would  set  every- 
body to  work,  and,  making  each  one  dependent  on  his  own 
exertions  for  success,  would  stimulate  all  energies."  The 
argument  is  continued  after  that  fashion,  and  it  is  a  telling 
one.  It  does  not  prove  the  point  unless  we  grant  two  things: 
first,  that,  the  present  waste  and  idleness  cannot  be  suppressed 
or  greatly  diminished  without  a  departure  from  the  funda- 
mental principles  of  our  present  industrial  order ;  second, 
that  socialism  is  practicable. 

Justice  is  a  strong  plea  in  the  program  of  socialism,  and 
it  cannot  be  for  one  moment  claimed  that  each  one's  income 
is  at  present  in  proportion  to  his  services  to  humanity.  In- 
come in  proportion  to  industrial  merit  is  attractive  to  an 
ethical  sentiment.  But  cannot  we  approximate  more  nearly 
to  that  than  at  present  by  social  reform  ?  And  by  social 
reform  is  meant  the  improvement  of  existing  institutions, 
but  not  their  abandonment.  No  doubt  the  idle  man  is  mor- 
ally a  thief.  He  receives,  but  gives  nothing  in  return.  Any 
man  who  by  past  services  of  his  own  has  not  earned  the  right 
of  repose  is  a  shameless  cumberer  of  the  earth,  unless,  indeed, 
he  is  physically  or  mentally  incapacitated  for  useful  employ- 
ment. Would  the  world  suffer  if  you  should  die  ?  That 
is  the  test.  If  you  merely  clip  coupons,  then  no  one  would 
miss  you.  Others  would  willingly  relieve  you.  But  your 
service  need  not  be  manual  toil. 

Dr.  James  Fraser,  the  late  Bishop  of  Manchester,  England, 
recognized  the  obligations  of  personal  service,  but  he  did  not 
in  consequence  favor  socialism.  He  argued  in  this  wise  : 
"  Most  of  us  are  by  our  necessities  obliged  to  render  services 
to  our  fellows.  Some  of  us,  however,  have  inherited  or  re- 
ceived money  in  some  way  without  a  return  on  our  part. 
We  are  placed  by  God  on  our  honor.  It  is  now  a  matter,  not 
of  physical  compulsion,  but  of  honor  with  us  to  serve  our  fel- 
lows." *  "What  is  here  said  would  apply,  of  course,  not  merely 

*  These  are  not  the  bishop's  exact  words.  It  has  been  many  years  since 
the  author  has  read  them,  but  he  has  reproduced  the  idea. 


312  OUTLINES  OF  ECONOMICS. 

to  those  who  receive  wealth  by  inheritance,  but  to  those  who 
become  wealthy  by  the  discovery  of  valuable  treasures,  like 
oil,  natural  gas,  gold,  minerals,  etc.,  on  or  under  soil,  which 
they  own,  or  by  the  mere  growth  of  cities,  which  adds  im- 
mensely to  the  value  of  land.  Legally  the  wealth  is  mine, 
but  morally  it  is  simply  a  new  opportunity  for  me  to  help 
forward  the  progress  of  humanity  ;  for  ethically  I  myself  am 
not  my  own. 

Social  Reform. — We  may  likewise  inquire  whether  with- 
out a  departure  from  the  institution  of  private  property  the 
laws  of  bequest  and  inheritance  may  not  be  so  changed  as 
to  bring  about  a  fairer  distribution  of  products  ;  whether, 
also,  by  public  ownership  and  management  of  natural  monop- 
olies much  of  the  waste  of  present  private  competition  may 
not  be  avoided.  These  and  a  multitude  of  other  questions 
suggest  themselves.  Social  reform  seems  likely  to  accom- 
plish more  valuable  results  than  socialism.  What  is 
needed  is  a  free  and  peaceful  evolution  of  industrial  insti- 
tutions, but  not  a  radical  departure  from  fundamental  insti- 
tutions. 

The  "Weakness  of  Socialism. — It  does  not  appear  clear 
to  the  author  how  socialism  could  be  made  to  work  in  actual 
life.  The  danger  to  freedom  seems  a  very  real  one.  It  is 
frankly  admitted  that  up  to  a  certain  point  there  is  a  tend- 
ency on  the  part  of  government  to  improve  as  its  functions 
increase.  But  would  this  hold  with  the  indefinite  extension 
of  the  sphere  of  government  ?  Let  us  admit  that  as  our 
livelihood  would  depend  on  the  efficiency  of  government  all 
the  force  and  energy  which  now  go  into  private  service 
would  be  turned  into  public  channels.  But  what  would  hap- 
pen if,  in  spite  of  all  precautions,  some  unscrupulous  combina- 
tion should  secure  the  control  of  government  ?  There  would 
be  no  standing-ground  for  effective  opposition  outside  of  gov- 
ernment, for  dismissal  from  the  service  of  government  would 
mean  a  cessation  of  opportunity  to  gain  a  livelihood.  If  all 
production  is  to  be  carried  on  by  public  authority  there  could 
be  no  private  press  for  criticism;  and  it  is  to  be  feared  that 


SOCIALISM.  313 

unwelcome  views,  which  after  all  may  be  the  true  ones,  would 
fare  much  worse  than  at  present. 

The  domination  of  a  single  industrial  principle  is  also  dan- 
gerous to  civilization.  It  has  been  held  that  the  domination 
of  a  single  social  principle  has  led  to  the  downfall  of  older 
civilizations, and  a  distinguished  American*  has  expressed  the 
fear  that  the  private  business  principle,  with  what  naturally 
goes  with  it,  called  by  this  scholar  "  mercantilism,"  threatens 
American  civilization.  Now  what  is  wanted  is  a  coordina- 
tion of  the  two  principles,  the  principle  of  public  business 
and  that  of  private  business.  It  is  desirable  that  some  should 
serve  the  public  in  an  official  capacity.  Some  are  adapted 
for  that.  It  is  desirable  that  an  ample  field  should  be  left 
for  those  who  prefer  private  initiative  and  activity.  Thus 
only  will  our  civilization  be  rendered  rich  and  full. 

Character  of  Socialists. — Socialism  has  rendered  good 
service  by  calling  attention  to  social  problems,  by  forcing 
us  to  reflect  on  the  condition  of  the  less  fortunate  classes, 
by  quickening  our  consciences;  ateo  by  helping  us  to  form 
the  habit,  acquired  by  few  as  yet,  of  looking  at  all  questions 
from  the  standpoint  of  the  public  welfare  and  not  merely  of 
individual  gain;  finally,  by  calling  our  attention  to  the  nature 
of  the  industrial  functions  of  government  and  helping  us 
to  separate  rationally  the  private  industrial  sphere  from  the 
public  industrial  sphere.  Socialism  as  a  theory  of  society 
cannot,  of  course,  be  regaixled  as  in  any  sense  morally  blame- 
worthy. It  has  been  advocated  by  good  men  and  by  bad 
men  also.  To-day  it  numbers  earnest  Christians  and  sincere 
ministers  of  the  Gospel  among  its  adherents.  As  there  are 
good  republicans  and  bad  republicans,  there  are  good  social- 
ists  and  bad  socialists.  If  every  time  a  republican  was  guilty 
of  a  criminal  act  all  the  newspapers  said,  "That  is  what 
comes  of  being  a  republican,"  we  might  begin  to  think  all 
republicans  bad  men.  It  is  a  mistake  to  suppose  that  social- 
ists belong  to  the  criminal  classes.  Those  who  have  worked 

*  Hon.  A.  D.  White,  ex-President  of  Cornell  University,  in  an  excellent 
address  entitled  "  The  Message  of  the  Nineteenth  Century  to  the  Twentieth." 


314  OUTLINES  OF  ECONOMICS. 

among  the  criminal  classes  and  carefully  studied  them  will 
tell  us  that  almost  no  socialists  are  found  among  them.  At 
the  same  time  it  must  be  said  that  the  socialists  have  been 
most  unfortunate  in  a  large  proportion  of  their  public  repre- 
sentatives, especially  of  their  noisiest  representatives,  who 
have  secured  the  largest  amount  of  attention.  Some  of 
them  have  been  vicious  men,  and  many  of  them  have  been 
bitter  and  vindictive.  Needless  animosity  has  been  aroused 
and  class  hatred  nourished.  The  cause  of  progress  has  thus 
been  seriously  injured.  Furthermore,  a  number  of  questions 
having  no  connection  with  socialism  have  been,  even  by 
socialists,  not  infrequently  associated  with  it.  Infidelity  and 
free  love  may  be  mentioned.  Of  course  these  have  nothing 
to  do  with  socialism.  Socialism  has  done  harm  on  account  of 
the  manner  in  which  it  has  been  too  frequently  presented,  and 
it  has  also  accomplished  good,  but  the  best  effects  of  socialism 
have  been  its  indirect  and  not  its  direct  consequences. 

Anarchism. — In  contrast  with  the  socialists  there  are 
those  who  hold  that  if  all  government  were  abolished  men 
would  freely  and  spontaneously  form  cooperative  groups 
which,  federated,  would  manage  all  production.  These  men 
attack  government  and  deny  the  moral  right  of  man  through 
government  to  exercise  authority  over  his  fellows.  These 
are  the  anarchists,  sometimes  called  anarchist-socialists.  The 
writer  frankly  confesses  his  inability  even  to  imagine  how 
this  kind  of  socialism  could  bo  made  to  work  in  actual  life. 

Communism  is  an  older  term  not  now  often  iised.  It 
has  been  employed  in  the  past  to  designate  an  extreme  kind 
of  socialism.  Some  writers  have  called  violent  schemes  of 
radical  social  reform  communistic,  and  reserved  the  term  so- 
cialistic for  the  more  conservative  plans  of  reconstruction. 
All  the  existing  communistic  societies  in  the  United  States  are, 
however,  composed  of  peace  men,  who  do  not  believe  in  war 
but  in  non-resistance.  It  is,  perhaps,  as  well  to  abandon  the 
attempt  to  make  a  distinction  between  communism  and  so- 
cialism, and  to  drop  the  word  communism.  Collectivism  is 
often  used  as  a  synonym  for  socialism,  particularly  in  France. 


SOCIALISM.  315 


SUMMARY. 

1.  Socialism  is  coercive  cooperation  in  all  industrial  enterprises. 

2.  Socialists  admit  private  property  in  income  but  not  in  means  of  pro- 
duction. 

3.  Socialists  claim  that  labor  produces  all  wealth,  and  they  aim  at  a  dis- 
tribution based  on  justice. 

4.  Socialism  is  but  an  extension  of  existing  institutions. 

5.  The  strength  of  socialism   lies  in  its  proposed  saving  of  waste    and 
its  juster  distribution. 

6.  Its  weakness  lies  in  its  almost  impossible  requirements  of  virtue  and 
the  absolute  dependence  of  all  upon  this. 

7.  Anarchism  is  the  opposite  of  socialism,  a  belief  in  the  needlessness  of 
government. 

8.  Communism  is  a  vague  arid  nearly  obsolete  synonym  for  socialism. 

.    QUESTIONS. 

1.  Define  socialism,  communism,  anarchism. 

2.  What  is  the  attitude  of  socialism  toward  private  property? 

3.  What  effect  would  successful  socialism  have  on  production  ?  on  distri- 
bution ? 

4.  What  difficulties  are  in  the  way  of  the  attainment  of  the  socialistic 
ideal  ? 

5.  What  is  the  character  of  socialists  ? 

6.  What  socialistic  features  now  exist  in  our  government?  .Do  they  in- 
crease or  diminish? 

7.  What  is  the  origin  of  wealth  according  to  socialists?    Are  they  cor- 
rect? 

8.  Why  is  anarchism  unfeasible? 

LITERATURE. 

Bellamy,  E. :  Looking  Backward. 

Marx,  Kail:    Capital. 

Gronlund,  L. :  Cooperative  Commonwealth. 

Schiiefle,  A.:    The  Quintesseme  of  Socialism. 

Lavelcye,  E.  de :   Socialism  of  To-day. 

Rae,  J. :    Contemporary  Socialism. 

Browne,  T.  E. :   Studies  in  Modern  Socialism  and  the  Labor  Prollem. 

Kirkup,  T. :  Inquiry  into  Socialism. 

Ely,  R.  T.:  French  and  German  Socialism;  Labor  Movement  in  America. 


PART  II. 

PUBLIC     EXPENDITURE. 


CHAPTER  I. 

INTRODUCTORY. 

IN  Part  I  we  considered  the  relation  of  the  State  to  the 
productive  activities  of  society.  We*  now  come  to  a  part  of 
our  work  which  is  usually  called  public  finance.  By  public 
finance  we  understand  that  part  of  economics  which  deals 
with  the  acquisition  of  the  public  revenues,  their  management, 
and  their  expenditure.  The  remainder  of  the  present  book 
deals  with  what  we  may  in  a  broad  sense  call  public  finance, 
although  other  than  purely  financial  considerations  enter  into 
our  treatment. 

Investment  and  Expenditure. — As  a  result  of  what 
has  gone  before,  we  have  reached  the  conclusion  that  as  a 
rule  private  enterprise  should  manage  the  various  competitive 
industries,  but  that  industries  not  subject  to  competition  are 
best  managed  by  the  State.  In  the  management  of  such 
enterprises  the  State  will  necessarily  invest  immense  amounts 
of  capital,  but  these  transactions  do  not  come  under  the  head 
of  public  expenditure  as  the  term  is  here  used.  When  we 
lend  money  we  do  not  call  it  spent,  nor  yet  when  we  use  it  to 
buy  productive  property.  Such  uses  are  investments,  not  ex- 
penditures. By  an  investment  we  mean  any  outlay  of  capital 
which  returns  a  direct  income  equal  to  current  interest.  An 
expenditure  is  an  outlay  which  yields  an  indirect  income 
only,  or  is  for  the  purpose  of  satisfying  wants  directly. 

Any  public  enterprise  may  be  managed  either  as  an  invest- 


INTRODUCTORY.  317 

ment  or  as  an  expenditure.  If  the  service  rendered  is  sold 
to  the  individual  consumer  at  a  price  which  covers  cost  and 
affords  a  reasonable  profit  it  is  an  investment.  If  the  service 
is  furnished  free  and  the  expense  paid  by  taxation  or  other 
revenue  it  is  an  expenditure.  Still  a  third  method  is  to  com- 
bine the  two,  furnishing  the  service,  not  free,  but  at  less  than 
cost.  State  railways  and  municipal  lighting  plants  are  exam- 
ples of  investments.  The  public  roads  are  examples  of  expen- 
diture. The  post  office  is  a  combination  of  both.  We  do 
not  here  include  the  entire  outlay  for  the  postal  service  under 
expenditures,  but  only  the  deficit  which  is  annually  covered 
by  an  appropriation.  On  the  other  hand,  if  a  public  invest- 
ment yields  a  surplus  it  is  classed  as  revenue. 

Whether  an  enterprise  should  be  managed  as  an  investment 
or  an  expenditure,  or  both,  is  purely  a  question  of  its  nature 
and  the  result  to  the  general  welfare.  If  it  is  something 
which  men  need  to  be  encouraged  to  use  it  should  be  made 
cheap  without  regard  to  cost.  If  it  is  something  the  use  of 
which  needs  restraint  it  should  be  made  dear  equally  without 
regard  to  cost.  For  example,  it  would  be  possible  to  charge 
an  admission  fee  for  entrance  to  the  public  parks,  but  such 
an  effort  to  make  the  parks  pay  for  their  maintenance  would 
simply  keep  people  out  of  them,  and  especially  those  who 
most  need  to  frequent  them.  Here  is  a  case  where  people 
need  to  be  encouraged  to  use  a  public  service,  and  conse- 
quently no  charge  is  made  for  it.  The  postal  service  is 
another  case  where  encouragement  is  needed  and  restraint  as 
well.  Ease  of  communication  is  highly  important,  but  no 
one  can  doubt  that  if  no  charge  were  made  the  mails  would 
be  unprofitably  used  and  waste  incurred.  Our  own  govern- 
ment has  thought  best  to  put  the  charge  low  without  remov- 
ing  it  and  to  meet  a  small  part  of  the  outlay  by  expenditure. 

Water  is  a  similar  case.  Its  use  needs  encouragement,  but 
to  furnish  it  free  would  result  in  wasteful  use.  A  small 
charge  usually  makes  people  more  saving.  Municipal  light- 
ing is  usually  made  to  pay  cost,  and  often  a  considerable 
revenue.  The  same  is  true  of  street  cars.  As  an  extreme 


318 


OUTLINES  OF  ECONOMICS. 


example  of  the  investment  principle  may  be  mentioned  State 
monopolies  of  intoxicating  liquors  and  tobacco.  Where  such 
monopolies  exist  prices  are  put  far  above  cost,  as  the  use  of 
these  articles  requires  strong  discouragement.  In  every  in- 
dustry a  point  will  be  found  where  the  service  will  confer  a 
maximum  benefit  upon  society,  and  here  the  price  should  be 
fixed,  no  matter  what  the  cost.  Roads,  harbors,  lighthouses, 
schools  cost  much  money,  but  it  is  very  generally  held  that 
they  should  be  free.  It  costs  but  little  to  carry  a  letter,  but 
everyone  believes  that  the  sender  should  pay  something  for  it. 
Increase  of  Public  Expenditure. — There  is  a  distinct 
tendency  in  highly  civilized  societies  to  increase  public  ex- 
penditure. The  expenditures  of  England  increased  forty-six 
times  between  1685  and  1841,  while  the  population  only 
trebled.  The  French  budget  in  1828  reached  the  sum  of  a 
thousand  million  francs,  and  people  were  alarmed.  Since 
then  it  has  passed  three  thousand  millions,  and  including  local 
expenditure,  four  thousand  millions.  The  State  taxes  of  Ohio 
increased  forty-six  times  in  sixty  years,  and  local  taxes  over 
one  hundred  times.  The  expenditures  of  the  federal  govern- 
ment are  shown  in  the  following  table  : 


Years. 

''ivil  Establishment. 

Total    Expenditures 
less  interest  on  the 
debt. 

Net    ordinary   Total 
Expenditure  includ- 
ing interest,  but  not 
bond  purchases. 

1828 

$3,676  053 

$13296  041 

$16,394,842 

1844        

5,645,184 

20,650,103 

22,483,560 

I860  

27,977  978 

60  056  754 

M  0(10,875 

1887          

85,204,825 

220,190,603 

267,932,180 

1892  

99,841,987 

321,645,214 

345,023,331 

The  first  impression  one  receives  from  such  facts  is  one  of 
alarm,  and  there  are  many  people  who  see  in  this  a  sign  of 
demoralization.  But  we  must  examine  carefully  these  facts 
before  we  reach  a  conclusion  as  to  their  meaning.  Increased 
expenditure  on  the  part  of  government  may  mean  either  in- 
creased costliness  of  service  or  increased  amount  of  service. 
The  prejudice  against  government  expenditures  arises  from 
a  confusion  of  these  two  things.  If  the  State  does  no  more 


INTRODUCTORY.  319 

for  us  than  formerly,  and  yet  spends  more  of  our  wealth  in 
doing  it,  then  indeed  there  is  reason  for  complaint  and  alarm, 
as  there  is  also  if  expenditures  exceed  capacity  and  bank- 
ruptcy or  repudiation  threatens  us.  But  if  government 
doubles  its  expenditures  and  at  the  same  time  trebles  its  serv- 
ice to  us  we  have  reason  for  satisfaction.  It  is  not  possible 
for  us  to  enter  into  an  exhaustive  examination  of  this  <jut's- 
tion,  but  there  is  abundant  evidence  that  the  service  of 
government  has  been  improved  in  extent  and  in  quality  enor- 
mously during  this  period  of  increased  outlay.  Compare  our 
postal  service  or  our  educational  system  with  that  of  fifty  or 
a  hundred  years  ago.  When  was  ever  a  letter  carried  so  far, 
so  quickly,  or  so  cheaply  as  now?  When  have  equal  educa- 
tional advantages  ever  been  had  at  so  low  a  price  as  now  ? 

Public  and  Private  Expenditure. — We  must  not  for- 
get that  wealth  is  to  be  consumed  with  a  view  to  the  satis- 
faction of  human  wants.  An  increase  of  expenditure  is  a 
good  thing  if  the  increase  is  wisely  spent.  This  brings  us 
to  the  question  which  is  vital  to  our  whole  subject.  Do 
we  get  more  from  public  or  from  private  expenditure  ?  On 
this  point  we  have  long  been  in  the  habit  of  feeling  rather 
than  thinking.  We  dislike  to  pay  taxes.  The  things  which 
taxes  buy  we  do  not  carry  home  in  our  pockets  or  have  "  all 
to  ourselves,"  and  we  feel  as  if  taxes  were  so  much  pure  loss. 
Of  course  we  know  better,  but  we  act  as  if  we  did  not.  It 
behooves  us  to  think  very  carefully  on  this  point,  for  some 
of  the  most  momentous  problems  of  our  day  are  here  in- 
volved. Let  us  notice  the  principal  differences  between  pub- 
lic and  private  expenditure. 

Public  Expenditure  is  Inclusive,  Private  Expenditure  Ex- 
clusive.— A  private  citizen  buys  a  beautiful  painting  for  ten 
thousand  dollars  and  puts  it  in  his  house,  where  he  and  a  few 
friends  can  see  it.  Perhaps  a  thousand  people  see  it  in  a 
year.  The  same  picture  in  a  public  gallery  is  seen  by  all 
who  wish,  say  a  hundred  thousand  persons  per  year.  Where 
does  it  do  the  most  good  ?  Or  look  at  it  from  another  stand- 
point. Suppose  interest,  insurance,  etc.,  amount  to  ten  per 


320  OUTLINES  OF  ECONOMICS. 

cent.  It  costs  the  owner  a  thousand  dollars  to  keep  a  picture, 
or  a  dollar  for  each  person  who  sees  it,  while  in  a  public  gal- 
lery the  expense  is  one  cent  each.  The  wealthy  owner  who 
pays  ten  thousand  dollars  for  the  picture  could  see  it  as 
often  as  he  liked  in  the  public  gallery  by  paying  a  single 
extra  dollar  in  taxes.  If  it  be  right  for  a  wealthy  man  thus 
to  imprison  a  world  treasure  away  from  the  public  one  thing 
is  sure,  that  system  is  better  which  puts  things  where  they 
will  do  the  most  good.  But  our  picture  problem  brings  us 
to  another  difference  between  private  and  public  expenditure. 

Public  Expenditure  is  Cumulative  in  its  Results. — Sup- 
pose the  hundred  thousand  people  who  visit  our  art  gallery 
have  an  average  of  a  dollar  apiece  to  spend  on  art.  "What 
can  each  one  buy?  A  cheap  chromo  or  engraving.  But 
suppose  they  combine.  They  can  buy  an  immortal  work  of 
art.  Let  a  hundred  thousand  people  spend  a  dollar  apiece 
in  beautifying  their  front  yards  and  the  result  will  scarce  be 
noticed.  Let  them  combine  and  they  can  create  a  park 
which  will  change  the  aspect  of  the  place  and  increase  the 
value  of  property  far  more  than  it  has  cost.  Nor  is  it  alone 
in  art  and  nature  that  this  cumulative  value  of  public  service 
appears.  In  Baltimore  the  mediaeval  custom  prevails  of 
compelling  each  man  to  sweep  the  street  in  front  of  his  own 
house.  It  costs  many  times  what  public  service  would  cost, 
and  is  not  half  as  efficient.  The  meaning  of  our  enlarging 
public  expenditures  is  simply  this,  that  year  after  year  we 
discover  new  methods  of  associated  economy  or  a  new  serv- 
ice. Of  course  we  must  remember  that  many  services  gain 
nothing  by  consolidation,  and  such  should  and  do  remain 
private  ;  but  the  great  gains  of  a  higher  civilization  are  pre- 
cisely of  this  kind  which  are  impossible  without  vast  coor- 
dinated resoiirces.  These  are  by  far  the  most  profitable 
expenditures  AVC  can  make.  A  dollar  spent  in  wisely  used 
taxes  brings  to  the  citizen  sometimes  ten,  sometimes  a  hun- 
dred times  as  much  as  if  spent  in  any  other  way. 

Opposition  to  Public  Expenditures. — It  is  urged  that 
government  spends  unwisely,  but  how  about  the  average  cit- 


INTRODUCTOKY.  321 

izen  ?  Does  not  the  average  competency  of  the  State  in  coun- 
tries like  England,  Germany,  and  the  United  States  to  spend 
wisely,  even  allowing  for  dishonesty,  exceed  that  of  the 
average  individual  ?  Where  do  we  see  more  absurd  "  finan- 
ciering" than  that  of  private  individuals,  even  judged  by 
their  own  standard  of  interests  ?  * 

The  second  reason  why  people  oppose  public  expenditure 
is  ignorance.  The  public  expenditures  which  offer  such  im- 
mense benefits  are,  on  the  whole,  new  developments.  To  be 
sure,  cases  like  Athens  may  be  cited  in  the  past,  where  in  the 
days  of  Pericles  one  third  of  the  public  revenues  was  ex- 
pended in  art,  resulting  in  a  public  education  which  it  has 
been  claimed  made  an  Athenian  gamin  more  of  an  artist 
than  many  a  modern  man  of  learning  ;  but  such  cases  are 
exceptions.  Our  modern  civilization  has  an  immensely 
broader  ideal  than  that  of  Athens.  We  seek  not  merely 
art,  but  comfort,  health,  security,  virtue,  intelligent  citizen- 
ship, culture,  education,  and,  in  short,  everything  that  makes 
for  human  well-being,  and  that  not  only  for  a  relatively  few 
citizens  with  an  excluded  mass  of  slaves,  but  for  all.  No 
such  attempt  was  made  in  the  past  by  public  or  associated 
action,  and  no  such  end  was  attained  save  by  a  small  num- 
ber who  made  it  a  point  to  monopolize  their  advantages. 

The  third  reason  for  popular  prejudice  is  a  false  concep- 
tion of  the  character  of  government.  We  are  but  recently 
become  familiar  with  the  fraternal  State.  Of  old  the  State 
centered  in  the  ruler,  and  too  often  his  theory  of  govern- 
ment was  that  of  Louis  XIV,  "I  am  the  State."  The  peo- 
ple were  not  citizens,  but  subjects,  and  existed  for  the  sake 
of  the  ruling  class.  A  large  part  of  public  expenditure, 
under  such  circumstances,  was  a  loss  to  the  people.  When 
taxes  were  increased  it  meant  too  often  another  palace  for 
the  king,  or  more  banquets  and  wasteful  luxury.  Subjects 

*  Much  is  said  about  dishonest  transactions  in  government;,  but  how 
about  transactions  in  our  Stock  Exchange  ?  The  average  congressman  is 
as  honest  as  the  average  merchant  would  be  if  obliged  to  manage  monopo- 
lies and  "regulate"  unscrupulous  private  despotisms. 


322  OUTLINES  OF  ECONOMICS. 

have  become  citizens  and  rulers,  and  with  all  recognition  of 
the  weakness  and  corruption  of  government  there  is  little 
room  for  doubt  that  public  expenditures  are  more  general  in 
their  benefits  than  private  expenditures.  When  AVC  consider 
their  inclusiveness  and  their  immense  cumulative  power  we 
are  tempted  to  draw  this  conclusion:  If  government  is  a* 
honest  and  competent  as  the  society  it  represents,  the  greater 
the  proportion  of  public  to  private  expenditure  which  can  be 
permanently  maintained,  the  better. 

Probably  most  readers  will  feel  that  some  qualifications 
are  required,  even  if  they  do  not  at  once  know  what  they 
are.  We  must  acknowledge  that  the  above  is  a  high  ideal. 
It  requires  close  examination  of  accounts  and  great  watch- 
fulness to  intrust  large  consumption  to  the  public.  Un- 
bridled public  extravagance  and  loose  financial  methods  can 
soon  ruin  a  great  commonwealth,  whereas  the  damage  of 
private  prodigality  is  more  restricted.  The  dread  of  large 
expenditures  in  the  United  States  rests  in  part  on  waste  and 
fraud  in  public  finance  in  the  past. 

Another  qualification  is  suggested  by  the  danger  that  very 
large  taxation  may  paralyze  private  industry.  Thus  we  say 
that  not  more  must  be  taken  than  can  be  permanently  taken, 
which  means  that  we  must  not  begin  an  exhaustion  of  our 
sources  of  supply.  We  can  also  add  that  we  cannot  take  more 
than  the  state  of  public  opinion  at  the  moment  will  tolerate. 

Still  another  qualification  occurs  when  we  remember  that 
if  wealth  is  wasted  in  private  hands  it  is  sometimes  in  such 
hands  expended  with  greater  wisdom  than  could  be  antici- 
pated from  public  authorities.  It  is  the  function  of  wise  and 
strong  men  to  go  before  the  mass  of  men  and  to  illuminate 
the  path  of  progress  with  their  superior  insight.  It  would 
be  a  great  loss  were  there  no  surplus  wealth  in  private  hands 
to  be  used  for  public  purposes. 

Finally,  the  fact  cannot  be  overlooked  that  many  things 
need  to  be  done  which  the  general  public  cannot  be  persuaded 
to  undertake.  It  remains,  therefore,  for  private  parties  to 
do  these  things,  or  they  must  be  entirely  neglected. 


INTRODUCTORY.  323 


SUMMARY. 

1.  Expenditure  differs  from  investment  in  that  it  is  not  directly  produc- 
tive of  revenue. 

2.  The  same  enterprise  may  be  managed  by  the  State  as  an  investment 
or  as  an  expenditure,  according  to  the  object  to  be  attained. 

3.  The  great  modern  increase  in  public  expenditures  is  to  be  judged,  not 
simply  by  its  amount,  but  by  its  productiveness. 

4.  Public  expenditure  is  inclusive,  private  expenditure  exclusive. 

5.  Public  expenditure  is  cumulative  in  its  results. 

6.  Opposition  to  public  expenditure  is  due  to  distrust  of  government, 
ignorance  of  modern  developments,  and  false  conceptions  of  the  character 
of  government. 

7.  With  healthy  government  increase  of  public  expenditure  means  prog- 
ress, but  this  principle  is  subject  to  important  limitations  due  to  circum- 
stances. 

QUESTIONS. 

1.  Define  expenditure  ;  investment.    What  determines  the  basis  on  which 
a  given  public  enterprise  shall  be  conducted?     Illustrate. 

2.  What  is  the  tendency  of  public  expenditure  as  regards  increase  ?   "What 
possible  explanation  of  this  tendency  may  be  offered?     Under  what  condi- 
tious  would  either  be  correct  ? 

3.  What  will  justify  an  increase  of  expenditure?     "What  are  the  natural 
limits  of  such  increase? 

4.  What  are  the  advantages  of  public  over  private  expenditure?     Are 
these  true  of  all  industrial  fields? 

5.  What  are  the  objections  to  public  expenditure?     How  far  are  they 
justifiable?     How  are  they  to  be  accounted  for? 

6.  What  is  the  law  of  increase  of  public  expenditure?  its  limitations? 

LITERATURE. 

Marshall,  A.:   Economics  of  Industry. 

Adams,  H.  C. :    TJie  fetation  of  the  State  to  Industrial  Action ;  Public  Debts. 

Kly,  R.  T. :  Problems  of  To-day. 

Bivstable,  C.  F. :  Public  Finance. 


CHAPTER  II. 

EXPENDITURES  FOR  SECURITY. 

HAVING  considered  the  general  principle  of  public  expendi- 
tures, it  now  remains  for  us  to  notice  some  of  its  varieties 
and  consider  their  relative  claims. 

National  Defense. — Under  this  head  is  included  the 
cost  of  army  and  navy.  If  we  leave  for  a  moment  our  own 
country,  which  enjoys  exceptional  immunities  from  attack, 
and  consider  Europe,  we  shall  find  that  we  are  in  the  pres- 
ence of  the  most  serious  item  of  the  national  budget.  The 
six  great  powers  of  Europe  spent  in  1888  nearly  nine  hun- 
dred millions  of  dollars  for  this  purpose.  Moreover,  the  ex- 
pense is  constantly  increasing.  From  1868  to  1888  the 
increase  for  the  same  nations  was  about  seventy-three  per 
cent,  not  counting  expenses  of  actual  war  or  interest  on 
debts  incurred.  This  increase  is  due  in  part  to  the  more  ex- 
tended scale  on  which  military  defense  is  now  conducted, 
and  also  to  new  inventions  which  constantly  make  old  arma- 
ments worthless  and  require  new  outlays.  Of  course,  if  we 
were  calculating  the  cost  of  war  as  a  whole  we  should  have 
to  add  the  immense  loss  of  keeping  hundreds  of  thousands 
of  men  in  enforced  idleness,  and  then  the  destruction  of  life 
and  property  during  actual  war.  This  indirect  cost  of  war, 
while  of  immense  importance  to  economic  interests,  is  one 
which  we  can  but  allude  to  here.  The  direct  expenditure 
for  war,  however,  we  must  consider  more  carefully. 

In  the  first  place,  we  must  not  forget  that  this  outlay  has 
some  economic  advantages.  We  in  America  are  apt  to  com- 
miserate Europe  xmduly  on  her  outlays  for  defense.  It  must 
not  be  forgotten  that  the  men  who  compose  the  army  derive 
immense  benefit  from  the  discipline  to  which  they  are  sub- 


EXPENDITURES  FOR  SECURITY.  325 

jected.  This  makes  them  better  producers  as  well  as  better 
soldiers ;  in  short,  it  makes  men  of  them  to  a  considerable 
degree.  This  fact,  which  is  keenly  appreciated  by  intelligent 
Europeans,  is  neglected  by  us.  Moreover,  a  certain  part  of 
the  army  is,  of  course,  composed  of  persons  who  are  naturally 
not  a  help  but  a  burden,  perhaps  a  positive  danger,  to  society. 

Whatever  may  be  the  ultimate  cost  of  national  defense,  it 
is  demanded  on  economic  grounds  if  no  others.  A  sense  of 
security  and  stability  is  indispensable  to  economic  prosperity, 
and  is  worth  all  it  costs.  And  yet  if  due  care  is  taken  we 
may  expect  a  lessened  need  of  military  and  naval  expendi- 
ture, and  while  we  should  avoid  "  slothful  overtrust "  we 
should  rely  so  far  as  possible  upon  peaceful  guarantees. 

The  United  States  is  peculiar  in  the  emphasis  it  \&ys  upon 
a  form  of  military  expenditure  which  cuts  but  a  small  figure 
in  European  budgets,  namely,  pensions  for  past  services  in 
the  army.  General  Garfield,  when  a  member  of  Congress, 
favored  a  pension  bill  which  appropriated  the  enormous  sum 
of  thirty-five  millions  for  pensions.  He  claimed  that  the  ap- 
propriation would  never  pass  this  amount,  and  that  through 
the  death  of  the  pensioners  the  amount  would  steadily  dimin- 
ish. Since  then  the  appropriation  has  been  quadrupled,  and 
now  equals  or  exceeds  the  direct  cost  of  the  most  powerful 
standing  army  in  the  world.  It  is  not  in  any  sense  a  military 
necessity  as  regards  either  present  or  future.  Immense 
resources  which  might  be  expended  by  the  State  with 
incalculable  advantage  are  thus  distributed  among  vast 
numbers  of  dissociated  and  to  some  considerable  extent  in- 
competent spenders  who  for  the  most  part  simply  "  use  it 
up."  A  judicious  public  use  of  the  same  resources  would 
confer  equal  benefit  upon  the  pensioners  themselves,  and  a 
like  benefit  upon  all  the  community,  but  it  would  not  in- 
fluence so  many  votes. 

Internal  Security. — Under  expenditures  for  internal  se- 
curity are  included  the  cost  of  our  police  system  in  all  its 
branches — including  constables,  sheriffs,  etc. — and  that  of  our 
judiciary  system,  since  both  of  these  are  occupied  almost 
22 


326  OUTLINES  OF  ECONOMICS. 

wholly  in  securing  person  or  property  from  injury.  This 
expense  varies  greatly  according  to  circumstances.  Among 
primitive  peoples,  and,  indeed,  until  civilization  has  made 
some  progress,  nothing  like  a  modern  police  system  is  known. 
Individuals  protect  their  own  property  and  persons,  the  right 
of  vengeance  being  recognized  and  constituting  a  system  of 
summary  justice  in  charge  of  private  enterprise.  The  in- 
crease of  expense  in  this  connection  therefore  marks  at  first 
a  new  branch  of  public  enterprise,  later  a  more  perfect  per- 
formance of  this  function,  and  closely  allied  to  this  a  more 
humane  treatment  of  offenders.  When  more  than  two  hun- 
dred offenses  were  punishable  by  death  the  cost  of  dealing 
with  a  criminal  was  slight.  Now  for  most  crimes  he  is 
subjected  to  a  long  imprisonment,  which  becomes  more  ex- 
pensive as  increased  efforts  are  ma<le  for  his  reformation. 
When  we  remember  how  largely  society  as  a  whole  is  respon- 
sible for  the  existence  of  crime  and  how  great  is  the  injustice 
necessarily  involved  in  its  punishment,  as  well  as  the  gain 
even  in  economic  resources  from  the  reformation  of  the 
criminal,  there  is  no  expenditure  Avhich  we  ought  to  make 
more  willingly  than  that  for  the  reformation  of  criminals. 

Another  cause  of  increased  expenditure  is  the  increase  of 
wealth  and  of  the  temptations  which  it  excites.  New  inter- 
ests require  new  safeguards  and  suffer  increasingly  from 
criminal  interference.  Not  only  are  social  relations  more 
delicate  than  formerly,  but  means  of  injury  ore  much  more 
potent.  The  invention  of  dynamite  necessitates  precautions 
once  unthought  of. 

For  these  and  other  reasons  the  expenditure  for  this  pur- 
pose has  rapidly  increased.  In  France  the  increase  from 
1822  to  1890  was  over  one  hundred  per  cent,  while  in  Eng- 
land from  1825  to  1890  it  was  over  three  thousand  per  cent. 
This  means,  not  that  England  is  growing  more  criminal  than 
France,  but  that  she  is  caring  for  more  interests  and  caring 
for  them  more  humanely  than  her  neighbor. 

Here,  too,  we  ought  to  expect  an  ultimate  diminution  of 
expenditure,  but  it  must  come  slowly  and  by  a  reformation, 


EXPENDITURES  FOR  SECURITY.  327 

not  of  criminals,  merely,  but  of  the  social  conditions  that 
produce  them.  Prevention  rather  than  punishment  or  even 
reformation  will  be  the  goal  of  a  wise  society. 

Administrative  Supervision. — This  is  in  reality  an 
extension  of  police  functions,. though  its  agents  are  more 
often  known  by  some  other  name,  as  commissioners,  inspect- 
ors, etc.  Its  purpose  is  likewise  public  security,  though  not 
so  much  against  open  violence  as  against  unsuspected  and 
indirect  dangers.  This  function  is  really  a  revival  of  a 
mediaeval  system,  denounced  by  Adam  Smith  and  discarded 
in  part  during  the  earlier  part  of  the  century.  It  must  be 
remembered,  however,  that  its  present  form  is  far  better  than 
the  discarded  one.  It  includes  the  inspection  of  sewers, 
tenements,  mines,  factories,  ships,  steam  boilers,  tramways, 
railways,  etc.,  the  testing  of  articles  of  food,  such  as  milk, 
meat,  etc.,  and  also  of  many  articles,  like  gun  barrels,  silver 
and  gold  plate,  etc.,  where  only  expert  examination  can  de- 
termine quality. 

We  cannot  here  discuss  the  extent  to  which  such  legisla- 
tion should  be  carried.  It  is  important,  however,  to  notice 
that  the  exigencies  of  modern  life  have  actually  forced  it 
upon  us  in  spite  of  the  most  vigorous  opposition  on  the  part 
of  believers  in  ultra-private  enterprise.  The  more  compli- 
cated our  civilization  becomes,  and  the  more  sensitive  our 
social  organization,  the  more  indispensable  such  protection 
is  found  to  be.  In  an  increasing  number  of  cases  men  can- 
not tell  what  they  are  buying  or  discern  whether  it  secures 
their  interests  or  not.  As  Professor  Jevons  tersely  says  : 
"  While  it  is  a  fact  that  people  live  in  badly  drained  houses, 
drink  sewage  water,  purchase  bad  meat  or  adulterated  gro- 
ceries, it  is  of  no  use  urging  that  their  interests  would  lead 
them  not  to  do  so.  The  fact  demolishes  any  amount  of  pre- 
sumption and  argument.  We  may  assume  that  no  consumer 
wants  to  buy  putrid  sausages,  poisonous  pickles,  dangerous 
guns,  or  fraudulent  plate.  Thus  the  government  official  who 
excludes  these  things  from  public  sale  actually  assists  the 
purchaser  in  carrying  out  his  own  desires." 


328  OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  Expenditure  for  national  defense  has  greatly  increased  in  recent  years, 
in  Europe  by  the  maintenance  of  armies,  and  in  the  United  States  by  the 
payment  of  pensions,  an  expenditure  only  nominally  for  the  purpose  of  de- 
fense.    .. 

2.  National  defense  is  an  economic  necessity,  and  is,  in  many  ways,  re- 
munerative. 

3.  Expenditure  for  internal  security  is  closely  allied  and  likewise  rapidly 
increasing.    Increase  means,  not  wastefulness  or  increasing  danger,  but  im- 
proved service. 

4.  Administrative  supervision   is  a  necessary  form  of  protection  to  so- 
ciety revived  aftiT  a  brief  suppression. 

QUESTIONS. 

1.  What'is  the  cause  of  increased  expenditure  for  security?     Is  it  justifi- 
able?    How  far  is  its  necessity  a  misfortune  ? 

2.  "What  is  the  real  connection  between  pensions  and  national  security  ? 
How  far  is  such  payment  justifiable  ? 

3.  What  is  the  significance  of  increased  expenditure  for  internal  security  ? 
How  much  of  the  increase  is  due  to  new  dangers? 

4.  What  has  been  the  tendency  regarding  administrative  supervision? 
How  much  is  included  under  this  term  ? 

LITERATURE. 

See  works  already  cited,  especially 

Jevons,  W.  S. :  The  State  in  its  Relation  to  Labor. 


CHAPTER  III. 

EXPENDITURES  FOR  THE   POOR  AND  THE  UNFORTUNATE. 

Tins  includes  primarily  the  paupers,  the  deaf,  the  blind, 
the  insane,  and  the  feeble-minded,  who  from  their  natural 
defects  are  unable  without  assistance  to  hold  their  own  in 
the  struggle  for  existence.  We  might  also  include  here 
those  extraordinary  cases  of  sufferers  from  fire  and  flood 
and  other  widespread  and  sudden  misfortunes,  but  as  these 
are  less  important  we  will  omit  them  from  our  present  con- 
sideration. 

In  earlier  ages  the  defective  classes  were  sometimes  most 
summarily  disposed  of,  but  the  moral  development  of  the 
race  makes  this  impossible.  For  a  long  time,  however,  their 
only  resource  was  begging,  as  we  see  from  the  constant  allu- 
sions of  the  New  Testament  and  other  ancient  books.  This 
doubtless  assured  them  a  most  uncertain  and  wretched  sub- 
sistence. In  the  Middle  Ages  they  were  systematically  but 
insufficiently  and  unwisely  cared  for  ,by  the  Church,  whose 
great  monastic  establishments  were  largely  used  for  this 
purpose.  This  system  was  enormously  expensive  relatively 
to  its  results,  and  its  obvious  abuses  were  one  of  the  chief 
causes  leading  to  its  abandonment.  It  demoralized  the  poor, 
neglected  the  defective,  and  treated  the  insane  with  almost 
incredible  cruelty.  It  was  a  palliative  but  not  a  remedy. 

Government  care  of  these  classes  is  now  recognized  by  all 
as  a  necessity.  Their  removal  from  immediate  contact 
with  the  rest  of  society,  and  systematic  treatment  of  them  by 
experts,  is  not  only  a  great  advantage  to  them  but  an  im- 
mense relief  to  society. 

From  the  standpoint  of  economics  little  need  be  said  re- 
garding the  treatment  of  the  insane  and  the  feeble-minded. 


330  OUTLINES  OF  ECONOMICS. 

The  expense  is  inevitable  and  should  be  cheerfully  borne,  for, 
though  abnormal  beings,  they  feel,  and  a  human  feeling  is 
an  ultimate  thing,  a  good  or  an  evil  which  we  who  have  the 
power  to  determine  its  character  must  wholly  respect.  Here, 
as  elsewhere,  however,  that  expenditure  is  best  justified 
which  tends  to  prevent  insanity  by  the  removal  of  the  causes, 
sanitary  and  otherwise,  which  produce  it.  If  our  insane 
asylums  constantly  increase  it  will  suggest  that  the  State 
fails  to  take  care  of  its  citizens  until  they  have  become  insane. 

The  problem  of  the  blind  and  deaf  is  primarily  one  of 
education,  which  must  be  of  a  special  character  such  as 
local  facilities  cannot  furnish.  By  means  of  such  education 
these  unfortunate  members  of  society  can  become  often  so 
useful  as  to  be  no  burden  to  society.  It  is  needless  to 
say  that  this  is  not  all  of  the  problem.  They  must  exist,  and 
we  are  not  at  liberty  to  decide  the  matter  regardless  of  their 
convenience  or  well-being.  The  worst  thing  that  can  befall 
a  man  is  to  be  deprived  of  all  opportunity  to  be  useful  to  his 
kind.  This  opportunity  the  State  should,  if  possible,  provide 
for  those  who  cannot  obtain  it  unaided. 

The  Difficulties  of  Poor  Belief  are  far  greater  than 
those  of  the  cases  just  mentioned,  and  its  economic  bearings 
indefinitely  more  serious.  The  reason  is  simply  that  in  the 
case  of  the  insane,  the  deaf,  the  blind,  etc.,  nature  has 
sharply  drawn  the  line  between  them  and  the  rest  of  society. 
No  matter  what  advantages  they  enjoy,  no  one  is  tempted 
to  become  blind  or  insane  for  the  sake  of  enjoying  these 
advantages.  Not  so  with  pauperism.  The  majority  of  men 
under  present  conditions  are  necessarily  poor,  as  poor,  many 
of  them,  as  paupers  themselves,  so  far  as  accumulations  go. 
Now,  if  the  dependent  poor  are  treated  better  by  the  State 
than  the  independent  poor  are  treated  by  society,  thousands 
of  the  latter  will  join  the  former.  Discouraged  by  the  fact 
that  by  their  utmost  exertions  they  get  less  than  they  could 
receive  by  no  exertions  at  all,  they  naturally  choose  the  lat- 
ter. The  history  of  poor  relief  is  full  of  such  cases.  Early 
in  this  century,  when  the  industrial  revolution  had  produced 


EXPENDITURES  FOR  THE  POOR  AND  UNFORTUNATE.     331 

great  suffering  in  England,  a  system  of  relief  was  adopted 
which  pauperized  thousands  and  immensely  aggravated  the 
difficulty.  An  allowance  was  given  to  each  laborer  in  pro- 
portion to  the  size  of  his  family.  If  he  earned  enough  to 
meet  the  legal  requirements  he  received  nothing.  If  he 
earned  less  the  balance  was  paid  by  the  community.  If  he 
was  out  of  work  the  community  paid  his  wages,  etc.  Now,  it 
seems  just  that  a  man  should  be  guaranteed  a  minimum  in- 
come by  society ;  but  what  was  the  result  ?  The  measure 
was  supported  both  by  employers  and  employees.  The  em- 
ployer could  now  cut  wages  without  resistance  on  the  part 
of  employee.  The  men  could  live  whether  they  worked  or 
not.  The  wage-earning  population  became,  it  is  said,  mu- 
tinous and  rebellious,  intimidating  the  overseer.  Poor  rates 
became  so  heavy  that  it  is  said  that  some  landowners  aban- 
doned their  farms  rather  than  pay  the  taxes.  The  law  was 
long  ago  repealed,  but  the  mischief  it  had  wrought  is  by  no 
means  eradicated  yet. 

In  America  we  have  had  no  legislation  so  mischievous  as 
this,  but  our  experience  has  been  most  unsatisfactory.  The 
relief  of  the  poor  has  been  so  managed  as  to  increase  pau- 
perism in  many  instances,  especially  when  the  poor  receive 
relief  in  their  own  homes,  and,  worst  of  all,  when  such  relief 
is  furnished  in  money.  Fraud  in  a  thousand  forms  has  re- 
sulted, and  in  all  cases  where  such  relief  is  loosely  adminis- 
tered pauperism  has  been  increased  and  the  poor  have  been 
degraded.  Experience  has  taught  us  the  recognition  of  cer- 
tain principles  which  we  can  only  barely  outline  here. 

1.  A  careful  distinction  must  be  made  between  the  victims 
of  temporary  distress  and  paupers.     The  first  lack  goods 
merely,  and  may  be  helped  without  danger,  often  preferring 
positive  starvation  to  the  demoralization  and  humiliation  of 
relief.     They  are  very  few  compared  with  the   other  class, 
and  often  find  private  help  sufficient.     The  second  class  lack 
character,  and  must  be  treated  accordingly. 

2.  Attention  should  be  directed  to  fundamental  rather  than 
surface  needs.     If  a  man  lacks  food  because  he  is  lazy  it  is 


332  OUTLINES  OF  ECONOMICS. 

liis  laziness  rather  than  his  hunger  which  should  receive  chief 
attention.  That  is,  the  treatment  of  paupers  should  be  dis- 
tinctly reformatory  in  character.  This  cannot  be  too  much 
emphasized.  Chronic  pauperism  rests  largely  on  defects  of 
character.  It  is  more  difficult  to  reform  paupers  than  crim- 
inals, and  their  condition  is  hardly  less  degraded.  Crime  is 
misdirection  of  energy;  pauperism,  lack  of  energy,  or,  as  it 
has  been  well  defined,  pauperism  is  under-vitalization.  The 
greater  leniency  accorded  to  paupers  is  due,  not  so  much  to 
their  moral  superiority  over  criminals,  but  to  the  fact  that 
they  are  seemingly  less  dangerous. 

3.  Pauperism  is  closely  connected  with  vice  and  disease, 
and  should  be  treated  with  a  view  to  the  restoration  of  physi- 
cal and  moral  health.     Vicious  practices  should  be  stopped, 
and,  if  possible,  the  tendency  to  them   eradicated.     If  by 
any  possible  argument  a  man  may  claim  the  right  to  spend 
in  vicious  indulgence  the  proceeds  of  his  own  industry  no 
one  will  accord  him  the  right  to  spend  thus  the  bounty  of 
society. 

4.  Pauperism  is  largely  the  result  of  a  bad  environment 
and  wrong  education.     So  far  as  possible  the  environment 
must  be  changed  and  the  education  corrected. 

5.  Above  all  things,  industry  must  be  inculcated.     The 
labor  of  a  pauper  may  be  worth  little  to  society;  it  is  inval- 
uable to  his  own  manhood. 

6.  From  the  foregoing  the  conclusion  has  been  generally 
drawn  by  American  experts  that,  so  far  as  possible,  paupers 
should  not  be  relieved  in  their  own  homes,  where  supervision 
and  reformatory  efforts  are  difficult,  but  in  institutions  under 
the  direction  of  experts.     The  aim  of  American  reformers 
has  been  either  the  total  abolition  of  outdoor  relief  or  its  re- 
duction to  a  minimum.     Another  idea  is  that  of  Germany, 
as  seen  in  the  "  Elberfeld  system,"  so  called  from  the  city 
which  has  tried  it  with  great  success.     It  is  the  reduction  of 
indoor  relief  to  its  lowest  terms  and  the  substitution  therefor 
of  outdoor  relief,  relief  in  the  homes  of  the  needy.     This 
prevents  the   breaking  up  of   homes  and   enables   the  dis- 


EXPENDITURES  FOR  THE  POOR  AND  UNFORTUNATE.     333 

pensers  of  public  charity  to  give  only  so  much  as  is  needed. 
Cases  which  would  require  full  support  in  an  institution 
often  find  all  the  relief  required  in  partial  support  in  their 
own  homes.  Sometimes  partial  outdoor  relief  is  required 
temporarily  only,  as  when  the  breadwinner  is  removed  by 
death  and  a  widow  is  left  with  small  children.  This  system 
keeps  the  family  together,  and  it  soon  takes  its  place  again 
among  other  independent  families.  It  seems  to  the  writer 
that  the  ideal  of  the  Elberfeld  system  is  a  higher  one,  but  it 
requires  a  pure  and  efficient  civil  service  such  as  German 
cities  have,  and  it  necessitates  also  a  general  cooperation  of 
the  best  social  elements  as  friendly  visitors  with  the  officers 
of  government.  Private  persons,  in  our  defective  system  of 
administration,  do  not  cooperate  with  government  to  the 
same  extent  as  in  Germany,  and,  where  the  "  spoils  "  system 
prevails  in  the  civil  service,  "  wire-pullers,"  politicians  of 
"  the  baser  sort,"  take  the  place  of  trained  experts  in  the 
service  of  government.  Civil  service  reform  is  a  question  of 
economics  as  well  as  humanitarianism,  for  a  poor  civil  serv- 
ice is  in  its  effects  cruel  and  wasteful  and  an  obstacle  to  prog- 
ress in  all  departments  of  social  life. 

7.  The   treatment  of   paupers  should  not  be  such  as  to 
make  their  lot  attractive.     It  does  not  follow,  however,  that 
they  should  be  starved  or  treated  with  gratuitous  severity 
in  any  form.     A  rigid  discipline  and  vigorous  reformatory 
measures  will  do  more  to  deter  from   voluntary  pauperism 
than  any  amount  of  starvation  and  neglect.    Severity  is  often 
the  truest  kindness.     A  tramp  will  endure  exposure  and  des- 
titution with  fortitude  who  will  be  appalled  at  the  sight  of 
a  woodpile  and  sawbuck. 

8.  Much  pauperism  is  due  to  old  age  and  failing  health, 
coupled,  perhaps,  with  previous  improvidence  or  incapacity 
now  past  remedy.    For  such  there  is  nothing  to  prescribe  but 
humanity  and  kindness  to  ease  the  pangs  of  dissolution. 

9.  Finally,  and  most  important  of  all,  pauperism,  though 
an  almost  incurable  malady  in  its  advanced  stages,  is  largely 
preventable.     The  State  can   do  little  to  prevent  blindness 


334:  OUTLINES  OF  ECONOMICS. 

or  deafness,  it  can  only  alleviate  the  misfortune.  But  pau- 
perism is,  to  a  great  extent,  the  result  of  bad  social  organiza- 
tion. A  pitiless  system,  based  on  unmitigated  self-interest, 
an  exaggeration  of  individual  as  opposed  to  social  rights,  a 
legislation  which  favors  the  strong,  even  a  well-meant  legis- 
lation which  is  negligent  and  unwise — any  of  these  causes 
may  multiply  pauperism  many  fold.  Nowhere  does  the 
duty  of  preventive  legislation  and  wise,  liberal  preventive 
expenditure  appeal  more  loudly  to  the  conscience  of  society 
than  here.  Comparatively,  at  least,  prevention  is  cheap  and 
cure  expensive,  prevention  is  easy  and  cure  difficult,  preven- 
tion is  profitable  and  attempted  cure  of  little  avail. 

There  are  those  who  deny  that  the  problems  here  discussed 
are  economic  problems.  If  these  things  in  their  cost  to  so- 
ciety, in  their  loss  to  productivity  and  their  demoralization 
of  organized  industry,  do  not  affect  the  problem  of  man  in 
his  relation  to  wealth,  what  things  do  ? 


EXPENDITURES  FOR  THE  POOR  AND  UNFORTUNATE.     335 


SUMMABY. 

1.  The  poor  and  unfortunate  were  formerly  uncared  for,  then  cared  for 
by  the  Church  and  finally  by  the  State. 

2.  The  care  of  the  deaf,  the  blind,  and  the  insane  is  purely  one  of  detail, 
the  duty  being  admittedly  a  public  one. 

3.  The  treatment  of  paupers  is   much  more  difficult,  owing  to  the  ease 
with  which  wrong  treatment  increases  their  numbers. 

4.  Paupers  are  in  general  the  victims  of  weakness  of  body  and  character. 
Their  treatment  should  be  distinctly  reformatory  in  character,  the  inculca- 
tion of  habits  of  industry  being  especially  important. 

5.  Pauperism  should  not  be  made  attractive  nor  treated  with  needless 
severity  when  due  to  old  age,  etc. 

6.  Pauperism  should  be  prevented  so  far  as  possible,  cure  being  both  ex- 
pensive and  difficult. 

QUESTIONS. 

1.  What  victims  of  misfortune   are   the   natural  wards  of  the  State? 
Why? 

2.  What  was  the  earliest  treatment  of  defective  persons?    Why?    What 
has  changed  this  policy? 

3.  What  is  the  objection  to  leaving  such  to  private  charity  ? 

4.  What  is  the  objection  to  church  supervision  and  control?    How  did  it 
work  unfavorably? 

5.  What  is  the  goal  of  public  effort  in  behalf  of  the  deaf  and  blind? 

6.  Mention  the   difficulties   in  poor   relief.     What  is   the  real  cause  of 
pauperism  ? 

7.  What  should  be  the  aim  of  State  relief? 

8.  What  was  the  experience  of  earlier  English  legislation  ? 

9.  What  is  the  Elberfeld  system  ?  the  difficulty  of  introducing  it  in  the 
United  States  ? 

10.  Why  are  leniency  and  kindness  difficult  or  even  dangerous  in  dealing 
with  paupers? 

LITEBAT  U  JiE. 

Toynbee,  A. :    The  Industrial  Revolution  in  England. 
Boies,  H.  M. :  Prisoners  and  Paupers. 

Proceedings  of  the  National  Conference  of  Charities  and  Correction,  a 
list  of  nineteen  very  valuable  Reports. 

The  literature  upon  this  subject  is  extensive,  but  not  wholly  satisfactory. 


CHAPTER  IV. 

EXPENDITURE  FOR  EDUCATION. 

OF  all  the  expenditures  of  modern  times  that  for  education 
has  grown  most  rapidly  and  constantly  in  the  development 
of  the  modern  State.  We  noticed  the  remarkable  increase 
in  England  of  the  expenditure  for  internal  security  and 
reform  of  criminals,  an  increase  of  nearly  3,000  per  cent 
in  about  seventy  years.  But  in  the  same  period  the  expen- 
diture for  education  increased  nearly  5,000  per  cent,  or  over 
six  times  as  fast  as  the  average  of  the  other  civil  departments 
of  government.  In  France  the  expenditure  for  education 
was,  in  1869,  the  last  year  of  peace  under  the  second  empire, 
twenty-five  and  a  half  millions  of  francs;  in  1883,  after  four- 
teen years  of  immense  financial  difficulties,  the  expenditure 
for  education  was  one  hundred  and  thirty-three  and  eight 
tenths  millions — an  increase  of  425  per  cent,  while  the  expen- 
diture for  internal  security  slightly  decreased  during  the 
same  period.  In  England  the  expenditure  for  education  is 
second  only  to  that  for  internal  security ;  in  France  it  is  sur- 
passed only  by  that  for  public  works,  which,  it  must  be  re- 
membered, is  largely  a  revenue-bearing  investment  and  not 
expenditure.  The  record  in  other  countries  is  similar  if  not 
so  marked,  but  we  in  the  United  States  have  relatively  lost 
ground  in  this  respect.  If  we  have  advanced  our  progress 
has  not  been  nearly  so  rapid  as  that  of  either  of  the  two 
countries  named. 

In  ancient  times,  with  a  few  notable  exceptions,  education 
was  left  to  private  individuals.  During  the  Middle  Ages  it 
was  left  to  the  Church,  whose  services  to  education  at  this  time 
in  her  monastic  institutions  are  often  underestimated.  With 
the  seizure  of  church  property  by  the  various  monarchs  of 


EXPENDITURE  FOR  EDUCATION.  337 

Europe,  and  with  a  change  of  ideas  regarding  the  functions 
of  the  State,  the  State  was,  however,  compelled  to  take  up 
the  work  of  education,  and  with  the  growth  of  popular  gov- 
ernment the  necessity  of  education  was  felt  and  emphasized. 
It  is  generally  admitted  that  one  cause  of  the  defeat  of 
France  by  Germany  in  the  last  war  was  the  superior  educa- 
tion of  the  German  people.  With  the  establishment  of  the 
republic  France  recognized  the  necessity,  both  military  and 
political,  of  general  education  and  vigorously  applied  herself 
to  the  task,  as  we  have  seen. 

Education  had  become  so  firmly  established  a  function  of 
government  in  the  days  of  Adam  Smith  that  with  all  his  dis- 
like for  State  activity  in  such  matters  he  admitted  its  legiti- 
macy. Both  he  and  his  followers,  however,  favored  State 
aid  to  primary  education  only.  Higher  education  they  con- 
sidered a  luxury  for  the  rich  which  they  should  pay  for. 
State  aid  to  such  was  class  legislation.  This  is  an  example 
of  the  narrowness  of  views  to  which  this  principle  leads. 
While  recognizing  the  public  danger  of  illiteracy  they  char- 
acteristically regarded  all  the  benefits  of  higher  education  as 
matters  of  private  concern  only — private  luxuries.  If  a  poor 
boy  who  could  not  afford  the  "  luxury  "  of  a  higher  educa- 
tion had  talents  to  be  a  great  statesman,  inventor,  or  scholar, 
the  State  should  not  seek  to  develop  these.  They  were 
his  affair.  How  plain  it  is  that  such  a  policy  is  ruinously 
wasteful  of  the  best  treasures  which  the  State  possesses,  the 
powers  and  faculties  of  its  citizens  1  Whatever  may  be  said 
as  to  what  private  beneficence  might  do,  we  must  consider 
what  it  does  do  and  has  done.  Does  it  offer  any  sufficient 
guarantee  that  the  available  resources  of  the  State  will  be 
utilized  ?  It  is  the  function  of  private  beneficence  to  supple- 
ment public  activity.  This  it  does  do  to  some  extent,  and 
will  do  more  when  the  value  of  State  enterprise  is  appreci- 
ated. 

It  is  urged  against  public  maintenance  of  higher  education 
that  only  a  few  can  or  will  avail  themselves  of  its  advantages, 
and  the  many  are  burdened  for  their  sake.  This  is  true  of 


338  OUTLINES  OF  ECONOMICS. 

our  courts.  Not  many  people  have  lawsuits,  but  all  help 
maintain  the  courts.  It  is  true  in  a  measure  of  every  activity 
of  government.  Not  a  law  is  passed,  not  a  tax  imposed, 
whose  benefits  or  whose  burdens  are  distributed  with  perfect 
justice.  It  is  as  just  as  may  be.  But  this  is  not  the  ques- 
tion. The  advantages  offered  by  a  high  school,  academy,  or 
university  are  not  simply  the  privilege  of  individual  instruc- 
tion enabling  a  person  to  carry  away  a  luxury  which  profits 
only  him.  Do  such  persons  profit  the  State  through  the  ed- 
ucation thus  acquired  ?  To  ask  this  question  is  to  spare  the 
need  of  the  answer.  There  is  many  a  university  whose  entire 
cost  has  been  returned  to  society  in  clear  cash  by  the  service 
of  a  single  one  of  its  students,  a  service  made  possible  by  his 
education.  But  this  is  as  nothing  to  the  general  influence 
exerted  by  people  thus  educated.  They  fill  responsible  posi- 
tions, public  and  private,  positions  in  which  society  exacts 
large  capacities  which  only  educated  men  can  supply. 

It  is  urged  in  view  of  the  numerous  private  universities 
and  colleges  in  the  United  States  that  private  schools  might 
render  this  service.  But  why  should  they  ?  It  is  the  State 
in  particular  which  demands  an  ever-increasing  number  of 
competent  men,  ought  to  demand  them,  ought  to  demand 
more  than  it  does,  would  do  so  if  they  were  to  be  had.  What 
more  natural  than  that  the  State  should  furnish  them  ?  We 
justify  State  primary  education  on  the  grounds  that  the 
State  requires  of  all  the  duties  of  citizenship  ;  we  should 
justify  State  universities  on  the  ground  that  the  State  requires 
of  many  the  duties  of  legislative  and  administrative  service, 
and  of  all  the  development  of  their  powers  for  the  service 
of  society. 

But  private  colleges  and  universities  do  not  adequately 
perform  this  service — cannot  do  so  from  the  very  nature  of 
private  enterprise.  That  a  few  such  schools  are  of  the  high- 
est rank  none  will  deny,  though  even  here  the  "highest  rank" 
is  lower  than  it  need  be  on  account  of  the  waste  of  private 
resources.  As  a  rule  these  are  most  wastefully  employed. 
The  State  of  Ohio  has  thirty-five  colleges.  Was  such  an  in- 


EXPENDITURE  FOR  EDUCATION.  339 

vestment  wise?  What  would  have  been  the  result  had  these 
resources  been  united  in  a  single  university  ?  This  could  not 
be,  we  are  told,  because  no  unifying  power  controlled  the  in- 
vestment. Certainly;  it  is  an  example  of  the  uncohesive 
and  wasteful  character  of  private  enterprise  in  education. 
The  unifying  power  needed  was  that  of  the  State,  the  only 
one  possible.  Its  university  struggles  weakly  against  such  a 
rival  league.  It  loses  the  majority  of  religious  students  of 
the  State,  and  then  is  called  irreligious  ;  it  educates  few 
students  and  so  educates  few  sympathies,  receives  few  be- 
quests and  meager  appropriations.  If  the  private  educa- 
tional enterprise  of  the  State  were  efficiently  consolidated  it 
would  justify  itself.  As  it  is  it  represents  divisive  forces 
descended  from  an  obsolete  sectarianism.  All  honor  to  re- 
ligious convictions  past  and  present  ;  but  the  confessedly  dis- 
astrous  influence  of  sectarianism  upon  private  education  em- 
phasizes the  need  of  coordination  and  the  wisdom  of  private 
beneficence  aiding  rather  than  retarding  the  work  of  the 
State.  The  United  States  has  four  times  as  many  colleges 
and  universities  as  Germany,  but  the  latter  have  more  students 
and  more  professors  than  the  former.  Which  system  pro- 
duces greater  results  in  instruction  and  research  ?  The 
function  of  a  university  is  not  simply  instruction  but  also  re- 
f-carch.  Few  expenditures  produce  greater  returns,  direct 
and  indirect,  than  this*  Notice  the  remarkable  results  of  re- 
search in  German  universities  in  the  last  half  century,  par- 
ticularly in  sanitary  science.  The  discovery  of  a  simple  test 
for  milk  a  fe\v  years  since  by  a  professor  in  an  American 
State  university  has  revolutionized  the  dairy  business  of  that 
and  other  States.  As  a  simple  matter  of  economic  production 
a  body  of  expert  investigators  is  one  of  the  most  profitable 
investments  of  government.  Such  a  body  can  only  be  main- 
tained by  the  State.  Otherwise  they  must  sell  their  services, 
divided  and  inefficient,  to  speculators  who  appropriate  the 
results  of  their  investigations. 

The  expense  of  modern   research  practically  necessitates 
resources  which  as  a  rule  only  the  State  can  adequately  fur- 


340  OUTLINES  OF  ECONOMICS. 

nish.  Especially  do  the  physical  sciences,  whose  development 
has  created  so  large  a  part  of  modern  wealth,  call  for  increas- 
ing outlays  for  their  continued  development.  Private  benefi- 
cence has  done  much  and  accomplished  notable  results,  but  by 
competing  with  the  State  ratlier  than  supplementing  its  work 
it  has  produced  a  superfluous  number  of  embryos  and  has  not 
yet  achieved  a  single  perfect  development.* 

We  have  considered  at  length  the  case  of  higher  education 
because  it  is  the  only  debatable  portion  of  the  problem  of 
public  education.  Objections  to  primary  education  are  now 
questions  of  detail,  not  of  principle.  It  is  interesting  to  note, 
however,  that  government  in  all  enlightened  countries  has 
altogether  abandoned  the  mistaken  policy  advocated  by  Adam 
Smith.  It  regards  higher  education  not  as  a  luxury  which 
the  rich  should  be  left  to  pay  for,  but  as  a  necessity  of  social 
development. 

Under  the  head  of  education  must  be  included  art  galleries 
and  museums  and  many  other  agencies  not  directly  employed 
in  giving  instruction.  The  impression  should  be  overcome 
that  the  purpose  of  such  things  is  the  amusement  of  specta- 
tors. They  are  repositories  of  material  for  scientific  study 
and  investigation,  and  under  the  influence  of  science  are 
rapidly  ceasing  to  be  curiosity  shops.  They  are  an  indispen- 
sable adjunct  of  higher  education.  Art  galleries  have  a  par- 
ticularly broad  and  beneficent  influence  upon  society.  Of 
course,  if  beauty  has  no  value,  if  a  house  has  no  other  use 
than  shelter,  and  paint  no  other  purpose  than  to  preserve 
timber,  if  a  sunset  might  as  well  be  mud  color  as  rainbow 
tinted,  if  exquisiteness  of  form  and  color  and  the  manifold 

*  It  is  not  intended  to  disparage  the  results  of  private  beneficence  in 
higher  education.  Not  only  has  it  accomplished  great  results  directly,  but 
it  has  created  the  sentiment  which  now  makes  public  effort  possible.  The 
lack  of  coordination,  also,  which  has  so  greatly  lessened  its  efficiency,  was 
not  its  fault,  but  was  inherent  in  the  situation.  Its  record  is  that  of  self- 
denying  and  heroic  effort  against  overwhelming  difficulties,  and  the  wonder 
is  that  it  has  accomplished  so  much.  We  do  not  estimate  lower  than  others 
the  results  of  this  system ;  we  estimate  higher  than  others  the  possible 
results  of  a  wiser  system,  which  this  should  supplement. 


EXPENDITURE  FOR  EDUCATION.  341 

movements  of  grace  by  which  Nature  speaks  from  her  soul 
to  the  senses  —  if  these  are  not  worth  the  trouble  it  costs  to 
perceive  them,  then  art  galleries  and  much  more  besides 
will  find  little  to  justify  their  existence.  But  if  such 
things  have  value,  if  art  is  the  interpreter  of  nature  and 
a  means  of  using  wealth  which  confers  supreme  satisfactions, 
then  it  is  preeminently  the  State  which  should  make  such 
expenditure.  Only  so  can  the  rare  and  costly  works  of 
genius  be  made  a  general  good  and  enabled  to  confer  their 
greatest  service. 

We  often  hear  of  public  luxury  as  though  it  were  a  repre- 
hensible thing.  What  do  we  mean  by  public  luxury  ?  We 
have  seen  that  luxury  consists  in  a  false  distribution  of 
wealth.  When  a  rich  parvenu  buys  a  masterpiece  of  art  and 
locks  it  up  it  is  a  luxury.  It  is  so  utilized  that  it  renders 
little  service  to  him  or  to  others,  and  so  attains  but  a  frac- 
tion of  its  possible  utility.  If  he  were  the  one  man  in  so- 
ciety able  to  appreciate  or  profit  by  that  picture  it  would 
not  be  a  luxury,  but  a  wholly  justifiable  expenditure.  Of 
course  that  can  never  be  the  case.  If,  now,  the  government 
buys  that  picture  and  puts  it  where  the  largest  possible 
number  of  people  can  see  it,  it  cannot  be  called  a  luxury. 
It  renders  its  greatest  possible  service  to  society.  The 
writer  has  no  hesitation  in  expressing  the  conviction  that  a 
public  art  gallery  and  a  public  library  should  be  the  aspira- 
tion of  every  community  and  the  immediate  attainment  of 
all  those  which  have  a  reasonable  development  of  private 
affluence.  This  is  not  luxury,  but  the  best  possible  safe- 
guard against  luxury,  which  by  the  misapplication  and  non- 
utilization  of  wealth  makes  us  poor  in  our  abundance. 
23 


342  OUTLINES  OF  ECONOMICS. 


SUMMARY. 

1.  In  modern  times  expenditure  for  education  has  enormously  increased 
in  highly  civilized  countries. 

2.  Education  as  an  activity  of  the  Slate  was  partially  admitted  even  by 
Adam  Smith. 

3.  Higher  education,  however,  was  regarded  as  a  luxury  of  the  rich,  to 
be  left  to  private  enterprise. 

4.  Higher  education  has  now  been  generally  added  to  the  educatioual 
work  of  the  State. 

5.  This  is  necessary  to  the  maintenance  of  free  institutions  and  to  the  de- 
velopment of  needed  individual  talents. 

6.  A  perfectly  equal  distribution  of  educational  as  of  other  advantages 
offered  by  the  Slate  is  not  possible. 

7.  Private  universities  and   colleges  have  not  sufficiently  provided  for 
higher  education  nor  wisely  economized  social  resources,  owing  to  a  lack  of 
coordination  in  their  efforts. 

8.  Art  galleries  and  museums  are  a  part  of  the  machinery  of  public  edu- 
cation, and  are  not  to  be  condemned  as  luxuries. 

QUESTIONS. 

1.  What  did  Adam  Smith  think  of  elementary  education  by  the  State? 
of  higher  education  ?    Why  did  he  distinguish  them?    Was  he  right?    Why? 

2.  Why  should  the  State  provide  for  elementary  education  ?  for  higher 
education?     How  far  do  the  two  differ? 

3.  What  is  the  defect  of  private  management  of  higher  education?     Is 
this  defect  inherent?     If  private  enterprise  performed  the  work  equally  well 
would  it  be  better  to  leave  the  service  to  it  ? 

4.  What  is  the  function  of  art  galleries  and  museums? 

5.  What  is  the  difference  between  public  and  private  luxury? 


CHAPTER  V. 

EXPENDITURE    FOR   COMMERCE,    DIPLOMACY,    AND    GOVERN- 
MENT. 

Ix  tliis  chapter  we  consider  a  number  of  expenditures 
which  are  grouped  together,  not  because  of  any  inherent 
connection,  but  because  all  must  be  considered  briefly,  and 
they  are  all  relatively  slight  in  their  importance. 

Commerce. — Under  this  head  are  included,  first  of  all, 
the  maintenance  of  those  industrial  facilities  which  we  have 
already  considered  in  Part  I :  roads,  bridges,  canals,  im- 
provements in  rivers  and  harbors,  lighthouses,  and  many 
others.  But  little  time  need  here  be  spent  on  this  branch  of 
public  expenditure  farther  than  to  emphasize  its  importance 
and  its  necessarily  public  character.  Most  of  these  improve- 
ments and  conveniences  cannot  be  arranged  so  as  to  furnish 
a  direct  revenue  sufficient  to  tempt  private  enterprise  to 
undertake  them.  This  is  clear  in  the  case  of  lighthouses, 
and  even  in  the  case  of  roads  where  private  ownership  and 
toll  is  possible  no  one  would  now  return  to  the  toll  roads. 
The  amount  of  expenditure  will,  of  course,  vary  with  a  great 
variety  of  circumstances.  In  general,  however,  we  may  say 
that  the  State  should  act  according  to  much  the  same  rules 
as  a  wise  individual  would  follow  in  the  same  position.  We 
know,  of  course,  that  subdivided  private  enterprise  is  nig- 
gardly in  its  outlnys  for  such  purposes;  but  imagine  a  single 
person,  a  shrewd  business  man,  in  possession  of  all  the  re- 
sources of  government  and  managing  them  as  such  men 
manage  their  business;  would  he  leave  our  roads  in  their 
present  condition  ?  If  not,  we  should  not  either.* 

*  Pullman,  111.,  furnishes  an  illustration.  The  company  owning  the  town 
finds  that  it  pays  to  sprinkle  the  streets  because,  among  other  things,  it  is 
not  necessary  to  paint  the  buildings  so  often  as  would  otherwise  be  required. 


344  OUTLINES  OF  ECONOMICS. 

Post  office,  telegraph,  and  railway  lines  are  primarily 
commercial  in  their  purpose,  and  subject  to  the  same  con- 
siderations, but  they  are  generally  managed  as  investments, 
the  last  especially  yielding  a  considerable  revenue.  The 
difference  of  method  between  expenditure  and  investment  is 
purely  one  of  convenience,  the  latter  method  being  prefer- 
able when  it  is  feasible  to  collect  the  revenue  in  the  opera- 
tion of  the  enterprise  and  when  the  enterprise  is  of  especial 
advantage  to  certain  interests,  or  liable  to  abuse  if  its  bene- 
fits are  furnished  without  charge. 

The  cost  of  maintaining  a  currency  falls  to  the  State. 
This  may  in  like  manner  be  defrayed  by  a  charge  for  coin- 
age, and  in  other  ways.  Closely  allied  to  this  is  the  estab- 
lishment and  maintenance  of  a  system  of  weights  and 
measures,  a  slight  but  important  and  necessary  expense. 

In  some  countries  special  codes  of  commercial  law  and 
special  commercial  tribunals  are  maintained  in  the  direct  and 
exclusive  interest  of  commerce.  Bounties  and  subsidies, 
which  we  have  already  discussed,  are,  of  course,  expenditures 
to  be  included  in  this  chapter. 

Diplomatic  and  Consular  Service. — This  is  not  wholly 
but  very  largely  a  service  in  the  interests  of  commerce.  The 
modern  State  in  its  foreign  relations  is  largely,  if  not  chiefly, 
a  social  organization  for  the  purpose  of  securing  commercial 
and  other  economic  advantages  to  its  people.  International 
disputes,  and  even  wars,  are  seldom  concerned  with  religion, 
or  national  honor,  or  claims  of  sovereigns,  or  even  race 
antipathies,  as  was  the  case  formerly.  They  are  about  eco- 
nomic advantages.  These  in  different  ways  make  up  the 
principal  duties  of  consuls  and  ambassadors. 

Government. — All  the  expenditures  we  have  been  con- 
sidering are  expenditures  by  government.  We  have  to  con- 
sider now  certain  expenditures  for  government ;  that  is, 
expenditures  for  certain  governmental  functions  too  general 
in  character  to  be  ranged  under  any  of  the  heads  we  have 
considered.  Such  are  expenditures  for  legislation  and  ad- 
ministration. In  some  countries,  notably  England,  legis- 


EXPENDITURE  FOR  COMMERCE,  DIPLOMACY,  ETC.     345 

lators  get  no  salary.  The  result  is  a  development  of  public 
spirit  on  the  part  of  wealthy  and  able  men  who,  in  England, 
serve  the  public  with  as  much  disinterestedness  as  in  any 
country  in  the  world.  On  the  other  hand,  the  system  seems 
to  prevent  poor  men  from  entering  Parliament,  though  this 
difficulty  is  partly  met  by  private  subscriptions  in  their  be- 
half. The  success  of  this  system  in  England  is  doubtless 
largely  due  to  peculiarities  of  the  people  and  the  distribution 
of  wealth.  That  country  has  many  wealthy  men,  who,  by 
reason  of  social  and  other  conditions,  are  relatively  free 
from  the  spirit  of  money-making.  In  new  countries  wealthy 
men  are  largely  successful  money-makers,  who  are  not  likely 
to  lay  aside  their  habits  of  looking  out  for  a  good  bargain  if 
they  are  not  made  to  realize  their  obligations  by  the  pay- 
ment of  a  salary.  For  this  and  other  reasons  the  new  coun- 
tries founded  politically  by  Englishmen  have  adopted  the 
principle  of  paying  legislators. 

The  amount  of  the  salary  is  a  matter  of  dispute.  Unques- 
tionably no  attempt  should  be  made  to  pay  members  of 
Congress  the  full  pecuniary  value  of  their  services.  This 
would  be  offering  a  strong  mercenary  inducement,  and 
would  probably  attract  mercenary  men.  On  the  other  hand, 
petty  and  inadequate  salaries  are  a  provocation  to  fraud, 
neither  appealing  to  the  generosity  of  the  rich  nor  satisfying 
the  necessities  of  the  poor.  It  would  seem  that  the  general 
principle  governing  the  payment  of  salaries  ought  to  apply 
here  in  full  force.  This  we  have  seen  to  be  the  standard  of 
life;  that  is,  an  adequate  provision  for  the  life  of  the  official, 
due  regard  being  had  to  the  influence  of  his  position  upon 
the  necessary  demands  of  his  establishment.  The  social  and 
moral  importance  of  keeping  families  together,  the  expense 
of  change  of  residence,  and  the  social  demands  of  life  in  an 
official  center  should  be  fully  considered  in  making  the  nec- 
essary estimate. 

The  administrative  department  includes  not  only  the  offi- 
cial head  of  the  nation,  but  that  of  various  subordinate 
officials  connected  with  this  function.  In  all  countries  such 


346  OUTLINES  OF  ECONOMICS. 

services  are  paid,  and  in  the  case  of  monarchies  very  highly 
paid.  At  the  center  of  government  are  those  ornamental 
and  yet  indispensable  functions  of  government  which  are  so 
expensive.  The  importance  of  these  functions  is  variously 
estimated  in  different  countries  and  paid  accordingly.  The 
French  Republic  pays  its  president  over  fifteen  times  as  much 
as  does  the  United  States.  No  rule  can  be  laid  down  farther 
than  that  the  nation  must  not  demand  socially  more  than  it 
pays  in  appropriations. 

Tax  Collection. — This  is  an  expenditure  of  government 
which  aggregates  a  large  amount.  We  may  say  of  this,  as 
of  every  other  expenditure  for  government,  that  it  is  not 
a  consumption  of  wealth  by  men  in  a  social  capacity  for 
the  purpose  of  conferring  direct  satisfactions,  as  is  the  case 
with  art  galleries,  schools,  etc.,  but  a  production  expenditure 
which  should  be  made  as  small  as  possible,  relatively,  to  the 
work  to  be  accomplished.  Of  course  reductions  must  be 
limited  by  efficiency  and  the  necessities  of  an  honest  service. 


EXPENDITURE  FUR  COMMERCE,  DIPLOMACY,  ETC.     347 


SUMMARY. 

1.  The  government  expenditures  for  commerce  include  the  cost  of  main- 
taining roads,  bridges,  harbors,  etc.,  the  cost  of  maintaining  a  currency, 
and  commercial  law  and  tribunals. 

2.  The  diplomatic  and  consular  service  is  primarily  an  expenditure  for 
commerce. 

3.  A  large  item  in  government  expenditure  is    for  the  maintenance  of 
legislatures  and  administration. 

4.  The  salaries  of  public  officials  should  be  measured  neither  by  the  value 
of  their  services  nor  by  their  ability  to  forego  payment,  but  by  the  require- 
ments of  living  in  official  station. 

5.  The  expense  of  tax  collection  is  an  expense  to  be  minimized  rather 
than  extended  by  the  development  of  society. 

QUESTIONS. 

1.  What  is  included  under  government  expenditures  for  commerce  ? 

2.  Should  these  expenditures  be  minimized  or  not  with  the  progress  of 
society  ? 

3.  What  is  the  chief  reason  for  the  existence  of  a  diplomatic  and  consular 
service  ?     In  what  respect  does  this  differ  from  former  conditions  ? 

4.  What  are  the  advantages  of  the  English  system  of  unpaid  legislators  ? 
its  disadvantages?    Would  it  work  equally  well  with  us?    Why? 

5.  If  legislators  are  to  be  paid  for  their  services  what  law  should  deter- 
mine the  amount  of  their  salary  ? 

6.  In  what  respect  does  the  expense  of  tax  collection  differ  from  that  of 
many  other  functions  of  government  ? 

LITERATURE. 

Bastable,  C.  F.  :  Public  Finance. 

The  principal  literature  on  the  subject  is  by  French  and  German  writers, 
and  is  therefore  not  enumerated  here. 


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