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THE LIBRARY

THE UNIVERSITY

OF CALIFORNIA

LOS ANGELES

SCHOOL OF LAW

GIFT OF

Charles Goldring

PRINCIPLES OF ECONOMICS

M/^

THE MACMILLAN COMPANY

NKW YORK • BOSTON • CHICAGO • DALLAS
ATLANTA • SAN FRANCISCO

MACMILLAN & CO., Limited

LONDON • BOMBAY • CALCUTTA
MELBOURNE

THE MACMILLAN CO. OF CANADA, Ltd.

TORONTO

PRINCIPLES OF ECONOMICS

F. W. TAUSSIG, Ph.D., Litt.D., LL.D.

HENRY LEE PR0FES80K OF ECONOMICS
IN HARVARD UNIVERSITY

VOLUME II
THIRD EDITION REVISED

THE MACMILLAN COMPANY
1923

All rights resewed

COPTBIGHT, 1911, 1915, 1921,

By the macmillan company.

Set up and electrotyped. Third edition published December, 1921=

PRIXTEl) IN THK UNITED STATES OP AMERICA

VOL. II
PAGES

3-19

CONTENTS

VOLUME II

BOOK V
THE DISTRIBUTION QF WEALTH

CHAPTER 38
Interest on Capital used in Production. The Conditions of
Demand •■••■■''

Section 1. What is meant by distribution. The meaning of the
term "capital," 3 - Sec. 2. There is no such thmg as capital dis-
tinct from capital goods, 6 - Sec. 3. The essential problem as o
interest ^lonev is not the cause of interest, nor does its quantity
affect'the rate of interest, 7 - Sec. 4. Why there is a demand for
present means; the effectiveness of the time-usmg processes o
production. Is capital productive? 9 - Sec. 5. How the marginal
effectiveness or productivity of capital determmes the rate of
return. A consumer's surplus arises from the more effective appli-
cations. Analogy to the problems of value and utility, 11 - Sec. 6.
Is there a general tendency to duninishing returns from successive
doses of capital? 14 -Sec. 7. Human direction indispensable to
successful operation of the capitalistic process. The human factor
often neglected in reasoning on this subject, 18.

CHAPTER 39
Interest, continued. The Equilibrium of Demand and Supply . 20-33
Section 1. Accumulation of present means needs an mducement,
20 — Sec 2 The gradations in the disposition to save. Cases
where the inducement needs to be sUght, 21 - Sec. 3. Cases where
a return is sought. Possibility that a lowered return will some-
times induce larger savings. More often, lowered return «hecfe
saving The conception of marginal savers, 24 — bee. 4 dia-
grams expressing the equilibrium of supply and demand. Savers
surnlus 27 — Sec. 5. The steadiness of the rate of interest m
modern times and its significance, 30 - Sec. 6. The race between
accumulation and improvement, 32.

vi CONTENTS

CHAPTER 40

VOL. II
PAGES

Interest, Further Considered ....... 34-50 ^

Section 1. Loans for consumption introduce no new principle as
to demand, but are much affected by the absence of full competi-
tion, 34 — Sec. 2. Public borrowing for wars an importan form of
such loans in modern times. Great wars and war borrowing give
rise to both economic and fiscal problems. For the problem of
interest, the economic effects are important, 37 — Sec. 3. Durable
consumer's goods, as a fqrm of investment, again introduce no new
principle, 40 — Sec. 4. No grounds for distinguishing between pro-
ducer's capital and consumer's capital, so far as interest is con-
cerned. Exchange of present for future the most general statement
of the cause of interest, 43 — Sec. 5. The mechanism of banking
and credit makes interest all-pervasive, 44 — Sec. 6. Variations in
the rate of interest in different countries and for different invest-
ments, 45 — Sec. 7. The justification and social significance of
interest, 48.

CHAPTER 41

OVERPRODtrCTION AND OVERINVESTMENT ...... 51-61

Section 1. Overproduction, in the sense of excess beyond the
possibility of use, is impossible. The extensibility of wants, 51 — •
Sec. 2. Overproduction, in the sense of production beyond the
stage of profit, is possible if investment proceeds unendingly. The
process of advances to laborers and the readjustment of production
under the supposed conditions. Check to the extreme results,
from the cessation of accumulation. The reasoning of Rodbertus
criticized, 53 — Sec. 3. A real tendency to overproduction, thru
overinvestment in the familiar industries, 58 — Sec. 4. Industries
with large plants, best managed under continuity of operation, are
tempted to overproduction or else to combination, 59 — Sec. 5.
The phenomena of crises and industrial depression are in reality
different from those of overproduction, 60.

CHAPTER 42
Rent, Agriculture, Land Tenure . . . . . . 62-82

CONTENTS vii

VOL. II
PAGES

to physical quantity of produce, not to value; a given stage of
agricultural skill assumed, 68 — Sec. 4. The stage when the ten-
dency to diminishing returns is sharp, 72 — Sec. 5. Are there
original and indestructible powers of the soil? Predatory cultiva-
tion; intensive and extensive agriculture. Inherent differences
tend to be lessened, but do not disappear, 73 — Sec. 6. Land
tenure. Cultivation by owners, each with moderate holdings, of
greatest social advantage, 77 — Sec. 7. Should the community
appropriate or retain for itself agricultural rent? 80.

CHAPTER 43

Urban Site Rent 83-97

Section 1. How rent arises on sites for retail trading, wholesale
trading, manufacturers, dwellings, 83 — Sec. 2. The principle of
diminishing returns on urban sites ; its operation less steep than for
agricultural land, 87 — Sec. 3. Site rent depends upon shrewdness
in utilization. The activity of real estate speculators, 89 — Sec. 4.
When capital is sunk irrevocably in the soil, there is difficulty in
separating rent from return on capital. How far ground rent is
identical with economic rent, 91 — Sec. 5. How far the activity of
real estate dealers and speculators is productive, 94 — Sec. 6.
Urban rent is sometimes deliberately created; is it then economic
rent? 95.

CHAPTER 44

REiiT, concluded ......... .98-112

Section 1. The rent of mines, how influenced by risk, 98 — ■
Sec. 2. Diminishing returns in mines, 100 — Sec. 3. A remining roy-
alties rent? 102 — Sec. 4. The selling price of a site is a capitalization
of its rent, 103 — Sec. 5. The problem of appropriating rent for
the public is presented most sharply by urban sites. The possibility
of leases on long term by the state; the historic 1 development of
unqualified private owners ip and of vested rights, 104 — Sec. 6.
The future increase of rent a proper object of taxation, but presents
many difficulties. Modes of levying such taxes, 108.

CHAPTER 45
Monopoly Gains - 113-121

Section 1. Absolute monopolies; industrial monopolies. Patents
and copyrights as instances of absolute monopolies; the grounds for
creating them by law, 113 — Sec. 2. "Public service" monopolies.
Increasing returns and increasing profits, 116 — Sec. 3. Combina-
tions and "Trusts " ; uncertainty as to the extent of their monopoly
power, 118 — Sec. 4. The capitalization of monopoly gains and
problems as to vested rights, 120.

viii CONTENTS

CHAPTER 46 vol. ii

PAGES

The Nature and Definition of Capital .... 122-130

Section 1. Is the distinction between interest and rent tenable,
in view of the wide extent of differential gains of a monopoly sort?
Grounds for maintaining that all returns from property of any kind
are homogeneous, 122 — Sec. 2. A different conception of "rent"
and "interest," the two being regarded as different ways of stating
the same sort of income. "Artificial " and " natural " capital. How
measure the amount of capital? 124 — Sec. 3. The important
iiuestions are on the effectiveness of competition, the existence of a
normal rate of interest, the justification of interest, 127.

CHAPTER 47

Differences of Wages. Social Stratification . . . 131-152
Section 1. Differences of wages which serve to equalize attrac-
tiveness of different occupations; domestic servants, universii-y
teachers, public employees, 131 — Sec. 2. Irregularity of employ-
ment and risk in their effect on relative wages. Expense of training,
133 — Sec. 3. Obstacles to free movement bring about real differ-
ences. Full monopoly rare, 135 — Sec. 4. Expense of education as
an obstacle to mobility, 136 — Sec. 5. Inequalities of inborn gifts
and social stratification. Uncertainty of our knowledge concerning
the influence of inborn gifts, 137 — Sec. 6. Non-competing groups,
roughly analyzed as five. The broad division between soft-handed
and hard-handed occupations, 141 — Sec. 7. Tendency to greater
mobility in modern times. The position of common laborers, 144 — ■
Sec. 8. Wliat differences in wages would persist if all choice were
free? 148 — Sec. 9. Why the wages of women are low, and wherein
the labor of women is socially advantageous, 149.

CHAPTER 48

Wages and Value 153-163

( Section 1. "Expenses of production" and "cost of production"
again considered. If there were perfect freedom of choice among
laborers, value would be governed by cost, 153 — Sec. 2. There
l)eing non-competing groups, demand (marginal utility) governs
relative wages. How this principle applies to a grade or group;
marginal indispensability, 155 — Sec. 3. Qualifications: earnings
may be so divergent as to cause seepage from on-^ group into an-
other; the standard of living may affect numbers within a group,
158 — Sec. 4. The lines of social stratification are stable; hence
changes from the existing adjustments of value are not usually
affected by them, 159 — Sec. 5. The theory of international trade

OfNTENTS IX

PAGES

brought int« harra.ny with the theary of value under U9u-cuuipet-
ing groups, IGl — Sec. 6. Anal«gies between international trade
and domestic trade, 162.

CHAPTER 4#

„ . . 164-179
r.trsiNESS Profits

Section 1. Business profits rest on the assumption of risks. The
term "profits," 164 — Sec. 2. Position of the business man as
receiver of a residual income. Irregularity and wide range of this
income, its relation to prices. Tho irregular, it is not due to chance,
IQQ _ Sec 3. The part played by inborn abiUty; that played by
opportunity, environment, training, 169 -Sec. 4. The qualities
requisite for success: imagination, judgment, courage. Mechanical
talent not so important as might be expected. Relations of the
business man to inventors. Diversity of qualities among the suc-
cessful, 170 — Sec. 5. A process of natural selection among busmes.s
men. Natural capacity tells more than in most occupations, 17::;
— Sec. 6. Motives of business activity and money-making. Social
ambition the main impulse; other motives are also at work, 175 —
Sec. 7. What changes would occur if business ability were very plen-
tiful and capacity for muscular labor very scarce, 177.

CHAPTER 50

Business Profits, continued 180-198

Section 1. Analogy between business profits and rent. A similar
analogy in other occupations. How far the element of risk vitiates
the analogy, 180 — Sec. 2. The difference in business abilities ex-
plains differences in cost of production. The conception of the
"representative firm" as settling normal expenses of production,
183 _ Sec. 3. One of the manifestations of busmess ability is in the
selection of good natural resources. In the end, an important dif-
ference between economic rent and differential business profits,
185 — Sec. 4. The connection between the return on capital and
business profits. Relations between owners and managers of
capital at different times. Modern tendency towards a separa-
tion of functions and rewards, 187 -Sec. 5. For considerable
periods, command of capital brings in a given enterprise the
probability of larger profits; but not in the long run without
business ability, 189 — Sec. 6. For industry as a whole and capital
as a whole there is a connection between interest and business
profits How thev may diverge in the end, 190 — See. 7. A view
of business profits which distinguishes them sharply from wages,
as arising solelv in a dynamic state, 192 -Sec. 8. Another
view whicli lays emphasis on risk, and distinguishes between

X CONTENTS

VOL. n

PAGES

the wages of salaried managers and the "profits" of independent
business men. The salaried manager often rewarded de facto in
proportion to "profits," 193 — Sec. 9. Legitimate and illegitimate
business profits. Their restriction within the legitimate limits de-
pends on the removal of monopoly gains and the maintenance of a
high plane of competition, 195.

CHAPTER 51

Great Fortunes 199-207

Section 1. The development of large-scale production and the
growth of numbers have been the fimdamental causes of the
growth of great fortunes, 199 — Sec. 2. The scarcity of high busi-
ness ability explains great fortunes accumulated out of business
profits, 200 — Sec. 3. Influences of a different kind are urban site
rent, the exploitation of rich natural resources, monopoly gains.
Unearned and fortuitous fortunes, 202 — Sec. 4. Unearned gains
are mingled inextricably with earned, 203 — Sec. 5. Large for-
tunes as a spur to productive activity. The building of plants and
of fortunes out of accruing profits, 205 — Sec. 6. The need of better
direction of economic and social forces, 207.

CHAPTER 52

The General Level of Wages 208-224

Section 1. The fundamental question on the general level of
wages is raised by the case of hired laborers, 208 — Sec. 2. The no-
tion that lavish expenditure creates demand for labor and makes
wages high. Consequences of investment as compared with "ex-
penditure," 209 — Sec. 3. The fallacy of "making work." Why
hired laborers universally desire that employment should be
created and dislike labor-saving appliances, 210 — Sec. 4. The
theory of the specific product of labor as determining wages, 213 —
Sec. 5. Wages depend on the discounted marginal product of labor.
Explanation of "margin" and of "discount." Advances to labor-
ers, 214 — Sec. 6. Some qualifications. (1) The current rate of
interest is assumed to be settled by time preference; otherwise there
is reasoning in a circle. (2) A broad competitive margin is assumed,
otherwise there is no settlement either of interest or of wages, 216
— Sec. 7. The mechanism of advances to laborers, the flow of real
income into their hands, the reservoir of existing supplies, the re-
placement of what is advanced, 218 — Sec. 8. With the increasing
complexity of production interest tends to be a larger part, wages
a smaller part, of the total income of society, 221 — Sec 9. The
theory of general wages, tho it seems remote from the problem of
real Ufe, is of high importance for the great social questions, 222.

CONTENTS xi

CHAPTER 53 vol. n

PAGES ^,^

PoPtriiATiON hKo THE SuppLY OF Labor .... 225-240

Section 1. The Malthusiaa theory, how far strengthened by bio-
logical science, 225 — Sec. 2. The maximum birth rate, the minimum
death rate, the consequent possibilities of multipHcation. In what
sense there is a tendency to rapid multiplication; the positive and
preventive checks, 226 — Sec. 3. The actual birth rates and death
rates of some coimtries in modern times. A Iiigh birth rate ordi-
narily entails a high death rate. Explanation of exceptions. The
situation in the United States, 230 — Sec. 4. Does a high birth rate
cause low wages, or vice versa? Interaction of causes. A limitation
of numbers not a cause, but a condition, of general prosperity and
hig'i w; ges, 236 — Sec. 5. The standard of living aflfects wages,
not directly, but thru its influence on numbers. Fallacies on this
subject, 237 — Sec. 6. Mode in which the modern decline in the
birth rate has taken place, 239.

CHAPTER 54 ^^^

Population, co tinned ........ 241-252

Section 1. Differences between social strata in birth rates, and
their relation to varying standards of living, 241 — Sec. 2. The
main cause of the general tendency to lower birth rates is social am-
bition. Its connection with private property and individualism.
Illustration from native-born and immigrants in the United States,
245 — Sec. 3. Is the preventive check being carried too far?
Eugenics and race suicide, 249.

CHAPTER 55 ^^

Inequality and its Causes. Inheritance .... 253-277
Section 1. The fact of inequality: distribution has a roughl}'
pjTamidal form. Figures indicating the distribution of income for
Prussia, for Great Britain, for London, 253 — Sec. 2. The distribu-
tion of property, as indicated by probates in Great Britain, by tax
statistics in Prussia, 257 — Sec. 3. The distribution of income in the
United States, 258 — Sec. 4. Is inequaUty becoming greater? 263
— Se ■. 5. The causes of inequaUty: differences in inborn gifts; the
maintenance of acquired advantages thru opportunity and above
all thru inheritance, 265 — Sec. 6. Inheritance to be justified as
essential f r the m int nance of capital under a system of private
property, 267 — Sec. 7. Possible limitations of inheritance, thru
taxation and in other ways, 268 — Sec. 8. Proposals for the radical
restriction of inheritance, 269 — Sec. 9. The grounds on which
private property rests. The utilitarian reasoning, 273 — Sec. 10.
The leisure clas-; its economic and moral position, 275.

References on Book V 277-278

xii CONTENTS

BOOK VI
PROBLEMS OF LABOR

CHAPTER 56 vol. ii

PAGES y/^

Tece Wages System. Strikes and the Right to Strike . . 2S 1-297 i^
Section 1. Introductory. Character of the questions in this
book: they involve the weighing of conflicting elements, and are
affected by social sympathy, 281 — Sec. 2. The wages system
necessarily involves restrictions on the individual's freedom, 283 —
Sec. 3. It has material drawbacks and spiritual drawbacks, yet
brings a net balance of gain, 284 — Sec. 4. A strike is not a mere
cessation of work, but a fighting move. It is the set-off against the
power of discharge, 287 — ■ Sec. 5. Should ths right to strike
be restricted? 290 — Sec. 6. Employee representation: its possi-
bilities and its limitations, 295.

CHAPTER 57

Labor Unions . . 298-317

Section 1. Bargaining power of laborers strengthened by unions.
Weakness of the single laborer. Immobility of labor; lack of re-
serve funds; perishabihty, 298 — Sec. 2. Monopolistic tendencies
of trade unions of skilled workers; not often of permanent impor-
tance. The open union, such as alone can develop among the less
skilled, a potent instrument for good, 301 — Sec. 3. Closed shop
or open shop? A strong prima facie case for the closed shop with
the open union, 304 — Sec. 4. The danger of a check to progress
and efficiency under the closed shop. Limitation of output; piece
work; the standard rate; labor-saving appliances: discipline, 306
— Sec. 5. A division between open shop and closed shop not unac-
ceptable. Grounds of employers' opposition often untenable. The
question of union leadership crucial, 310 — Sec. 6. The scab and
the use of violence. The tie-up, 313 — Sec. 7. The unionist move-
ment Ukely to extend, and entitled to sjrmpathy, 315.

CHAPTER 58

Labor Legislation and Labor Hours .... 318-334

Section 1. Labor legislation, like labor organization, aims to
standardize conditions of employment. Legislation on the hours
of labor for women and children the typica case. Other sorts of
restriction. Situation in the United States, 318 — Sec. 2. 'Why
legislation must supplement and support the laborers' own efforts.

CONTENTS xiii

VOL. II
PAOE3

A great moving force behind it is the gro\vth of altruism, 322 —
Sec. 3. Limitation of hou 's for men comparatively rare. Are there
grounds on principle for confining such legislation to women and
children? Constitutional questions in tho United States, 324 —
Sec. 4. The demand for an eight-hour day deserves support. In-
troduced suddenly and universally, the eight-hour day would mean
a decline in produc and in wages; introduced gradually, and jari
■passu with improvements in production, it brings unmixed gain,
326 — Sec. 5. Minimum wages introduce no new principle, but
present the problem how to deal with the unemployable, 330.

CHAPTER 59

Some Agencies for Industrial Peace ..... 335-351
Section 1. Profit sharing affects profits as the residual element.
Some modes of applying it. Immediate and deferred participation,
335 — Sec. 2. Profit sharing will not be widely apphed unless it
pays, by increasing efficiency. Uncertain connection between
profits and workmen's efficiency. Importance of the employer's
pensonalitj', 339 — -Sec. 3. Other methods of linking employee to
employer: "gainsharing" and "welfare" arrangements, 342 — Sec. 4.
The shding scale applicable where product is homogeneous. Not
in harmonj' with the general principle of emploj^er's assumption of
industrial risks, yet often helpful toward avoiding friction and dis-
pute, 343 — Sec. 5. Arbitration, private and pubhc. Not appUca-
ble where such matters as recognition of the imion or the closed shop
are in dispute; but applicable to the questions of wages and the like.
Private boards imply trade agreements and organized unions.
Public boards are usually boards of conciUation, but none the less
helpful, 344 ^ Sec. 6. Compulsory arbitration, carried to its logical
outcome, means settlement of all distribution by public authority,
and may be the entering wedge to socialism. Possibihty that it will
remain indefinitely in a half-way stage and not proceed to this out-
come, 348.

CHAPTER 60

Workmen's Insurance. Poor Laws ..... 352-371
Section 1. Irregularity of earnings and its causes, 352 — Sec. 2.
Provision against accident is feasible thru insurance. The German
system, the English, the French. The charges, tho levied on the
employer, are likely to come ultimately out of wages, 353 — Sec. 3.
Insurance against sickness no less feasible. The Friendly Societies,
the German system of compulsory insurance. The possibility of
malingering and the need of supervnsion, 3.57 — Sec. 4. Old-age

XIV CONTENTS

pensions in European countries and in Australia. Are they deter-
rents to thrift? The pecuniary difficulties not insuperable, 359 —
Sec. 5. The situation in the United States as to accidents long
chaotic; the need of reform. Rapid spread of compensation for
accident. The political difficulties in the way of this reform and
others, 362 — Sec. 6. Unemployment, tho it tends to correct
itself, is a continuing phenomenon. Difficulties of applying any
method of insurance. Possibility of supplementing trade-union
out-of-work benefits. The British National Insurance Act of 1911.
Relief works, 364 — ■ Sec. 7. Poor laws: the conflict between sym-
pathy and caution. Relief may be liberal where no danger of de-
moralization exists. For the able-bodied, it needs to be adminis-
tered with the utmost caution, 369

CHAPTER 61

Cooperation 372-384

Section 1. Cooperation attempts to dispense with the business
man. Its various forms, 372 — Sec. 2. Cooperation in retail trad-
ing, when done by the well-to-do, of no social significance. When
done by workingmen, as in Great Britain, it has larger effects.
Methods of the workingmen 's stores and causes of their success.
The movement elsewhere, 373 — Sec. 3. Credit cooperation in
Germany; its methods and results. Other sorts of societies, and
development in other countries, 378 — Sec. 4. Cooperation in
production would most affect the social structure, but has had the
least development. Causes of failure; the rarity of the business
qualities and the limitations of workingmen. The future of cooper-
ation, 381.

References on Book VI ....... . 385

BOOK VII
PROBLEMS OF ECONOMIC ORGANIZATION

CHAPTER 62

Railways 389^06

Section 1. Railways an instrument for furthering the geo-
graphical division of labor. Corollary from this that they are not
to the public interest imless they pay, 389 — Sec. 2. Economic
characteristics of railways; first, the great plant. Consequent
tendency to decreasing cost. Hence also frequent transition from

CONTENTS XV

VOL. II
PAGES

financial failure to financial success, 392 — Sec. 3. The element of
joint cost, both as to fixed charges and operating expenses. Charg-
ing what the traffic will bear; classification of freight, 395 — Sec.
4. Justification of charging what the traffic wUl bear lies in full
utilization of the railway equipment, 397 — Sec. 5. Other conse-
quences of joint cost: flexibility of rates, and difficulty of deciding
what is a reasonable rate, 399 — Sec. 6. Chaotic rates in the United
States, and concession to favored shippers, partly corrupt, partly
the result of competition, 400 — Sec. 7. "Rebates" and the
grounds for prohibiting them. Rate agreements and pools as aids
in preventing discriminations. Inconsistency of our legislation on
rebates and rate agreements, 402 — Sec. 8. In an industrially solidi-
fied and thickly populated country the principle of joint cost be-
comes less important in determining railway rates : monopoly posi-
tion of railroads more important, 404.

CHAPTER 63
Railway Problems, continued ...... 407-418

Section 1. Effects of railways on distribution. An unearned in-
crement analogous to rising rent of land, 407 — Sec. 2. Tendency
toward concentration of ownership; how promoted by American
methods of corporate organization. Overcapitalization and its con-
sequences, 409 — Sec. 3. Stock speculation, stimulated by over-
capitalization, has faciHtated acquisition of control by the "great
operators," 412 — Sec. 4. "Inside management" and its evils, 414

— Sec. 5. What benefits have come from private ownership in the
United States, and how far railway fortunes have been earned, 415

— Sec. 6. Increasing tendency to monopoly, and need of public
control over rates, 417.

CHAPTER 64
Public Ownership and Public Control .... 419-440

Section 1. What are "pubUc service" industries? The legal con-
ception less important than the economic; the essential earmark
is monopoly, 419 — Sec. 2. The spur of profit necessary for im-
provements in the arts; hence a preliminary stage of private
ownership is inevitable, 423 — Sec. 3. The question of vested rights
when public ownership displaces private. "Franchises" should
always be for limited terms. Purchase at market value, 425 — Sec.
4. Are there criteria marking some industries as suitable for public
management? The tests suggested by Jevons; distrust of public

xvi CONTENTS

VOL. II
PAGE3

officials underlies them all, 427 — Sec. 5. To secure trustworthy
and eJBcient public officials is partly a problem of political machin-
ery. Some difficulties of public management, as regards the em-
ployment of labor and the maintenance of progress, 429 — Sec. 6.
The fundamental requisite in a democracy is a generally high level
of character and intelligence. In what way corruption is connected
with monopoly industries, 431 — Sec. 7. The future of democracy
depends on its success in dealing with these industries. Experiments
in ownership to be welcomed, especially in municipalities. The
prejudices of the business class on this matter, 433 — Sec. 8. Pub-
lic regulation the only alternative to public ownership. The two
types of regulating boards. The essential object is to limit prices
and profits. The elevation of the standards of private manage-
ment, 435 — Sec. 9. The Transportation Act of 1920. Provisions
on valuation and on rates. A half-way step toward public owner-
ship, which is likely to come in the end, 437.

CHAPTER 65

Combinations and Trusts ....... 441-463

Section 1. Combinations in restraint of trade and the common
law rule making them void. Surprising effectiveness of this rule,
441 — Sec. 2. Modern forms of combination in the United States:
the "trust," the holding company, the unified corporation. The
Kartell in Germany. The fact of monopoly, not the form of combi-
nation, the important thing, 443 — Sec. 3. The permanency of
combination as affected (1) by the economies of large-scale manage-
ment; (2) the devices of "unfair" competition — railway favors,
discriminations in prices, factor's agreements, advertising devices.
The effective defense against "unfair" competition is not from leg-
islation so much as from large-scale competition, 447 — Sec. 4. Will
large-scale competition persist? The pressure from constant ac-
cumulation of fresh capital. Potential competition, and the pos-
sible emergence of far-sighted management tinctured by a sense of
public responsibility, 452 — Sec. 5. The possible public advan-
tages of combination lie in the mitigation of industrial fluctuations.
The supposed ruinous effect of competition to be judged from this
point of view, 455 — • Sec. 6. The legislative problems. Federal regu-
lation called for on publicity, capitalization, eventually perhaps on
profits and prices, 458 — Sec. 7. The earmarks of monopoly: size,
profits, discriminating prices, 460 — Sec. 8. Legislation in the
United States. The act of 1890 and its enforcement. The acts of
1914. The Federal Trade Commission, 461 — Sec. 9. Economic
problems have outrun poHtical capacity for deahng with them, 463.

CONTENTS xvu

CHAPTER 66

464-483
Socialism .■•■•■

Section 1. Proposals for large-scale socialism have superseded
those for isolated communism. The essence of socialism is economic
transformation: changes in reUgion, the family pohtical mstitu-
tions, are not essential to its program. Nor is violen change essen-
tial 464 -Sec. 2. Land and capital to be in public hands; not
necessarily public property in every instance. The peculiar prob-
lem as to agricultural land. Wages to be the on^j. form of income^
Exchange and money in the socialist state, 467 -Sec 3. Guild
socialism; under large-scale industry, it leaves the problems essen-
tially the same, 470 - Sec. 4. Three conceivable principles of dis-
tribution: need, sacrifice, efficiency, 474 - Sec. 5. How far public
ownership, as adopted in present society, is socialistic; how far
labor legislation and the like are so, 478 - Sec. 6. Some current
objections to socialism are of little weight; for examp e that the
huge organization is impracticable, that goods could not be valued
that capital could not be accumulated. Would freedom disappear?
480.

CHAPTER 67

. , . . 484-501

Socialism, continued . • •■ • •

Section 1. The family and the problem of population under
socialism The Malthusian difficulty a real one, 484 — Sec. 2.
Vigor and efficiency among the rank and file. The absence of the
power of discharge. The irksomeness of labor, 486 - Sec S.
Leadership and the ways of securing it. The love of distinction;
can it be satisfied by the laurel wreath? Mixture o higher and
lower aspects in the love of distinction. The possible growth of
altruism 488 — Sec. 4. The selection of leaders m a socialist state.
Genius and originality likely to be deadened 490 - Sec. 5. Mate-
rial progress thru the improvement of capital hkely to be checked.
Is a change in distribution alone now needed; can advance in pro-
duction be neglected? 492 - Sec. 6. The problem is essentially one
of motive and character. Human nature and ideals of emulation
and distinction are subject to change. Tho socialism and current
movements of reform rest on the same force, the difference m degree
is vast 493 — Sec 7. Is socialism to be the ultimate outcome ot
social evolution? The materialistic interpretation of history and
its prophecies. The certainty that change will be gradual and the
impossibility of foreseeing how far it will finally go, 497.

,,TT . 501-502

References on Book Vli

xviii CONTENTS

BOOK VIII
TAXATION

CHAPTER 68 vol. n

PAGES y

Pkinciples Underlying Taxation 505-518 l/^

Section 1. The essential nature of taxation: no quid pro quo.
Taxes a sign of wider consciousness of common interest, 505 —
Sec. 2. Proportional or progressive taxation? This question of jus-
tice inextricably connected with the general question of social
justice and the righteousness of inequalities in wealth. "Ability"
and "equality of sacrifice" are inconclusive principles, 507 —
Sec. 3. Should property incomes be taxed at higher rates than those
from labor? 512 — Sec. 4. Can taxes be made higher according to
the source or nature of the income? 513 — Sec. 5. Progressive taxa-
tion of interest from capital, on the principle of taxing saver's rent,
516.

CHAPTER 69 .

Income and Inheritance Taxes ...... 519-538 "^

Section 1. Income taxes present the problem of progression
sharply, yet should be considered in connection with other taxes,
519 — Sec. 2. Income taxes limited as a rule to the well-to-do
classes. The exemption of small incomes rests partly on social
grounds, partly on administrative expediency, 520 — Sec. 3. The
British income tax and the device of stoppage at the source. The
system not consistent with progression; it has undergone steady
modification, 522 — Sec. 4. Progressive taxation on the entire
income. Declaration necessary. Conditions for the effective ad-
ministration of such a tax. Income taxes peculiarly adapted for
readjustment from year to year to fit fiscal needs, 527 — Sec. 5.
The income tax question in the United States. The system devel-
oped since the Constitutional amendment of 1913, 529 — Sec. 6.
Inheritance taxes are comparatively easy of enforcement and lend
themselves easily to progression. The trend toward progression,
532 — Sec. 7. A high rate of progression in inheritance taxation
would check accumulation. If appUed new ways of ensuring the
supply of capital must be found, 535.

CHAPTER 70

Taxes on Land and Buildings 539-551

CONTENTS xix

ifications and limitations of this proposition, 542 ■ — Sec. 3. Effects
of taxes on real property — land and buildings combined, 544 —
Sec. 4. In the long run, it makes no difference in the incidence of
such taxes whether they are first imposed on owner or tenant; but
for short periods it does. Similarly, it is in the main of no concern
whether the assessment be on rental or on capital value; tho in
some respects the two methods bring different results, 546 —
Sec. 5. Concealed taxation of workingmen thru taxes on their dwell-
ings, 548 — Sec. 6. Taxes on real property should be primarily
local taxes, 549,

CPAPTER 71

Taxes on Commodities 552-562

Section 1. Direct and indirect taxes. Various ways in which
"indirect" taxes are levied on commodities, 552 — Sec. 2. In the
simplest case, of a competitive commodity produced under constant
returns, a tax tends to be shifted to consumers. Explanation and
qualification of this principle, 553 — Sec. 3. Complexities where the
commodity is produced imder increasing or diminishing returns;
where there is monopoly. Cautions to be observed in the appUca-
tion of theoretic reasoning on these topics, 555 — Sec. 4. Taxes
on imports present no peculiarities, except as they bring a rival un-
taxed supply and thus raise the questions concerning protection, 558
— Sec. 5. Taxes on commodities are httle noticed by consumers.
They are commonly on articles of large consumption, and regressive
in their effects. A large and varied list of articles is most easUy
reached by customs duties, 559.

References on Book VIII 562

BOOK V
THE DISTRIBUTION OF WEALTH

CHAPTER 38

Interest on Capital used in Production. The Conditions

OF Demand

Section 1. What is meant by distribution. The meaning of the term "cap-
ital," 3 — Sec. 2. There is no such thing as capital distinct from
capital goods, 6 — Sec. 3. The essential problem as to interest.
Money is not the cause of interest, nor does its quantity affect the rate of
interest, 7. — Sec. 4. Why there is a demand for present means; the
effectiveness of the time-using processes of production. Is capital pro-
ductive? 9 — Sec. 5. How the marginal effectiveness or productivity
of capital determines the rate of return. A consumer's surplus arises
from the more effective appHcations. Analogy to the problems of value
and utihty, 11 — Sec. 6. Is there a general tendency to diminishing
returns from successive doses of capital? 14 — Sec. 7. Human direc-
tion indispensable to successful operation of the capitahstic process. The
human factor often neglected in reasoning on this subject, 18.

§ 1. The word "distribution," in the sense commonly attached to
it in economic writings, refers to the apportionment of the in-
come of a community among its several classes and members.^
^^^lereve^ industrial ~3evelopment is^" in any degree"ad\^1nced^
there are owners of capital and of land; there are persons using
land and capital who yet are not the owners — tenants and bor-
rowers; there are all sorts of workers, ranging in earnings and in
social position from the poorly paid day laborer to the prosperous
professional man and salaried manager. A\Tiat share goes to a
person who simply possesses capital or land, and what share goes
to an individual for his labor, of whatever sort — these are
among the central problems of distribution. A common division
of the subject is into four heads, corresponding to four groups in
the communit}' whose income is supposed to be governed by dif-

^ The word obviously is used in quite a different sense when we speak of the
"distribution" of commodities thru wholesale and retail dealers until they reach
the hands of consumers — the more common meaning in business parlance.

4 THE DISTRIBUTION OF WEALTH [38-5 1

ferent causes: capitalists, landowners, laborers, and finally, buSi-
ness mentor .acti ve managers of industrial affairs. The capitalists
are said to receive interest, the landowners rent, the laborers
wages, and the business men profits or earnings of management.
We need not at present consider how far this classification is sat-
isfactory; it suffices to indicate the nature of the new subject on
which we now enter.

Neither is it necessary to explain in advance why one or an-
other of these subjects should be selected for first consideration.
They are closely connected, and no full understanding of any one
can be had until the others also have been examined. We shall
begin by considering interest — that share which goes to the
owner of capital.

It has already been explained * that capital results from saving
and investment. It has been explained, too, that investment is
closely connected with the successive division of labor — with
the series of stages thru which production proceeds and with the
factor of time in the organization of production. It has been in-
timated, further, that the special form which investment takes in
modern communities — the hiring of laborers by a separate body
of capitalists — is a consequence, and indeed perhaps the most
important single consequence, of existing inequality in the distri-
bution of wealth. All these propositions bear on the reasoning
which follows on the subject of capital and interest, and in turn
are illustrated and further explained by what follows.

First, what do we mean by the "capital" on which interest is
obtained? It is best to begin by still using the term in the sense
of producers' capital — concrete tools made by man and used
for the production of consumers' goods. Such are factories, ware-
houses, raw materials and goods in dealers' hands, railways and
steamships, agricultural implements. For the present we shall
set aside consumers' wealth, such as dwellings and household fur-
niture. Land and like agents provided by nature without appli-
cation of labor may also be excluded from the discussion of capi-
tal. In order to break up the complex problem into its several

' See Chapter 5, §§ 4r-6.

38-§l] CAPITAL USED IN PRODUCTION 5

parts, we shall proceed piece by piece. Producers' capital, or pro-
ducers' goods, are what we shall begin with.

Some distinctions and some questions of terminology call for
further preliminary consideration.

An individual usually thinks so much of his property to
be capital as yields him an income; but there i^ an obvious
distinction between that which is capital for the community
and that which, in this usual sense, is "capital" to the indi-
vidual.

Stocks, bonds, and securities yield an income to the owner, and
are regarded by him as part of his capital. In themselves these
are simply evidences of ownership or of indebtedness. A stock
certificate states that the holder has certain fractions of owner-
ship in a given concrete thing or set of things. A bond is a mere
promise to pay. Bonds are commonly issued as the result of op-
erations of saving and investingjyliich have to do with the mak-
ing of capital. But, as in the case of government borrowing for
war expenditure, they may be the result of operations which are
quite wasteful. Tho capital to the individual, they may or may
not signify the creation or the existence of real capital.

Consumer's wealth is not commonly regarded by an individual
as part of his capital. A factory; a stock of materials or goods
used in business operations; money on hand or in bank, not in the
nature of spare cash for current expenses, but a fund or reserve
for business purposes — such things he thinks of as capital.
Household furniture, clothing, horses and carriages, he does not
so reckon, since these yield him no income. Possibly a dwelling,
tho occupied by the owner and yielding no direct income, would
still be regarded by him as part of his capital; for he might re-
flect that, if he did not own it, he would have to hire one at a
rental, and hence might conclude that his own was equivalent to
income-yielding property. Dwellings not occupied by the owner,
but let to tenants, would unquestionably be regarded as capital.

The term "capital," like others imported from everyday speech,
constantly used in economics — such as profits, wages, rent,
money, taxes — has varying connotations and associations,

6 THE DISTRIBUTION OF WEALTH [38- § 2

Every person who writes or thinks on economics will find himself
attaching to any one of these words sometimes the meaning which
it has in ordinary usage, or one of the meanings, and sometimes
the more exact sense which he has assigned to it for the purposes
of rigorous analysis. Usually the context of a given passage will
show in what way it is used. -Ja. .spgaking of the capital of a
bank, for example, we mean obviously the capital reckoned in'"
terms of money; and so in speaking of the capital and surplus, the
income account and capital account, of a business or corporation.
Sometimes, it is true, ambiguity still slips in; the most careful
writer may be tripped up in his exposition and even in his own
thinking by the absence of an accepted scientific terminology.
In the following pages and in general thruout this book, the en-
deavor is made to denote by "capital" the concrete things or
capital goods which constitute the material equipment of the
community. We shall have in mind real things, not rights to
things; and we shall have in mind producers' capital — those
goods which make up the apparatus of production.

§2. Some writers have distinguished between "capital" and
"capital goods." By the latter term they mean the concrete ap-
paratus of production — just that to which, in the present dis-
cussion, the single word "capital" is affixed. But by the word
"capital" alone these writers mean the value of the concrete ap-
paratus; and they sometimes speak as if there were a sort of dis-
tillation or essence of capital, distinct from the tangible capital
goods in which it is embodied.

It is often convenient to measure and record capital in terms of
value and price — as so much money. In that way alone can the
various constituent elements be reduced to a common denomi-
nator. An individual usually states his capital as being so much
in money value. His capital obviously consists, not of the stated
sum of money, but of factories, machines, buildings, merchandise,
stocks and bonds, if you please — the various things which make
up an individual's " capital." He simply measures it in terms of
the price for which the whole would sell. Similarly, we can
reckon the community's capital in terms of the price for which

38-§3] CAPITAL USED IN PRODUCTION 7

the whole would sell. If the total prices, at current rates, of the
various factories, railways, ships, machinery, tools, materials,
goods in stock, were added together, the sum would give an idea of
how much capital the community possesses. It would give a
very imperfect idea. Statistics of this sort, occasionally collected
by public officials for census purposes, are in many ways mis-
leading. Yet if we wish to measure total capital or total wealth
at all, we can proceed only in this unsatisfactory way. Tho some
forms of capital can be measured in other terms — machinery,
for example, in terms of horse-power, or textile mills in terms of
spindles and looms — the only measurable element common to.--^
all forms is thaTthey^Eave value^and^riceT^and the only way of
reaching a quantitative statement as to the whole is in terms of
value and price. But it is not to be supposed that there is any
such thing as capital distinct from the capital goods. . The only
actual and existent thing is the concrete apparatus of production.
Its value or price is merely a relation to other things, a mode of
measuring it,

§3. Having disposed of these questions of terminology, we
may proceed to the substance of the matter in hand.

The essential problem concerning interest can be stated in
simple terms. Why should an individual who borrows from an-
other a given quantity of commodities — represented, in any
except primitive communities, by a given quantity of money —
engage to return, after a fixed time has elapsed, not only what he
has borrowed but something in addition? That the amount bor-
rowed should be returned, seems sufficiently easy of explanation.
But why can the lender get the premium also? That premium,
as is familiar enough, usually is expressed in terms of a percentage
paid each year. The borrower engages to pay back not only the
principal, but five per cent or thereabouts in addition for each
year that elapses, and a proportional percentage for each fraction
of a year. To ascertain why this additional percentage is paid,
is to solve the problem of interest.

The fact that the transaction in modern communities takes the
form of a loan of money and a repayment of money with inter-

8 THE DISTRIBUTION OF WEALTH [38-§3

est, has often led to the notion that it is pecuHarly connected
with money and arises from the nature and functions of money.
Usually this notion takes the form of reasoning in a circle. People
are familiar with the everyday practise of lending at interest;
they say that money is "worth" so much, meaning that it can be
lent at some annual rate; and they argue that the borrower must
pay this rate in order to get the money. What more simple? Or
they say vaguely, with Shylock, that money "breeds" interest;
which again is a statement of the problem, no solution. A little
reflection shows that, here as elsewhere, money serves simply as
the medium of exchaiige. What the borrower wants is not the
money itself, but that command over commodities and services
which money gives. He wishes to buy commodities, either for
his own immediate use or for use in operations of production ; and
in the latter case (the one to which the present discussion is more
immediately directed) he wishes to procure machines, materials,
and the means for paying laborers whom he hires. And when he
returns the money, plus the premium, he gives back to the lender
the same command over commodities which he had received, and
something in addition; he gives back more commodities than had
been lent him. If there were no such thing as money, the same
sort of transactions would take place; precisely as, given the divi-
sion of labor, the exchange of different sorts of commodities would
take place under barter in fundamentally the same way as with
the use of a medium of exchange. Under barter both transac-
tions obviously would be managed with much greater diflBculty.
The medium of exchange makes borrowing easier, as it makes ex-
change easier; and it makes possible much borrowing and much
exchanging which otherwise would be impracticable. The ex-
planation, however, of both sets of phenomena is not to be found
in the use of money, but in the nature of the operations which it
facilitates.

We may brush aside not only the notion that interest arises
from the use of money, but that the rate of interest depends on
the quantity of money. More money makes higher prices, not
lower interest. The connection which does exist between the

38-§4] CAPITAL USED IN PRODUCTION 9

rate of bank discount and the quantity of money held by banks
has been sufficiently explained.^ This bank rate oscillates abo\'e
and below what may be called the true rate of interest — the re-
turn on steady investments. In the exposition which follows, this
essential rate of interest will be had in mind.

§4. Interest, then, appears as the result of an act of exchange
by which a quantity of money (or commodities) now in hand, is
given for a greater quantity of money (or commodities) to be re-
turned in the future. The excess or surplus thus emerging seems
to be got for nothing; there is no obvious equivalent for the pre-
mium or interest. Yet an exchange of something for nothing
going on year after year, decade after decade, century after cen-
tury, is not to be expected. Two questions present themselves:
on the one hand, why is the borrower, whom we may regard 33
the purchaser, willing to pay this excess; on the other hand, why
is the lender, _ or seller,^ able to secure it for hirnself? In other
words, what are the conditions of demand, represented by the
borrowers, and what the conditions of supply, represented by the
sellers? These we shall consider, in the order stated, in the present
and the following chapter. The conditions of demand we shall
analyze first with reference to those borrowers who are engaged
in operations of production; since we are considering first the case
of interest derived from producers' capital.

Some indication of the conditions of demand has already been
given. In a previous chapter 2 the nature and functions of capi-
tal were described. It was pointed out that the use of capital
means production spread over time. Production with capital has
been aptly described, in Bohm-Bawerk's phrase, as indirect or
roundabout production. Labor is first applied to making tools,
collecting materials, perfecting means of communication; finally,
at the close of preparatory steps which may be long and arduous,
the enjoyable product emerges^and emerges .„m„,much greater
abundance than if labor had been applied directly. The mine,
the railway, the steamship, the iron works, the factory, the ware-

> Chapter 25, especially § 2.
«See Chapter 5, §§1-3.

10 THE DISTRIBUTION OF WEALTH [38-§4

house, the wholesale and retail store, all stand for a prolonged
and time-requiring process of production.

Further, production in the advanced communities of modern
times is "capitalistic" in another sense: there is a class, separate
in the main, of capitalists. The long-maintained application of
labor in successive steps is possible only if at the outset there has
been a surplus — if there has been saving and accumulation in
some form. The persons who do the saving and possess the sur-
plus are commonly, tho not necessarily, a different set from those
who do the labor. They hire the laborers in the various stages of
the productive operations. The creation of capital and the emer-
gence of interest as a distinct element in distribution are alike the
consequences of the double process of surpluses saved and of labor
applied in roundabout ways.

We have now to note more explicitly that this process means
an increase in the productiveness of labor. The great modern
flour mill is more efficient than the modest grist mill of former
times. Per unit of labor applied, more is accomplished. To
make an accurate comparison of labor product between two such
cases would call for intricate computation. On the one hand, the
modern mill stands for much more of preparatory labor. On the
other hand, it is usually more durable and the labor applied to
making it continues to play its part thru a long period, until the
mill is finally worn out and discarded. The later labor in the
series — that done by the current workers in the modern flour
mill, who turn out their thousands of barrels a day — seems
much more effective than that of the old-fashioned miller, because
we do not ordinarily think of the preliminary labor embodied in
the plant as being engaged in milling. That even so the efficiency
of all the labor engaged, of earlier as well as of later date, is
greater, is shown by the simple comparison of prices: flour is
vastly cheaper (that is, the excess in the price of flour over that
of grain) than in former days. So in the railway: there has been
an enormous application of capital — that is, of previous labor —
with an outcome of transportation rates so low as to prove that,
taking account of all the labor of construction, maintenance, and

38-§5] CAPITAL USED IN PRODUCTION 11

operation, its efficiency is immensely greater than that of the sim-
pler instruments of pack horse and wagon.

This consequence has sometimes been stated by saying that
capital is productive; a phrase which must be used with care.
The strictly accurate statement is that labor applied in some
ways is more productive than labor applied in other ways. Tools
and machinery, buildings and materials are themselves made by
labor, and represent an internfediate~stage m the application of
labor. Capital as such is not an independent factor in production,
and there is no separate produHTvene^s^of capital. "\^Tien, in the
following pages, the productivity of capital is spoken of, the lan-
guage must be taken as elliptic, expressing concisely the result of
the capitalistic application of labor.

All this analysis of the relation of labor to capital and to sav-
ings leads, again, to the proposition that all the operations of
capitalists resolve themselves into a succession of advances to
laborers.^ Some persons have a surplus, and set it aside for in-
vestment — ^^ey arethe capitalists pure and simple. Still other
persons borrow this surplus (very likely using also available means
of their own) and hire laborers to make tools and materials, to
carry on all the stages of production, and so produce in the end
more consumable commodities than have been turned over to the
laborers. The laborers as a whole produce more than they receive.
Those who borrow and then hire the laborers can afford to pay
back more than the}^ have borrowed. This is the process by which
interest on capital used in production comes into existence.

§ 5. Let it be supposed now that at any given time thecapilai-
istic ways of production — the applications of tools, machinery,
materials, and the like — have been so settled and established as
to become familiar to all. Let it be supposed also that they are
equally available for all; that no one has a monopoly of any par-
ticular form; that all who wish to use them are in unfettered com-
petition with each other. No borrower, in getting control of any
particular kind of capital, will then be able to secure a greater ad-
vantage than any other from the use of savings. Competition
* See Chapter 6, §5.

12 THE DISTRIBUTION OF WEALTH l38-§5

will bring the return in all channels of investment to the same
level. What will determine that miiform level ?

All the constituent parts of capital, tho they will yield the same
return to those applying them, will not necessarily affect to the
same degree the productiveness of labor. Some may be, and al-
most surely will be, more helpful in production than others.
Imagine that a community, once in possession of a stock of tools
and appliances, were compelled to part, by successive steps, with
installments of this capital. Clearly it would first relinquish those
parts which contributed least to the productiveness of labor, and
then, as more and more had to be given up, would relinquish
others in the inverse order of serviceableness. It would reserve
to the very last those constituents of capital — that is, those
means of roundabout production — which added most to the out-
put. These means — the last to be given up under existing con-
ditions, the first to be used — would probably be, on the one
hand, such as were essential for the agricultural processes which,
in the temperate climate, involve seasonal operations — seed
and farming tools, and about a year's surplus of food; and, on the
other hand, the metallurgical apparatus which yields iron, the
prime requisite for almost all tools. These, the most effective
forms of capital, have not necessarily been the first historically.
The progress of invention may have brought them in at a later
date than others of less serviceableness. But given various ap-
pliances that have come to exist side by side, some will be more
effective than others, and in case of inevitable curtailment would
be the longest retained.

Under these conditions the gain, or premium, or interest, which
the owners of capital will secure, will be determined by the least
productive use of capital; or, to be quite accurate in language,
by the addition to the ultimate product of labor which results
from the least effective phase of the roundabout or capital-using
process. Those who use capital in ways more effective than the
least cannot retain the superior gain for themselves. Since all
who have capital at command can turn to these more effective
ways, competition will prevent any one set of persons from secur-

38- §5] CAPITAL USED IN PRODUCTION Ic-

ing especially high gains from them. It is the efTectiveness of the
last installment of capital (last in the order of productiveness)
that determines the rate of gain for all capital. Or, to put the
same proposition in other words, the return to capital depends on
its marginal productivity. "Productiveness" and "productiv-
ity" are used, to repeat, in the elliptic sense already explained.

It may be asked, Does the productiveness or serviceableness of
all forms of capital descend to that of the marginal forms? An
equalization of the return to owners of capital takes place; does
an equalization of productivity also take place? Not necessarily.
The outcome is like that which we have found, when discussing
the principles of value, as to the utility and the price of the several
constituents in the supply of an enjoyable commodity.* Tho all
the units of a supply sell in the market at the same price, not all
have the same utility. There is such a thing as consumer's sur-
plus. Similarly, tho the return to the owners of all the constitu-
ents of capital is under free competition the same, the contribu-
tion from all the constituents to the community's well-being is
not the same. Some remain more serviceable than others. And
the difference in serviceableness has the same consequence as in
the case of the utilities from enjoyable goods — it affects con-
sumer's surplus. The more, effective uses of capital lead in espe-
cial degree to greater abundance of commodities, to another pro-
vision of some sorts of utilities, and so to wider satisfaction of
wants in the community at large.

A similar principle to that which underlies the theory of value
thus underlies the theory of capital. Marginal vendibility deter-
mines the current value of commodities; marginal productivity
determines the current rate of interest. There are utilities in
goods (and services) greater than at the margin. There are con-
tributions from different forms of capital greater than at the mar-
gin. These surpluses the individual owner cannot keep; the com-
munity at large enjoys them in the form of consumer's surplus.^

^ See Chapter 9, especially §§ 3-6.

^ Compare the pregnant passage in Jevons, Theory of Political Economy, p. 277.
A contrary view is implied in Clark, Distribution of Wealth, Chapter XXI.

14 THE DISTRIBUTION OF WEALTH [38- § 6

And the same sort of difficulty which we found in measuring the
consumer's surplus derived from goods would appear if we en-
deavored to measure the same sort of surplus derived from some
of the constituents of capital. What constituents of capital would
be longest retained and how great the effectiveness of this most
precious remnant would be, we cannot possibly gauge. We can
only rest assured that differences in the degree of productiveness
there are, and that society as a whole profits greatly thru secur-
ing all forms of its capital at the same rate that it pays for the
least advantageous forms.

§ 6, Some of the most acute economists of our day ^ have
stated this part of the theory of capital and interest in different
terms, tho with a conclusion not in essentials very divergent.
Briefly, their view is that by a resort to more and more capital-
istic or roundabout ways of production, the output per unit of
labor can be indefinitely increased. But this increase does not
take place continuously at the same pace. There is a tendency to
diminishing gain, or diminishing return; a tendency to a decline
in the rate of increase in production. Add more tools and appli-
ances — that is, do more and more labor of preparation, make your
(total process of production more prolonged and elaborate — and
you will always get a larger final output. But the increase in the
productiveness of labor, great in the first stages of this capital-
istic way of applying it, becomes less in the later stages. There
is believed to be no limit to the heightened effectiveness of labor
due to marshalling it over time and elaborating machinery and
materials more and more. The obstacle is like that in pulling a
stout rubber band: it can always be stretched a bit more, but
each additional application of force means a lessened effect.

In this view, it will be seen, differences in productivity and
marginal productivity appear not only on taking a cross-section
of industry at a given moment, but in the development of industry
over the course of time. The tendency to a diminishing gain in
efficiency may indeed be counteracted by inventions and improve-
ments. But in the absence of such progress, the marginal increase

* For example, Professora Bohm-Bawerk, Clark, and Carver.

38-§6] CAPITAL USED IN PRODUCTION 15

of gain tends to sink, and so also the rate of return on capital;
and it sinks gradually and with some degree of regularity.

It would follow as a corollary that the application of capital
can be increased indefinitely without bringing a cessation of re-
turn in the way of interest to the owner of capital. Additional
installments could always be used to some advantage; there would
always be some marginal productivity. Interest, in other words,
would persist indefinitely, notwithstanding the utmost growth of
accumulation. Whereas in a more skeptical view the indefinite
increase of savings and of capital may cause the point of satiety
to be reached. Unending increase in the means for applying
preparatory labor may bring difficulty, nay impossibility, in using
the savings to advantage; and then, so far as the forces of de-
mand determine interest, it will be brought down to nil.

Like other problems bearing on the distribution of wealth, this
must be confessed to be unsettled. To enter on a full discussion
of the trains of reasoning involved, would pass the compass of
the present book. I will present concisely my reasons for hesi'
tating to accept a general principle of diminishing returns in the
applications of capital.

The increase of tools and instruments may be supposed to take
place in two ways: either by the addition of more tools of the
sort already in use, or by the addition of new kinds of tools. Mere
duplication of familiar tools would seem to promise little or noth-
ing in the way of greater productiveness. Twice as many saws or
planes for each carpenter, twice as many looms for each weaver,
twice as many locomotives for each engineer — such a proceed-
ing does not mean that more will be accomplished by the carpen-
ters and weavers and engineers. It means an embarrassment of
riches. Of the complicated machinery of a great factory this
would seem to be true also. To run this machinery, a certain
staff of operatives is required, adjusted to it by nice experiment
and calculation. Duplicate the whole outfit, and there will be no
one to take charge of it. The staff can utilize no more than is al-
ready on hand.

More difficult is the problem as to the second way in which the

16 THE DISTRIBUTION OF WEALTH [38-§ 6"

additions to capital may be supposed to take place. Here it is
assumed that there are not more tools of the same kind, but tools
of a more elaborate and complex kind. With greater savings and
a greater possibility of applying labor in advance, capital takes
by a quasi-automatic process a different form : not two saws, but
one larger and better saw; not two locomotives, but one heavier
and more powerful. The mere fact of greater present resources
available for investment causes the roundabout operations to be
extended, the time of the whole process to be prolonged. Plant
becomes larger, machinery more complex and more nearly auto-
matic, materials are heaped up in more varied supply. Then
product ultimately becomes greater; but in the rate of increase
there is supposed to be a tendency to diminution. ^

It is the quasi-automatic or predictable character of this process
of elaboration that seems to me doubtful. The more "capital-
istic" application of labor does not necessarily bring an increase
in efficiency. Where it does bring such an increase, the more pro-
longed preparation may be effective at the same rate or at an in-
creasing rate or at a decreasing rate. Thej)utcome depends on the
progress of invention, concerning which no rule can be laid down. _

It is true that during the period since the Industrial Revolu-
tion, the progress of the arts has been precisely in the direction
of making appliances which require time and labor and which
greatly increase the eventual productiveness of labor. Nor is
there any indication that progress of this kind will cease. The
history of the last few generations, and the prospects for the next
few, support the proposition that the increase of savings and of
capital has brought and will bring greater productiveness of labor.
But this has been due and will continue to be due to a host of
projectors and inventors, to a succession of steps each one of
which is at the outset more or less doubtful. How great such
progress will be, and how long it will continue, cannot be pre-
dicted. The possibility of an indefinite use of savings and of an
indefinitely increasing effectiveness of capital is not a tendency
inherent in industry, but a fact of comparatively short experience
in the modern world.

38-§6] CAPITAL USED IN PRODUCTION 17

To put the same problem in another way: the roundabout or
capitaHstic process may be supposed to adjust itself to the supply
of present means (savings); or the supply of present means may
be supposed to adjust itself to the roundabout process. The first
is the view of those who maintain the quasi-automatic transfor-
mation of capital as it increases, and the tendency to diminishing
returns as it is transformed into more complex shapes. The sec-
ond seems to me the view more in accord with historical fact.
The progress of invention has taken the direction of more elabo-
rate and complex capital; hence there has been the possibilitj^ of
using a larger and larger volume of savings in productive ways.
The supply of savings, as will appear in the next chapter, is highly
flexible. It has taken advantage of all available opportunities for
investment and will contmue to do so; it has enabled factories,
machinery, railways, steamships, electric appliances, to be made
as fast as inventors have shown the way to the effective use of
these forms of capital. It is true that in this matter, as in so
many others dealt with by the economist, there has been an inter-
action of causes; none the less it is more nearly true to say that
the progress of the arts has made possible the vast investment of
savings than that the great volume of savings has brought about
the progress of the arts.

But the differences in opinion on this point do not affect the
main conclusion stated above — that, at any given-periodj the
rate of return oa capital depends on the gain in p^O(hlcti^'encss
fesuTting from tlie least eii'ectix'e part df tlie capital. So far as
this proposition is eoneerne 1, there seems to be substantial agree-
ment among modern economists. Whether or no it is believed
that there is a really separate productivity of the capital as dis-
tinct from the labor, and whether or no it is believed that the
differences in the productivity of capital show themselves thru a
process of diminishing returns, it seems to be agreed that'the
factor which determines the rate of interest on capital used for
production (so far as it is dependent on demand) is the gain in
efficiency or output accruing with the last or marginal installment
of capitah ■ — -'^

18 THE DISTRIBUTION OF WEALTH [3^§7

§7. It has been remarked in the preceding section that there
is no necessary connection between the amount of capital and its
productivity. Account must be taken of the march of invention,
of the irregular course of improvements in the arts. This element
of irregularity is connected with the human factor, too much
neglected in the traditional discussion of interest on capital.

Each and every use of abundant present resources for the pur-
pose of elaborate equipment means that some one must plan it
and manage it. Elsewhere the Utopian character of many expec-
tations about large-scale production has been dwelt on,^ — the
notion, for example, that doubling of the size of establishments
of itself brings greater effectiveness. There must be men behind
the guns. Not the mere making or mere enlargement of plant
brings increase of return, but the choice of the best ways of mak-
ing and enlarging it. Now, in the modern organization of indus-
try, the persons who direct the capitalistic processes and those
who provide the present means needed for their expansion are
not the same. The acting managers are indeed themselves savers
and owners of capital; associated with them, yet in the main sep-
arate, is the great class of inert savers. The two sets — business
men and investors — find between them that intensification of
equipment meets with a profitable response. But the increase in
output is not due merely to the lengthening of the productive
process or the accumulation of available present means. Depend-
ent tho it be on these factors, it is brought to fruition only by
proper management.

Hence there arises a question of the division of the gain. The
larger the number of first-rate managers, and the smaller the sup-
ply of present means, the more likely is it that the savers will get
the lion's share, and rates of interest tend to be high; with the op-
posite results if savers are many and managers scarce. If there
be a good supply of fairly capable managers, but a few among
them who tower above their fellows in ability to handle great
capitalistic enterprises, these few will reap a large harvest, which
yet will not redound to the advantage either of the savers or the

» See Chapter 4, 5 3.

38-§7] CAPITAL USED IN PRODUCTION 19

mass of business men. All this is connected with the theory of
business profits, presently to be considered. It is one of the many
indications how interdependent are the several phases of the
theory of distribution. What needs to be emphasized at this
stage is that the human factor — able leadership — is indispen-
sable for bringing the capitalistic mechanism to work with suc-
cess. Nothing in economics is automatic. Everywhere we have
to deal with human beings, with their limitations, their habits
and traditions and motives, the extraordinary differences between
them; with doings whose general outcome may be predictable, but
which show in individual cases the greatest divergence and the
greatest unpredictability.

CHAPTER 39

Interest, continued. The Equilibrium of Demand
AND Supply

Section 1. Accumulation of present means needs an inducement, 20 — Sec. 2.
The gradations in the disposition to save. Cases where the inducement
needs to be shght, 21 — Sec. 3. Cases where a return is sought. Pos-
sibility that a lowered return will sometimes induce larger savings. More
often, lowered return checks saving. The conception of marginal savers,
24 — Sec. 4. Diagrams expressing the equilibrium of supply and
demand. Savers' surplus, 27 — Sec. 5. The steadiness of the rate of
interest in modern times and its significance, 30 — Sec. 6. The race
between accumulation and improvement, 32.

§ 1. We turn now to the conditions of supply for capital, and
to the equilibrium of supply and demand. The rate of interest,
like the value of a commodity, is settled at any given period
chiefly by demand. But in the long run the variations in supply
must have their effects also. What is the situation of those per-
sons who have a surplus of present means — the lenders?

If the accumulation of a surplus were in no way irksome, the
supply of present means or savings would increase rapidly and
indefinitely under the inducement of a reward in the way of in-
terest. So long as borrowers were willing to pay a premium —
to return to lenders more than had been supplied by the lenders
— these latter would accumulate more and more, and their in-
creasing savings, put at the disposal of producers, would allow
greater and greater advances to laborers. Assuming the arts to
remain the same, and no new ways to be found for increasing the
productiveness of labor by more elaborate implements, the stage
would be reached when the additional advances to laborers would
bring no addition to the output. The marginal productivity of
capital would then be nil, and interest on capital would disap-
pear. If, in fact, this stage is not reached, the reason must be

39-§2] EQUILIBRIUM OF DEMAND AND SUPPLY 21

that accumulation and paving do not continue indefinitely unless
there be some inducement offered.

§ 2. Does saving — the putting by of present means — neces-
sarily depend on a reward in the way of premium or interest?
This question, be it observed, is quite different from one of a re-
lated sort already considered, namely, do the making and the
maintenance of capital depend on saving at all? It is sometimes
said, more often tacitly assumed, that capital maintains itself by
some automatic process, quite independently of the dispositions
or intentions of its owners. This view has been held by j>ersons
quite free from any socialistic taint.^ The socialists themsglvev-
^o often they quite ignore the problem of ca|>ttat"accumulation,
jusually assume that this is. a matter which takes care gfjtself^— -It
is true that in a highly organized modern society it may seem to
do so. Plant and machinery, as they wear out, are steadily re-
placed; new plant and machinery are steadily made. But we
have seen that back of all this are the processes of saving and in-
vestment; and have seen, too, that not only the creation of new
capital involves saving, but the maintenance of existing capital
also.2 With the constant wearing out of the productive apparatus,
and the constant need of replacing it if the equipment is to be
kept intact, a choice is recurrently presented to the owners as to
the way. in which tliey shall use their surplus possessions —
whether^they shall continue investment and maintain capital, or
cease investment and cause ]a])()r to be directed to making con-
sumable goods. For any given period they may have committed
themselves irrevocably to investment, and cannot change the
form which their property has taken. But as time passes, and
the process of using and renewing the various kinds of wealth
goes on, they have again the option which they had in the initial
stages. They may save and invest, or they may spend and
enjoy. However considerable thelength of time over which the
capital of a community, when once constructed, endures in the
shape which has been given it, and however slow the process by

* See for example J. B. Clark, Distribution of Wealth, Ch. IX.
2 See Chapter 5, § 6.

22 THE DISTRIBUTION OF WEALTH [39-§ 2

which the disposition of the capitalists takes effect, it is still true
that in^the long run the owners' intention determines whether
there shall or shall not be capital.

But, to repeat, there is the other question: granting that the
making and maintenance of capital do involve, saving, must there
be a pecuniary inducement, a payment of interest, in order to
bring people to save? It is certain that this is not universally
the case. There is a considerable volume of saving which would
S^take place even if there were no premium — if the amount paid
back in the future by the borrower were no greater than the
amount now supplied by the lender. Nay, a situation is conceiv-
able under which the familiar relation would be reversed; then
not the borrower, but the lender, would pay a premium. On the
other hand, there are savings which would not take place at all
except for the reward which is commonly paid by the borrower
as interest. These gradations in the conditions under which ac-
cumulation and lending take place call for some detailed consid-
eration.

One extreme, just referred to, is of theoretical concern rather
than of practical importance: the case of the lender who is so
desirous of providing for the future that he is willing to accept at
a later date, as the price of the safety of his possessions, a less
sum than he parts with in the present. This situation might con-
ceivably arise where means were very abundant in the present
and where a future with scantier means was expected. Thus a
man in his prime, with good earning power but without income-
yielding investments, knowing that old age must come, might set
aside a considerable amount from his present income in order to
be assured at a later date of an even smaller sum. At forty, S200
might be saved from an ample income with comparative ease;
and it is conceivable that it would be saved cheerfully in order
to have, at the age of seventy, the certainty of $150. Hence, if
no other choice presented itself, an exchange of $200 at forty, for
$150 to be received thirty years later, would not be out of the
question. There might be negative interest, so to speak. But
another very simple choice in fact presents itself. The $200 may

39-§2] EQUILIBRIUM OF DEMAND AND SUPPLY 23

be set aside, tucked away, and kept until the later date when the
need becomes greater. It may be hoarded, without being lent or
invested. This, of course, is feasible only if there be some kind of
commodity which does not deteriorate, which can be easily safe-
guarded, and which maintains its value. If men lived in primi-
tive conditions, and all incomes were received and managed in
kind — if the actual bread and meat had to be put aside in order
to provide for the future — a bargain for giving a greater amount
of such perishable things in the present for the guarantee of a less
amount in the future might be consummated. But money brings
an easy alternative between present and future use. Given se-
curity and ordered government — given also stable value of
money — then money in hand is as good as money in the future.
Specie or its equi^^alent in paper money can be hoarded with little
trouble ; elaborate safe-deposit boxes are to be had at a charge in-
significant in proportion to what they will contain. Hence we
may set aside as negligible the possibility of negative interest.
The present will command at least par in the future. It is this
sort of reasoning that led Bohm-Bawerk to lay down, in some-
what technical terms, the general proposition that present goods
are always at least equal in value to future goods of like kind —
because a choice exists between present and futiu-e use.^

But tho the cases in which interest might be negative may thus
be neglected, those in which it might be zero are many. Great
masses of savings are made quite without the need of stimulus in
the way of premium or interest. In such cases present means
might be exchanged for future means at par. A large part of the
deposits in savings banks in most civilized countries are probably
of this nature. A great number of persons have acquired the
habit of providing against a rainy day. Where a seciu-e and con-
venient depository is offered, they set aside something from cur-
rent means as a safeguard against future emergencies. If interest

' It is still conceivable that, with most perfect facilities for hoarding, a few
highly timorous persons would pay negative interest for a supposedly unquestion-
able guarantee of the future; just as a few timorous investors may insist on buy-
ing government beads bearing very low interest, rather than the safest of privately
issued securities.

24 THE DISTRIBUTION OF WEALTH [39-§ 3

is paid on such savings it is welcome enough; but the savings
would be made in any case. Not only deposits in savings banks,
but the accumulations of life insurance companies from annual
premiums partake in some degree of this character. Provision for
dependents, by annual payments thru the mechanism of insur-
ance, would be made even if these annual payments were not
augmented, as in fact they are, by the interest added to them by
the insuring companies. How large is the proportion of savings bank
and life insurance accumulations made with this sole motive, it is
impossible to measure; but the proportion niust be considerable.

§3. On the other hand, there are accumulations that will not
be made except for the stimulus of a rew^ard. Some receipt of in-
terest is indispensable for a large part, probably the larger part,
of the savings made in modern communities. Yet this stimulus
does not need to be applied in its full strength over the whole
range. Much saving, that is done with a view to some return
would yet continue even if the return were lowered. Other sav-
ing, again, requires the full current rate for its continuance. The
differences between the various degrees of stimulus required (i.e.
the various rates of return) are no less noteworthy than the broad
difference between some return and no return at all.

Suppose the rate of interest, which for many generations had been
somewhere near four or five per cent, should drop very sharply to
two per cent, or one per cent. No doubt many persons would
cease to save. But many others, especially those with large pres-
ent means — those who have enough and to spare in any case
— would maintain their accumulations unchecked.

Perhaps the most characteristic and quantitatively important
case of this sort is that of the successful business man. He
"makes money," in the current phrase; which means that his
earnings considerably exceed his habitual living expenses, and
that he puts by something for the future without sensible depriva-
tion of present pleasures. The aim of such men usually is to ac-
cumulate a competence or a fortune. In a country like England,
the founding of a "family" is a common aim: the transmission to
children of a sum sufficient to enable them to take their place

39-§3] EQUILIBRIUM OF DEMAND AND SUPPLY 25

among the leisure-class idlers, to attain association or matri-
monial alliance with the gentry and aristocracy, and eventually, if
there be money enough and some address, to be awarded a knight-
hood or even a peerage. In all modern communities the worship
of "society-," perhaps the most ubiquitous phase of the deep-
rooted and universal love of distinction, contributes powerfully to
accumulation. No doubt, among the active men of affairs other
motives play their part, such as the love of power, the impulse
for activity, mere imitation and emulation. Certain it is that
money-making is impelled by very complex motives. Among
these no specific rate of return on accumulation plays a dominant
part.

It has been suggested by some writers that within a consider-
able range a decline in the rate of interest, so far from checking
accumulation, would increase it. Man}^ persons among the well-
to-do look forward to providing a settled income for the future,
either for themselves on their retirement from activity or for
their widows and children. In order to provide a "satisfactory"
income of say S5000 a year, a capital sum of $100,000 must be
put by if the rate of interest is 5 per cent. But if the rate is 2i
per cent, double the sum must be put by in order to bring the
same income. On this sort of reckoning, the lower the rate of
return, the greater will be the amount accumulated and invested.

Such reasoning, however, cannot be pressed far. No doubt
there are cases in which a decline in the rate prompts a wish to
get together a larger capital sum. But a wish is very different
from a deed. For the immense majority of men it would be a
very diflBcult matter to double the amount accumulated. Among
those who have very large current incomes but still wish to accu-
mulate a capital sum — the small number of business men and
professional men whose earnings are high — it may be true that
a decline in interest will increase rather than lessen savings. But
most men who are accumulating with a view to building up a
" competence," cannot with ease increase their savings materially,
not to mention doubling them. There are constant and pressing
demands of the moment, innumerable tempting ways of spending

26 THE DISTRIBUTION OF WEALTH [39-§ 3

money at once. A decline in the rate of interest is quite as likely
to lead to a readjustment of the scale of what is a " competency "
or a "satisfactory" income in the future as it is to induce greater
savings. In the supposed case, the man who had looked forward
to providing for himself or his family an income of $5000 on a
capital of $100,000 is likely to say, when the rate falls to two
and one half per cent — an income of $2500 must suffice !

On the other hand, with many individuals and for great amounts
of savings the usual relation of price to supply appears — namely,
a higher price leads to an enlargement of supply and a lower price
to a lessening of supply. Stated with reference to interest and
capital, the proposition is that an increase in the rate will bring
more savings and more capital, a decrease less savings and less
capital. No one would doubt that if the rate rose to twenty per
cent, many sums would be set aside and invested which at a lower
rate would be spent for immediate satisfactions. Conversely, if
the rate were to fall to one per cent, or to one half of one per
cent, many sums would be spent at once which at a higher rate
are saved. Between these possible extremes is the current rate
of something like four or five per cent; and among the various
savings there are some for which that current rate is just enough
to induce the sacrifice involved.

Thus we reach the conception of a margin. There are intra-
marginal savings and marginal savings; and also, it may be
added, extramarginal or potential savings. There are the willing
and almost spontaneous savers — those whose motives for accu-
mulation are so strong that they would continue even if there
were no return at all. There are the less spontaneous but still
eager savers, who need the stimulus of some return but would go
on even tho that return were lower than the current rate. There
are the niarginal savers — cool and calculating persons we may
conceive them — for whom the existing rate of interest is just
enough to induce the sacrifice of present for future. And finally
there are the extramarginal savers, who do not now accumulate,
but would be led to do so if the return were to increase.

In strictness, we should speak not of more or less willing sav-

39-§4] EQUILIBRIUM OF DEMAND AND SUPPLY

ers, but of installments of savings more or less easily induced.
The same person may be very differently disposed as regards dif-
ferent parts of his accumulations. Something he may put by in
any case for a rainy day; something more he may put by from
the love of social distinction, or from other motives in which, tho
the expectation of some return plays a part, a higher or lower
rate is not decisive. Something more, finally, he can be induced
to save only under the stimulus of a return at the existing rates.
The gradation runs not by individuals, but by installments.
There are marginal savings, even tho there is perhaps no indi-
vidual all of whose savings are at the margin.

§4. The outcome of the discussion of demand (carried on in
the preceding chapter) and supply (in the present chapter) can
be stated in simple form under the theory of value. The several

ITio. 1.

installments of savings are to be had at various rates, some for a
small reward, some for a larger reward. The case thus is one of

28 THE DISTRIBUTION OF WEALTH [39-§ 4

varying supply price, coming under the principle of increasing
costs. A diagram of the familiar sort will illustrate the situa-
tion.*

The conditions of demand are indicated by the line DD', whose
descending slope represents the diminishing productiveness of the
several installments of capital. The ascending line ORS indicates
the conditions of supply — the increasing prices which must be
paid in order to induce the several installments of savings which
enable the capital to be forthcoming.^ This line in its earlier part
does not rise above the base line OB. That is, some savings would
be made, even if nothing were paid in the way of interest on capi-
tal. Nay, if we believe that the disposition and incentive to pro-
vide for the future is so great among some savers that a smaller
sum in the future will be accepted by them in return for a larger
sum in the present, the line in its earlier part will sink below the
base line, and will begin at 0'. There would be negative interest
if the rate were determined solely by the competition of these
persons. As we reach installments as to which the disposition to
save is less and less strong, and more and more must be paid in
order to induce accumulation, the line rises. Finally, we reach
the marginal saver at B. The price at which he is willing to save
corresponds to the gain which is secured from the use of the mar-
ginal increment of capital. Here equilibrium is reached; the rate
of interest settles at a point where the marginal productivity of
capital suffices to bring out the marginal installment of saving.

Evidently those persons whom we have designated as spon-
taneous savers — those who are disposed to save under any cir-
cumstances — gain something in the nature of a surplus. The
total amount paid as interest is indicated by the rectangle
PP'BO. There is a large amount of savers' surplus or savers'
rent, indicated by the area ORP'P, or possibly O'RP'P. For

* Compare Chapter 13.

* The sacrifices or disutilities involved in the installments are not necessarily
measured by the prices calling them out. Those savings which would be made
without interest (rainy-day savings) may involve serious sacrifice. Here, aa in
Book II, the supply schedule relates to the matter-of-fact question of the price
which must be paid in order to call out a given supply.

39-§4] EQUILIBRIUM OF DEMAND AND SUPPLY

those who would save in any case, the whole of the interest which
they receive is in the nature of surplus. For those who would be
willing to save at a smaller rate than that current, a part of what
they receive in interest is surplus.

How great now is this surplus in modern civilized communities?
or, in other words, what is the conformation of the line ORP'? In
Figure 1 it is represented as rising slowly from OR, and approach-
ing P' somewhat steeply; indicating that much saving would be
done for less than the marginal or market price, and that there is
a large amount of savers' surplus. But it is no less possible that
ORP' should rise steeply from OR, and then move nearly parallel
to PP', as in Figure 2; indeed, it may be coincident with PP' in

Fia. 2.

the latter part of its course. In other words, a large part of the
saving may need the stimulus of the whole current rate of retiu-n,
or nearly the whole, and savers' surplus may be correspondingly
less in amount. And a further question arises as to the confor-
mation of the supply line beyond P'. Suppose there is a general

30 THE DISTRIBUTION OF WEALTH [39-§ 5

increase in demand (which would be indicated by a shifting of the
demand curve to the right) — will the rate of interest perma-
nently rise, or will the supply of savings and capital extend and
bring the rate of return back to the amount BP'? In other
words, is BP' capable of being continued to the right indefinitely,
prolonging the horizontal line PP' beyond P' without rising in its
further course? To some of these questions our answers must be
quite uncertain; and even for those which we can answer with
some assurance we must rely on general observation rather than
on any acciu-ate data.

As has already been intimated, it is tolerably clear that there
is much of savers' surplus; but how much, it is impossible to say.
One might hazard the guess that the line ORP' has some such
conformation as is shown in Figure 2; that after lingering for a
part of its length along OB, it rises gradually to a point near PP',
and in the latter part of its course runs nearly parallel to PP' or
coincident with it. Thence it would follow that a decline in the
demand for capital, unless very great, would not sensibly affect
the rate of return on it; since the decline in the rate would check
many savings which were at the margin or near the margin, and
hence would bring about a decline in the supply of capital. No
test of this kind, however, is likely to be applied in modern com-
munities. The demand for capital has grown enormously during
the last century or two, and there is no indication that it will
cease to grow in the future. In other words, the gain from the
use of more and more capital in production has been great, and
promises to continue great. The progress of invention and of
improvement in the arts has steadily moved the line DD' (at least
in its lower reaches) to the right; it has never shifted the line to
the left. At the same time, the response of the supply of capital
has been rapid and sure. Notwithstanding the vast increase in
demand, the rate of interest has remained, on the whole, singu-
larly even ; indicating that, so far as the extension of ORP' toward
the right goes, it has been prolonged, and probably will continue
to be prolonged, without any permanent tendency to rise.

§5. The steadiness of the rate of interest during the vast

^^ " \ vyA £^

39-§5] EQUILIBRIUM OF DEMAND AND SUPPLY 31

chanf^es since the industrial revolution of the eighteenth cen-
tury is a remarkable phenomenon. Even before that era, inter-
est had fallen to rates such as we consider normal. In Switzer-
land during the seventeenth centuix the ra,te had fallen so far
that legislation was enacted, oddly enough, to check its decline.
Several cantons passed laws rnaking void all loans at Ics^ than four
per cent. Nevertheless, in the century following, the rate went
down to that figure and even lower. ^ Holland and England were
able to borrow in the middle of the eighteenth century at about
three per cent. Sincethen the rate has fluctuated between a
minimum of something like three per cent and a maximum of
something like six per cent. In new countries it has tended to be
higher than in old countries; and in times of activity and of hope-
ful investment it has been higher than in times of depression.
Great wars, with their consequence of heavy public borrowing
(of which more will be said presently), have raised the rate on
occasions; then it has slowly declined as the normal conditions of
peace have been gradually restored. During the first three quar-
ters of the nineteenth century the rate, in older countries, was
usually in the neighborhood of four and five per cent, and in
newer countries, six per cent of a trifle more. During the last
quarter of the nineteenth century it sank to three and four per
cent in older countries, five per cent in newer. After the opening
of the tv/entieth century a rise again appeared; the enormous bor-
rowings by governments for war purposes then caused a further
and very sharp advaiTce. We are considering here, it need hardly
be said, not the fluctuating rates of interest on short loans, but
the long period rate on permanent investments. The trend of
this rate, to repeat, in view of the extraordinary increase alike
in the demand for capital and in the supply of capital, has been
remarkably even.

From this it is perhaps not an unjustified inference that there
is a large volume of savings at the margin. The steadiness of the
rate of interest thru so long a period of striking changes both in

^ Rappard, Le facteur economique dans V avhnemcnt de la democratie en Suisse,
pp. 113, 114.

32 THE DISTRIBUTION OF WEALTH [39-§ 6

the uses and in the accumulation of capital, would seem to point
to a steadying cause — a marginal supply price to which the
rate of return on the whole has adjusted itself. That supply,
price, to be sure, is likely to be affected in the future by the very
fact of large accumulation, or at least by those general industrial
and social conditions which accompany large accumulation. The
increase in the number of persons belonging to the well-to-do
classes, and in their incomes, causes saving and investment to be
greater in volume and to entail less sacrifice. The marginal sup-
ply price may sink in the course of the next fifty years to some
such rate as two per cent. But the experience of the last few
generations makes a greater decline improbable.

§ 6. Even tho there be a steadying cause of the sort just men-
tioned, the rate of interest for long periods — decades at_a_time
— depends on the demand for capital with reference to a supply
which is constantly and quasi-automatically increasing. It de-
pends on a race between accumulation and improvements

Accumulation proceeds fast, and promises to continue to pro-
ceed fast. It threatens constantly to increase the supply of sav-
ings and of capital to the point where a decline in the return must
set in. So ingrained is the habit of accumulation among the pros-
perous classes of modern society, that it seems to proceed irre-
spective of the rate of interest. Only over considerable periods
and after a long disenchantment will a lessening of the return
check its unceasing march. How soon and how completely such
a relaxation of its advance would take place, we cannot say.
Neither can we say with what gradations the decline in interest
itself would take place. If there is a general and far-reaching
principle of the kind discussed in the chapter last preceding —
that the use of added capital always brings additional product,
tho at a diminishing rate — the process would be a slow one;
nay, if that principle is of indefinite application, interest never
would quite disappear, however vast accumulation might be. If
there be not this supposed possibility of always using more and
more savings in productive investment, the stage of vanishing in-
terest would be reached, in the absence of improvements and in-

39-§6] EQUILIBRIUM OF DEMAND AND SUPPLY

ventions, at a comparatively early date. If the reasoning of the
preceding sections is sound, accumulation will be relaxed long be-
fore the return vanishes; yet reluctantly and haltingly, and with
a constant pressure from the continuing offerings of those who
now enjoy a savers' surplus.

In one respect there will always be an opening for the use of
additional savings, even with no change in the methods of produc-
tion, namely, thru the increase of population. Additional laborers
need to have an additional supply of the familiar kinds of ap-
paratus. Very few modern countries have stationary numbers.
France is the only large one whose population fails to grow. In
most communities numbers increase. In so far there is obvious
opportunity for the employment of more savings.

But in the main the way in which the increase of savings can
find escape from its difficulties is thru the parallel advance in the
arts, calling for more and more elaborate forms of capital. Sav-
ings in civilized communities easily outstrip the growth of num-
bers, even in a country of rapidly swelling population like the
United States. Hence, to repeat, the race-is bfi-tween improve-
mentsjind^ccumLulation. Given continued improvements calling
for more and more elaborate plant — more of tjnie-consuming
and roundabout applications of labor — then savings can heap
up, and" a return still be secured by the owners of capital. Such
has been the course of industrial history for the last century and ^
a half. Such, also, is apparently to be its course at least for an- . (/.

other generation or two.
1

i-U^'

CHAPTER 40
Interest, Further Considered

Section 1. Loans for consumption introduce no new principle as to demand,
but are much affected by the absence of full competition, 34 — Sec. 2.
Public borrowing for wars an important form of such loans in modern
times. Great wars and war borrowing give rise to both economic and
fiscal problems. For the problem of interest, the economic effects are
important. 37 — Sec. 3. Durable consumer's goods, as a form of invest-
ment, again introduce no new principle, 40 — Sec. 4. No grounds for
distinguishing between producer's capital and consumer's capital, so far
as interest is concerned. Exchange of present for future the most general
statement of the cause of interest, 43 — Sec. 5. The mechanism of
banking and credit makes interest all-pervasive, 44 — Sec. 6. Varia-
tions in the rate of interest in different countries and for different invest-
ments, 45 — Sec. 7. The justification and social significance of interest,
48.

§ 1. Spendthrift loans, tho far less important in modern times
than those for use in production, continue to play a part. Indi-
viduals and public bodies still borrow to satisfy needs of the mo-
ment, hoping to repay in the future from some extraneous resource.
Pawnbrokers' loans are of this sort on a petty scale; the borrow-
ings of nations for the conduct of wars are so on a great scale.

Such loans introduce no new principle concerning the play of
demand. There are gradations in the demands of the various
borrowers. Some have pressing needs or are much tempted by
opportunities for immediate expenditure. Others have needs less
pressing or more caution and foresight. If we suppose a fixed
supply of present means, such as the lenders offer, and suppose
loans of this kind to be the only ones, the rate of interest, under
effective competition, will settle at the point determined by the
least eager among the spendthrifts — by marginal utility among
the borrowing consumers. If we suppose this demand for loans
to be added (as in fact it is) to the demand for productive uses,
the modification of the conclusions reached in the last chapter will

40-§l] INTEREST, FURTHER CONSIDERED 35

be simply a quantitative one. There is an additional opening for
the lenders, but no essential alteration in the gradations of de-
mand or in the play of the forces by which the emerging rate of
interest is settled.

The most striking peculiarity in spendthrift loans is that so
often there is no suchthing as unfettered competition, no such
tjiing_as .a.4ir£i'a.lent_or_competitive rate determined at the mar-
giiu The ignorance and the necessities of borrowers, their in-
abijity to pause and inquire what terms can be got, frequently
cause "unfair rates" and "extortion" — phrases which signify
here, as they commonly do also when used of the prices of goods,
that the rates which would result from active competition are not
in fact attained.^

Consider pawnbrokers' loans, for example. The borrowers are
usually in immediate need, often timid, ignorant, and anxious for
privacy. They are likely to accept hurriedly such terms as are
offered at the first place where application is made. So strong is
the general belief that the resulting bargains bring an undue ad-
vantage to shrewd and unscrupulous lenders that in civihzed
countries public authority often regulates the transactions. Some-
times the rate of interest is prescribed, that is, a maximum is set;
and detailed regulations are made for the keeping of books and
accounts and concerning the mode in which the eventual sale of
pledges shall take place. Sometimes, as in France, public pawn-
brokers' shops are established, where advances are available at
reasonable rates (that is, at something like the competitive mar-
ket rate). Allowance, of course, must be made for the risks in-
volved and for the heavy expenses of administration. A rate of
ten or twelve per cent on pawnbrokers' loans, after account is
taken of expenses, amounts to only a moderate net rate. But
much more is often charged than suffices to pay all expenses, to
offset risks, and to yield a sufficient return for the lender's capital
and labor; hence the occasion for regulation by public authority.

In most semi-civilized communities, the village usurer who
lends at high rates to the improvident or necessitous is a familiar

^ Compare what was said in Chapter 10, §8, on "fair prices."

36 THE DISTRIBUTION OF WEALTH [40-§ 1

figure. The peasant of Hindustan lives upon a very narrow mar-
gin. His crops barely suffice to feed his family until the next
season's crops are ready, and at the end of a poor season he must
either borrow or starve. Not only is he often necessitous; he is
often improvident. At the marriage of a daughter or at a funeral
he will squander sums quite out of proportion to his means, and
will borrow on any terms to raise the money — a heedlessness of
the future incomprehensible to the calculating Western observer.
The usurer has him in his clutches. So, also, it was in the old days
with the fellaheen in Egypt. One of the boons which the English
administration in Egypt has brought the native is the establish-
ment of a semi-public bank which has undertaken to displace
usury by offering loans at competitive rates. In many parts of
Europe, in Austria, in Ireland, in Russia, the lender of small sums
to agricultural producers is a usurer; that is, he is removed from
the influence of competition, he lends to poor and ignorant per-
sons, and he exploits the possibilities of the case.

In medieval times the acceptance of interest by lenders was
prohibited, at least for Christians (the prohibition was by church
law, and applied to Christians only; hence the position of the
Jews as money lenders). To receive from the borrower more than
had been lent him was thought unrighteous. The explanation of
this attitude, so different from the present-day acceptance of in-
terest as a matter of course, is probably in the main that during
the Middle Ages borrowing was chiefly for consumption. When
the borrower uses loans for his own gainful operations, the bar-
gain between him and the lender for interest seems natural and
equitable. But where he is in need, and uses the loan to satisfy
pressing wants, the lender's requirement of interest has an aspect
of harshness. Moreover, in medieval times competition and mar-
ket rates of interest hardly existed. Such loans as were con-
tracted were often on terms fixed by the necessities of the indi-
vidual borrower. As the division of labor and the use of money
spread, as industry became more complex and the instruments of
production more mobile, loans for production -became, common;
and with this change came a change in men's point of view re-

40-§2] INTEREST, FURTHER CONSIDERED 37

garding interest. The exceptions to the original strict rule of the
canon law, the excuses and explanations for departing from it,
the nominal retention of the prohibition with growing practical
relaxation, the final acceptance of interest on loans as a familiar
and normal phenomenon — all this illustrates the process by
which men slowly adjust their conceptions to new ways and new
institutions.

§ 2. One form of loans for consumption remains of great quan-
titative importance in modern times — public borrowing for
^;ars. Where highways or railways or irrigation works are con-
structed from public loans, we have the ordinary phenomena of
saving, investing, capital making. But where the sums advanced
by investors are used for war expenditures, we have saving and
investing, but no resulting capital. We have vast waste by con-
tending armies, and great loans which — so far as their strictly
economic consequences are concerned — are essentially of the
spendthrift sort. The drain on savings for this purpose has been
enormous. Every great struggle has caused hundreds of millions,
even thousands of millions, to be borrowed and squandered —
squandered, that is, so far as concerns the economic^consequences.

The conditions of demand for this sort of use are highly inelas-
tic. When a nation's blood is up, the means for prosecuting a
war are demanded at any price. Hence prolonged fighting often
causes a rise in the rate of interest which endures for years, per-
liaps for a generation. The Napoleonic wars, especially because
of the huge loans contracted by Great Britain to carry them on,
affected the current rate of interest thru the first quarter of the
nineteenth century. In the second half of that century there was
a succession of wars and of consequent borrowings — the Crimean
War of 1854-1855, that of France and Italy against Austria in
1859, the American Civil War of 1861-1865, that of Prussia and
Italy against Austria in 1866, of France and Germanj'^ in 1870-
1871, of Russia and Turkey in 1876-1878, of Great Britain with the
Boer Republic in 1899. Each caused public loans to be contracted
at home and abroad, and each had its effect on the investment
market in the world at large. The whole series tended to bolster

38 THE DISTRIBUTION OF WEALTH [40-§ 2

up the rate of interest over a long period. During the Great War
of 1914-1918, loans were contracted by the billion, and the pub-
lic debts not only of the warring countries but to a considerable
extent those of the neutrals also were swelled to dimensions un-
dreamed of before. Under the pressure of this extraordinary de-
mand the rate of interest was doubled the world over.

In all these periods of struggle and waste, the high rate of in-
terest probably served to bring out some savings that otherwise
would not have been made. And not merely the high rate, but
other inducements also. Patriotic sentiment caused people to
save and to invest in government securities. Such is likely to be
the case most of all when an entire nation is stirred by a feeling
that its existence is at stake; as during our own Civil War, and in
almost all countries during the great struggle of 1914-1918. So
far as savings are stimulated by the very conditions of the crisis
— by high interest and by patriotic feeling — they are not with-
drawn from productive use. They simply add to the investments
of the buyers of the public securities and swell for an indefinite
period the capital in terms of money on which interest is regu-
larly paid.

War loans and public debts have further consequences. They
not only raise the rate of interest, often for a long time; they
cause the supply of real capital to be less, for periods longer or
shorter according to the duration of the strain. At the seat of
fighting there is immediate and often frightful destruction. Else-
where, factories are pushed to their utmost, and raw mate-
rials of every kind are used up at a prodigious rate. Repair and
replacement are reduced to a minimum. No new plant is con-
structed, except when needed for military purposes, and what is
constructed for such purposes usually proves unsatisfactory for
the uses of peace. If indeed the war does not last very long,
the gaps in capital may be filled quickly and easily. A prolonged
and exhausting struggle is followed by a period of suffering and
readjustment, the more trying if accompanied, as usually it is, by
monetary derangement.

Once the war is over and borrowing ceases, the war debt means

40-§2] INTEREST, FURTHER CONSIDERED 39

in the main a continuing series of cross-payments within the com-
munity. It means this in the main, not always or necessarily.
So far as the debt has been incurred abroad, payment of interest
must be made to foreigners, and eventually (according as the
terms of the loan may be) repayment of the principal also. The
effects of such transactions on international trade have already
been considered. There is here a real drain on the country's re-
sources. The situation is different so far as interest and princi-
pal are payable within the country. Interest charges and repay- ^/j^
ments of principal then bring no net loss, no net gain.

People often speak of a national debt as a crushing burden.
But the payment of interest on the debt means simply that taxes
are levied and the proceeds paid to the holders of the govern-
ment securities. One set of persons are called on by the gov-
ernment to make payments to another set. The process may
involve hardship, even injustice. If the taxes are paid predomi-
nantly by the poor — if for example they are taxes on commodi-
ties of everyday consumption, such as sugar, salt, tea, coffee, to- ' " *^
bacco — and if the holders of the public securities are chiefly the '•'^*^
well-to-do and rich, the result will be an accentuation of inequal- j-^>-^
ity. Such was the consequence of the methods of finance and -^'"^
taxation that were common until very modern times. Of late,
and markedly during the war of 1914-1918, the outcome has been
different. Income taxes and similar levies bearing chiefly on the
prosperous classes have been used to meet the debt charges. This
was strikingly the case in the financial operations of Great Britain
and the United States during and after the Great War. So far as
the same classes are also holders of the public debt (and they are
the holders of by far the greatest part of it) the process is in es-
sentials that of shifting cash from one pocket to another of the
same sort. No doubt those among the well-to-do who hold a
large proportionate share of the war bonds get a net balance in
the way of interest. Those on the other hand whose incomes are
high and who hold comparatively few bonds, pay more in the way
of income tax than they receive in the way of interest.

It must be said, however, that this sort of cool weighing of the

40 THE DISTRIBUTION OF WEALTH [40-§ 3

real effects of loans and interest plays little part in the thinking
of the ordinary bondholder and the ordinary taxpayer. Almost
all people have a feeling that a tax is a net loss, an interest re-_
ceipt^ net gain. They regard a tax as an unwelcome net burden.
Let it be assumed, for example, that in a situation such as that
outlined in the preceding paragraphs, the amount of interest pay-
able to each taxpayer is exactly the same as the amount of in-
come tax payable by him. Then there is no loss to anyone, no
gain.^ Yet most taxpayers would probably feel that they were
burdened. They would regard the interest receipt as a natural,
proper, satisfactory income; the tax payment as unnatural, un-
welcome, irritating. And if some taxpayers received less in inter-
est than they paid out in taxes, they would be even more ag-
grieved; whereas if the interest receipts of others exceeded their
taxes, they would not be at all correspondingly mollified. This
state of mind is quite absurd and quite inevitable. It is the
natural result of the attitude of the whole world toward taxation
and the government's doings, toward property and the income
from property.

§3. Another form of savings used in investment stands mid-
way between those for production in the stricter sense and those
for consumption. This is investment in durable goods suited for
immediate use, of which dwelling houses let for hire are the most
important type.

The hiring of a dwelling brings about an exchange of present
means for future means, and the emergence of a premium, in es-
sentially the same way as in the simplest loan at interest. The
tenant normally pays as rental a sum sufficient to reimburse the
owner or landlord for repairs, depreciation, and such charges as
insurance and taxes; and he pays him in addition a sum which
constitutes a net income to the landlord and which is the interest
on his investment. (We leave out of consideration for the present

* Of course, there will be the expense of collecting the taxes and distributing the
interest ; a real burden, of which the concrete form is that government officials are
engaged in this task when they might be engaged on work of more substantial aer-
viceableness. Expenses of collection and administration, however, are a, email
fraction of the total^Buma involved.

40-§3] INTEREST, FURTHER CONSIDERED 41

the land on which the dwelHng stands; its relation to the gross
rental will be considered in the next following chapters.) The
landlord at the outset has present means or savings at his dis-
posal — the sum which he applies to building the house. If the
rental which he receives were just enough to bring him back this
same sum, covering the eventual return of his capital (as well as
repairs and other current charges), he would get from the tenant
or series of tenants precisely what he gave. But this return is
spread, by installments, over a long time. We may suppose the
house, for example, to last fifty years, being worn out and useless
at the end of that time. The full repa\Taent of the capital sum
will then be completed only after the lapse of half a century. A
postponement of satisfactions on the landlord's part is necessar-
ily involved, and will not be accepted unless there is some induce-
ment — unless the tenant pays more than enough to repay the
sum originally invested ; that is, unless interest is paid.

Where a building, or indeed any other concrete form of wealth,
is expected to last a very long time, depreciation (that is, the
gradual recovery of the capital sum invested) plays but a small
part, and the rental, over and above repairs and expenses, is
made up almost solely of the interest charge. Strictly, the in-
vestor should always face the fact of depreciation. Tho some
forms of durable consumer's wealth, like a few forms of pro-
ducer's wealth, seem to endure indefinitely, decay and deprecia-
tion eventually set in. In many cases of such investments, how-
ever, it is probable that the distant future when the capital sum
will finally have to be replaced is forgotten. The landlord in his
calculations of rentals will often reckon merely on interest; with
allowance for repairs and other expenses, but without allowance
for the ultimate replacing of the initial investment. In regions
where population is growing, this sort of real or apparent miscal-
culation is fostered by the expectation that a rise in the value of
the land will ofi'set the depreciation of the building — a phase of
the subject which is reserved for later consideration.

Turning now from the conditions of supply to those of demand,
we find a situation less complex than that as to the demand for

42 THE DISTRIBUTION OF WEALTH [40-§ 3

producer's capital. The demand for house room and the like is
similar to that for other present satisfactions. House room is con-
stantly compared with other utilities and exhibits the same grada-
tions of demand. The dwelling yields shelter and it may satisfy
the love of beauty. It ministers also in no small degree to the
love of distinction; for here is one of the most familiar forms of
display. The more of these gratifications are offered, the lower
will be their marginal vendibility and their price. Suppose that
dwellings were the only available form of investment, and that all
the sums saved were turned into this channel; we may reason
that, as a steadily increasing supply of such sources of satisfaction
was offered, the amounts which purchasers would pay for suc-
cessive installments of them would grow less. Still supposing
them to be the only form of investment, we may reason further
that the decline in rentals would not cease until investors (those
building dwellings for hire) came to the conclusion that it was no
longer worth while to abstain from the present use of their means
in the process of providing house room for tenants; or, to speak
more carefully, when the last or marginal investor came to this
conclusion. The case would again be one of the equilibrium of
supply and demand.

Other forms of consumer's wealth present the same phenome-
non. Pianos, the furniture in lodgings, theatrical costumes and
fancy dress, carriages for hire — all illustrate the principle. Wear
and tear, -and allowance for depreciation, play a larger part in
these than in dwellings, and interest forms a smaller proportion
of the gross rental. The civilized man's repugnance to miscel-
laneous and indiscriminate use of his possessions sets limits to the
spread of such hiring and letting; but anything which by custom
can be passed readily from one person to another, like a dwelling
or a piano, may cause a return to arise in the way of an interest
payment.

Consumer's wealth of a durable and transferable kind thus of-
fers still another way of investing present means and of securing
an interest return. The whole mass of savings put aside for in-
vestment is to be compared with all the opportunities for utilizing

4(>-§4] INTEREST, FURTHER CONSIDERED 43

them — in production, in loans for consumption, in consumer's
capital. These combine to make up the total demand which is to

Hbe set against the supply of savings. No one of the various op-
portunities can be said to dominate the others, so far as the rate
of interest is concerned. But they are by no means of equal
quantitative importance. Except for public borrowings, loans of
the spendthrift type are comparatively small in modern com-
munities. Durable forms of consumer's wealth, of which dwell-
ings are typical, present a much ampler and steadier opportunity
for the investment of savings; one which enlarges steadily with
an increase in population and in general prosperity. The opera-
tions of production, and the possibility of increasing the efficiency
of labor by applying it over time, form the most important open-
ing of all. In this sense, loans for production may be said to
dominate the market and to settle the return to all kinds of capi-
tal and investment.

§ 4. We are now prepared to give an answer to a set of ques-
tions suggested at an earlier stage, which have to do with the
relation of producer's wealth to consumer's wealth, and the defi-
nition of capital.^ Matters of definition, tho not in themselves of
the first importance, yet repay discussion^ because they compel
reflection on the essentials of the things defined.

Producer's wealth and consumer's wealth are similar, in that

Jthey are. both Jnstruments. Both serve to provide utilities or
gratifications. They differ_as to the time at wliich the utilities
will emerge. P^educer's wealth brings no utilities in the present;
all of its effects are to appear in the future. Consumer's wealth
brings utilities in the present. But not all of its utilities are so
brought. It sheds them, to so speak, continuously thruout its
existence. The longer it lasts, the longer will the process con-
tinue. Some of its utilities are thus also future; and the more of
them in proportion as it is durable.

The most general statement of the conditions under which in-
terest arises is that it results from an exchange of present things
for tilings future. This proposition, more or less foreshadowed in
» See Chapter 5, § 2.

44 THE DISTRIBUTION OF WEALTH [40- § 5

the discussions of a long series of economists, and sharply formu-
lated late in the nineteenth century by the brilliant Austrian
economist, Bohm-Bawerk, applies to all the various operations in
which a surplus appears for him who makes loans or advances.
It applies no less to operations which involve consumer's wealth
than to those which involve producer's wealth. From this point
of view the one is capital as much as the other. In both cases
true interest arises, due to the fact that the present ordinarily
outweighs the future in attractiveness, and that those who have
present means at command will not postpone enjoyment of them
unless some inducement in the shape of premium is offered. So
far as the problems of distribution are concerned, consumer's
wealth and producer's wealth thus present similar phenomena.
Either of them may fetch interest and so lead to the emergence of
a set of persons who have an income from accumulated means and
who need not work for their living — a leisure class.

Tho thus similar in the essential relations of present to future,
the two forms of wealth yet present differences in other respects.
There is an obvious difference in the nature of the social advan-
tage secured from the possession of present means. That advan-
tage, in the case of producer's wealth, is found in the increase in
the productiveness of labor because it is applied in the "capital-
istic" way. The demand for producer's capital and the ability
of the users of capital to pay interest depend on factors which do
not bear on consumer's capital or on interest derived from con-
sumer's capital. The progress of invention, the growing effective-
ness of larger plant and more costly tools, the possible limits to
the increase in output from more laborious preparation — all
these are questions which must be considered with reference to
capital in the narrower sense, and do not present themselves as to
consumer's wealth.

§ 5. When once the payment of interest is a familiar and ac-
cepted fact, it is extended to all cases where present means are in
one person's hand and are turned over to another person. He
who has money to lend can always get interest on it. He who
borrows must pay for the veriest fraction advanced to him and

40-§6] INTEREST, FURTHER CONSIDERED 45

for every day of the advance. The competition and interaction
of a highly developed banking and credit system is always keep-
ing the possessor of present means in connection with those who
are the eventual users of capital and the ultimate employers of
labor; and interest can be continuously and unfailingly secured on
every scrap of disposable cash.

Here, as in so many fields of economic activity, the persons di-
rectly engaged are little aware of the significance of their doings.
The professional money lender knows by everyday experience
that he can always get interest on the money he has to lend, and
he commonly thinks of it as "earning" interest. He who bor-
rows accepts the need of paying interest as a necessary part of
the world as it is, and does not stop to think that his own de-
mand for present means — in order, say, to buy a machine or a
batch of materials or wares — is part of the very situation that
causes a return to the lender to arise. Just as, under the division
of labor, each individual worker has no consciousness of the part
he plays in the complex organization of industry; just as, in the
adjustment of foreign trade, each merchant has no notion of his
place in the mechanism — so neither individual lenders nor indi-
vidual borrowers have insight into the conditions which underlie
their bargainings. Economists are often twitted with being theo-
retical and out of touch with the facts of industry. Much more
unpractical is the attitude of the average business man, who is
familiar with but one small corner of the industrial world, con-
tents himself with the most superficial commonplaces, and knows
so little of the essential problems of economics that he is hardly
aware even of their existence.

§ 6. The minimum rate of interest, on the best security, differs
a little between different countries. For generations it was low-
est in England and sensibly higher in France. Until the close of
the nineteenth century, it was higher in the United States than in
most European countries. As a rule, it is higher in new, prosper-
ous, and rapidly growing countries; lower in old countries that
Tiave long been prosperous. The explanation is mainly to be found
in the varying conditions of supply and demand, in the race be-

46 THE DISTRIBUTION OF WEALTH [40-§ 6

tween accumulation and improvements. In a country like Eng-
land, which enjoyed complete internal peace and high industrial
prosperity for two centuries, accumulation was steadily great
and, notwithstanding the periodic sweeping away of large amounts
thru loans for war expenditure, there was almost constant pres-
sure to find advantageous employment. France enjoyed similar
prosperity only after the close of the Napoleonic wars, and, tho
long a rich country, never had such an overflowing supply as
England. Moreover, her huge public debt withdrew from pro-
ductive use a larger part of her people's savings. From both
countries there was an outflow of money means for several gener-

^, ations, thru investments in countries where the demand for use
in production was great. Germany, whose industrial advance
^ ^after 1870 was extraordinary, also reached the stage of fast accumu-

*^ lating resources, and of overflow to other countries. From all
these the outflow was chiefly to the newer countries, whose own
accumulations were not yet great, whose resources were still not
fully utilized, and whose opportunities for using capital were large
and profitable. Such was the United States thruout the nine-
teenth century. Canada, Australia, South Africa, Argentina,
Chili, and other regions offered advantageous fields for invest-
ments from older countries. Not the least striking transfer of ac-
cumulations was that from the older part of the United States,
along the North Atlantic coast, to the West and latterly to the
South of the country. From New England a steady stream of
savings flowed to the West, and enabled the latter section to
provide itself with much-needed capital.

If the transfer of savings from one country to another took
place without question or hesitancy, the rate of return on invest-
ments would be the same in both. But it does not so take place.
A loan to a person at home, or for use in an enterprise at home,
is made more readily than one to a strange country. Something
extra must be paid by the borrower who has to deal with a lender
on the other side of a political boundary. Even where no political
boundary has to be crossed, but only a less familiar region entered,
the same sort of inducement must usually be offered; as when an

4(>-§6] INTEREST, FURTHER CONSIDERED 47

Englishman is asked to lend in Canada or Australia, or a New
Englander in Texas or Oregon. If the only supply in new and
rapidly growing regions were that from their own savers, the rate
of return there would be considerably higher than in fact it is.
The inflow from older countries brings it down, tho not to a rate
as low as that prevailing in those older countries.

The same sort of difference arises between familiar and unfa-
miliar investments within the same country and region. A large
city like Boston and New York can borrow on better terms than
a small town or municipality, even tho the latter be as near and
as solvent. A large railway corporation, whose securities are
known favorably to a wide circle of investors, can sell its bonds
(that is, contract its loans) more advantageously than a modest
enterprise, even tho the latter be no less secure. The activity of
bankers and traders and the publicity given by stock exchanges
tend to lessen differences of this kind, as they do those between
countries ; but some differences still persist.

In ail this process of transfer, and tendency to equality with-
out the attainment of complete equality, account must be taken
of risk. Investments in a new country, promising as they may
be and likely to yield in the end returns larger than in old coun-
tries, often contain elements of uncertainty in each individual
case. Hence something in the nature of an insurance premium
must be paid.

Unattractiveness tends to keep high the returns from some
forms of lending. Pawnbrokers' loans arc usually made, as has
already been remarked, under circumstances which prevent the
full effect of competition from being felt. But even if made at
rates resulting from complete knowledge of market possibilities
by borrowers, they would doubtless be higher than ordinary loans;
since such lendings are not in social esteem. Similarly, dwellings
and tenements let to the poor commonly yield a return higher
than the current rate, even after allowing for the risks of non-
payment and the considerable expenses of management and col-
lection. There is an aversion to dealings that involve real or seem-
ing pressure on the necessitous. Tho "philanthropy at four per

48 THE DISTRIBUTION OF WEALTH [40-§ 7

cent" has caused model dwellings in cities to be offered to the
poor at rentals that yield the owners no more — possibly a shade
less — than could be secured in other ways, such operations have
reached but a small part of the field, and it still remains true that
investments of this kind ordinarily secure a return above the cur-
rent rate. For reasons of the same kind, business premises used
in American cities for the retail sale of liquor secured an unusual
return : a certain discredit attached to this sort of investment.

§7. What can be said, in conclusion, of the justification and
social significance of interest?

In the older English books on economics, interest was often
said to be the "reward of abstinence." The phrase has often
been ridiculed: a Rothschild or a Vanderbilt abstains and deserves
a reward! The clear-headed among the older economists prob-
ably never had in mind a moral connotation in the phrase, tho
those who tried to popularize their theories often did. The phrase
simply tried to state a fact: that interest arises because the ac-
cumulation of savings and the making of capital involve "absti-
nence." The way in which the present means were secured by
the person now possessing them has nothing to do with the ques-
tion of saving and abstinence. He may have got them by swin-
dling or robbery; or he may have got them by the exercise of pro-
ductive faculties in ways advantageous to his fellowmen. The
act of saving from such means, again, may be of a kind deemed
meritorious, as for example if it is to provide for wife and chil-
dren; or it may be an idle heaping up from superfluous income,
animated only by senseless rivalry in money-making. It is all
one, so far as concerns the strictly economic theorem. The es-
sence of this is that present possession is preferred to future, and
that present resources will not be exchanged for future resources
unless some inducement be offered. Here is a cold fact; whether
it squares with moral desert is quite a different matter.

Interest seems to be an inevitable outcome of the system of
private property and free exchange. It appears in early and sim-
ple societies, and grows in volume and importance with the
greater complication and eflficiency of the processes of production.

40-§7] INTEREST, FURTHER CONSIDERED 49

At the outset it arises chiefly in the simple form of loans for con-
sumption. With the development of our modern communities,
loans for production have come to play a greater and greater
part, until now they are the dominating form. As we survey the
tangled course of economic history, it is impossible to see how the
private accumulation of capital under the stimulus of interest
could have been dispensed with. In so far, it may be adjudged
to be just.

On other than this simplest utilitarian ground, however, there
is a case against interest, resting on the fact of inequality. Those
who have saved and put aside present means usually have had
ample means. Saving may have been a sacrifice, in the sense that
postponement of present enjoyment is commonly irksome; but it-
has not commonly been an onerous sacrifice. Until within recent
times accumulation and investment were possible only for a very
small circle of persons, who by fair means or foul had got an in-
come much above that of the rest. The beginnings of modern
capitalism are not known with any certainty, but it is clear that
in its earliest stages and for many centuries but a small knot of
persons — traders, bankers, city folk of unusual prosperity —
had any part in accumulation and investment. Tho this situa-
tion is somewhat modified in our own day by savings banks, life
insurance companies, cooperative societies, and all the multiplied
openings for investment by the masses, it remains true that most
saving is done by the well-to-do and the rich. There is no sta-
tistical evidence to prove this with certainty, but such evidence is
not necessary. Observation of the familiar facts makes it plain
that accumulation and investment are now matters of steady con-
cern chiefly for the small circle of persons who are already mem-
bers of the possessing classes or in close association with them.

Interest-yielding property, thus the outcome of inequality, it-
self promotes and maintains inequality. Not only are those who
receive it put in possession of greater present means, but, what is
more important, thej'^ are enabled to perpetuate their own and
their children's favored position as earners of income. The social
stratification of our time, the separation of the well-to-do classes

50 THE DISTRIBUTION OF WEALTH [40- §7

from the nonpossessing, is supported and strengthened by the in-
come from existing possessions. The leisure class has emerged as
the consequence of interest and tends to perpetuate itself and en-
large itself thru the receipt of interest.

To repeat, then, interest is an inevitable outcome of private
property. The whole course of modern industrial development
has taken place under that system. We cannot perceive that it
could have taken place otherwise. The phenomenon of the
leism-e class has never been a self-justifying one for the unbiassed
observer. It must be accepted as part of a system beneficial on
the whole, and at all events indispensable; indispensable, that is,
in the past and for the visible future. Whether private property
and all that hangs thereby will last into the indefinite future
raises questions which are much wider than those directly con-
nected with interest, and must be reserved for discussion at a
later stage.^

1 Compare what is said below, in Chapter 55, on Inequality and Its Causes, and
in Chapters 66 and 67, on Socialism.

^^,

Overproduction and Ovebji^t'^'i

ESTMENT

Section 1. Overproduction, in the sense of excess beyond the possibility of
use, is impossible. The extensibility of wants, 51 — Sec. 2. Overpro-
duction, in the sense of production beyond the stage of profit, is possible
if investment proceeds unendingly. The process of advances to laborers
and the readjustment of production under the supposed conditions.
Check to the extreme results, from the cessation of accumulation. The
reasoning of Rodbertus criticized, 53 — ■ Sec. 3. A real tendency to over-
production, thru overinvestment in the familiar industries, 58 — Sec. 4.
Industries with large plants, best managed under continuity of operation,
are tempted to overproduction or else to combination, 59 — Sec. 5. The
phenomena of crises and industrial depression are in reality different from
those of overproduction, 60.

§1. The present chapter, is in, part a digression. The subject
of overproduction runs across more than one part of economic
theory. It is connected with problems of production and of value
as well as with those of distribution. The usual reasoning about
it touches more especially on the possibility of overinvestment,
and so on the determination of the return to capital. Hence
it is conveniently taken up at this point.

"Overproduction" may mean various things, and the question
whether there can be overproduction is accordingh' to be answered
in various ways. ► Let us consider first the widest use of the term :
general overproduction beyond what man can use. Is such a
thing possible?

The negative answer commonly given by economists rests on
the extensibility of human wants. It is true that the bare physical
needs of man for food, clothing, and shelter are satisfied with
comparatively little. If, with a possibility of further supplies,
only more of plain food, simple clothing, dry shelter were added,
there would soon be an excess beyond men's wants. But by
varying the supplies, satisfaction can be added almost indefinitely.

52 THE DISTRIBUTION OF WEALTH [41- §1

Refine the food, elaborate and vary the clothes and the house,
and there seems to be no limit to what can be enjoyed. As Adam
Smith remarked, "the desire for food is limited in every man by
the narrow capacity of the hmnan stomach; but the desire of the
conveniences and ornaments of building, dress, equipage, ancT^-^
household furniture seems to have no limit or certain boundary." i
Nothing is more extraordinary than the ease with which a man
who begins with a small income and modest enjoyments, accom-
modates himself to larger means, finds new openings for expendi-
ture which soon crystallize into "needs," and complains of a "high
cost of living" which merely reflects his own habituation to grow-
ing comfort and luxury. All this.is the result of variety — thru
the stimulation of new wants and the discovery of new ways of
satisfying them. The great increase of productive power during
the last century or two has meant necessarily a diversification of
industry and a constant resort to new things or new refinements
of things familiar. Many articles which were formerly luxuries are
now everyday comforts; and many which were formerly com-
forts are now deemed necessaries.

It is true that one of the wants to whose satisfaction additional
means are turned is the mere love of distinction. Many things
are valued, partly or wholly, for the simple reason that they are
symbols of supposedly higher social station — evening dress,
motor cars and carriages, lavish entertainment, yachts, palaces.
The expenditure for these is perhaps waste : waste, that is, in the
sense that the satisfaction from them is elusive. On the other
hand this very satisfaction, resting on the instincts of emulation
and ostentation, is one of the most universal in mankind and has
been a powerful stimulant to productive activity. So far as the
problem of overproduction is concerned, it matters not how
great or enduring is the enjoyment secured, how far propor-
tionate to the expenditure involved. It suffices that as in fact
men are, their wants of all kinds are indefinitely extensible —
for physical comfort, for aesthetic and intellectual gratification,

1 Wealth of Nations, Book I, Chapter 11, Part II; Vol. I, p. 165 of Cannan'a
edition.

41-§2] OVERPRODUCTION AND OVERINVESTMENT 53

for variety and amusement, for ostentation and display. There
is no danger of producing more than they will at least think they
want.

This general statement needs some qualification as regards men
of other races and climes than those of Europe and America.
There are men whose wants are not extensible, or at least expand
slowly and sluggishly. Negroes and others in the tropics, when
they have enough to eat and drink, prefer lolling in idleness to
further work for the satisfaction of tastes which we consider
refined, or, at all events, civilizing. They irritate the modern
business man, when he strives to exploit new territories, because
they cease to produce when their elemental wants are satisfied.
He wishes to stir them to added effort, and is willing to pay them
for it, in order that profit may emerge; but unless somehow new
wants are aroused, they work less, not more, when their pay is
greater. Here^ too, overproduction, in a strict sense, is quite
impossible; these untutored folk simply cease to work and to pro-
duce when they have had enough.

§2. It is not in this general sense, however, that "overpro-
duction" is commonly spoken of. Trouble arises, it is contended,
not from the production of more things than can be used, but from
the production of more things than can b^5oM at a profit. The
difficulty, it is said, is one peculiar to our modern capitalistic
society, which finds itself in difficulties because of its very achieve-
ments. More is produced than can be disposed of to the capital-
ists' advantage, and loss ensues from the very operations which
were designed to bring gain.

This of course is possible for any industry and anj^ one com-
modity. It is entirely conceivable that more bicycles or more silks
should be produced than could be sold at a profit. The case, tho
not the usual one, occurs frequently enough to be entirely familiar.
Mistakes and miscalculations will occur. But the remedy seems
simple and automatic. If more is produced of any one thing than
can be sold on profitable terms, the production of that thing will
be diminished. Sooner or later — perhaps after a considerable
interval, if the operations involve large plant — some of the pro-

-^-^^^^l^ .^v ,^-^'.THE DISTRIBUTION OF WEALTH [41-§ 2

ducers will withdraw, supply will lessen, price will rise, and the
overproduction will cease.

It is maintained, however, that this avenue of escape is not
available where all industries are pressing masses of goods on the
market at the same time. If indeed a few industries only are pro-
ducing beyond the point of profitable sale, labor and capital can
be and will be transferred to others not thus embarrassed. There
is no such remedy if those others are in the same quandary. And
the tendency, it is said, is for all industries to be, if not perma-
nently, at least recurrently and periodically in the' stage of produc-
tion beyond the point of profit. Modern plant and machinery
pours forth consumable commodities in huge quantities. True,
while the machinery is in the process of making, there is demand
for iron, timber, and other things used in making the plant, and
there is profit in producing them, and while the machinery is in
the first stages of being used, there is demand for materials like coal,
wool, cotton, and the like, and again profit in producing these.
But when the consumable article — clothing, say — is finally put
on the market in vast quantities, it cannot be sold on profitable
terms. There is overproduction, stoppage, and shut-down, reac-
tion in turn on the making of plant and materials, cessation in the
industries which will produce these, and general depression. The
recurrence of commercial crises is thus ascribed, in part at least,

to recurrent overproduction.

\(\ In all this reasoning there is confusion of two essentially different
things: on the one hand, investmeot beyond the point where a
return to capital can be maintained; bn the other hand, production
beyond the point where a market for goods can be found. The first
of these is quite conceivable, tho highly improbable. The second,
so long as human wants remain extensible, is not conceivable.

Let it be supposed, by the way of putting the problem in its
extreme form (and it is in this way that a question of principle is
best tested) that accumulation and investment go on by leaps and
bounds; that plant and machinery are indefinitely multiplied, and
that consumable commodities are multiplied in proportion. What
course of events will ensue?

41-§2] OVERPRODUCTION AND OVERINVESTMENT 55

/[J^rety purchasing power or "money" (to put it briefly) is turned
to the buying of plant and machinery, and of materials for making
these. It is no longer turned to the things formerly enjoyed by
those who have become investors. There is a cessation or great
slackening of "luxurious expenditure." With this change in
demand there ensues a corresponding change in the direction of
production. The machine-making industries will be profitable
and the luxury-making industries unprofitable. Labor will be
turned from the one to the other. The fallacy of supposing that
labor will be less employed because of a diminution of luxurious
expenditure has been exploded over and over again. ^ Saving and
investment do not mean that labor fails of employment or is less
-employed, but merely that it is employed in a different way.

Before long, however, the plant and the machinery must be used;
that is, turned to making more consumable things. What sorts of
consumable things will be in demand? Not such as are adapted to
the demands of investors and savers (presumably, the well-to-do).
These, by supposition, no longer buy for enjoyment; at all events
they reduce such expenditures to the minimum. The laborers,
however, have passed no self-denying ordinance. For commodi-
ties adapted to their needs there is an unlimited market. To be
sure, in order to induce purchase, things must be of the sort they
fancy. But there is no difficulty in disposing of goods of this sort,
if offered cheap enough. Until the masses of mankind come to be
in a vastly more prosperous condition than has been dreamed of in
all the Utopias, an indefinitely extensible market can be found for
goods adapted to their use.

^ut, to repeat, the things sold to laborers, as the quantity of them
increases, must be offered at a lower price. If the whole process of
enormous saving and appropriately modified production is carried
on relentlessly, in the end all the goods for laborers' use will be sold
without profit, nay, if it be really relentless, at a loss. There will be
universal overproduction of the kind which those maintaining this
possibility have in mind — production not indeed beyond the
possibility of sale, but beyond the possibility of sale at a profit.

^ Compare Chapter 52, § 2.

56 THE DISTRIBUTION OF WEALTH [41-§ 2

The real cause of difficulty, however, .in this sort of situation
evidently is not overproduction but overaccumulation and over-
investment. The essence of normal capitalistic investment is that
advances are constantly being made to laborers, and that the
laborers are constantly producing more than has been turned over
to them. The supposed increase in savings and the decline in
luxurious expenditure would bring it about that greater and
greater amounts were paid to laborers than before. If this keeping
up of advances were carried to the limit, the amounts produced
by the laborers would barely suffice to replace what had been
advanced to them. To put it in another way: before the process
begins, part of the laborers are engaged in making commodities
for the capitalists' consumption, and part for the consumption of
the laborers themselves. After the process is completed, all the
laborers (or virtually all) are engaged in making goods for each
other. Then the laborers will be consuming all that they produce,
and no return to capital can emerge.

The very statement of this result and the steps by which it is
reached shows how improbable it is. The thing is conceivable,
but so improbable that it may be declared virtually impossible.
It assumes that saving and investing go on blindly and quite irre-
spective of any return. Now, as has been pointed out in the pre-
ceding chapters, the connection between accumulation and interest
is not a simple one. But it is absurd to suppose that accumula-
tion would continue unabated if it resulted in no return at all. The
very sort of pressure which is supposed to bring about this univer-
sal disappearance of profit would bring quasi-automatically its
own relief. As interest fell, more and more of the well-to-do would
conclude they might as well spend as invest; would buy houses,
pictures, automobiles, champagne, and would cause labor to turn
to making such things. A balance would in due time be restored,
by the making of less goods for laborers' consumption and by the
return of profit and interest in all branches of production.

The extent to which the process of continuing investment could
be carried, and the approach to eventual cessation of return, would
depend on the effect of increasing capital on the productiveness of

41-§2] OVERPRODUCTION AND OVERINVESTMENT 57

industry. As was noted in the preceding chapters, some econo-
mists believe that increase of capital means increase of production
without limit; an unfailing increase in the output, tho at a dimin-
ishing rate. If this be the case, a return to capital will always be
secured, however great the rush of accumulation. I have inti-
mated my own view that the gain in efficiency from the application
of more savings and the making of more capital is not automatic or
certain, but depends on the progress of invention. ..However that
may be, it is agreed on all hands that a great pressure of capital
seeking employment will lessen the return; and a progressive
lessening of the return, or decline in interest, will bring j^'^'o tanto
the same effect as disappearance of the return; it will check accu-
mulation and so bring its own remedy.
'l Rodbertus, one of the ablest socialists, tried to explain crises by
^^(si theory of overproduction very similar to that just considered: a
theory which made crises an inevitable adjunct of private owner-
ship of capital. His explanation has been repeated by Marx and by
other socialists. The well-to-do, it is alleged, are persistently set
on investing and increasing production; the}^ are not disposed to
spend. The laborers, on the other hand, have not the wherewithal
for spending. Hence productive power tends constantly to outrun
consuming power; hence the recurrence of crises. The answer is
that the laborers are quite able to spend. The process of invest-
ment by the well-to-do simply means that the "consuming power"
is turned over to the laborers in the form of wages. There is no
lack of consuming power. If indeed this process goes to its limit,
if the investors persist in saving willy-nilly, the ultimate result
must be overproduction in the sense of disappearance of profit or
interest. But this limit will never be reached. Long before it is
approached, an end will come of the excessive investment; demand
will be readjusted, and the various sorts of goods will be turned out
in such apportionment that (barring the inevitable occasional
mistakes) all will be sold at a profit.

This analysis of extreme cases and impossible hj'potheses, fan-
ciful tho it may seem, is necessary in order to bring into sharp relief
what is really meant by overproduction of the kind supposed. And

68 THE DISTRIBUTION OF WEALTH [41-§ 3

it has more bearing on the actual phenomena of modern Hfe than
it appears at first sight to have; because, tho the extreme case is
not reached, tendencies do exist which suggest it. To these
attention may now be given.

§ 3. Accumulation in modern times does proceed, for short
periods, blindly, and almost automatically. Savings arelnade and
are invested merely because the habit of doing so has become
ingrained among the possessing classes and because the mechanism
for the first steps in investment has been so perfected — public and
private savings banks, investment bankers, stock companies, and
the like. Hence, for familiar and approved sorts of undertakings,
there is always available "capital" (in terms of money) without
limit. And in these undertakings there is a great and nearly con-
stant pressure of competition and a tendency toward "overproduc-
tion " — that is, toward putting on the market more goods than
can be sold at a profit. This tendency is not peculiar to industries
which produce commodities for laborers' consumption. It appears
in any well-established industry, or rather in any industry conduct-
ing its operations in a well-established way. Plere competition is
ever active. The return to capital is within a hand-breadth of the
minimum; there is constant danger of something like "overpro-
duction." And this in turn threatens industrial irregularity and
uncertainty — stoppage because of disappearing profit; resump-
tion after awhile in the hope of restored profit; unwillingness to
abandon the investment entirely, yet inability to maintain it, or
at least inability to enlarge it, at a profit.

The path of escape from this danger — if a real and general
danger it can be considered — is obvious. It is by change, at once
in the methods of production and in the direction of production.
Change in the methods of production is constantly taking place in
the established industries. So long as improvements involving
more capital (that is, more application of preparatory labor in
"roundabout" methods) are made, there is an opening for a return
on a larger investment. Change in the direction of production
takes place by variety, by finding new things to satisfy newly
awakened wants. Ornaments, wall papers, rugs and carpets,

41-§4] OVERPRODUCTION AND OVERINVESTMENT 59

tableware, household furniture, fruits — there are hosts of new
things to which labor has been turned as comp>etition has threat-
ened overproduction in the staples which alone were familiar a
few generations ago. It has sometimes been pessimistically said
that all the inventions and machinery of civilization have not
improved one whit the lot of the mass of mankind. Yet he who
will observe what are the commodities now produced for the
masses and compare them with the slender list of things available
even for the richest but a century ago, must see how mistaken is
the statement. It is more nearly true that the toil of most men
has become no less. Certain it is that there has been a vast gain
in the abundance and variety of the goods which yield satisfac-
tions. The process by which this gain has been secured without
"overproduction," that is, without general selling at a loss, has
been on the one hand thro invention and improvement, on the
other thro diversification in the articles produced.

There is thus a show of reason for the statement that the capital-
istic system of production bears in its bosom the seed of its own
destruction. The constant pressure of accumulation does threaten
to annihilate profit. But it has also the forces of recuperation —
invention and variety. And in the last resort there is always the
option, sure to be exercised before a real breakdown occurs, of
ceasing accumulation.

§ 4. Among individual industries, some seem to be more than
others in danger of occasional, even of recurrent, overproduction;
that is, of such large output that they must sell at a loss. Indus-
tries of a familiar kind, which use a very large plant, seem to be
in this case; especially if they are subject to seasonal irregularities
of demand.

Thus there was constant talk, for many, many years, of "over-
production" of our American anthracite coal and of the need of_
reducing the siipi)ly in order to avoid loss. Xow, like all mining,
coal mining involves a large investment in shafts, levels, machinery,
transportation. In the case of anthracite, the plant must be
sufficient to supply the heavy needs of the winter months; since
the fuel is used chiefly for domestic purposes, the amount called

60 THE DISTRIBUTION OF WEALTH [41-§ 5

for is much greater in that season. Coal used for power, as bitu-
minous coal so largely is, suffers no such marked seasonal oscilla-
tions of demand. The plant for anthracite, which must be ade-
quate in winter, is more than adequate in summer. There is, none
the less, a temptation to utilize it continuously, summer and w inter.
As with all plant, there is a loss in leaving it idle. Storage on a
great scale, which would equalize the irregularities of consumption,
is extremely difficult. Hence, we are told, there is recurring over-
production, and some agreement must be reached among the
producers by which the total amount put on the market shall be
kept within the bounds of advantageous disposal. Otherwise
there is feverish activity at one time, with cut-throat competition,
followed by stoppage and depression; the whole round means
irregularity of employment and evil social conditions.

It is on such grounds as these that combinations have been said
to bring real advantage to society.^ It is not imposjjjble that they
will do so; but I suspect the danger is exaggerated, ^hile the remedy
may be worse than the disease. Business men and capitalists, when
they speak of overproduction, commonly mean, not that profits
have disappeared, but that profits are less than they wish. They
talk of maintaining a "fair" proJfit, when they really wish to secure
a fat profit. Overproduction, that is, supply so great as to bring
about sales at an actual loss, is probably much less common than the
business community would have us suppose; and when it occurs, it
is due to oscillations in demand which would probably affect a com-
bination or trust as much as a body of scattered producers. The
advocacy of combination as a means of avoiding overproduction
and industrial irregularity is commonly a mere excuse for trying to
build up a monopoly which will restrict production, and secure (or
try to secure) regularity at the expense of extra levies on the public.

§ 5. Some of the phenomena connected with crises, and espe-
cially the course of events during a period of depression, have been
ascribed to overproduction. During times of depression, it would
seem, more is produced than can be readily sold or than can be
sold at a profit: is there not general overproduction?

^ Compare what is said below, Chapter 65, § 6.

41-§5] OVERPRODUCTION AND OVERINVESTMENT 61

These phenomena, however, result from the breakdown of the
machinery of exchange.^ They are not due to permanent or deep-
seated difficulties of finding an extensible or profitable market.
They are due to the fact that confidence has been shaken, credit
disturbed^ -the usual course of production and sale subjected to
^^9ckr- They may, indeed, be ascribed in part to some real " over-
production " — to the fact that some industries have been pushed
beyond the needs of the present, possibly beyond any needs whether
present or future. These things correct themselves in time. The
mechanism of exchange is restored to its normal working, and
the maladjustment in production is set right. Unfortunately, as
we have seen, a state of completely normal adjustment is never
reached. Undue activity is likely to succeed undue depression.
But these oscillations are in essentials not connected with any ten-
dency to ajfiberal overproduction. The problems which they

present relatJiHlargely to money, banking, credit; for a solution,
they point to fne improvement of intelligence and the possibility
of conducting industry with progress and yet without irregularity.
They are little related to those supposed limitations of demand
and those possibilities of permanent overinvestment, which are
urged by the persons who maintain that there is danger of general
overproduction.

^ See the Chapter on Crises (Chapter 28).

CHAPTER 42
Rent, Agriculture, Land Tenure

Section 1. The theory of surplus produce or "rent." Rent does not enter
into the price-determining expenses of production. Rent is not the
specific product of land, 62 — Sec. 2. The existence of rent is dependent
upon diminishing returns from land. Advantages of situation as affect-
ing rent, 65 — Sec. 3. Quahfications of the principle of diminishing
returns : a possible stage of increasing returns ; specific plots alone to be
considered; proposition refers to physical quantity of produce, not to
value; a given stage of agricultural skill assumed, 68 — Sec. 4. The stage
when the tendency to diminishing returns is sharp, 72 — Sec. 5. Are
there original and indestructible powers of the soil? Predatory cultiva-
tion; intensive and extensive agriculture. Inherent differM|ces tend to be
lessened, but do not disappear, 73 — Sec. 6. Land teni^ft Cultivation
by owners, each with moderate holdings, of greatest §^s\ advantage,
77 — Sec. 7. Should the community appropriate (jPretain for itself
agricultural rent? 80.

§ 1. To understand the reasoning of the present chapter, the
reader should turn back to Book I, Chapter 13. There value under
the conditions of differing cost and diminishing returns was
analyzed. Equilibrium of supply and demand is found under these
conditions when marginal cost and marginal vendibility are equal.
Stated in simpler terms, the cost of the most expensive portion of
the supply regulates the long-run value of the whole supply.

It follows that those who produce at lower cost secure more
than ordinary gains. Referring once more to the diagram (vol. I,
p. 177), it will be seen that the marginal producer at B, who sells at
the price BP', secures the ordinary gains on capital and the ordi-
nary remuneration for labor — whether his own capital and labor,
or labor and capital which he hires at interest and for wages. If
he did not secure such gains, he would sooner or later withdraw
from the industry. The producer at A has smaller expenses of
production, measured by the distance AA', and it would be per-
fectly possible for him to continue operations at the price AA'.
The producer at 0, who has the greatest advantage of all, could

42-§l] RENT, AGRICULTURE, LAND TENURE 63

continue operations if the price were as low as SO. Both sell,
none the less, at the ruling price BP' — PO — the price which
must be paid in order to make it worth while for the producer at B
to keep on, and which must be paid in order to bring about equi-
librium. The difference between the larger sum BP' and the smaller
sums A A' and SO measures an extra gain for the more advan-
tageous intra-marginal producers. The total gain to all these
fortunate persons is indicated by the area, of approximately tri-
angular shape, PP'S.

Thjs-^ditional amount, secured by those producers who have
advantages over the marginal producer^ is commonly called "rent"
by^writers on economics, because it usually arises in connection
with land. It has been proposed to call it "producer's surplus."
In ordinary parlance, rent signifies a sum paid by one person to
another for the loan or lease of any durable thing, such as a tract
of land, a house, a piano. Its use by English-speaking economists
to signify producer's surplus, with special reference to land, has
gone on for several generations, and on the whole has served to affix
to the word "rent" this technical sense. It is true that "pro-
ducer's surplus" is more apt, and that the technical meaning of
rent has the disadvantage of conflicting with everyday usage, and
so of leading to misunderstanding among those not familiar with the
terminology of the writers on economics. But "rent" has the
advantage of brevity, and the sanction of long-continued usage by
the best-known writers. It will be used in this book in the tech-
nical sense. Where there is danger of misunderstanding, it will
be spoken of as "economic rent." Where the word "rent" is used
in its popular and not in its technical sense, the context or express
warning will guard against confusion.

Rent forms no part of the expenses of production; that is, it
forms no part of those expenses of production which affect price.
It is a differential gain, an excess over and above the total expenses
of the more fortunate producers. Price is determined by the cost
of the marginal increment. Rent is not one of thejactors bearing
on price, but is the result of price. It is due to the comparatively
high~price^ which must be paid to bring out the total supply.

64 THE DISTRIBUTION OF WEALTH [42-§ 1

It Is true that there are conditions under which rent may seem
to enter Into the expenses of some producers. Suppose that a pro-
ducer at the point 0, possessed of a source of enduring advantage
— say a fertile or advantageously situated plot of land — does
not wish to carry on operations himself, but lets his land to some
one else. That other person will be able to pay him for the use
of the land an amount measured by SP, or the total rent. Not
only will he be able to do so, but he will be compelled to do so by
competition. On that land the amount SO suffices to meet all
the expenses of production, Including remuneration to labor and
adequate return to capital. If the owner offers It for use by
tenants, they will bid against each other for the land up to the point
where they will retain for themselves the usual return for labor and
capital; that is, they will bid a rent up to the amount 8P. There-
after the tenant, having contracted to pay SP as rent, will say that
his expenses of production are no less high than those of the
marginal producer at B. Tho he pays less out for labor and the
like, he pays rent, which the marginal producer has not to pay.
From his point of view, rent is as much an expense as wages,
and his total expenses are no less than those of any other pro-
ducer. But all payments of rent, tho they are called expenses
by such tenants, clearly stand In a different relation to the price
from the expenses at the margin of production. They are the
consequence of lessened expenses within the margin, not the
cause of price at the margin. They equalize the position of different
persons no one of whom is so fortunate as to own an advantageous
source of supply. For the person who does own such an advan-
tageous source, they form an extra gain, which Is secured equally
whether he exploits his advantage on his own account or receives a
payment from another who bids for the privilege of using It.

The typical case of rent, and the one which serves most readily
to Illustrate the principle, Is that of agricultural land. Suppose
that the producers at 0, A, and B have farms of different fertility.
The same application of labor and capital yields at 0 25 bushels of
wheat to the acre, at A 20 bushels, and at 5 15 bushels to the acre.
The price must be such as to make wheat-raising at 5 worth while;

42-§2] RENT, AGRICULTURE, LAND TENURE 65

otherwise the total supply will not be forthcoming. The supply
which can be raised at 0 and A is limited and an additional supply
must be got at B before an equilibrium of supply and demand is
reached. The price is high enough to bring normal returns to the
producer at i? for 15 bushels to the acre. The receipts from 15
bushels also suffice to cover the expenses (including usual return
to capital) for the producer at A. The extra 5 bushels got from
his land thus constitute an extra gain for him. Similarly the extra
ten bushels at 0 yield an extra gain for the producer at 0. And
if the owners oi AovO chose to let their lands, instead of cultivating
for themselves, they could secure rents of 5 and 10 bushels to the
acre, or the equivalent in money price. It is immaterial w^hether
they secure the advantage from the better site in the one form or
the other.

Rent is^ometimes^aid to be the specific product of land. Simi-
larly, interest is often said to be the product of capital, and wages
the product of labor; and thus three elements in distribution —
wages, interest, rent . — are set against three factors in production
— labor, capital, land. But this phraseology is to be used with
caution. The reasons for questioning it with regard to capital
have been already stated.^ Labor applied in some ways (thru the
use of tools) yields more than labor applied in other ways; in this
sense only is there a productivity of capital. The same care in the
use of the term should be observed in the case of land. Labor on
some land yields more than labor applied on other land; in this
sense onl}^ is there a productivity of land. If land were unlimited
in supply and all of uniform quality, the natural forces inherent in
it would still be directed and utilized by labor. But there would
be no differential return on any plot of land, no emergence of rent,
no notion of a separate productivity of land leading to rent. Rent
arises because of the limitation of the better sources of supply; 1)
because of differences in the amounts brought forth by equal quan- "^i
titles of labor.

§ 2. Such is the fundamental principle of rent. But it requires
many qualifications. These concern the kinds and causes of dif-
1 See Chapter 38, § 4.

66 THE DISTRIBUTION OF WEALTH [42- § 2

ference in productiveness, and need separate consideration. The
case of agricultural land, which has been used most often to illus-
trate the principle, may be first taken up, and will engage our
attention for the rest of the present chapter.

Unless there were a tendency to diminishing returns from any
one plot of land, there would be no such thing as rent. JLLthe
better sources of supply could be pushed indefinitely without
lessening of yield — if more and more labor and capital could be
applied to a given plot of land and could always bring an increase
of product proportionate to the additional outlay — then those
better sources of supply only would be resorted to. The less good
lands would be left untouched, and all agricultural produce would
be got from the best lands. The fact that this is not the case; that
good lands, mediocre lands, and poor lands are cultivated side by
side — proves that at some stage there appears a tendency to
diminishing returns from any one plot of land.

When additional labor and capital are applied to cultivation, it
may be a matter of indifference whether they be applied to poorer
land, or to the better land under poorer conditions. In the pre-
ceding section, three grades of land were assumed, having yields,
for the same application of labor and capital, of 25, 20, and 15
bushels to the acre. But it might also be supposed that the three
applications of labor and capital were all made on the same land,
yielding successively diminishing returns in the ratio of 25, 20, 15.
In either case, the marginal product is 15. In either case, the 15
bushels constituting the last installment will not be brought to
market unless the price is such as to make their production worth
while; hence, in either case, the other installments bring a surplus
or rent. In either case, the margin of cultivation is that stage in
production where only the normal returns to labor and capital are
secured. The margin is said to be extensive, when poorer land
is resorted to; it is said to be intensive, when more capital and
labor are applied under less favorable conditions to the better
land. Difference in yield would appear, and therefore a differ-
ential return, even tho all land were originally of the same
quality. In fact, there is never such a thing as equality in

42-§2] RENT, AGRICULTURE, LAND TENURE 67

the natural endowments of land. Some^ land is. better than
othe^ hence there is both an extensive and an intensive margin
of cultivation. ^^

T5Ifferences in situation have precisely the same effect as differ;^
ences in fertility, ^n apt illustration of the effects of situation
(first elaborated by the German economist, Thiinen) is got by
supposing all land to be of the same quality, and to be situated on
all sides of a central city to which its produce is brought for sale.
Imagine concentric circles to be drawn about such a central point.
Evidently the land in the nearer rings has an advantage over that
in the more distant rings. All the produce is sold in the central
market at the same price; but that from the more distant land has
to bear a higher cost of transportation, and its cultivator must be
reimbursed for this. The owner of the nearer land has an advan-
tage which causes rent to arise.

The advantage due to situation obviously is less, the lower the
cost of transportation. The cheapening of carriage in modern
times has -greatly diminished the importance of situation rent.
This is strikingly the case for all agricultural produce — grain for
example — which is_easily:jtransportable. Tho refrigerating ap-
paratus and fasFfreight facilities have made it possible to bring
meat, fruit, vegetables, and milk from very distant sources of
supply, the nearer lands still have some advantage from the situa-
tion. If indeed the rates of transportation should be the same for
all distances, the advantage would disappear. The railways which
bring the milk to some of the large cities of the United States
adopted at one time the practise of a "postage stamp rate" —
that is, an even charge on all shipments, distance being disregarded.
So far as they^carried out this method, advantages in situation and
consequently economic rent resulting from situation were done
"away with for milk farms. As it happened, public authority was
appealed to by the owners of the nearer lands to prevent this
practise, it being alleged that it was unreasonable and unjust to
fix rates of transportation without regard to distance. The Inter-
state Commerce Commission sustained this contention, and~for^
bade the postage stamp rate; tho it would seem to have been to

68 THE DISTRIBUTION OF WEALTH [42-§ 3

the advantage of milk consumers, and not in violation of any
sacred or inalienable rights of the nearer producers, i

§ 3. We proceed now to some qualifications and explanations
of the principle of diminishing returns.

In some stages of agriculture it may not appear at all. There
are circumstances under which additional applications of labor and
capital may yield for a time not less in proportion, but more. This
is most likely to occur where a people advanced in civilization
suddenly takes under cultivation virgin land, as has been the case
during the last century in~tEe~tJmted States and in other new
countries. ' In the first or pioneer stage, cultivation, for such a
people, often proceeds under difficulties. A second stage is reached,
[,. when more labor, more elaborate clearing and draining, more ex-
pensive agricultural implements, are put on the land; and then
only is the largest return per unit of labor and capital attained.
The question may be asked, how it happens — if this be the case —
that additional lands are taken under cultivation at all before the
stage of maximum productivity is reached on those previously
resorted to. The answer is that the pioneer farmer looks not only
to present yield, but to the coming years when, as owner of the soil,
he will possess much land in good condition. It is the lodestone
of complete ownership that attracts men to the breaking up of the
wilderness. But the stage of increasing returns which the process
of settlement thus involves is but a temporary one — temporary,
that is, in the industrial life of a community. Before many years,
still another stage, and one enduring indefinitely, is reached : the
time comes when the land, tilled in the more careful way of the
post-pioneer stage, begins to cease responding to more intensive
use. Diminishing returns show themselves and agriculture reaches
what we may consider its normal condition.

Next, it is to be observed that the tendency to diminishing
returns holds good only of a specific plot or specific plots of land.
It does not necessarily follow that modern communities in general
have to face difficult conditions. There may be additional plots

^ Compare what is said below, Chapter 62. On milk rates, see Interstate
Commerce Commission Reports, Vol. VII, p. 92.

42-§3] RENT, AGRICULTURE, LAND TENURE 69

of available land, no less good than those already used. The open-
ing up of new regions has had far-reaching effects of this sort. It
has greatly affected the older countries of Europe as well as the
new countries themselves, and has given rise to the knotty problems
already considered,^ about the advantages of the trade between
them. In the broad sweep of history, these are but temporary
deviations from the permanent course of things; but for recent
generations they have been of great consequence.

Further, the proposition that returns tend to diminish is to be
understood as referring to physical quantity of produce, not to
value. It means that less bushels of wheat or of corn are got,
less pecks of potatoes or peas, not that the cultivator gets a less
money return. Indeed, it is part of the proposition that he get an
undiminished money yield. The price of wheat or potatoes rises
jn accord with the additional expenses neecled Tor producing the last.
Jncrement. L^nless the price did so rise, the farmer would not
grow the additional produce. It is not the farmer who has to face_
unpleasant possibilities; it js_the consumer, that is, tlie population
at large. Only so far as the farmer himself is a consumer of

agricultural produce is he involved in the unwelcome consequences
which follow from the tendency to diminishing returns.

Failure to understand this distinction between quantity and
value has led to some curiously erroneous speculation on social
problems. , The tendency to diminishing returns has always been
eyed askance by the constructors of Utopias. It is an obstacle in
the way of unlimited increase of production, still more in the
way of unlimited increase in population. Hence a tendency to pooh-
pooh it, and to look about for evidence purporting to discredit it.
The fact that the cultivator earns no less under high cultivation
is supposed to supply such evidence, it being ignored that not the
earnings of the cultivator are in question, but the physical quanti-
ties produced by him. A striking illustration of this sort of
fallacious reasoning is in a passage in which the unshrinking
optimist, Kropotkin,2 points to the high earnings of market gar-

» See Chapter 37, § 4.

' See Kropotkin, Fields, Factories, and Workshops, pp. 73-87. The passage is

70 THE DISTRIBUTION OF WEALTH [42-§ 3

deners who raise produce for city markets on small plots of land.
Consider how much in money value is produced on a tiny piece!
Can it be said there is any evidence of diminishing returns or indeed
any practical limit to what can be produced from land? Quite
true; there is no limit to the soaring of the value of the produce.
The market gardener who raises early peas or green-house toma-
toes may get a yield of thousands of dollars per acre. But he
does not feed himself, or feed his customers. He supplies an
expensive luxury. The bulk of the quantity of produce used by
him and his customers must come from other and perhaps distant
land. For the community as a whole the tendency to diminishing
returns on each several plot of land must be accepted as an
obstacle to the indefinite advance of production and population,
and as a limit which must be soberly faced in all schemes of social
reconstruction.

Finally, thfijtendency to diminishing returns must be understood
with reference to a give stage in the agricultural arts. New and
better ways of using the land may Ibe discovered, and may make
possible an increase of product in proportion to the increase
of labor applied ; nay, may make possible a gain more than in pro-
portion to the additional labor. Thus, during many centuries,
from the dawn of the middle ages until within a hundred years
(more or less), it was customary in European countries that a part
of the land — usually a third — should lie fallow each year, serving
during that time only as a lean pasture for common use. The land
actually under cultivation at any one time was only two thirds of
the total; and any particular plot after being in use for two years
was idle and recuperating for a third. About the middle of the
eighteenth century root crops, especially clover, were found to
offset in large part the exhaustion of the soil which results from
continuous grain-growing ; and a systematic rotation of crops came
into use, which enabled all the land to be kept under cultivation all
the time, and yet (with judicious use of fertilizers) to maintain its
productive power. After this great change, more labor was

quoted with approval by so clear-headed a thinker as Bertrand Russell, Proposed
Roads to Freedom, pp. 60, 90-92.

42-§3] RENT, AGRICULTURE, LAND TENURE 71

applied to each plot of land than had been applied before; yet was
applied under more favorable conditions. Again, during the last
half century, the applications of chemistry to agriculture have
shown the way to still better culture — more elaborate rotation
of crops, and the use of new fertilizers. The methods of plowing,
draining, the selection of new varieties of plants and animals, have
also been greatly advanced . Not least, agricultural machinery and
tools have been greatly improved and cheapened. Hence the soil,
when utilized in the best-known way, has been pushed more and
more, with yet — up to a^cer^iin jpoint — no diminution in the
Imarginal returjtx.

It seems paradoxical to say that there is a real tendency to di-
miriishihg retiirns, and also that in fact there have been increasing
returns. Yet both statements are true. Tho in backward coun-
tries, like British India and China, and even in some parts of
Europe, the soil still is used in the ways that we regard as primitive
— ways that prevailed five hundred years ago — agricultural
labor in the United States and in most parts of Europe is applied
with much more intelligence and with better effect than five hun-
dred years ago, or one hundred years ago. None the less there
remains a tendency to diminishing returns. Improvements in the
way of rotation, fertilizers, deeper plowing, systematic drainage,
sta^'e off for a while the decline in return. So long as the amount
which it is attempted to get out of any one plot remains moderate,
the stage of pressure is not reached. But this moderate limit
passed, any attempt to get an increase of product encounters seri-
ous and, before Jong^Jmpassable oLsta£les. ,

So far as permanent differences in the yield from the different
sites are concerned, it matters much whether agricultural improve-
ments are equally applicable to all land or are applicable only to
some land. If, for example, they were applicable only to the
poorer grades of land (or those deemed poorer in the earlier stages
of the agricultural arts) ; if by some processes of drainage, clearing,
and leveling, available only for some soils once disadvantageous,
these could be made as fertile as those previously more fertile —
then rent, so far as due to the superiority of some lands over others,

72 THE DISTRIBUTION OF WEALTH [42-§4

would disappear, and would emerge only as all land came to be more
intensively used. But if the improvements in agriculture were
equally applicable to all lands, the differences between them
would remain. Good lands and bad would alike yield more, but
there would still be an extra yield on the good lands; hence, so far
as both were cultivated side by side, there would be inequality of
return for the same labor, that is, rent. And this in general has
been the effect of agricultural improvements. They do not oblit-
erate the inherent differences. The only sort of improyement
which has markedly unequal effects is the cheapening of transpor-
tation, which brings the more distant lands virtually nearCT and
greatly reduces advantage of situation.

§ 4. With regard to any given plot of land, there is a stage at
which it may be said with substantial accuracy that the land yields
all of which it is capable. It can then maintain virtually no more
persons. It is only for the purpose of illustrating the general
principle of diminishing returns that we suppose such an
evenly ascending curve as that of the figure, vol. I, p. 177.
Before long the stage is reached when a steeply ascending
curve would represent the situation. The land can indeed be
made to yield more and the ascent would not become quite vertical.
But the increase in cost for additional yield is prohibitory.

Tho agricultural improvements counteract this tendency, and
remove further the stage when the tendency to diminishing returns
shows itself sharply, they seldom have great and rapid effects.
When once a country's land is all taken up and is brought under
that kind of cultivation which the existing knowledge of agriculture
has made familiar as the best, further advance of production takes
place but slowly. Population can then increase but slowly, so far
as it depends for support on the country's own land. It is true
that some economists and students of agriculture believe that with
widespread utilization of the best kinds of tillage, the yield of the
land could be much increased even in thickly settled and highly
cultivated European countries. I suspect that these possibilities
are exaggerated. In any case, the rapid adoption of the best
methods is checked, especially on the continent of Europe, by the

42-§5] RENT, AGRICULTURE, LAND TENURE 73

ignorance and stolidity of great sections of the agricultural popu-
lation. Even tho there be considerable possibilities of improve-
ment, the stage where diminishing returns will begin to appear
sharply is in fact not far ahead. If a marked increase of popula-
tion in modern times has not caused a severe pressure to be felt,
the explanation is found in that great change which has so pro-
foundly influenced all recent economic history — the extraordi-
nary improvements in transportation and the opening of addi-
tional sources of supply in new countries.

§ 5. Ricardo, with whose name the theory of rent is most asso-
ciated, reinarked that rent "is paid ... for the use of the original
and indestructible powers of the soil." But it is urged that the soil
has'iioindestrtictible powers. "" "if'continually cropped, it loses its
powers. "Worn-out land" is a familiar phenomenon. The soil
contains certain chemical constituents, which are taken from it
by growing plants and whose continued loss means the eventual
destruction of fertility. The chief of them is nitrogen. This is
restored (tho by uncertain and irregular steps) thru the spontane-
ous action of nature if the land be not cropped ; hence the ancient
practise of allowing land to lie fallow, or allowing it to "rest."
But it is restored more promptly and effectively by fertilizers and
by the rotation of crops, and especially by the root crops. On
all these chemical processes the science of modern times has thrown
a flood of light, explaining the practises which had been empiri-
cally worked out in former times and pointing the way to new
and better practises. Certain it is that improvident cultivation
wastes the powers of the soil, and that there is need of restoring to
it what continuous cropping removes.

When new land is first taken in cultivation, the necessity of res-
toration is not felt. The store of elements of fertility is then large.
It may maintain itself, notwithstanding continuous drain, for years
and even for a generation. If there be plenty of new land, another
parcel can be taken under cultivation when signs of exhaustion
appear on that first used ; and so on, as long as new land is available.
This is what the Germans call " Raub-bau" — predatory cultiva-
tion. Thus, on the sugar lands of Cuba, the crop is grown contin-

74 THE DISTRIBUTION OF WEALTH l42-§5

uously year after year, the juice being extracted from the cane, and
the stalks and leaves burned as fuel. There is no fertilizing, and
not even those elements which are contained in the stalks and leaves
are restored to the land. But after a series of years even the rich-
est sugar land begins to show a declining yield. Then, however, the
planter turns to fresh plots, and the same process begins over again.
It will continue until no more fresh land is available; for predatory
cultiyatioii^^o long as the land holds out, is the most profitable.

Such has commonly been the first stage of agriculture in the
United States, especially on the fertile lands of the Mississippi
Valley and the West. The usual crop has been wheat, because of
the universal demand for that staple and its easy transportation.
In this pioneer stage, wheat is grown year after year, with no
manuring or little of it, and often with burning of the straw.
Where the soil is rich in humus, such use of it can be maintained
for ten or fifteen years and sometimes for an even longer period.
Yet in time the signs of approaching exhaustion appear. The land
no longer yields as before; it must have a "rest" or be "nursed";
and the farmer must either turn to plots of virgin soil, or cultivate
the old with the conservation of its capabilities. In the United
States this transition has often been accompanied with a change
in ownership. The pioneer sells his worn-out land — not yet in
reality much worn out, but simply in need of careful husbandry —
to a newcomer, not infrequently a German or Scandinavian, who
is habituated to more complex ways of cultivation; while the pio-
neer himself moves farther West, again takes up virgin soil, and
repeats the old round.

Predatory cultivation is one phase of extensive cultivation; it
stands in contrast with the intensive cultivation of England,
France, Germany, and most parts of Europe. Extensive cultiya-
tion means that labor and capital are spread comparatively thin.
The yield per acre is commonly small. Thus the average yield of
wheat per acre in the United States is between 12 and 15 JiU^ls.
In England, the average is 25 bushels and more. But the yield
per unit of labor and capital is smaller in England; for much more
labor is applied to each acre. A farm of one hundred and sixty

42-§5] RENT, AGRICULTURE, LAND TENURE 75

acres in the typical agricultural regions of the United States — say
in the North Central states — is tilled by the owner and his family,
with possibly one hired laborer, A farm of the same size in Great
Britain is tilled by the capitalist farmer employing a whole staff of
farm laborers.

Extensive cultivation, however, is not necessarily^ predatory
cultivation. Labor and capital may be spread thin on the soil, yet
nevertheless may be applied with care and with due conservation
of the elements of fertility. In the United States, the first stage
of pioneer or predatory cultivation — lasting perhaps for ten or
even twenty years — is usually succeeded by more careful, but still
extensive tillage. Most of the land in the upper Mississippi
Valley is now in its second stage. It may be expected that, as
population thickens and the resort to the new land becomes more
and more difficult, a gradual transition will take place toward the
stage of high farming or intensive cultivation. More elaborate
rotation of crops, more continuous use of each tract, deeper plowing,
more frequent harrowing, systematic drainage, more abundant and
more carefully selected fertilizers, will be used, as they now are in
the advanced countries of Europe. This change is due to the ten-
dency to diminishing returns, and is a sign that the conditions of
pressure on the land have been reached. High farming is essential
to maintain the productivity of the land if large returns are sought
from it; but it means that those large returns are got with some
difficulty, and that the limit to the possibilities of increase is begin-
ning to be approached.

In any case, as the land of a country is used more and more, its
efficacy as an agent for production depends in greater and greater
degree on what man has done for it. , Those lands which were
originally best have been denuded somewhat of their natural stores.
Those which were originally less good have been brought nearer
the average by continued careful cultivation. All have been
leveled, drained, fenced, freed from large stones, and provided
with roads. The differences between plots are thus less great, the
longer they have been in use; and in old countries there is a tendency
to bring all land to something like the same state.

76 THE DISTRIBUTION OF WEALTH l42-§5

From this it might be inferred that inherent differences in land
cease to be of importance. But the conclusion by no means fol-
lows. It is true that all land needs careful use, and depends on
man's action for the maintenance of its fertility; but all does not
respond to man's action with the same ease or to the same degree.
Land with a deep layer of humus contains very rich stores of latent
plant food, not easily transferred to the plant, yet capable of being
utilized almost indefinitely if only there be restorative cultivation.
The physical constitution of land — in what proportions it contains
sand, clay, humus — has an important influence on its possibilities
for tillage. Tho a sandy waste or barren hillside may be brought
to a state of high yield by continued care and remaking, it cannot be
brought to that state or maintained there with as little labor as land
having better natural endowment. New England can never be made
as fertile as Illinois and Kentucky. Climate, again — smishine,
temperature, and precipitation — is an important cause^f endur-
ing differences. The newly opened land in the Canadian North-"^
west, for example, of which so much has been said in recent years,
seems to be well adapted for wheat growing, and promises for a long
series of years to give profitable opportunities for pioneer cultiva-
tion. But when, after perhaps a generation, the inevitable stage
of restorative cultivation is reached, its possibilities will be found
less than that of the land in the milder regions. Land that is frost
bound thru the larger part of the year is not a flexible instrument
and will not readily respond to more intensive cultivation. In the
semi-arid regions of the Western states — those stretches in Ne-
braska, Kansas, Texas, which lie intermediate between the well-
watered Mississippi Valley and the arid plains of Wyoming, Colo-
rado, and New Mexico — it is said that "dry farming," in the way
of deeper plowing, careful harrowing and rolling, specially selected
seeds, will remove climatic obstacles long thought insuperable.
Whether or no these expectations are fulfilled, it is certain that
more labor will need to be applied in those regions than in the
Mississippi Valley, where nature provides ample moisture.

Tho inherent differences in fertility thus persist, it is true that
on all land which has long been in use there is difficulty in deter-

42-§6] RENT, AGRICULTURE, LAND TENURE 77

mining how much the yield is affected by its "original and inde-
structible powers," how much by qualities supplied thru man's
action. Economic rent is extremely difficult to mark off. Beyond
question it is present on some sites: thus on bottom lands in our
Western valleys, where the layer of humus is extraordinarily deep,
or (by virtue of situation) on convenient sites for market gardens
close to great cities. We may be certain that on other lands there
is little or none of it — on the rocky pastures of New England or
on the Highlands of Scotland. But on any particular plot which
has been long under cultivation it is almost impossible to say how
much labor is aided by the improvements made by man, how much
by inherent properties.

When once permanent improvements have been embodied in the
land, their effect is precisely the same as if nature had made the
land good. Subsoil draining, for example, which has been
applied on a great scale in Ohio, Indiana, Illinois, and other states
where the pioneer stage has been passed, means an irrevocable
investment. \Mien the drains are in, it is as if nature, not man,
had provided the best means of admitting moisture and of dis-
charging the harmful excess. So it is when great operations for
drainage are undertaken — as on the Bedford Level in England,
or the tracts on the Mississippi River along the boundary between
Missouri and Arkansas. Extensive areas, high in the elements of
fertility, have thus been freed from excessive moisture. Once these
improvements are made, the return on the land depends on the
principles of rent rather than on those of interest. It depends once
for all on the productive quality of the land as it stands after the
improvement. 1

§ 6. The leasing of land and the payment of "rent" in the usual
sense does not necessarily imply the existence of economic rent.
What the tenant pays may be no more than the ordinary return,
in the way of interest, on improvements made by the owner.
But commonly the actual payment contains something of economic
rent as well as of return on capital. Tenancy raises some inde-
pendent questions. ^

» Compare what is said bdow, Chapter 43, § 4.

78 THE DISTRIBUTION OF WEALTH l42-§ 6

Almost always tenancy Is an obstacle to the best use of the land;
for the tenant is concerned only with getting out of it what he can
during his term, and is tempted to employ predatory methods. In
its barest form, where the landlord does nothing, and the land is
simply let to the tenant from year to year, it results not only in bad
tillage but in demoralized tillers. Such was the outcome of
V cottier holdings in Ireland, maintained there for centuries in the
^ dealings between alien landlords and an oppressed and ignorant
f tenantry. The situation is better where there is fixed tenure in
the form of long leases, with provisions for compensation to tenants
for improvements made by them and not exhausted on the expira-
tion of the lease. Even under this arrangement the landlord must
have a care for the way in which the soil is used, and usually makes
stipulations regarding the rotation of crops and the maintenance of
improvements. Yet these very stipulations, if detailed, hamper
the tenant unduly. In England, a practise of short leases (usually
from year to year) has been carried on without much ill effect,
because landlord and tenant have been virtually partners. The
English farmer is a person of some means, who leases a considerable

t tract of land and is prepared to cultivate it systematically for an
extended period, relying on renewal of his lease at equitable terms
so long as his husbandry is good. The landlord himself makes per-
manent improvements and is thus an investor in the land. The
actual payment made to the landlord represents economic rent
only in part. Traditions of friendliness and fair-minded dealing
between the two have made this arrangement a workable one; and
indeed the agricultural arts in England have reached a high degree
of advancement under them. In Scotland long leases, sometimes
for twenty-one years, are common and under them perhaps the
most refined forms of intensive cultivation have been developed.

None the less, the most effective use of the land is likely to be
made by the owner. Such at all events is the case where land is
readily transferable, and so can be bid for and secured by those
who know how best to make use of it. This facility is lacking in
many European countries, especially England and France; where,
moreover, the obstacles which the state of the law presents are

Vfrry >•"

42-§6] RENT, AGRICULTURE, LAND TENURE 79

increased by the social prestige which often attaches to large
landed estates and makes the owners reluctant to sell. In the
United States none of these obstacles exist. Here, at least in the
northern part of the country, most land is tilled by the owners.
Farms are constantly passing from one hand to another, according
as varying possibilities of cultivation are perceived by different per-
sons — a condition which promotes the most productive utiliza-
tion of the soil. In the North Central states, the great agricul-
tural region of the country, about sixty per cent of the farms are
tilled by their owners. Since the opening of the twentieth
century there has been some increase of tenancy in this region, and
in the North generally. But the increase is largely due to the
efforts of younger men to swing themselves into the position of
owners — a process which takes time in those sections where land
commands a high price and where a considerable sum in hand is
required to buy it outright. Notwithstanding the increase in ten-
ancy, the conditions of land holding in the northern parts of the
United States are satisfactory. The same is true of many parts of
Germany, and especially Southern and Western Germany, where
the percentage of land ownership is also high.

A not uncommon form of tenure in the southern part of Europe
— notably in Italy — is metayer tenure. The land is let for a
share of the crop; often one half of the crop, but more or less accord-
ing to the fertility of the soil and the extent of the landlord's other
contribution. The landlord himself provides part of the capital
used. Metayer tenure has the advantage, as compared w^ith
hired labor, of stimulating the cultivator to get from the land
as much as possible; but evidently with the drawback which
comes from the fact that the landlord also shares in the output.
In the southern part of the United States there is a widespread
practise of share tenancy among the negroes. The owners of
the land here contribute a very large part (sometimes all) of the
advances needed by the tenants: not only seed, implements,
animals, but even the food of the negroes. This arrangement
was doubtless inevitable under the conditions in which the South-
ern states found themselves at the close of the Civil War, the

Y THE DISTRIBUTION OF WEALTH [42-§7

fj-eedmen being destitute alike of means and of any experience in
agricultural management. Yet it is not comparable in social
%3vantage with complete ownership by those who work on the soil.
It is inferior also to leases at a fixed money rent, where the leases are
so adjusted as to bring security of tenure and encouragement to
improvement. A wide diffusion of the ownership of land and a
predominance of cultivation by the owners are the most whole-
some agricultural conditions; and it is much to be wished that
these conditions which fortunately prevail over the greater part of
the United States, should develop in the Southern states also.

§ 7. The considerations which have been adduced in the pre-
ceding sections — the need of conserving the fertility of the land,
the growing importance of man's action as cultivation becomes
more intensive, the difficulty of distinguishing between nature's
endowment and artificial improvements — have an important
bearing on some social problems.

It has been proposed to confiscate economic rent for the benefit
of the community. Rent is a surplus over and above what is
necessary to induce investment, an unearned increment, tending
to rise as growing population leads to greater demands oji the soil.
Why should the individual landowner keep it? Under the so-
called "single tax," it is proposed that all land be taxed to the full
amount of its economic rent; the tax being called single, because it
is expected that so much revenue would be secured for the public
as to enable all other levies to be dispensed with. Substantially
the same result would be attained if the community were to take
possession of the land once for all, never part with the title, and let
the land to tenants for the amount of its rent — allowing the
tenant to keep for himself enough to pay for all his improvements
and for interest on them, but requiring payment of the excess.

One fundamental obstacle in the way of this program of action
is, as regards agricultural land, the difficulty of measuring the in-
vestment made in the soil and the normal return on it. Rent, as
has been remarked, does not arise spontaneously. It is nQt_earr
marked as a sej>arate return. Its emergence is inextricably inter-*
mixed with the complex processes of tilling the soil and of main-

42-§7] RENT, AGRICULTURE, LAND TENURE 81

taining its fertility. For the effective use of the land, there must
be elaborate application of labor, much experimenting, plans of
cultivation that run over a long period; not least, constant indi-
vidual watchfulness and care. No stimulus to the best use of land
is comparable to that which comes from secure possession, from the
certainty that he who makes it yield abundantly will reap the
results of hi& industry. And no kind of secure possession is so
effective to this end as untrammeled ownership. It is true that by
private ownership the community loses something which, if dis-
creetly carved out, might be appropriated without discouraging
good management; but the difficulties of discreet^ carving are so
serious and the need of good management so great that the
balance of social gain is against any scheme of taxation or periodic
appropriatioiT."^" ' "••*•.. .-i.

There is something attractive in the proposal that the community
should never part with its title to the land, but should lease it only
— lease it for long terms, in such manner as to give tenants free
scope for improvements and no inducement to impoverish the soil,
and yet to bring back to the community in the end the gradually
increasing increment of economic rent. If the country had started
from the outset on this plan, and if its goverimient were rigidly
honest, highly intelligent^ and excellently administered, this mode
of managiiigHtS'"'''patrimony would be preferable to private
ownership. But no country has started on this plan; or if it has
done so (the historians are uncertain as to the extent to which the
Germanic races began with a system of true communal ownership),
long centuries of private ownership have followed. The spur of
ownership was historically indispensable for the advance of the
agricultural arts. It is conceivable that where a civilized com-
munity, equipped with the accumulated experience of centuries,
takes possession of new land — as in the United States, Canada,
Australia — it might retain in public ownership the fee of the land,
parting only with long leaseholds. But it is precisely the fee which
the pioneer generations covet. The thought of the conservation
of the interests of the coming generations rarely presents itself to
them; or, if it does, they think of their own direct descendants only.

82 THE DISTRIBUTION OF WEALTH [42-§7

not of the indiscriminate mass of the later population. Hence all
communities, whether they have moved slowly thru a long historical
development or have begun at once on the plane of advanced
civilization, have rested their industrial organization on private
ownership of land. Land then has been bought and sold for
centuries on the supposition that the property rights which have
existed from time immemorial will be maintained indefinitely into
the future. To destroy all these acquired rights is not indeed
unthinkable, but it would involve a reconstruction of the whole
framework of society. It presents the problem of socialism, not
of the appropriation of the unearned increment.

A different proposal is that to appropriate, not the whole of the
unearned increment, but the future accretions. Let vested rights
— the private ownership of land and the enjoyment of existing
rents — remain undistiu-bed. But take for society at large the
increase of rents that will arise hereafter. There can be no objec-
tions in principle to this proposal. The sole question is whether
it will on the whole bring gain to the community. To carve out
economic rent proper and to leave undisturbed those gains which
are necessary to secure the effective use of the land, calls for high
intelligence as well as scrupulous honesty among the public officials.
A dull or corrupt administration of so delicate a function would
work great harm and indeed would probably lead before long to the
summary abandonment of the whole scheme. It is to be borne in
mind, however, that where the ownership of land is much diffused,
a wide dispersion of economic rent takes place, and those extreme
inequalities are avoided which are the most objectionable results of
the regime of private property. All things considered — admin-
istrative difficulties and the imperfections of government, as well
as strictly economic factors — the balance of gain is probably in
favor of the untrammeled right of private ownership in agricul-
tural land, and of such legislative changes only as facilitate its free
transfer and its easy acquisition by those who will use it best.

CHAPTER 43
Urban Site Rent

Section 1. How rent arises on sites for retail trading, wholesale trading,
manufactures, dwellings, S3 — Sec. 2. The principle of diminishing
returns on urban sites; its operation less steep than for agricultural land,
87 — Sec. 3. Site rent depends upon shrewdness in utilization. The
activity of real estate speculators, 89 — Sec. 4. When capital is sunk
irrevocably in the soil, there is difficulty in separating rent from return
on capital. How far ground rent is identical with economic rent, 91 —
Sec. 5. How far the activity of real estate dealers and speculators is pro-
ductive, 94 — Sec. 6. Urban rent is sometimes deliberately created; is it
then economic rent? 95.

§ 1. Urban rent resembles in essentials the rent of agricultural
land. Like that, it results from the differential advantages of
certain plots. The application of capital and labor on some sites
yields greater returns than on others. So long as the possibilities
of production on the better sites are limited, the owners are subject
to a restricted competition only, and can retain the extra return for
themselves; and this, irrespective of whether they utilize the sites
themselves, or let them to others.

The cause and the extent of the differential advantage of urban
land can best be elucidated by a consideration of the various ways
in which the land is used. Most characteristic, and simplest in its
manifestations, is the case of sites used for retail trading. Wher-
ever throngs of people habitually pass, retail operations can be
conducted with most advantage. Enter a great shop in the heart
of a city, and observe what goes on. The selling clerks are con-
tinuously busy; the turnover of capital is large and quick; the
building and all its appliances are in constant effective use. Con-
trast the scene with the village shop, where the shopkeeper lolls
about during the greater part of the day, waiting for a customer;
or (if he be energetic) has ample time for attending to other things
also. For each unit of labor and capital applied, the product is

84 THE DISTRIBUTION OF WEALTH [43-§ 1

vastly greater on the city site. By "product," in the case of the
shop, we mean the contribution to the community's income of
utiHties or satisfactions — the completion of what is usually the
last stage in the process of getting commodities into consumers'
hands. In everyday speech, the same thing is expressed by saying
that in the one place much business can be done and in the other
very little.

The precise reasons why some sites are better than others for
retail trading are sometimes simple, sometimes obscure. Most
simple are accessibility and familiarity. The places where urban
transportation lines converge are the most valuable for retail trade.
From such centers the retail streets commonly radiate, those being
most advantageous along which the largest number of persons move
to and fro in their daily tasks. Anything which causes many per-
sons to betake themselves to a given point — a railway station, a
post office, a theatre — gives the neighboring sites an advantage
for retail trading. Less simple are the effects of tradition, or of
proximity to the dwellings of the well-to-do, or of the initiative of
a few skillful dealers, by which one street or region rather than
another may come into vogue for shops of the more expensive kind
and its profitableness may for that reason become greater. Dis-
play has a great part in attracting customers (it is a cardinal
maxim of the retailer that his windows must show his goods) ; hence
the southern side of the street, where goods can be put into show
windows with most effect and with least danger of spoiling, often
has an advantage over the northern and commands a higher rent.

The prices of the commodities sold on the expensive sites are not
usually higher. Here, as in the case of agricultural land, rent is
not a cause of high price. It is the result of the facilities for sell-
ing many things at the usual prices. The so-called department
store sells its wares at prices at least as low as those of the suburban
or village shop. To this statement there seems, indeed, to be an
exception in the case of those shops which make their appeal to the
rich, and to persons who ape the ways of the rich. Here a given
article is not infrequently sold at a price higher than that charged
on less pretentious premises within a stone's throw. Here high

43-§l] URBAN SITE RENT 85

prices and high rents go together; and the dealers, if asked, would
certainly explain the connection between the two by saying that,
having to pay high rents, they must charge higher prices. But in
reality the causal connection runs the other way ; it is because they
can get high prices that they bid high for the premises and pay the
high rents. In shops of this character there is usually a stock of
well-selected and attractively arranged articles of good quality;
there is quiet, and, not least, there is a flattering of the purchaser's
vanity by obsequious demeanor and by a suggestion of superior
company. The satisfaction of the snobbish love of distinction is
one of the utilities here pur\eyed, and is one for which most people
are willing to pay handsomely.

Sites for wholesale trading command their rentals largely because
pf their proximity to other sites where the same or similar busi-
nesses are carried on. This advantage may seem a trifling one,
especially in these days of the telephone. Yet where trading is
done on a great scale, a few hundred dollars more or less paid for
rent, or even a few thousand, do not signify much in the general
account, and the facilitation of larger dealings leads to the ready
payment of a high premium for the convenient sites. Here every
sort of negotiator can run in promptly; banks, brokers, shipping
agents, insurance companies, are close by. Wholesale dealers in
the same trade commonly are near each other; in a great city there
is the metal district, the dry goods district, the boot and shoe dis-
trict, the shipping district, and so on. All together cluster about
the financial center, which in turn gets its advantage from being in
close touch with any and every kind of business. The most various
sorts of persons who need to be where they can easily get at their
customers and where their customers can easily get at them, bid
for premises near the heart of things; such as lawyers, brokers,
schemers and middlemen of all kinds, the managers and represen-
tatives of manufacturing establishments. Hence the office build-
ing, developed to perfection in American cities. The largest urban
rents seem to be vsecured, at least in American cities, on sites used_
for offices, for financial enterprises, and for the great retail shops.
They sometimes reach an extraordinary range. An acre of land

86 THE DISTRIBUTION OF WEALTH [43-§ 1

in the financial center of New York City had about 1910 a capital
value of roughly $20,000,000, representing a net rental of $800,000
a year.

Manufacturing sites sometimes command their price because of
intrinsic advantages. They may be near water power, or a deep-
water harbor, or cheap fuel and materials. Facilities fof ^^ans-
portation by railway tell no less than water facilities. In the
United States, so long as competition among railways was active
and railway rates were lower if one line could be played off against
another, a spot atLwhich several lines met had advantages in much
the same way as if nature had made the site good. When once a
city has developed, it continues to attract manufacturing estab-
lishments, for reasons that are often not apparent on the surface.
f Why should a premium be paid for urban premises when sites
^ apparently no less good can be had at much lower rentals in the
/ country? Here, too, the telephone would seem to remove the draw-
backs entailed by remoteness. And yet the keen calculations of
shrewd business men, constantly weighing the advantage of prox-
imity against a higher rent charge, cause the gravitation of many
manufactures to the urban centers and the suburbs close to them.
Easy access to customers, to supplies, to subsidiary industries, even
to competitors, is one factor. Probably most important is the
plentifulness and flexibility of the labor supply, to which reference
has already been made,^ and which is of particular moment in
establishments whose work is subject to rapid fluctuations.

The precise point at which a city's business operations will con-
centrate and at which urban rents will be highest, is often deter-
mined by no natural or inherent causes. The site of a great city
_jtself is indeed, usually fixed by natural advantages, such as a
superb harbor, as in the case of New York City and San Francisco,
or the confluence of rivers in the neighborhood of great coal sup-
plies, as Pittsburg, or access to inland water routes, as Chicago.
But within the city there is usually no reason why one small area
should be preferred to others as superior for business. It is the
■ gregariousness of industry that gives business sites their value,

1 See Chapter 14, S 2.

43-§2] URBAN SITE RENT 87

just as the gregariousness of men has the same effect on sites for
dwelhngs. Some one center will be resorted to by all, and will be
prized by all; but the causes which fixed the center at Threadneedle
Street or Wall Street are usually historical and complex, and some-
Jimes wtjjmsicaL

The value of sites for dwellings is explained by the same prin-
ciple, with similar complexities and similar apparent anomalies.
Sometimes such sites have intrinsic advantages — broad and
sunny streets, frontage on parks and open spaces, convenience of
access. But often the advantage is purely factitious. Nearness
to one's kind is in many cases alone sufficient to explain the demand
for some spots. Crowded, noisy, and unhealthful city streets
attract the working classes more than quiet lanes in the country.
At the other end of the social scale, among the well-to-do, and most
of all among the very rich, snobbish difierences tell enormously.
Certain streets are resorted to by those who have social distinction.
Thither flock all who yearn for such distinction — a great and grow-
ing multitude — and sites believed to be proper for the select are
paid for at rentals limited only by their incomes. The very cracks
and crannies of fashionable districts, narrow side streets and dark
back rooms, when touched by this potent charm, command high
rentals, notwithstanding their intrinsic unattractiveness.

§ 2. Something closely analogous to the tendency to diminish-
ing returns shows itself on urban sites.

Buildings can be pushed higher almost without limit. In these
modern days of steel-frame construction, ten, twenty, thirty,
stories are practicable. But sooner or later the stage is reached
where the gain from additions to the structure begins to diminish,
and where it becomes a question whether it is not better
to resort to building on another site than to push construction
further on the same site. Where the land is used for manufactur-
ing or mercantile operations, that stage seems to be reached, in
American cities, with the sixth or eighth floor. One rarely sees a
building of greater height used for these purposes. The poorer
light and air on the lower floors, the cost^ lifting goods and
materials (even with smooth-running elevators), the difiiculties of

88 THE DISTRIBUTION OF WEALTH l43-§2

supervision, begin to tell, and tell the more as more stories are
added. Wliere buildings are used for office purposes in the busi-
ness centers of great cities they are often pushed much higher, at
least in the United States. The advantage of being at the very
heart of things is so great that a multitude of persons, engaged in
all sorts of occupations, are willing to pay liberally for this facility;
and a small city in itself is established in the towering office build-
ing. But even here there is eventually a limit, tho one which the
progress of invention is steadily pushing higher. It must be borne
in mind, in any case, that all the sites cannot be used in this way,
for then the buildings would cut off too much of each other's light
and air. Hence adjoining sites must be controlled and limited; in
other words, taking the combined sites, the possibility of inten-
sive use is much more limited than it appears to be when a single
plot is considered by itself. Situations on a corner, or those which
face a public square or other open space (like Trinity churchyard
on Broadway in New York City), offer the possibility of investing
an enormous capital on a given area.

Much the same is true where dwellings are put on urban land.
Here, also, buildings can be made taller, thus securing very inten-
sive use of sites advantageously situated in large cities. Dwellings
for the very poor as well as for the very rich can be pushed high;
tenements for those who must be near their work (or think they
must be) and near their comrades, and great mansions or apart-
ments for those whom fashion attracts to "choice" sites. But
eventually, even with steel frame construction and with elevators
and telephones, a limit is reached where it begins to be less
profitable to add more and more stories. The tendency to
diminishing returns under the increasing application of more and
more labor and capital to the utilization of the same site, finally
asserts itself.

This tendency does not act so steeply on urban land as on rural
land. On a plot used for agriculture, diminishing returns are
encountered at a comparatively early stage. It is true that for
certain purposes — as for market gardening or vineyards — very
intensive use can be made of a few agricultural sites; precisely as

43-§3] URBAN SITE RENT 89

highly intensive use is made of a few urban sites. But in almost
all cases_diminishing returns are reached comparatively early^on
agnculturaTTand, and the obstacles which cause a lessening of prod-
uct act steeply. On urban land, on the other hand, the obstacles
appear more gradually, and hence there is a larger choice between
the more and the less intensive use of the sites. One will find
side by side, on the same city street, very high buildings and com-
paratively low ones; indicating that as regards the additional stories
on the high buildings, there is neither any great gain (over and
above return on the cost of construction and management) nor any
sharp tendency to a lessening of return, as the building is pushed
higher. It would seem that very large amounts of capital can be
invested on some urban sites, especially on business premises,
with a prolonged stage at which returns are nearly constant.

§ 3. On urban land, as on agricultural land, there is no separate
product of the land. Nothing is automatically yielded by the site;
nothing is earmarked as "rent." What happens is that labor and
capital applied on some sites yield unusually large returns. The
sites being limited, the owners are able to keep for themselves the
excess of return over and above what is usually got.

The yield on the advantageous sites depends in no small degree
on the skill with which they are used. Their possibilities are not
seen by all persons. The bidding for them comes most actively
from those who have the shrewdness to see what can be done on
them and the courage to put their calculations to the test of actual
trial. Mistakes are sometimes made and losses incurred by those
who lease or buy city land on high terms; while at other times
success and unusual profit follow from its ingenious utilization.

For example, the office building which is so striking a feature of
American cities is the result of a process of gradual evolution.
Successive sets of persons have devised more and more elaborate
utilization of central sites — new methods of construction, higher
buildings, more convenient service. Each improvement entailed
a^rtain risk; each, if fortunate, promptly had a host of imitators.
A successful venture inured to the advantage first of the owner of
the particular site, and later to the owners of similar sites. Very

90 THE DISTRIBUTION OF WEALTH [43-§3

common!}^, in American cities, the innovator who has in mind a
new use of the land (say thru a more elaborate building) will buy it
outright from the previous owner at a price based on the traditional
ways of using it. Then, if he succeeds in his venture, he finds the
return on his total investment handsome, and his site worth in the
market more than it was before. Sometimes he leases the land for
a long term and then enjoys the gain during the period of his lease.
Sometimes the owner himself is shrewd enough and energetic
enough to use his site in such a way as to get the maximum yield.
In whatever way the more effective and profitable utilization comes
about, it soon has plenty of imitators and the new method becomes
the common one for sites of the same sort; to be succeeded in due
time, especially if the city continues to grow, by other still more
ingenious methods. But success does not invariably follow. Mis-
takes and miscalculations occur, as in every kind of investment.
Often enough it happens that a projector pays high for a site and
erects an elaborate building, perhaps one adapted to special uses,
in the expectation of meeting a brisk demand for the quarters pro-
vided in it but finds that he has overestimated the growth of busi-
ness in the city or the demand for the particular accommodation
which he offers.

In every large city there are so-called "real estate men" who
make it a business to manage investments in urban realty, partly
for themselves, partly for others. Among them a process of
selection causes the less shrewd to drop out, the more shrewd to
come to the fore. Usually there are some among them who are
gifted with a sort of instinct for discerning the possibilities and
adaptations of the various grades of city land, and they commonly
make large sums, sometimes fortunes, either from the purchase and
sale of sites or as managing agents for the owners. They set the
pace so to speak, and are followed by the rank and file. There are
always others, equally venturesome but less shrewd or less fortu-
nate, whose experiments do not succeed and who lose money for
themselves and their backers. The spur of individual profit^and
the stimulus of competition are no less necessary here than in
other parts of the industrial world for the most effective employ-

43-§4] URBAN SITE RENT 91

ment of the factors of production. And here also the difficult prob-
lem is that of so adjusting rewards that enough shall be earned by
projectors and managers, and not more than enough, to induce the
full exercise of their industrial talents.

§ 4. The investment of capital on urban sites is usually more
irrevocable than on rural sites. It is true that there are agricul-
tural improvements, such as operations for irrigation or permanent
drainage, which last indefinitely and which, when once made, are
irrevocable. But most work done on farms exhausts its effects in
a short time — usually in a few years — and the choice recurrently
presents itself whether any particular application of labor and capi-
tal shall be repeated or shall be discontinued. The investment of
capital on urban land, on the contrary, is usually such that the
improvements last a very long time, and hence that a change is
made with difficulty.

Thus, in many seaports, tide flats or shallow stretches ha'> e been
filled, and deep-water sites secured. For such an investment there
is no wear and tear, and no possibility of shifting the capital in the
manner in which it may be shifted when invested in machinery —
by letting it wear out and replacing with something else. The
changed land surface is there once for all. So it is whenever land
has been leveled or filled. The case is similar, tho not so extreme,
with buildings. It is true that buildings do not last forever; but
they may last for generations, even for centuries. Commonly they
have to be kept in repair, in order that they may be used at all. So
long as they yield anything over and above the expense of repairs,
it is worth while to maintain them, even tho the return be but slight
on what has been invested. It will be profitable to tear down an old
or ill-adapted building and replace it with a new building, only
when the new one promises to yield not merely enough to pay a
satisfactory return on its own cost, but in addition enough to com-
pensate for the loss of the net revenue which had still come in from
the old one. Consequently the antiquated structure, even tho
it does not utilize the site in the best way or to the full extent,
remains undisturbed for a long time, yielding such a return as its
conveniences may make possible. Where a city is growing rapidly.

92 THE DISTRIBUTION OF WEALTH l43-§4

the demand for new structures will cause the stage to be reached at a
comparatively early date when it will pay to raze to the ground an
obsoleteHbuilding and substitute something new and up-to-date.
Where a city grows slowly, still more where its population is station-
ary, such a building, especially if thoroly put together and in
little need of repairs, may remain in use indefinitely long.

In other words, when once an urban site has been adapted to use
by an investment of capital — and the common and typical mode
of investment is that of erecting a building on it — the return on
it is irrespective of the extent of the investment. The parcel of
"improved" realty — land and building as one complex — earns
an amount determined solely by its serviceability for business or
dwelling uses. It is only in the very long run that the difference
becomes apparent between rent and interest — between that return
which goes to the owner of the site as such and that which goes to
the owner of the capital put on it. As time goes on, buildings do
wear out, old ones are torn down, and new ones are substituted in
their place in order to put the land to its most profitable use.
Landowners as such then secure the full differential gain which
their site is capable of affording. But the slowness with which
capital invested on land can be shifted may prevent for a long
time the attainment of this maximum.

None the less, it is usually possible to ascertain with a fair degree
of accuracy what is the gain or rent accruing from an urban site
as such. While the ways of using it change from time to time,
there is at any given stage an established or normal utilization,
just as there is at any given time an established or normal method of
manufacturing cotton goods or boots and shoes. It is practicable
to measure what are the income-yielding possibilities of the site as
such under these normal conditions. Hence the selling value of
the land, which is based on its income-yielding possibilities, can
also be measured with sufficient exactness. It is so measured, in
the higgling of the market, by the current sales of land. It is
measured by the assessment of land for the purpose of taxation.
The rent which the landowner gets, tho it is not earmarked as a
separate return and tho it is much affected by the use to which the

43-§4] URBAN SITE RENT 93

site happens to be put, is none the less distinguishable from the
interest which goes to him, or to some lessee, upon an investment
of capital in the land.

It may seem that the difference between rent and interest is
clear in the case of land leased for a ground rental. In Great Bri-
tain urban sites are commonly leased for a long term (usually ninety- .
nine years) and built on by the lessee. Leases on ground rent are
not unknown in American cities and are becoming more frequent;
tho the common custom here is still for the landowner to put up the
building himself. When ground rent is paid by a lessee to the
landowner, the amount received by the latter is almost always
economic rent pure and simple. In Great Britain, where the
owner of the site customarily does nothing whatever to improve
it, his income seems to be clearly of this nature.

But it by no means necessarily follows that the whole economic
rent of the site goes to him; and it is conceivable that he may
receive under his lease more than that rent. The long-term lessee
may pocket, for many years, part of the strict rent of the site.^ The
increase of population, or its greater concentration in a particular
city, may cause the site to become more advantageous than it was
expected to be when the lease was made. The buildings which the
lessee erects on it may bring a return much more than sufficient to
pay interest and depreciation; there is a surplus, which accrues to
him thru his lucky bargain. It is possible, of course, that the
reverse may happen. The site may become not more advantageous
than was expected but less so; and the landlord will then receive
under his bargain more than his site proves to be worth. During
the last hundred years, when population in all the civilized countries
has not only grown but has crowded more and more into the cities,
much the more common experience has been that ninety-nine-year
lessees have pocketed part of the site rent. When long leases of

1 In the city of New York leases of sites are often made for twenty years at a
stipulated rental, with privilege of renewal for a second and perhaps third term
of twenty years, the rentals for the additional terms to be fixed by arbitration, or
on the basis of a fixed percentage (four per cent say) of the appraised selling value
of the land. Such an arrangement makes it more certain that the landowner will
secure the full economic rent.

94 THE DISTRIBUTION OF WEALTH [43-§5

this sort reach the end of their term, there is sometimes a wonderful
accretion for the heirs or successors of the lessor of a century before.
An ancestor of the Duke of Bedford in the eighteenth century
leased large tracts on what was then the edge of London, for ground
rent. Ninety-nine years later, when the land was in the heart of
the great metropolis, his descendants reaped a huge harvest of
urban site rent. Such windfalls bring into sharp relief the mean-
ing of "unearned increment," and they suggest also questions as to
the possible limitation of private ownership in urban land to which
we shall presently give attention.

§ 5. Reference has been made to "real estate men" and to the
higgling and bargaining by which the prices of city sites are fixed.
Speculation in urban land is a familiar phenomenon in modern com-
munities. Especially where the law of real property makes easy
the transfer of title, sites are bought "for a rise," and are passed
from hand to hand at fluctuating prices according to the calcula-
tions of sellers and buyers. In cities that grow rapidly, or are
expected to grow rapidly, the speculation is sometimes furious.
The bidders for promising sites overreach themselves, and in the
end some among them incur heavy losses; while others, more
shrewd or fortunate, pocket gains from the accruing rise in the
value of the land or from the mistakes of their fellow speculators.

In all this there seems to be purely unproductive labor, as that
phrase was defined before.^ No small amount of energy and skill
is given to figurings and calculations, bargainings and perhaps
intrigues, whose outcome is simply to cause one person rather than
another to get the gain from growing site value. From the social
point of view, this seems to be waste. True, it is not quite like
ordinary gambling where one person gains precisely what the other
loses. Unless real estate speculation be overdone, one person gains
only something which another fails to gain. Nevertheless, nothing
appears to be contributed to the community's income.

This in the main is true; yet it is subject to some qualification.
Speculation in city land does contribute something to the commu-
nity's welfare, in so far as it promotes the most effective use of the"

'^ 1 See Chapter 11. ]

43-§6] URBAN SITE RENT 95

land. It stimulates those who are engaged in it to ferret out all the
possibilities. It tends to bririg~tHe land into hands which will
utilize it to the utmost. The successful speculator is commonly a
projector who hits on new and more effective uses of the sites, or
a person who fraternizes with such projectors and weighs their
schemes with judgment.

Here, as in almost all of the working of the system of private
property, the question is one of the balance of advantage and dis-
advantage. Much the same question presented itself in the discus-
sion of speculation in commodities, such as grain and cotton.^
Speculation, whether in goods or land, has its advantages for the
community; but more persons engage in it, and more labor is given
to it, than is necessary to secure that advantage. There is no small
diversion of time and energy to what must be termed unproductive
operations. How far these can be restricted without sapping the
inducements to improvement is part of the fundamental problem
of modern society — that of promoting: both progress and_equality.

There is another sense in which speculation in general, whether
of the serviceable or the unproductive kind, may be said to be one of
the factors on which rests the demand for urban business sites.
What proximately determines the demand for such sites is the
facilities they afford for money-making. While pecuniary gain
arises commonly from the use of sites in ways that really add to the
well-being of the community — as when premises are used for trade
or manufacturing — it may come also when a site is used for
gambling operations. A great lottery, if permitted to exist by the
law (as it still is in some European countries, to their shame),
would pay handsomely for premises in the heart of a great city.
The brokers thru whom speculative gambling is carried on are
among the most insistent bidders for quarters in the financial dis-
tricts of large cities; for they must be near the center of things to
reach their customers and execute their customers' orders.

§ 6. Urban land values and urban rent are sometimes created.
As has just been said, the precise point at which a city shall arise
is not settled solely by natural causes; still less do such causes settle

i See above, Chapter 11.

96 THE DISTRIBUTION OF WEALTH [43-§6

the precise spot within a city which shall have large site value.
Projectors sometimes try to direct the forces that bring urban rent
into existence. A large industrial enterprise or set of enterprises
may be established in a small village, or on a spot where there had
not been even a village, in the expectation that about it a city will
grow up, with its accruing land values; the owners (or managers)
buying up the land in advance and expecting to profit by its sale or
lease. Thus the Pullman Company established the town of Pull-
man, near Chicago. The Steel Corporation deliberately created
Gary. A great railway company, by placing its workshops at
one spot or another, may influence markedly the growth of a city.
And within a city the same sort of intentional direction of the
urban currents may be attempted. Two or three great firms or
banking houses may transfer their operations to a new street and
carry business after them. Similarly with sites for dwellings:
persons of wealth and social repute may move to a new district and
give it the prestige of fashion. By purchasing in advance the sites
they propose to bring into favor, they may secure for themselves
the newly arising land values.

In most cases, it is true, land values are guided or diverted
rather than created. If population is the same, and is distributed
in the same way, site rent is sure to arise in any event. Then it is
possible only to cause it to appear in one place rather than an-
other; not to add to its amount. Yet there are cases where its
amount may be aft'ected, as in the skillful development of a
"residential" suburb or section, or in that of a well-planned
manufacturing center.

All such operations, however, whether they create or merely
divert urban values, are attended with risks even greater than those
of ordinary investment on the land. Where, for example, a new
city is sought to be created, streets must be made and water mains,
sewers and other conveniences put in. The whole depends for its
profit on the fulfillment of the expected growth. A set of project-
ors tried to create a manufacturing town named Depew near the
city of Buffalo, and spent much money in preparatory operations.
But they found it difficult to get either industries or people to

43-§6] URBAN SITE RENT 97

betake themselves to Depew, and the final outcome was failure and
loss. So it may be with attempts to turn urban currents toward
new streets or outlying districts. The favor of_the crowd —
whether it be a set of business men or of the idle rich — is prover-
bially fickle, llercj a^ain, shrc\v(hiess and personality tell. Some
individuals will undertake such ventures and overcome obstacles
with success, while others will fail. The higher site values which
may be attained in places so developed will not represent economic
rent pure and simple; they will be to a greater or less degree com-
pensation for risk and earnings of managing activity.

There are cases, on the other hand, in which the risk is small,
even negligible. When a government establishes a great work-
shop or a large educational institution, it is well-nigh certain that
population will be directed to the favored spot and that some
influence on site values will appear. When an important railway
fixes on a given town as its "division point," that is, a center for
administration and operation, or places its manufacturing and
repair shops there, the result is no less certain. It may chance
that the managers and directors of the railway, who know in
advance what is to happen, can then mak£.money'by clandestine
purchase of sites — a semi-corrupt abuse of positions of trust
which unfortunately has too often appeared in connection
with railway management in the United States. In such cases,
the gain should be reaped, if by any individuals, by the stock-
holders of the railway as a whole, not by a clique of managers.
Better still, it should be reaped by no individuals, but should go
to the entire community.

CHAPTER 44
Rent, concluded

Section 1. The rent of mines, how influenced by risk, 98 — Sec. 2. Dimin-
ishing retm-ns in mines, 100 — Sec. 3. Are mining royalties rent? 102 —
Sec. 4. The seUing price of a site is a capitaUzation of its rent, 103 — Sec.
5. The problem of appropriating rent for the pubHc is presented most
sharply by urban sites. The possibility of leases on long term by the
state; the historical development of unqualified private ownership
and of vested rights, 104 — Sec. 6. The future increase of rent a proper
object of taxation, but presents many difficulties. Modes of levying
such taxes, 108.

§ 1. Mines present a ease in some respects similar to that of
urban and agricultural sites, in some respects different. There
are obvious differences between individual mines. Some are
richer than others or more advantageously situated, and these
yield a differential return to their owners. If we assume free com-
petition and mobile investment, we may reason that, as the demand
for a given mineral (say coal) increases, more and more mines will
be put in operation — the most productive first, then those less SQ,;„.
that the coal will normally sell for enough to repay all expenses of
production on the margin, that is, at the poorest mine in use; and
that all better mines will yield a surplus income which is strictly
rent.

But with mines the conditions of mobile investment hold good
only to a limited degree. Mobility of investment presupposes not
only ease of transfer for capital, but also a generally diffused
knowledge of the prospects of profit. Neither of these conditions
obtains in mining, which calls for an irrevocable and usually very
large investment, and involves a high degree of risk and uncer-
tainty.

There is some risk in all use of land. The risk probably is
least in the long run (that is, over a series of years long enough to
equalize the accidents of the season) in the case of agricultural

44^§1] RENT (Concluded) 99

land; for the possibilities of such land are readily discerned by any
capable farmer. It is greater in the case of urban sites, where
there is the chance of ill-adapted buildings, of shifting population,
of the caprices of business movements. It is greatest in the case
of mines ; tho varying again for different sorts of mines. Even tho
prospecting is sometimes facilitated or encouraged by a preliminary
geological and physiographic survey (such as, for example, that
which ascertains the carboniferous area of a country) and even tho
it may thus be known that abundant mineral underlies a given area
— none the less, expensive trial is needed to ascertain how much
there is, of what quality, of what ease of procurement. When
once a coal mine has been opened and put into operation, it is
usually possible to judge how long the supplies will last and what
will be the expense of getting them to market; but even this is
in some part a matter of guesswork. The case is similar with iron
ore. Here, also, drilling and prospecting will often show how large,
how good, how^ accessible, is the ore body; but this preliminary
knowledge is got only by scoiu-ing a wdde territory. A multitude
of failures in "prospecting" is relieved by occasional success.
Where minerals occur in pockets, the chances both of failure and
success are greatest, and the miner's operations are akin to gam-
bling. Such was the case with the so-called bonanza mines of the
precious metals in Nevada. Some discoveries of these extraordi-
narily rich pockets of gold and silver brought fortunes to their
owners. On the other hand, there were unnumbered failures,
tempted by deceptive surface indications. Copper mining is
notoriously uncertain and speculative. In all such cases, even
when the first excavations are promising, there is a stage of doubt,
when capital must be invested in the form of shafts, machinery,
concentrating and smelting works. Venturesomeness, judgment,
persistence, and efficient management are essential to ultimate
success.

Where there are many losses, there must be corresponding gains.
The traveler thru such states as Colorado, Nevada, Montana,
Idaho, Arizona, California, sees the sides of the hills and mountains
scarred by innumerable openings, each with its tell-tale pile of rock.

100 THE DISTRIBUTION OF WEALTH [44- § 2

The immense majority of these ventm-es were failures. Were it not
for the chance of some great prizes, all this necessary work of explo-
ration would not have been undertaken. Under such conditions a
high return on the lucky ventures does not constitute a true sur-
plus. Nor is it easy to say whether on the whole the gains in
successful mining ventures suffice to offset the losses in the unsuc-
cessful. Prizes often have an undue effect on the imagination.
The unfailing attractiveness of a lottery (in which it is obvious that
the speculators as a body must lose) proves that where there is a
chance of great gain from a lucky stake, men will often pay for the
chance more than its actuarial value. As has already been noted,
there is ground for supposing that in mining for the precious metals
in former times the total outlays were not recompensed by the
total net earnings.^ At least a possibility of the same sort exists
as regards mining operations in general.

It is probable that in many mining ventures the risk is less now
than it was in former days; while on the other hand the need of
large initial investment is greater. With the advance of geological
and mineralogical knowledge it is much more possible to infer from
the surface outcrop or from experimental borings the quality and
quantity of what is underneath. The improvements in treating
ores have made available low-grade ores of gold, silver, copper,
lead, such as occur, not in pockets, but in continuous veins, or great
beds. This is the case, for example, in the gold mines of South
Africa, from which so great a supply of gold has been secured
during recent years. Here mining operations, when once the body
of ore has been found, are in no great degree speculative; and the
yield on the better sources of supply has more the nature of a true
surplus or rent. The same is the case with much mining of iron
ore and coal in modern times, where the mineral body can be
surveyed and appraised in advance with some measure of certainty.
None the less — especially in view of the heavy investment in
diggings and machinery required by modern mining methods —
risk is greater than in most industrial operations above ground.

§ 2. There is, in a sense, a tendency to diminishing returns in

1 See Chapter 19, § 1.

44-§2] RENT (Concluded) 101

mines. Yet in this regard also the general reasoning which under-
lies the principle of rent must be qualified in its application to
mining.
In any one mine, there is often — probably in a majority of cases

— a tendency to lessening yield with increasing depth. Pumping
to keep it free of water becomes more costly, and minerals must be
hoisted farther to bring them to the surface. So it is with the tin
mines of Cornwall, which after centuries of working have now been
extended beyond the shore line far under the bottom of the sea. It
is the case, also, with the anthracite mines of Pennsylvania. And
in the end, too, every mine reaches its absolute limit. A mine is not,
like agricultural land, or an urban site, a permanent instrument
enabling the investment of capital to be continued without limi-
tation of time. Its store is fixed — even tho sometimes very large

— and when that store is exhausted, there is not diminution of
return but complete cessation.

Against these tendencies to diminishing return and to ultimate
exhaustion must be set the possibility, even the probability, of the
discovery of new sources of supply. The total land area available
for agriculture (even tho there are sometimes unexpected open-
ings) is known with sufficient accuracy. But what is contained in
the bowels of the earth must always be more or less uncertain.
The nineteenth century was marked by the finding of wonderful
mineral resources. In Great Britain there was the discovery of
the great Scotch iron ore deposits at the opening of the century,
and of the Cleveland deposits (on the northeast coast) in the
middle. In the United States, after the coal deposits of the
Pittsburgh region, came those of Ohio, Indiana, and Illinois. Not
less important were the great copper deposits of IMichigan, Mon-
tana, and Arizona, discovered successively after the Civil War, and
the iron ore deposits of the Lake Superior region, of even more
recent exploitation. The gold mines of South Africa have been
found within the same recent period. It is known that there are
other untapped resources, such as the great iron and coal deposits
of China, the coal regions of Alaska; and there may be still others
not yet dreamed of. Notwithstanding the limitations of each

U^'

102 THE DISTRIBUTION OF WEALTH [44-§3

single deposit in the earth's crust, mankind may look forward, for
long ages to come, to an increase rather than to a diminution of its
available mineral resources.

§ 3. The owner of a mine, when he leases it to another for work-
ing, usually gets a royalty — a fixed payment of so much per ton.
» Royalties naturally vary with the quality of the minerals and the
ease of their extraction. They are a rough-and-ready way of
carving out the economic rent. They are not necessarily in the
nature of rent; for where a mine has been found by "prospecting,"
with all the risk of possible failure, the payment may stand for no
real surplus. But where royalties are paid in well-explored coun-
tries, on minerals whose quality and value are reasonably well
known, they are simply rent. Such seems to be the case with the
royalties on English coal mines.

It is argued by some able economists ^ that a royalty is in any
case different from rent; or rather, that there is on every mine
some sort of payment to the owner, or revenue for him, and that
even the poorest mine will yield something in the natm-e of a
royalty. The better mines yield in addition a true rent, disguised
as a further or ampler royalty payment. The ground for this
contention is that a mine contains a fixed store, and that the
owner will not consent to its partial exhaustion unless he receives
some recompense. But I am skeptical of the validity of this rea-
soning. The fact that a store is physically limited does not enable
its owner to secure a price. Sand and clay are thus limited; but
the available quantity is so abundant that a clay pit or sand deposit
is worth nothing unless it has an advantage of situation. It may
(be doubted whether any payment at all, royalty or whatever it be
called, can be secured hy the owner of the very poorest mine —
assuming he has done nothing to develop it. • Deposits of this
sort are at the margin of utilization, and at the margin there is no
surplus of any sort. Probably no mine in its entirety is on the
margin; just as no farm in its entirety is on the margin. Good

» This is Professor Marshall's view; Principles of Economics, Book V, Chapter
X, § 6 (6th edition). It was also Ricardo's view; Political Economy, Chapter III.
On the whole subject, see Professor L. Einaudi, La Rendita Mineraria.

44-§4] RENT (Concluded) 103

bits are mixed with bits less good, and the actual payment is ad-
justed by a higgUng process, in which account is taken of the
whole of the natural opportunities as well as of all the expense and
risk of development. Here, as in every part of the economic field,
the concrete phenomena show only an approximate correspondence
with the sharply stated theorems that serve to indicate their gen-
eral trend. But rent proper shows the same sort of development on
mines as on other natural agents.

§ 4. The selling value of a natural agent — be it agricultural
land, an urban site, a developed mine — is a capitalization, at the
currentjaJ^-oLinteiejjL of the fixed income which accrues to its
owner. It varies, therefore, inversely to the rate of interest.
Suppose a building on a given site is to cost $100,000, and promises
a net income or commercial rental of $15,000 a year; then if the
rate of interest be 5 per cent, the investor will readily pay $200,000
for the site. On his total outlay of $300,000 he will get $15,000, or
5 per cent. If the rate of interest should fall to 2^ per cent, the
same site would sell for $400,000. The differential advantage of
the site would remain as before — worth $10,000 a year; and the
buyer would get 2| per cent on his investment by purchasing the
site for $400,000. On the $100,000 invested in the building he
would be compelled by competition to accept the current interest
rate of 2^ per cent, and the total rental would be $12,500, not
$15,000. The decline in the rate of interest would lessen the
return on the building (considered alone), but would double the
value of the land. The lower the rate of interest on freely offered
cajntal, the higher the sum which will be paid for any piece of
property which jields a fixed return.

^~ The same principle applies to what are known as guaranteed
seciu*ities — the shares of corporations, such as railroad corpora-
tions, which have been leased on fixed terms. Thus one railway
may be leased (virtually bought up) by another, with stipulation
to pay an annual sum equal to 10 per cent on its shares. If the
current rate of interest is 5 percent, each share of the leased railway
(par value being assumed to be $100) will sell for $200. If the rate
of interest is 4 per cent, it will sell for $250; if 2^ per cent, for $400.

104 THE DISTRIBUTION OF WEALTH [44-§5

The selling price of land is affected, of course, not only by the
process of capitalizing its present rent, butjby the^expectations of
the owners and of the investing and speculating public concerning
the future.' In a growing city, an advantageous site will command
a price more than in proportion to its present rent, because it is
expected that the rent will increase still further as the years go on.
Conversely, a doubt as to the future of the site will cause it to sell at
a price lower than its present rent would determine.

§ 5. The same problems of public policy arise for urban land as
for agricultural land. There is here an unearned iiierenLent, due
to the increase and thickening of population and ascribable in
slight degree, if at all, to the labor or care of the fortunate posses-
sors. There is a differential return over and above what is neces-
sary, on the most liberal estimate, to induce the adaptation of the
site to its most effective uses. Why should not the community
appropriate this return? ,

This question is presented more sharply in the case of urban
land than in that of agricultural land. In the first place, it is
usually possible to ascertain with more accuracy just what is the
site rent and the site value of urban land.- We have seen that for
any specific plot of agricultural land which has long been in use,
there is great difficulty in determining how much of its productivity
is due to natural advantages, how much to man's action. That
difficulty is much less for urban plots. It is almost always possible
to state at least a minimum sum which represents the differential
advantage of the site pure and simple. Something must be
allowed, it is true, not only for pure interest, but for the risk and
labor involved in building and management. But after the most
liberal allowance for all such items, a surplus remains. In other
words, it is possible to set aside some part of the gross return which
is clearly rent for the site.

In the second placey urban rent, is ugualljnconcentm in fewer
]bands,.and gives rise to wider inequalities of wealth and income.
Urban rent may or may not be in the aggregate greater in amount
than agricultural rent. In countries like Germany and France,
agricultural rent is probably at least as great. In England, where

44^§5] RENT {Concluded) 105

much the larger part of the population is gathered in cities and
where the free importation of foreign produce checks the growth of
agricultural rent, urban rent is no doubt much larger in the aggre-
gate. It probably is so in the United States also; for the abun-
dance of farming land and the efficiency of the means of transpor-
tation have limited agricultural rent, while the increase of city
population has vastly enhanced urban rents. . But_in any case
f^ urban land is usually, in fewerhands. True, the agricultural land
of Great Britain is concentrated in comparatively few hands, and
in Austria also there are (or were) vast estates in the possession of
a small number of titled proprietors. In France, however, in
southern and western Germany, and in the United States, the
ownership of agricultural land is widely diffused ; and its economic
rent is dispersed among millions of proprietors. Urban rent, on the
other hand, flows into the hands of a much smaller number of per-
sons, and among these a few receive great amounts. ' The Duke
of Westminster and the Duke of Bedford are types of British peers
who have been enormously enriched by the ownership of urban
sites and the falling-in of long-term leases. John Jacob Astor in
the early years of the nineteenth century became the owner of
sites in New York whose value in the course of the century became
almost fabulous; his descendants not only enjoy this yield, but
have greatly enlarged the family holdings, until their income has
exceeded that of dukes and princes. The same sort of thing has
happened in almost every American city. Certain "old fam-
ilies" — usually founded by an ancestor of the successful business-
man type — have become rich from the growth of the community.
It is true that tenacious holding of the land by successive genera-
tions of the same family is much less common in the United States
than in Great Britain. The ease of transferring the title to land
'^^ and the habit of speculation have caused a dispersion of urban
rent in our own country and a parceling of the increment among a
succession of purchasers. None the less, in the United States, as
in other countries, urban rent has been a cause of conspicuous
inequalities in wealth.
Hence the proposal to appropriate for the public the whole or a

106 THE DISTRIBUTION OF WEALTH l44-§5

part of rent is urged more insistently for urban sites than for agri-
cultural land. It seems to me impossible to deny that if a reserva-
tion of rent for the community had been made from the start,
with due care and discrimination, the community would have been
better off. The effective utilization of the land would not have
been retarded, while a lessening of the general tax burdens and a
check to inequality would have been brought about. Careful and
discriminating management would indeed have been essential.
The quinquennial or decennial carving out of economic rent would
have raised delicate questions as to how much allowance should be
made for the return necessary to enlist shrewdness and enterprise.
A mechanical administration of such a system, still more a grasp-
ing one (and public administration is too apt to show one or both
of these characteristics) might bring more harm to the community
in checking the utilization of land than good in capturing the un-
earned increment.

The leasing of land on long terms by the state, which was sug-
gested among the possibilities for agricultural land, would have
been no less possible for urban land. So far as the promotion of
investment goes, a lease for ninety-nine years is as good as a title in
fee simple. No doubt, if land were held on such terms from the state,
the holder during a large part of the ninety-nine years might secure
a handsome slice of the accruing site value.. But at least when
the end came the community would reap its gain. Much shorter
leases — for fifty or even twenty-five years — could conceivably
be drawn, with provisions for compensation to the improving
tenant such as would allow sufficiently free play to the investment
of capital. Land leases for such terms are not uncommon in
the city of New York {e.g. on the Astor properties) and are
not found incompatible with the most intensive utilization of
the sites.

In the case of mines, it is difficult to see how any other method
than that of long leases could secure- the two desired ends — the
effective utilization of the resources and the conservation of the
public's fundamental equity. The uncertainties of mining are such
that any recurrent carving out of economic rent is quite impracti-

44-§5] RENT (Concluded) 107

cable. The only feasible policy would be that of allowing private
enterprise to take its risks and reap its rewards over a stated period.
No doubt the possessor or tenant during his term would be tempted
to work the mine to the utmost and perhaps exhaust it; a difficulty
possibly to be met by requiring the payment of a progressive roy-
alty as a large output was reached. Here, as elsewhere, occasional
great gains to lucky or shrewd investors must be accepted with
equanimity; a policy too grasping overreaches itself.

All this, however, is little more than idle speculation, at least so
far as the past is concerned. No community has reserved to itself,
by lease or by periodic levy, the right to the unearned increment.
Historically it could not be otherwise. Private property in land
was an indispensable instrument for the advance of civilization.
Surveying the history of European industry and the growth of
European cities, weXcannot see how advancing arts, free enter-
prise, accumulating capital, could have been secured without the
instrument, comparatively crude as it may seem, of unqualified
title to land. The new countries of modern times — the United
States, Canada, Australia, Argentine, and the like — might con-
ceivably have started with a more far-sighted and more complex
system of land tenure. In fact they have not done so. The force
of tradition and habit, the rapacious desire of the pioneers for the
unrestricted title, ignorance and indifference about the underlying
economic principles, have led them to follow the ways of old
countries and to accept the established principles of the unquali-
fied law of real property.

Hence the problem of vested rights in urban land stands as
stubbornly in the way of the ardent reformer as it does for agri-
cultural land. The purchase and transfer of urban sites have
gone on from time immemorial in the same way. To the present
owners the capitalized value represents an investment or an inher-
itance. Land at its existing value cannot be treated on different
principles from those applied to other kinds of property. -The
whole institution of property may indeed be overhauled ; all pri-
Y_ate_ownership and investment, all inheritance, may be restricted,
conceivably abolished; but unless tlie-system of private property

108 THE DISTRIBUTION OF WEALTH [44-§6

be remade, the existing rights to land, as they have been allowed
to develop thru the centuries, must be respected.
/ § 6. The question is different as regards the rise in rent that is
still to come. There is no vested right in the indefinite future.
The proposal that the future increment shall be reserved for the
community was made fifty years ago, chiefly with reference to
agricultural land, by John Stuart Mill and other reformers.
But the advantages of unrestricted property in agricultural land,
especially where wide distribution of ownership prevails, and the
difficulties in the way of carving out economic rent with any
accuracy — these considerations have led to the rejection of
Mill's proposal, as to agricultural land, by most economists of the
later generation. On the other hand, with the rapid growth of
modern cities and the unmistakable swelling of site rents, a
reservation for the community's benefit with respect to urban land
has met with steadily increasing recognition.

Many persons of conservative bent object to such proposals on
grounds of principle. They urge that this would be only a begin-
ning. Eventually not merely the increase newly accruing would
be appropriated, but existing values as well. Objections of this
kind, however, are urged against every proposal for reform, and
if allowed, would prevent any disturbance whatever of the status
quo. The day is gone by when they are felt to be insuperable.
The dogma of an unrestricted right of property and the belief in
the expediency of the exercise of that right without a jot or tittle
of abatement have been shaken beyond repair. The rights of
property must prove themselves on examination in each particular
case, and must submit to modification where a balance of gain for
the public can be reasonably expected.

Less easy to answer are the objections on the score of practi-
cability — whether a legislative scheme can be devised in such way
as to meet the complexities of the situation. How proceed? The
problem is by no means a simple one. The accruing increase of
rent is the thing which it is desired to divert to public use. But
what emerges most openly is capitalized value. The easiest way
of adapting the machinery of taxation to the phenomenon familiar

44r-§6] RENT {Concluded) 109

to all the world is to tax in proportion to the higher selling price of
land. To tax the increase in selling price may indeed seem to
accomplish the same end as to tax the growing rent; since the price
is but a capitalization of the rent. Yet there are difficulties and
complications.

From whom shall such taxes be collected? Usually the proposal
is for collection from the seller. This being the case, the buyer
pays the full value of the site, and the seller is mulcted by the tax-
gatherer for part (conceivably the whole) of the increase in value.
But this process tends to prevent the seller from parting with the
site; he will hold it and secure the site rent for him self, rather than
sell subject to a tax. There will be a certainty of securing the
accretion only if the land is periodically valued, or if its transfer by
inheritance is made the occasion of levying the tax. Periodic
valuation is not impracticable; but it is extremely complex and
expensive. Indeed, so expensive is it that this alone is a for-
bidding obstacle; the cost of ascertaining the increment may easil}^
be greater than the revenue secured. On ly if a valuation of sites is
undertaken in any case for other tax purposes (the ordinary taxes
on real property), and if continuing records are thus available, is
there likelihood that a substantial net revenue will be secured. It
would carry us too far afield to enter on a discussion of the admin-
istrative and political questions that must arise: the control of
valuations, the rights of revision and appeal, the friction between
local and central authorities. No doubt difficulties of this tj-pe
are often exaggerated. They are made much of by those who at
heart oppose all change and turn to any and every pretext for
justifying their opposition. On the other hand, ardent reformers
often fail to face squarely the problems involved in the legislati^-e
formulation of their proposals. No final judgment can be rendered
on any scheme until it is seen what it is like in the form of a care-
fully drafted bill or statute.

There is still another objection to taxes on seller's increment.
They are, so to speak, a sale by the public of its birthright. The
buyer pays the full capitalized value, and pays the increment
(via the seller) to the taxgatherer. In effect, he buys a rent charge in

110 THE DISTRIBUTION OF WEALTH [44- §6

perpetuity. The state parts with its principal; in consideration
of a sum paid in at once, it parts forever with its right to appropri-
ate the accrued increase of site rent. This is unthrifty, in the same
sense in which it would be unthrifty for an individual to spend his
principal rather than his income. And obviously the process con-
tributes to the perpetuation of the leisure class. The buyer and
his descendants buy the right to collect for the unlimited future
the site rent whose capital value has been paid over to the public.
It would seem in principle much preferable to levy all such
taxes, whether their intent be to capture a large slice of increas-
ing rent or a small one, with reference to the economic rent itself.
This is doubtless not in accord with existing practises in the
purchase and sale of real property; and in the United States it is
also quite out of accord with the tradition of levying all local
taxes on the capital value of property, not on the income. Hence
it is a method difficult of adoption — particularly so because
tax changes of every sort encounter more vehement opposition
than almost any other kind of economic readjustment. Yet the
periodic assessment of site rent is in itself not more difficult than
the periodic assessment of site value. The increase of site rent,
or whatever part of it is to be secured, could be subjected to an
annual charge, with revaluation every five years or every decade.
Selling value would adjust itself to the diminished share left the
owner, modified (as now) by changes in interest rates, but not
affected (or less affected) by prospects of rise in the rent. The
chief difficulty inherent in this method would appear for vacant
land — urban sites whose potential rents are high, but which
for the time being are withheld from use by their owners. They
may have high capital value, but in their existing undeveloped
state no rent at all has accrued. To leave them untaxed would
contribute to keeping them undeveloped. Our existing Ameri-
can system of taxing vacant land on its capital value does operate
to hasten its utilization. Yet to tax it in full on an estimated po-
tential increase of rent would be a troublesome matter, in view of
the fact that all such land cannot possibly be brought into use at
once and all of it cannot be made to yield a rent at once. Some

44^§6] RENT (Concluded) 111

sort of compromise would seem to be called for — a partial tax,
perhaps at half rate, on such potential increases: enough to bring
pressure on the owner to utilize the site.

A partial tax, indeed, is all that can probably be levied with
enduring public advantage on any increase of site value, regard-
less whether the site be vacant or built on. This limitation of the
application of the principle results from the aleatory element
which attaches to urban sites. There is some analogy to mines.
If every profitable mine were to be taxed for its full "rent" (in the
sense of the excess over ordinary return on the capital invested
in that particular mine) and if on the other hand every unprofit-
able mine were left to its own fate, mining ventures would not be
made. The public's way of playing the game would be heads we
win, tails you lose. The case w^ould be similar if all growth of
urban site rent were taxed in full but all decline were left uncom-
pensated. True, the analogy between mines and city sites is not
complete; for the element of chance in the former arises because
of the uncertainty of the physical condition underground, in the
latter because of the fickleness of urban demand for the surface.
But there is the essential resemblance that in both cases the in-
vestment of capital on the land or under the land must be made,
and that in both it involves risk. In neither case does rent accrue
spontaneously or automaticall;^ . The full utilization of a city site,
like the development of a mine, calls for enterprise and judgment,
and for the irrevocable sinking of large sums; and it entails the
possibility of loss and failure.

Such reasoning must not be pushed to the conclusion that there
should be no attempt at all to tax future increment. The prob-
lem is one of degree. Risk there is in urban building ventures;
but not risk so great and so all-pervasive as to make the outcome
solely a matter of chance. The constant buying and selling of
sites, the bargains in leases on ground rent, the higgling of the
market, give a significant indication of what is expected by the
real estate fraternity, and of what return may fairly be expected
in the way of growing site yield. Some substantial part of the
reckonable future of sites can be taken for the public without

112 THE DISTRIBUTION OF WEALTH [44-§6

deadening the spirit of enterprise or hampering the full utiliza-
tion of the land; always provided that the legislative problems
be solved, and that the administration be honest and efficient.

Last, but not least, a most troublesome difficulty must be faced,
that of making allowance for the general movement of prices.
If all prices double, money rents of land may be expected to
double also; more slowly, it is probable, than the prices of most
commodities, but in the end with substantially the same rate of
advance. The special causes affecting each particular plot mean-
while will still be in operation, causing its site rent to rise or
perhaps to fall, — to diverge more or less from the general trend
of prices and of rents. How disentangle the increment which
economic theory and social policy would wish to set aside?
These must be knotty problems even when prices rest on the gold
standard. The gold standard ordinarily prevents rapid and abrupt
changes; it may assure stability for five or ten year periods; but
it by no means prevents fluctuation over the longer period
which must be considered in schemes of increment taxation.
The difficulties become almost insoluble after such a monetary
revolution as ensued with the Great War of 1914-18. Indeed,
there is no scheme of economic or social improvement whose
complexities are not increased to an intolerable degree by such
fatal disruption of monetary standards. All taxes, all rent, all
payments, all modifications and equalizations of income, must be
framed in terms of money; but what should money terms mean in
1920 compared with those of the years before the cataclysm? And
who can say what they would mean ten years after? ^

1 In 1911 Germany enacted an increment tax (on increases in urban site value)
which at its maximum reached 45 per cent — 30 per cent for the imperial treasury,
with a possible 15 per cent in addition for local bodies. Great Britain in 1909 en-
acted a similar tax of 20 per cent. Based as they necessarily were on the pecuniary
values at the time of enactment, they were rendered hopelessly out of accord with
their professed aims and principles by the subsequent price revolution. The British
tax was repealed m 1 920 ; the repeal was defended, however, not on the ground that
monetary standards had changed, but because of the complexity and expense of land
valuation under any conditions. The German tax later became merged in a general
tax on all increases of values.

On the general subject of the taxation of sites, compare what is said below, Ghap<
ter 70, on the taxation of land and buildings.

CHAPTER 45
Monopoly Gains

Section 1. Absolute monopolies; industrial monopolies. Patents and copy-
rights as instances of absolute monopolies; the grounds for creating them
by law, 113 — Sec. 2. "Public service" monopolies. Increasing returns
and increasing profits, 116 — Sec. 3. Combinations and "Trusts"; un-
certainty as to the extent of their monopoly power, 118 — Sec. 4. The
capitalization of monopoly gains and problems as to vested rights, 120.

§ 1. The differences between natural agents, bringing about
the phenomenon of rent, constitute one great cause of variations
in the yield from labor and capital. Monopoly is another. Rent
has often been said to be due to monopoly, and to be merely one
case of monopoly. But this is not an accurate statement. The
characteristic of monopoly is single-handed control over the total
supply. Rent is not due to control over the supply by any one
landholder or by any organized combination of landholders; it is
due to the scarcity of the better sources of supply. But monopoly
is similar to land scarcity in that it causes unusual returns to
some enterprises, and so contributes to inequalities in the distri-
bution of wealth and income. Of its regulation we shall say little
here. The present chapter is concerned only with its relation to
other gains from the ownership of capital and with its place in the
theory of distribution.^

Sundry classifications of monopoly have been proposed. The
simplest, and that which will suffice for such a general survey as is
undertaken in this book, is into absolute monopolies on the one hand,
and industrial monopolies on the other. Absolute monopolies
are those in which, by law or by ownership of all the sources of
supply, the holder's control is complete. Industrial monopolies
are those in which the control over the supply, while not com-

1 Compare the chapters on Railroads, Combinations, Public Ownership; Chap-
ters 62-65.

113

114 THE DISTRIBUTION OF WEALTH [45-§ 1

plete, is yet effective enough to bring a state of things different from
that of competition; in which, even tho there be no legal or natural
restriction, the nature of the operations is such that competition is
wholly removed, or operative only to a limited degree.

Where there is an absolute monopoly, the situation is com-
paratively simple. The general principles involved have been
sufficiently stated in the chapter on Monopoly Value. ^ The
monopolist, if vigilant and shrewd, will fix that price at which his
net profit is greatest.

Copyrights and patents supply the simplest cases of absolute
monopoly by law. During the term of the exclusive privilege,
the holder is affected by competition only in so far as substitutes
are available, — often a considerable limitation, yet by no means
such as to prevent very great gains from some patents and copy-
rights. Among modern patents, those of Bessemer for making
steel, of Bell for the telephone, of McKay for the sewing machine
used in shoe manufacturing, the Northrop automatic loom, the
Mergenthaler linotype machine, the Edison light, have been con-
spicuous for success. The justification for the high incomes from
such patents is that the prospect of securing them has been a spur
to invention, and that, tho prices may be above the competitive
level during the term of the patent, the public in the end gains.
Patents are granted for a limited period, usually for about fifteen
years (this is the term in France, Germany, and Austria; in Great
Britain it is fourteen years, in the United States seventeen) . When
they expire, the unrestricted use of the device is expected to bring
to the community cheaper or better goods than it would have had
otherwise.

The assumption underlying patent laws, namely, that the im-
provements would not have been made but for the monopoly
privilege, in the main is justified. Though some persons are born
with an instinct for contrivance, and will be impelled to inven-
tion as irresistibly as others will be to literature or science, the
prospect of a reward is in most cases an indispensable stimulus;
needed perhaps not so much in order to evoke contrivance as to
1 See Chapter 15.

45-§ 11 MONOPOLY GAINS 115

direct it Into channels of service to the community.'^ This is the
more the case with patents, because they almost always involve
considerable risk, both for the inventor and for those who supply
capital for working the invention. Of the patents actually taken
out — thousands of them annually in a country like the United
States — the immense majority come to nothing. Tho most of
the failures were certain from the start (all sorts of absurd or in-
significant devices are patented), the future of many, involving
much thought and labor, is uncertain. They may prove valuable,
and may prove worthless. After a patent has been secured and
launched, there must often be expensive experimenting with fur-
ther devices and improvements. For at least two of the inven-
tions just mentioned — - the Northrop loom and the Mergenthaler
printing machine — hundreds of thousands of dollars were spent
in preparatory and experimental operations. In other words,
risks must be run, and there must be prizes to offset the failures.
If every process that had been worked out with much labor and
large expenditure were, when perfected, at once open for use to
every comer, the original inventors and investors would have
much less prospect of reaping a sufficient reward. Here, as else-
where, occasional windfalls, which may seem out of proportion to
the desert of the particular fortune-winner, must be accepted as
part of the encouragement of vigor and enterprise.

Much the same can be said of copyrights. It is true that in
this case, more than in that of mechanical inventions, the inborn
bent of some individual produces its effect, irrespective of rewards.
But literature as well as art shows not only all degrees of merit,
but all shades of motive. In the making of most modern books
the stimulus of individual gain plays no small part. Legal pro-
tection for the book writer is peculiarly necessary; for a book can
be reprinted verbatim at once, whereas a new mechanical device
may be often shielded from competition for some time even with-
out a patent. Given the principle of reward in proportion to use-
ful activity, then copyright is a natural and consistent application
of it; and those who, in the absence of legal protection to authors,

1 See on this subject Taussig, Inventors and Money-makers, Lecture L

116 THE DISTRIBUTION OF WEALTH l45-§2

print their books without making payment, are not inaptly termed
pirates.

Absolute monopoMes resting not on legal restriction, but on
control of natural resources, are rare. The diamond mines of
South Africa, to which reference has already been made, afford
an instance. The owners of the nitrate beds in Chile have
effected a combination, and the owners of the world's borax
supplies have consolidated into a single corporation. In both
of the last-mentioned cases the natural resources are supposed
to be limited; but there is always in the background the possi-
bility of the discovery of new supplies or of the utilization of
others that are known but are of poor quality. Hence the mo-
nopoly is not unchecked in its control over supply. The usual
situation is that so-called monopolists of this sort are in the pos-
session not of the sole sources of production but of the best, and
hence that their gains are more in the nature of economic rent
than monopoly gains in the narrower sense.

§ 2. Much more important in the modern world are industrial
monopolies. These also are rarely quite unfettered; but the
limitations on their prices and profits come not so much from the
existence of poorer sources of supply as from public regulation
and the possibility of competition. Broadly speaking, they are
of two sorts — "public service" industries and the familiar
"trusts."

"Public service industries" is a convenient phrase to designate
water supply, gas supply, railways and street railways, the tele-
phone and telegraph, electric lighting, and the like. These are
operations which affect great numbers of people, which usually
call for some special grant or privilege, such as the right of emi-
nent domain or the use of the public highways, and which are best
carried on under single management. The last-named characteristic
is the important one for our present purpose. The advantages of
single management are so great that even tho there be an
initial period of competition between two or more establishments,
consolidation is certain to ensue. The community may as well

I See Chapter 15, § 2.

45-§2] MONOPOLY GAINS 117

accept once for all the fact of the monopoly and regulate its affairs
accordingly.

Increasing returns in the strict economic sense are a usual
characteristic of these industries. A single great plant can do
the work more cheaply as it gets larger and larger. It is a waste-
ful process to duplicate a railway line, the mains of a water or gas
system, the wires of a telephone or telegraph system. In the case
of telephones and telegraphs there is the further circumstance that
all customers are better served if all are connected with a single
system. Sometimes, it is true, when the stage of very intensive
use is reached, the duplication of a plant may become necessary;
there may be need of a second set of main pipes, of duplicated
railway tracks or an additional line. Even then there are almost
always appreciable economies in managing the several plants as
one; and in any case it is certain that so small a number of com-
petitors will form a combination. Chiefly because of increasing
returns in production, and in any case because of the small number
of possible competitors, the emergence of single control is inevit-
able.

These industries bring increasing returns in another sense: not
merely increasing efficiency of labor, but increasing pecuniary
gain. The growth of numbers in the community will commonly
make the single plant or combination of plants more profitable as
the years go on. A traditional price for the product or services is
fixed at the outset, which then is usually a "fair" price — that is
a price such as yields no unusual gains. As time goes on and pop-
ulation increases, expenses per unit decline; and improvements
in the arts often cause the expenses to decline still more. But the
traditional price remains, competition is absent or only intermit-
tent, and the gains from the undertaking swell. In this gradual
growth of gains, due chiefly to the advance of the community at
large, there is a strong analogy to the rising rent of land and es-
pecially of urban sites.

Some inventions of modern times served greatly to increase the
gains in such industries. The application of electricity to traction
enormously increased the efficiency of labor in street railways.

118 THE DISTRIBUTION OF WEALTH [45-§3

The Improvements in gas manufacture, especially from the use of
naphtha in making water gas, were hardly less important. The
growth of cities would in any case have tended to make these in-
dustries more lucrative. Cheapened as their operations were by
great advances in the arts, they became sometimes fabulously
profitable.

It is part of the irony of fate that the half-fortuitous gains which
accrued for a while from this situation, and which were expected in
most quarters to persist indefinitely, were interrupted, perhaps
permanently wiped out, by a cause hardly less fortuitous. The
very circumstance which promised to maintain large profits
proved, under the unexpected conditions of a monetary revolu-
tion, the cause of financial distress. So long as prices in general
remained stable, and expenses therefore not subject to general
increase — invention and improvement meanwhile steadily con-
tinuing — the stability of the price of these products and serv-
ices had promised high returns. But as the prices of most other
things and the rates of wages tended to rise, the fixity of the street
railway fare or gas prices became a cause of financial embarrass-
ment. Not only tradition, but the growing effectiveness of public
regulation prevented a rise in charges. The slow but steady ad-
vance of the price level during the early years of the twentieth
century tended steadily to pare down profits. The abrupt ad-
vance during the war of 1914-18 brought the tendency to a sudden
climax. The public furiously and vociferously opposed changes
from the accustomed scale of charges. Increases finally had to
be accepted ; they were as inevitable as those in salaries, in taxes,
in rentals of dwellings and shops; but they were sparingly allowed.
The problem for the owners and investors was no longer how to
conceal and pocket profits but how to avoid losses; and the prob-
lem for the public became for the time being that of assuring the
maintenance and extension of essential industries, not that of
controlling the profits of monopolies.

§ 3. More troublesome problems of economic theory, and no
less difficult problems of public policy, are presented by the so-
called "trusts"; that is, the great horizontal combinations, under

45-§3] MONOPOLY GAINS 119

single management, of a series of separate establishments. The
difference between the monopoly industries considered in the last
section and the trusts lies in the fact that here there are usually a
number of physically separate plants. A street railway, a gas
system, a telephone and telegraph net, a railway system — each is
a physical unit. But when a dozen sugar refineries, or chemical
works, or lead factories, are united in a trust, the separate plants
remain separate, tho now managed as one.

It must be confessed frankly that we do not know, in the pres-
ent state of economic inquiry, to what extent effective monopoly
is likely to develop in such industries. If there were a general
tendency to increasing returns from the mere fact of concentration
in ownership and management, we should expect monopoly to de-
velop without fail.i Yet even in the absence of such a tendency
continuously in operation, some degree of monopoly control may
appear. The great combination or trust may keep out rivals by
cutthroat competition, by sheer weight and power. On the other
hand, large gains do tempt interlopers, and the constantly swelling
volume of accumulations in search of investment causes every
chance of securing large returns to be sought out. There is the
crucial question of management, too; the possibility, when once the
founders of a great combination (usually men of exceptional ability)
have left the field, of nepotism and ossification. New blood may
api>ear in competing enterprises, and an apparently secure posi-
tion of dominance may be lost to a later generation of business
leaders. To repeat, we are much in the dark as to the future of
this remarkable economic movement, and cannot be certain how
far the range of monopolistic control and monopoly profit will
extend.

This much, however, is clear: that competition acts more slowly
in many directions than was believed by the economists of a gen-
eration ago. If not complete monopoly, a quasi-monopoly endur-
ing for a considerable time is likely to appear wherever industry
is conducted on a very large scale. For an indefinite period some-
thing more than ordinaiy or competitive gains may be secured.

1 Compare Chapter 14, § 3. See also Chapter 65, on Trusts and Combinations

120 THE DISTRIBUTION OF WEALTH [45-§4

Given the constant enlistment of fresh abiUty of a high order in the
management of the great combinations, and the gains may be kept
very large by mere force of great size, great capital, great over-
awing of would-be competitors. There is the possibility, even
the probability, of a gain which is in excess of interest and of eco-
nomic rent, as these have been analyzed in the preceding chapters;
in excess, too, of "business profits," as this sort of income will be
analyzed in the chapters next following; a gain, therefore, which
is to be classed as a monopoly return.

§ 4. As the rent of land may be capitalized in the selling price
of land, so monopoly gains may be capitalized in the selling price
of the monopolized piece of property. This happens nowadays
most commonly thru the mechanism of corporations and thru the
"watering" of corporate securities. When a corporation having
some sort of monopoly advantage secures high returns, its shares
may yield large dividends and may sell at a high premium; or the
number of shares may be increased or watered, and the same
returns distributed among the owners in the form of lower divi-
dends on a larger number of shares. The total selling value of the
shares, whether of a small number at a high price or of a large
number at a moderate price, will represent in either case the capi-
talization of the net earnings at the current rate of interest on in-
vestments.

Vested interests present questions of the same sort in the case
of monopolies as in the case of land. Where some kind of exclu-
sive privilege has been expressly granted and monopoly gains have
consequently arisen, the terms of the grant cannot but be observed.
Even where there has been no grant for a clearly specified term,
but only the long-continued maintenance by the public author-
ities of settled policy, vested rights are entitled at least to some
degree of consideration. Thus, in certain American cities, street
railways have no privileges for any stated period of years and are
subject to regulation at will. Yet where they have in fact carried
on their operations undisturbed for an indefinite period, and where
purchases of securities have been repeatedly and continuously
made in the expectation that the status quo will be maintained, the

45-§4] MONOPOLY GAINS 121

holders have a position not very different from those of the land-
owner who has bought a site in good faith. On the other hand,
where such rights have been given for a limited period or in express
terms left subject to public modification, the investor must be held
to have taken his risks. Still more, a future rise in yield and in
selling value is clearly open to appropriation by the public.

CHAPTER 46
The Nature and Definition of Capital

Bection 1. Is the distinction between interest and rent tenable, in view of the
wide extent of differential gains of a monopoly sort? Grounds for main-
taining that all returns from property of any kind are homogeneous, 122
■ — Sec. 2. A different conception of " rent " and "interest, " the two being
regarded as different ways of stating the same sort of income. "Arti-
ficial" and "natural" capital. How measure the amount of capital? 124
— Sec. 3. The important questions are on the effectiveness of competi-
tion, the existence of a normal rate of interest, the justification of in-
terest, 127.

§ 1. The gradations of monopoly; the analogies between mo-
nopoly gains and rent (in part still to be set forth) ; the often shad-
owy line of demarcation between interest and the other incomes
from property — all these suggest the question whether the whole
conception of capital and of income from capital does not need
revision.

In recent times many economists have questioned the validity
of the distinctions drawn in the preceding pages between the dif-
ferent instruments of production and the different sorts of return
to their owners. The distinction between land and capital has
perhaps been most questioned, and with it the corresponding one
between rent and interest. But the distinction between rent and
monopoly gains has also been drawn into doubt, and hence that
between land and monopolized capital goods. There has been a
general disposition to reconsider w^hat should be included under the
term "capital," and what is the social significance of the various
incomes accruing from the ownership of property.

There are several tenable grounds for regarding all these incomes
as homogeneous. In the first place, no returns are earmarked as
monopoly gains or as rent; none are distinguishable at sight from
simple interest. When it is said that land " yields " economic rent,
the phrase is used elliptically ; so, also, when it is said that a patent

122

46-§ 1] NATURE AND DEFINITION OF CAPITAL 123

or an industrial monopoly "yields" a monopoly return. What
happens in the case of land is that the output is large in propor-
tion to the labor or outlay in preparing or tilling it; and, in the
case of monopoly, that the receipts are large in proportion to the
expenses of constructing the plant and operating it. In either case
there is an exceptional return, a surplus yield. But this is dis-
tinguishable from interest only on the assumption that there is a
well-defined nonexceptional return — one normal for capital
subject to unfettered competition. In any concrete case there
is always a difficulty in setting apart with precision that return
which would be received under competitive conditions from the
surplus which would disappear if competition were free.

Further: the divergences from the "normal" return, or simple
interest, are many and various. They shade into each other by
gradations. All sorts of industries present a differential element;
not only the urban site in the heart of a metropolis and the valu-
able patent monopoly, but the factory established at a "strate-
gical" point and that which has a quasi-monopoly of prestige and
trade-mark. There are plenty of industries and plants where for
very long periods much more than simple interest is secured.
There are others where much less is secured. The older writers
often described the industrial situation as presenting a few cases
of monopoly and some other cases of easily distinguished "rent";
and then a great stretch of industries having normal profits. But
this does not truthfully represent the extraordinary variety and
irregularity of the world as it is.

Again, in view of the diversities in the rates of return, it is rea-
sonable to say that monopoly returns are not separable from eco-
nomic rent. True, the essential element of monopoly, as we have
defined it, is control of the supply; and so far as a monopolist has
this, he is in a different possition from the person who has merely
a differential advantage in producing part of the supply. But
complete monopoly control is very rare; some sort of comjjetitive
or inferior substitute is commonly to be reckoned with. Mo-
nopoly gains then may be said to be only a variety of the species
"rent." And in any case monopoly gains rest on the fact that

124 THE DISTRIBUTION OF WEALTH [46-§2

the thing monopolized has high serviceability or utility; it yields
more in the way of eventual satisfactions than other things; and
hence it may be said to yield a differential return, very much as a
good water power or a fertile field yields a differential return.
What its owner gets is thus analogous to the "rent" derived
from a natural agent.

§ 2. Considerations of this kind have led to a method of ap-
proaching the problem of property income very different from
that followed in the preceding chapters. It is said, and with un-
doubted truth, that all concrete instruments of production have a
derived value. They get their value from the utilities which in
the end they bring about or aid in bringing about. The income-
yielding power of a cotton mill results from the price of the cotton
goods, which in turn rests on the utilities of the goods to consumers.
The income-yielding power of a street railway rests on the utilities
of rapid transportation; that of a house lot on the agreeableness
of dwelling on the site; that of business premises on their con-
venience for making or distributing commodities. Some of these
instruments are more effective in supplying utilities than others
and in proportion as they are more effective are more valuable.
But all belong to the same class: they are immature utilities, so
to speak, and are valuable in proportion to the satisfactions that
in the end will ripen.

It is a further development of this train of thought, and a fur-
ther proposed change in phraseology, to say that every instrument
yields a "rent" — a rent not in the older sense, but in quite a new
sense. That "rent" is its yield or its income; in the sense in which
the possessor of a settled income is styled (on the continent of
Europe) a "rentier." It is the net income yield of the instru-
ment, resulting from the utilities which the instrument provides
or aids to provide. Whether it be a huge steamship made by
much labor or a lucrative city lot, the income of the owner depends
on what this concrete thing yields in the way of addition to the
ultimate income of the community. The one as well as the other
is based on serviceability. The owner's income, it is said, may
be regarded as "rent" or as "interest," according to the point of

46-§2] NATURE AND DEFINITION OF CAPITAL 125

view. Regarded as an absolute sum, it is the rent of the instru-
ment; regarded as a percentage of the property or capital embod-
ied in the ship or the lot, it is interest. Capital being regarded
as homogeneous, and as including all the various kinds of instru-
ments, all return from it is homogeneous. The return is regarded
in a different light, but is not different in essentials, according as
we dub it interest or rent.

Pursuing this train of thought further, we might say,^ that
capital is of two kinds — artificial and natural. Natural capital
is that which has been classed under the general head of "land" or
"natural agents"; artificial capital includes all instruments made
by man. Natural capital may be highly useful and highly valu-
able, as in the case of a rich mine or a deep harbor site. In that
case it may be said to contain or embody a great deal of capital. A
street railway, or a factory in which a monopolized article is pro-
duced, may be said also to contain or embody an exceptional
amount of capital. Their valuation is high; their capitalization
indicates the existence of a large volume of capital.

Evidently still another question is here involved: how measure
the amount of capital? The reasoning just stated would meas-
ure it in terms of value. And this, too, is the ordinary business
method of measurement. A mine, a railway, a parcel of real
estate, a factory, each is valued on the basis of its net income; it is
capitalized. The distinctions sought to be drawn by economists
between interest, rent, and monopoly gains find no response in the
world of affairs. There all property is valued in terms of its in-
come; all that brings in an income is alike capital, and all is meas-
ured or capitalized on the basis of its income. Those economists
who dissent from the older view follow the business community's
way of defining and measuring capital. In that older view, on the
other hand, the definition of capital as instruments made by man
led to its measurement in a very different way — namely, in terms
of cost, of expense, of labor. As will appear later, these are not
precisely equivalent terms ;2 but for the purpose of the present

1 With Professor A. S. Jolinson, Introduction to Economics, p. 107.

2 See below, Chapter 48.

126 THE DISTRIBUTION OF WEALTH [46-§2

discussion, discrepancies between labor involved and expense
incurred may be neglected. In the main, capital was measured
in the older view, in terms of labor involved. Capital meant
previous labor or embodied labor; and capital v/as more or less,
not according to its value, but according to the amount of labor
involved and the length of time over which that labor was spread.
The difference between the older and the newer views is similar
to that between a "commercial" and a "physical" valuation of
a railway.

Pushed to its last consequences, this valuation principle leads
to some results that take one aback. A public debt, say in the
form of a French "rente" (that is, a mere promise to pay an
annual sum), is capitalized in terms of selling value; and it becomes
"capital." A burden on the community is thus included under
the term "capital," tho that term in general indicates the useful
apparatus of the community. A naked patent right or "fran-
chise," not yet attached to a concrete instrument, becomes capi-
tal. A perpetual pension, such as the English Parliament used
to grant to royal favorites or military heroes, becomes capital; it,
too, can be measured in terms of value and capitalized. Nay, a
human being, in so far as he is an instrument for production —
and he may be conceivably regarded as such, just as a slave is an
asset — becomes capital; and then return to labor, as well as in-
come from property, may be regarded as "interest" or "rent." ^

From still another point of view, the distinctions between inter-
est and rent and monopoly gains have been discarded — namely,
from the socialist point of view. To the socialist the difference
is simply between tweedledum and tweedledee. All these incomes
are unnecessary and unjustified. All result from a bad social sys-
tem and should be abolished. And it is true that all are alike in
that they make possible the leisure class. This last is the phe-
nomenon in existing society which, when once privilege is no longer
regarded as part of the order of nature, most calls for explanation.

1 This extreme application of the reasoning is made by Professor I. Fisher,
Elementary Principles of Economics, Chapter XXIV, § 1, and by Professor F. A.
Fetter, Economic Principles, Chapter XVI, § 1. Compare also J. B. Clark, Distri-
bution of Wealth, Chapter XXII.

46-§3] NATURE AND DEFINITION OF CAPITAL 127

Why should a considerable number of able-bodied persons live in
idleness and plenty? That the aged and infirm, the children and
even the women (at least the married women), should not be en-
gaged in the ordinary productive occupations, seems proper
enough; but why should healthy adult men and women not labor
to contribute to the general welfare of society? In the feudal
system, the privileged classes were at least called on to render
military service. In our own society, they are called on for no
service at all. Is this inevitable? Is it just? Is not this ques-
tion the same for all of the leisure class, and for all of their in-
comes? Do they not all own "capital" and all alike secure a
capitalist income?

§ 3. Two important questions underlie these matters of defi-
nition and phraseology. One is the question of taxonomy, of
cold classification: are there sufficient differences between the
various sorts of income from property to make different names
reasonable for the incomes and for the kinds of property? The
other is a question of large social import: are there grounds for
applying a different public policy to the various sorts of income?
Both questions, as it happens, turn in the end on the same point :
is there effectiveness of competition as to capital (artificial capi-
tal), and is there a normal competitive return usually secured
from investment and needful in order to induce investment?

It is clear that there is not effectiveness of competition or equal-
ization of return as to "natural capital" — land and natural
agents. The better among these agents yield more than those less
good. So far as there is similar ineffectiveness of competition and
similar inequality in return among the instruments made by man
their yield presents no phenomena essentially different from those
of natural agents. But if there be effective competition between
the various forms of artificial capital, no one among them will
permanently bring to its owner an exceptional or differential
return; then there is interest, and interest only, on capital in the
narrower sense; and then there is a substantial difference between
"interest" and "economic rent."

On this matter of the actual efficacy of competition, we must

128 THE DISTRIBUTION OF WEALTH l46-§3

si>eak with reserve. In some directions it is clear that the older
notion of full competition between all forms of artificial capital
must be given up. There are industries in which large-scale
operations and increasing returns lead inevitably to monopoly —
such as many of the so-called public service industries — and in
which the return is in so far analogous to economic rent in the
older sense. There are the trusts and quasi-monopolies in which
similar variation from a supposed normal return is found. And
even in industries outside the pale of monopoly or combination
there are extraordinary variations in the returns got by the own-
ers of factories, warehouses, ships; so that there seems ground
for rejecting the whole supposition of equalization in yield from
artificial capital, and so for rejecting all distinction between rent
and interest.

Yet in the long run, for probably the greater quantity of " ar-
tificial capital," the matter takes a different aspect. Tho the
competitive regime has broken down over a considerable range of
industries, it has not yet ceased to be the prevailing regime. Tho
there are great variations in the returns secured by the owners
of almost any form of concrete capital, these are mainly explicable,
as will presently appear,^ from differences in the business capacities
of the owners. Setting aside the differences so explained, and
those due to the irregularities of demand; having regard to the
slowness with which new plant can be made, and even the greater
slowness with which old plant wears out; looking at the long-run
results — we find that there is after all a tendency to equaliza-
tion over a large part, probably the larger part, of the industrial
field. If a particular kind of artificial capital proves exceptionally
profitable, more of that kind will be made, and the return on it
will be lowered. In this probability lies the essential ground for
distinction between capital and land, interest and rent, competi-
tive gains and monopoly gains. If the return on every specific
kind of concrete instrument were a mere matter of accident, or at
least were not subject to any competitive or equalizing influence
— then all alike would be mere "rent" yielders, and would have a

1 See below, Chapter 49.

46-§3] NATURE AND DEFINITION OF CAPITAL 129

value resting once for all on the utilities provided thru them. The
conditions of demand alone would govern. In fact, however, the
conditions of supply affect the larger part of the concrete instru-
ments. Only a part are limited natural agents or are shielded
from competition by a monopoly position. Hence we can speak
of a normal return, or interest, in the one case, and of rent and
monopoly gains in the other cases.

The same conclusion can be stated in another way: there is a
broad margin at which the return to capital is settled — settled
at that normal rate which suffices to induce saving and accumula-
tion. Other gains to the owners of concrete instruments are
measured by the excess above what is got at the margin. These
extra gains are in some respects similar to economic rent, in
some respects different. Their extent and variety is much greater
than was supposed by the economists who first worked out the
principle of rent, and the}^ have a great effect on the distribution
of wealth. But so long as the broad competitive margin persists,
they leave unaffected the distinction between the normal or
"earned" return on capital and the excessive or "unearned"
return.

In answering our first question, the taxonomic one, we have by
implication answered the second, also. Interest on artificial
capital, as settled under competitive conditions, presents different
social problems from those presented by the rent of natural agents
or by monopoly gains. The one is an inevitable part of the regime
of private property ;i the others are not, or at least are inevitable
only in so far as vested interests must be respected or the exact
line between interest and surplus returns proves impossible to draw.
Economic rent and monopoly gains are unearned returns, and
should be treated differently from return on capital pure and sim-
ple. This is indeed admitted by the economists who are disposed
to treat all " capital " as homogeneous. When it comes to problems
of legislation — of taxation, for example, or matters of public
regulation — they agree that the various capitalistic incomes
should be dealt with differently: those from the better natural

1 Compare also what is said below, Chapter 55.

130 THE DISTRIBUTION OF WEALTH [46-§3

agents or monopoly industries should be curbed; those from
competitive capital should in the main be allowed to go their
way.i The socialists, on the other hand, hold that these sorts
of income are alike unnecessary and unjustified, and alike should
be swept away. It is from this point of view, at all events, that
the question of classification and nomenclature is most important.
Economics is in a special sense a pragmatic subject. Its truths
are eminently truths in the sense that they concern us. Its ans-
wers are answers that declare what we should do. With regard
to any question of classification and distinction, the test of truth
is, what of it? what follows? In economics the consequences that
follow are ultimately consequences for general welfare and public
regulation. So considered, the question whether income-yielding
property is homogeneous, and all the sorts of income essentially of
the same sort, is to be answered in the negative.

1 Iq the main : compare Chapter 68, § 6.

CHAPTER 47
Differences of Wages. Social Stratification

Section 1. Differences of wages which serve to equalize attractiveness of
different occupations; domestic servants, university teachers, public
employees, 131 — Sec. 2. Irregularity of employment and risk in their
effect on relative wages. Expense of training, 133 — Sec. 3. Obstacles to
free movement bring about real differences. Full monopoly rare, 135 —
Sec. 4. Expense of education as an obstacle to mobility, 136 — Sec. 5-
Inequalities of inborn gifts and social stratification. Uncertainty of our
knowledge concerning the influence of inborn gifts, 137 — Sec. 6. Non-
competing groups, roughly analyzed as five. The broad division between
soft-handed and hard-handed occupations, 141 — Sec. 7. Tendency to
greater mobility in modern times. The position of common laborers, 144 —
Sec. 8. What differences in wages would persist if all choice were free?
148 — Sec. 9. Why the wages of women are low, and wherein the labor
of women is socially advantageous, 149. *

§ 1. Wages are commonly thought of as a separate and clearly
distinguishable form of remuneration, appearing when one man
is hired to work for another. Very often, however, they are part
of a mixed or combined return, as when a farmer owns his land
and capital, and gets rent and interest in addition to a return for
his labor. In almost every case where a worker is not hired by
another — a physician or lawyer, or an artisan working on his own
account — there is some combination of returns. The theory
of wages should consider the remuneration of every sort of labor,
that constituting a part of the complex earnings of such indepen-
dent workmen as Avell as that constituting the sole earnings of a
hired laborer. But most of the problems are sufficiently dealt
with by an examination of the case of hired laborers, with inci-
dental consideration of those not hired.

Tho it would appear logical to examine first the causes which
act on the general rate of wages, the way is cleared by taking up
first the^causes of differencesjn.tlie.earnings of various sorts of
labor ancT some other topics closely connected with those differ-
^ 131

132 THE DISTRIBUTION OF WEALTH [47- § 1

ences. The theory of general wages is reserved for treatment at
the very last. // )

Differences of wages may be classed under two h^s — those
that equalize the attractiveness of occupations, aiwthose that
persist irrespective of their varying attractiveness. If choice be-
tween occupations were perfectly free, only differences of the for-
mer sort would exist. We may begin with these, which may be
called equalizing differences.

If choice were free, an agreeable occupation would command a
lower rate of pay than one not agreeable. Something would
need to be given, in the way of premium, to offset unattractive-
ness. As between occupations of similar grade, open to persons
of the same class, we find differences that are explicable on this
principle. A woman or girl working in a factory or shop receives
in the United States a lower rate of pay than a domestic servant.
Tho the payment in money to both is often very nearly the same,
the servant receives in addition her food and lodging and her total
remuneration is very much higher. The main explanation is that
in a democratic community domestic service is repugnant; it has
the associations of a menial position. The shop girl often has longer
hours and harder work. But her work is of a more impersonal
sort and her hours are strictly defined. When the day's work is
done she is her own mistress. In European countries, where the
spirit of freedom and the yearning for equality are less awakened
than in the United States, considerations of this sort count for much
less; and domestic service there receives no such comparatively
high wages. American housekeepers of the well-to-do class com-
plain of the scarcity and the high wages of servants, usually with-
out an inkling that these are the results of the spirit of democracy.;

In another range of occupations the principle is illustrated by
the pay of university teachers. Much has been said of late years
in this country of the low range of professors' salaries. Very pos-
sibly it is true that, as compared with earnings in other occupa-
tions of the same grade, and for persons of the same training and
ability, the range has been low — so low as to make the occupa-
tion less attractive than it should be to capable men. But the

47-§2] DIFFERENCES OF WAGES 133

calling has great charms. The respect which it enjoys, the settled
and moderate routine, the pleasure of intellectual interest and
achievement, the long vacation — these make it attractive, even
with pay less than that of competing occupations.

Peace of mind and industrial security, are valued by most peo-
ple; hence governments and large corporations, able to promise
continuous employment, can secure their employees at compara-
tively low wages. Wliere indeed public business is not managed
oiTsfrictly fiscal principles, this consequence does not show itself.
In most democratic communities, and especially in the newer ones,
like the United States and Australia, the government is expected
to pay more than the private employer, irrespective of the steadi-
ness and attractiveness of its work. The great bulk of the work-
men, tho they are not in government employ, nevertheless ap-
prove of the favored position of those who are; partly because of
general class sympathy, partly because of ignorance of the eco-
nomic effects. Nothing is more certain than that higher wages to
public employees come out of the pockets of the rest of the com-
munity. But such wages are none the less welcomed by other em-
ployees, because of a notion that they have an uplifting effect on
wages at large.

§ 2. Irre^ularit;xj^f_employment, on the other hand, may be
expected, so far as competition is free, to make wages higher. It
is said that bricklayers receive higher wages than carpenters,
largely from this cause; their work being more likely to be inter-
rupted by the weather and the seasons. So far as the higher pay
per day or per hour simply offsets the smaller time actually given
to work, there is here no difference in the total remuneration. But
if the greater uncertainty makes the occupation unattractive to
most men, it will cause the total remuneration to be higher. Un-
fortunately most manual workmen have not the foresight and in-
telligence necessary for discounting wages which seem high but
are uncertain. It may be doubted whether irregular or hazard-
ous work usually yields wages in proportion to its actuarial worth.
This same undervaluation of risk shows itself in the attractive-
ness of occupations in which there are prizes. The law is a pro-

134 THE DISTRIBUTION OF WEALTH [47-§2

fession in which there are great possibiHties — the chance ofji
jarge income, and, not least, the gHttering possibiUty of success
and fame in those pubHc posts to which the law is the usual path-
way. Hence^ aotwUhstaiiding the need of an expensive training
and the cgrtaiDLtx of a slow rise to full earnihg power, it draws more
men of promise and capacity than any other of the. learned pro-
fessions. Again, the training of an opera singer is highly elabo-
rate and costly, and also involves a large possibility of complete
failure. Yet the great prizes — the extraordinary fees of the
notable few, and their conspicuous tho short-lived fame — attract
so many that for the occupation as a whole there is probably but a
very moderate return.

An occupation which calls for a prolonged and expensive train-
ing will have, ceteris paribus, a relatively high reward. Phy-
sicianjj__engineers, lawyers, must equip themselyea..by_ years of
study, and ordinarily must serve some sort of apprenticeship even
after the period of set study has been passed. It is obvious that
people will not incur the required outlay unless there is a prospect
of earnings at least in some degree commensurate. No doubt this
factor operates in combination with others, and there is great ir-
regularity in the final outcome. Not only do prizes in an occu-
pation affect the resort to it, and lead people to undertake a costly
preparation without a cool-headed calculation of the chances of
success; but parents, thru whom the decision to enter on a prolonged
training is commonly made, are not solely actuated by mere calcu-
lations of gain, nor are they the best judges of the probabilities of
gain. Their first wish is generally to provide for their children
greater happiness in life, and they will often pay for an elaborate
education chiefly for the sake of the supposed social advantages.
Often they do not weigh w^ith impartiality the question whether
their children have the inborn qualities to profit by such an edu-
cation. Qn the other, hand, any occupation whichjequires expen-
sive training is by that fact closed to the immense majority of the
people — a circumstance which, as will presently be noted, is of
at least as much importance as any other in explaining the effects
of education and training on variations in wages.

47-§3] DIFFERENCES OF WAGES 135

§ 3. It requires but the most cursory observation to show that
such explanations of the variations in wages as have just been
given do not tell the whole story. The broad fact Js^ that t^^
attractive and easy employments do not in general command the
lowest pay. It is more nearly true that they command the high-
est pay. The common laborer or the miner receives less for his
hard, dirty work than the skilled workman for his lighter and
cleaner work ; and this, tho the latter's hours are usually the shorter
and his employment no more irregular. The work of the lawyer, the
physician, the business man, is easier as well as intrinsically more
interesting, more varied, more attractive, than that of most sorts
of manual laborers. Yet even after due allowance is made for the ex-
pensive training called for by these so-called "liberal" professions,
their earnings are large as compared with the sacrifices they involve.

This discrepancy between sacrifice (work) and reward could not
exist if choice between occupations were free. The day laborer
would be glad to become a mechanic or engineer, or to advance
his children to those more attractive occupations, if the choice
were open to him. The obstacles are in some small degree due to
a quasi-monopoly in certain occupations; but in the main they are
based on the great fact of long-establishe,d^,SQcial.^§tratification.

Set monopoly of any sort is becoming less and less important in
the modern world. Legal monopolies, such as those of the craft
gilds of the Middle Ages, have disappeared. Something analo-
gous to craft monopoly is occasionally aimed at by trade unions,
admission to a union being restricted by high fees or by limitation
of members, and employment permitted, so far as the power of the
union extends, to members only. In some trades which retain
the handicraft character, and in which skill can be acquired only
thru careful instruction and long practise, such restrictions have
sometimes proved effective. But Jn most industries the machine
t^jids to displace the tool. General ability rather than specialized
skill is required for attaining mastery ; no small knot of mechanics
can keep under their control the art of doing any one kind of work.
-Attempted labor monopolies have usually broken down.*
I Compare Chapter 57, § 2.

136 THE DISTRIBUTION OF WEALTH l47-§4

The permanently important forces are not those intentionally
set in motion by any group of workmen, but the varied influences,
direct and indirect, patent and obscure, which set up barriers
between the different classes of society. They may be considered
under three heads: expense of education and training; the
subtle influence of environment; and, finally, differences in inborn
gifts.

§ 4. Expense of education, as we have already noted, would
bring about, even under free competition, higher wages. This is
most obviously the case where the parents or the young persons
themselves pay for the training. It is so, even if the training is
supplied gratuitously in public schools and colleges; for tho in-
struction itself be gratuitous, support must be provided. Only
if the state were to supply education of every kind on the terms
which it grants in the United States for the army and navy cadets
at West Point and Annapolis, would the burdens which education
entails be taken entirely from the individual's shoulders. As
things stand, this burden is not only heavy, but it is one which, as
it becomes heavier, the poorer members of the community can less
and less undertake to bear. When the day laborer's child reaches
the age of thirteen or fourteen (often even earlier) the increasing
expense of support and the possibility of some earnings cause him
to be taken from school and set to work. Only rare conditions —
great altruism and persistence on the part of parents, evidence
of exceptional ability in the child, charitable aid — enable him to
go beyond the elementary school. The gateway to a more ad-
vanced education is virtually closed. The child of the mechanic
and clerk goes a little farther in his schooling, and is more likely
to find his way into the secondary school. Even so, the comple-
tion of the secondary school curriculum is unusual; the path for-
ward is cleared but a little way. As a rule those only who them-
selves have enjoyed a higher education and its fruits provide for
its completion by their children also. Hence differences in re-
ward, and the social classes which rest mainly on them, tend to
perpetuate themselves. The very fact that a man has had an
advanced education tends to secure it for his children. The very

47-§5] DIFFERENCES OF WAGES 137

fact that a laborer has not had it is an almost insuperable barrier
to his children securing it.

Expense of education thus affects differences of wages doubly.
It affects them, thru the working of competition, in lifting rewards
^to a level at least high enough to make the expense worth while.
It affects them also thru the restriction of competition, by im-
peding access to the better places for multitudes who, were they
able, would gladly seek it.

Environment, the second among the barriers to free movement,
cannot be sGarpIy' separated from education and training. To
the factor of expense in education, it adds another that keeps po-
tential competitors from trying to enter the more favored ranks.
All the associations of nurture and family, all the force of example
and imitation, keep a youth in the range of occupations to which his
parents belong. In a highly mobile and democratic community
like the United States, environment tells less than in older coun-
tries. But it tells much in all countries. The gifted and alert
may feel ambition to rise, hut the mass accept the conditions to
^which they are habituated.

§ 5. Finally, we have to consider differences, of inborn gifts;
undoubtedly of great and far-reaching effect, yet in their influence
on the broad phenomena of social stratification not fully under-
stood. Some fundamental questions relating to this topic still
await positive answers.

In the eighteenth century, the common belief was that men were
endowed by nature with the same mental and moral gifts. "The
difference between the most dissimilar characters, between a phi-
losopher and a common street porter, seems to arise not so much
from nature, as from habit, custom, education." ^ Rousseau be-
lieved that with proper education he could shape men's capacities
at will; and Robert Owen rested his optimistic social experiments
on the belief that, given favoring conditions, all men would prove
equally industrious and equally virtuous. During the nineteenth
century the effect of biological investigation, under the leader-

1 So said Adam Smith, Wealth of Nations, Book I, Chapter II, p. 17, Cannan'a
edition.

.y^.

138 THE DISTRIBUTION OF WEALTH [47-§5

ship of Darwin, was to turn opinion the other way. It laid stress
on the inborn differences between individuals of the same species,
"the transmission of variations from ancestor to descendant, the
close association of physical and mental traits. A possible corol-
lary was that the better position of the more favored classes re-
sulted, in part at least, from inborn qualities transmitted from
generation to generation. In recent years more and more atten-
tion has been given to the bearing of such reasoning upon social
phenomena, with the result that no positive proof or disproof has
been given as to the part which natural endowment plays in sepa-
rating social classes.

Some differences in remuneration and in consequent social sta-
tion are certainly due to inborn gifts. Within any one grade in
society, still more certainly within any one profession, some indi-
viduals have exceptional capacity and thereby gain exceptional
rewards. There are lawyers, physicians, scholars, poets, invent-
ors, business men, whom nature endowed with rare qualities.
Education may aid them, environment may hamper, but in:^
nate capacity proves decisive. The influence of heredity is often
traceable ; yet the degree to which a given talent or combination of
talents' shall be transmitted from ancestor to descendant seems
subject to no ascertainable law. The fact of varying endowment,
whether in the way of genius or of high talent, is as unmistakable
as its causes are inscrutable. And from this fact it follows that
some individuals earn more than others, and that great differ-
ences in wages, under a regime of competition, are inevitable.

The more difficult question is whether there are broad differ-
ences in gifts of mind and character among the several social
classes. More particularly are the well-to-do possessed, on the
whole, of qualities not possessed by manual laborers? If we could
go back to the very beginnings of social differences, we should
doubtless find that those who first swung themselves into favored
positions did so by virtue of natural gifts. The earliest savage
chiefs rose to command because of superior strength or cunning.
The feudal lords were at the outset the natural leaders of the clans.
The city merchants in whom we find the origin of the bourgeoisie

47-§5] DIFFERENCES OF WAGES 139

were the shrewd and capable men of their towns. The analogies
of heredity suggest that the qualities of such ancestors were trans-
mitted to their descendants, and that the so-called higher classes of
modern times constitute a born aristocracy. Tho heredity is ir-
regular in its individual manifestations, for large numbers it shows
regularity and persistence. Take a thousand children of gifted par-
ents and a thousand children of mediocre parents; the former will
prove the superior class, even tho a sporadic genius may emerge
among the latter. Can it not be inferred that the broad differences
between social classes rest on differences in their inherent intel-
lectual and moral endowments?

Further, it is mamtained that the distribution of success in life
proves the greater average gifts of the higher classes. Statistics
concerning the notable men of several countries (especially Eng-
land and France) show that the aristocracy, the well-to-do classes
and the town dwellers, have furnished the immense majority of
the men of mark — the writers, statesmen, soldiers, industrial
leaders. In proportion to their numbers, and as indicated by
achievement, talent has been vastly more abundant. Even ge-
nius has been recruited chiefly from their ranks. Such evidence
is adduced as strengthening the view that Jnborii gifts_vary.j5dth
social classes.

(!)n the other hand, it is contended that this very evidence
shows the commanding influence of opportunity and environment.
Any one of intellectual capacity who consorts with the average
persons of the "superior" classes, and observes their narrowness,
their dullness, their fatuous self-content, their essential vulgarity,
must hesitate before believing that they and their descendants
achieve success solely because of unusual gifts. He cannot but
suspect that their favored position must be due, in large measure
at least, to training, advantageous start, fosteriiig_jenA4fomnent.
If few among the lower classes rise, it must be because of the re-
pression of many who are talented. Only those of very unusual
vigor and ability can escape from the trammels of a deadening en-
vironment. Many ardent reformers are convinced that a great
fund of capacity, no less in its possibilities than that which is found

140 THE DISTRIBUTION OF WEALTH [47-§5

among the well-to-do, remains undeveloped. Tho variations
between individuals are unmistakable, variations between classes
are declared to be unproved.

To this it is added that any higher or favored class tends not so
much to transmit to descendants the qualities by which the ances-
tors achieved success, as to become itself enervated and weakened
by continuance in privilege. The later generations of the stock
deteriorate. It is only by the infusion of fresh blood from below
that vitality and strength are preserved. Such is said to be the
lesson of history as to royal and noble houses; such is perhaps the
tendency among the successful bourgeoisie. When the conditions
of life are made easy and the struggle for advancement becomes
less strenuous, the unfit are no longer eliminated and the moder-
ately capable are enabled to hold their own. Tho conspicuous
success continues to be attained only by those of unusual gifts
(whether born in the lower classes or anjon^ the well-to-dp)j^
the advantages of an easy start and constant support still enable
persons of mediocre quality to remain in the favored class from
which they sprang and to maintain their favored position.

The problem is unsolved, and is likely long to remain so. The
method of experiment cannot be applied to it, as indeed it cannot
be in an accurate way to social problems of any sort. We cannot
take a thousand children of the more favored classes, and another
thousand of the less favored, subject them to precisely the same
influences of education and environment, and watch their careers
thru life. Still less can we do so with successive generations of
their descendants. The method of observation alone is available ; a
method hampered not only by the limitations of the evidence and the
complexity of the data, but by the prejudices of those who conduct
the observations. Tho the analogies from biology (where experi-
ment in the strict sense is applicable) strengthen the view that in-
heritance is all-pervading, the plain facts of everyday life prove
that opportunity and environment are of signal importance. Those
of inborn gifts make them tell with immensely greater ease if they
have the advantages of education and training, and of support
during the early stages of their career. Those of the very highest

47-§6] DIFFERENCES OF WAGES 141

gifts are doubtless least dependent on adventitious aid. Generals
probably are born, not made. But colonels and captains can be
trained. In the ranks there may be many men who have it in
them to become good officers, yet are kept in the ranks because no
way is available for bringing out the sterling qualities which they
do possess.

§ 6. At all events, whether from natural causes or as the result
of existing social conditions, thj£_ movement of labor from grade
to grade is not free. Amid the great variety of occupations and of
wages, certain broad groups may be distinguished. These may be
called, in the plirase introduced by Cairnes, non-competing groups;
non-competing in the sense that those born or placed in a given
grade or group usually remain there and do not compete with
those in other groups. For most men it is very difficult, for manj-
it is impossible, to move from the group in which they find them-
selves into one more favored. We may enumerate, for simplicity
and convenience of exposition, five such groups. They are not
distinguished by sharp demarcation, for they shade one into
another by continuous gradations; but they are distinguished
sufficiently to bring into relief some important questions as to the
relations between social classes and the fundamental causes acting
on distribution and on value.

(1) In the lowest group belong the day laborers, so-called: the
diggers and delvers who have nothing to oflFer but their bodily
strength. No doubt, among these there are some gradations.
The ver}' capacity and willingness to labor continuously, even at
the simplest tasks, thru nine, ten, eleven hours a day, are not pos-
sessed by all men, still less by all races, and mark something be-
yond the quite unskilled grade of common labor. But labor of
this sort is common enough. Almost any adult is able to do the
work. For this group, even in the most advanced countries, edu-
cation is rarely carried beyond the minimum which the law requires.
Children are set to work at the earliest age at which they can earn
something. The maximum wages of any individual are earned as
soon as he is full grown, andJaecome less rather than greater as
middle age is reached.

142 THE DISTRIBUTION OF WEALTH l47-§6

In the same group belong those factory employees whose work is
of the simplest sort. In every factory there is a certain amomit of
"heavy work" to be done, for which the common laborer is needed.
In agriculture there is always a sharp demand for such labor at har-
vest time and some demand for it thruout the year; tho the plan-
ning and direction of farm work calls for much more than simple
muscular effort.

(2) In the next group belong those who, while not needing spe-
cialized skill, yet bear some responsibility and must have some

.^ertness of mind. , Such for example are motormen on the street
jailways. Most miners belong here, certainly in England and in
Germany. In the United States, there has indeed been a tendency
(except where machinery is used underground) to put coal mining
into the hands of unskilled workers. The development of machin-
ery and of large-scale establishments has created a demand for an
immense number of factory workers whose tasks are comparatively
simple and often are desperately monotonous, but who yet must
have some intelligence in watching and applying machinery.
Wages in this group are commonly paid by the week, not by the
day; a circumstance marking a greater continuity of employment
which in itself constitutes a considerable advance over the situa-
tion of the first group.

(3) In the third group belong the aristocracy of the manual
laboring class: the skilled workmen. Such are carpenters, brick-
layers, plumbers, machinists; the whole range of occupations where
there is need for a sure eye, familiarity with tools, a deft and
trained hand. Tho machine processes have displaced in large
degree the handicrafts, the workman skilled at a trade is still in
many directions indispensable. Further, the development of
machinery has itself called for a great class of workmen capable of
making, repairing, and adapting machines. Specialized skill at a
particular trade may be less certain to command as high a reward
as in former days, because so largely threatened by competition
from the machines; but general mechanical ability is in constantly
growing demand. It is among workmen who possess such ability
that trade unions are strongest. Some accumulation of prop-""

47-§6] DIFFERENCES OF WAGES 143

erty is possible, by deposit in the savings banks or by o\\Tiership
of a dwelling. Some pride in the occupation is developed, and a
^trong spirit of independence. Education, too, is carried further
than in the lower classes. The children are usually put thru the
entire curriculum of the elementary (grammar) school, and are
prepared by apprenticeship or otherwise for a particular trade.

(4) ,Next comes the group that approaches the well-to-do : the
lower middle class, which avoids rough and dirty work, and aims
at some sort of clerical or semi-intellectual occupation. Here are
clerks, bookkeepers, salesmen, small tradesmen, railway conduc-
tors, foremen, superintendents, teachers in the lower grades. Edu-
cation m this group is carried further; for parents are more ready
and better able to support children thru a long period. The sec-
ondary school (high school or academy) is usually entered, and
very often attended thru its entire course. Marriage takes place
at a somewhat later age; and some endeavor at saving or accumu-
lation is almost always made. There is commonly a feeling of
contempt for the manual laborers of all sorts, whether skilled or
unskilled, and a demarcation of social feeling that does not corre-
spond to differences in wages; for in modern communities, the rate
of pay in this fourth class is often little different from that in the
third class.

(5) Finally we reach the class of the well-to-do; those who regard
themselves as the highest class and certainly are the most favored
class. Here are the professions, so called — the lawyers, phy-
sicians, clergymen^ teachers of the higher grades; salaried officials,
public and private, in positions of responsibility and power; not
least, the class of business men and managers of industry, who
form in democratic communities the backbone of the whole group.
The associations are with property and accumulation, and the
common aim is not merely to procure a suitable support but to
save money or to make money. Education is carried to the highest
level, commonly thru the secondary school, often thru the college
or university. Earning power does not begin early. Not only is
there a long period of training and education, but an additional
stage of slow start and slender beginnings; while an increase of

144 THE DISTRIBUTION OF WEALTH [47- §7

earning power thru life or at least thru middle age is confidently
expected. Marriage is delayed until late — often too late for full
happiness. The wives are largely ornamental; they are not expected
to do household work or even to undertake the full care of their
children, but are given the aid of servants. "^ ——'--- . . — '

The first three groups, including the manual laborers of all kinds,
constitute a class by themselves, not only because the gradations
of wages are continuous but because their members have the same
point of view and the same prejudices. They ex^sct usually to
live on their wages, not looking to the accumulation of property
or to an income derived from property. There is a common sense
of dependence on manual labor and a common sense of separation
from the well-to-do and possessing class. The last two groups
have similar feelings of solidarity. Even tho there are great va-
riations in possessions and income among them, all have the habits
and hopes and prejudices of the well-to-do. They share a feeling
that manual labor is beneath them, and their garb indicatesjthejr
freedom from it — no jumpers or overalls. Their hope is for._
accumulation and investment, and.J;heir ambition is primarjly
to swing themselves into the position of the leisure class. Busi-
_ness,:z=-Jthat is, the management and direction of industry, and
work close to such management — is the core of their doings. We
may thus divide the workers into the two great classes of the soft
handed and the hard handed. Those who do not labor at all —
the owners of property yielding income — belong in the strict eco-
nomic sense in a group by themselves: their income is not wages of
any sort, but interest or rent or monopoly gain. But in a larger
sense they are in the same class with the upper groups of the wage-
earners and especially with the highest and most favored group,
sharing the same traditions, and, not least, intermarrying with the
members of that group.

§ 7. In modern times, and especially in democratic communi-
ties, the barriers which separate the groups tend to be broken
down, and passage from one to another becomes more easy. We
may consider first how these changes affect the lowest group,
that of common laborers.

47-§7] DIFFERENCES OF WAGES 145

There always has been and there always will be much hard, dirty,
common work to do; aijxi there always has been and there always
will be a desire on the part of the powerful or favored social classes
to get others to do this work for them. Hence slaver}^ in ancient
times and serfdom in the Middle Ages. In modern times we have
negro slavery, Chinese and coolie labor, unskilled common labor.
For such there is an insistent demand: in building railways, dig-
ging sewers, handling the crops, delving in the mines — all the
tasks for which simple muscular energy is needed. Here are the
helots of society. As to them, it is far from being true that unat-
tractiveness in an occupation causes wages to be high. The re-
verse is more nearly true. The hardest, dirtiest, least attractive
work gets the lowest pay.

Evidently, in a free society the explanation of the low wages tft"^
this group must be that there are very many persons who can do
such wor¥^and can do lio other.'Their offer of abundant labor
forces waues down, and they are prevented from making their way
to the more favored" group by the obstacles of environment and
lack of training or by deficiency of inborn qualities. So far as these
obstacles are abseirt"br are weakened, there will be a constant en-
deavor to get out of the lowest group; therefore a constant seepage
into the groups above and a tendency towards equalization of
wages. This movement for escape from the lowest group is strong
in the United States. All the influences of a democratic society—'
— the absence of rigid class distinctions, the atmosphere of free-
dom, the education of the public schools — tend to break down
the barriers between groups. The position of the common
laborers in the United States (that is, in the Northern and West-
ern states) has been kept at its low level only by the continued
inflow of immigrants. Those of the second generation among the
foreign-born usually swing themselves into the second and third
groups. The public schools, both by the direct effect of their
training and still more by their indirect effect in breaking the
thralls of environment, open the way to something better. But dur-
ing half a century and more, ever fresh streams of immigrants have
brought new supplies of common laborers, taking the places left

146 THE DISTRIBUTION OF WEALTH l47-§7

vacant as the children of their predecessors have made their way
into the higher groups. First came the Irish, whose great move-
ment set in after the Irish famine of 1846; then the French Cana-
dians; later the Italians, Hungarians, Poles, and the varied races
of eastern Europe. These constant new arrivals kept down the
wages of the lowest group, and accentuated also the lines of social
demarcation between this group and others.

A rate of pay for common laborers much lower than that for
other laborers is assumed by most people to be part of the order of
nature. But it is by no means a matter of course, and it is very
much a matter for regret. Freedom in the choice of occupations
is one of the most important conditions of happiness, and the tra-
ditional position of common labor is due to the absence of such
freedom. The disparities in earnings and in social position of
which this is the most glaring are not consistent with the ideals
that are dominating the civilized world. They are most of all
inconsistent with the aspirations of democracy. It is probable
that even with the removal of all artificial barriers to free move-
ment, common labor would still remain, as its present name im-
plies, the most common and the least paid. But such discrepn
ancies as the world has hitherto accepted as a matter of course are
not inevitable. They bring grave social dangers, in the intjensifi-
cation of class prejudices and class struggles. They bring a false
attitude in the rest of the community toward all manual labor —
an unworthy contempt for indispensable Vv^ork. An elevation of
this group to a plane of higher pay and better social regard would
indeed mean that other groups would be relatively worse off —
they would no longer secure the fruits of hard labor on cheap
terms; but it would mean a better distribution of happiness.

It is on grounds of this sort that the exclusion of Chinese from
the United States is to be justified. Such labor as theirs was much
"needed" on the Pacific Coast in earlier days — "needed" in the
sense that there were very few who could be got to do it for the
wages deemed by tradition adequate for the work. On strictly
economic grounds it was advantageous to the rest of the com-
munity. But a permanent group of helots is not a healthy con-

47-§7] DIFFERENCES OF WAGES 147

stituent of a democratic society. It is on the same grounds that
the position of the negro in the Southern states is matter for grave
anxiety. His indefinite continuance as a semi-servile laborer is
not consistent with high social ideals ; yet his freedom to move into
better conditions (so far as his innate qualities permit) is resisted
not only by the selfishness of other groups but by all the strength
of bitter race prejudice. The question of the restriction of immi-
gration into the United States is to be decided chiefly, in my judg-
ment, from this same point of view. If immigration means the
perpetuation of a low economic and social stratum, it should be
restricted. But if those who come in are transformed in due time
— their children, if not themselves — into free and mobile mem-
bers of the community, the country may accept them with little
misgiving. The immigrants themselves certainly gain from the
very beginning, by finding better conditions and better pay than
in their native countries; they do hard work on cheap terms for
the rest of the community; and their stagnation in the lowest group
may be condoned if it is but a temporary stage.

The spread of education and the breaking of the shackles of
environment, which make it easier for the lowest group to rise,
have had their effects on the relations of other groups also. Clerks,
salesmen, and the Uke were formerly shielded in some measure
from competition, and so maintained in a favored position, by the
difficulty of getting the book learning (simple tho it may be) which
their calling requires. The public school and especially the pub-
lic high school have changed all this. There is a plethora of per-
sons qualified to do such work and a consequent tendency for their
wages to fall rather than to rise. The earnings of a good mechanic
are in the United States higher than those of the average clerk.
None the less the resort to the clerk's trade shows no sign of abat-
ing. This is due in good part to its association with the manage-
ment of business and to the possibility of advancementto a post df
command — the alluring tho decepTTve chance of a prize. But it
is due chie%Jo a traditional contempt for manual labor. The'ex^
ternals of the leisure classes are aped. This conventional and
irrational feeling against "dirty work" is indeed likely to give way

148 THE DISTRIBUTION OF WEALTH [47-§8

as the pecuniary advantage of the mechanics' group becomes more
pronounced and more famiUar. In time people adjust their notions
of social superiority to earnings. Any occupation that pays well
is likely in the end to be respected, just as any person (or family)
having a sufficient fortune is likely in the end to be accepted by
the so-called upper classes. Yet such changes in the conventional
hierarchy of society take place but slowly. The esteem in which
an occupation is for the time being held is a powerful part of its
attractions; and the more open is competition, the more will peo-
ple move into those occupations which are supposed to bring
social superiority.

§ 8. What would be the differences in wages, and to how great
an extent would groups and classes persist, if all had the same op-
portunities, and if choice of occupation were in so far perfectly
free? Would wages then differ only so far as they might be af-
fected by attractiveness, risk, and other causes of equalizing vari-
ations? Would coarse manual labor, for instance, then receive a
reward nearly as high as any other labor, nay conceivably (since
the work is dirty and disagreeable) higher than any other? Would
the soft-handed occupations lose entirely the advantage in pay
which they now commonly have?

The answer must depend on our views concerning the limitation
of natural abilities. It is clear that some gifted individuals — a
few men of science and letters, inventors and engineers, business
men and lawyers, physicians and surgeons — would tower above
their fellows, and would obtain in a competitive society unusual
rewards. But would physicians as a class secure higher rewards
than mechanics as a class? They would do so only if the faculties
which a capable physician must possess are found among man^iiid-^
in limited degree. And mechanics in turn would receive wages
higher than those of day laborers only if it proved that but a limited
number possessed the qualities needed. On this crucial point, to
repeat, we are unable to pronounce with certainty. What are the
relative eflfects of nature and of nurture in bringing about the
phenomena of social stratification, we cannot now say.

One thing, however, is clear: it is much to be desired that this

47-§9] DIFFERENCES OF WAGES 149

fundamental question be put to the test. The removal of all arti-
ficial barriers to the choice of occupation is the most important
goal of society. Given this, the innate faculties of all will be
brought to bear and all will bring to the social dividend whatever
it is in them to contribute; while at the same time the most per-
fect freedom will be secured and thereby probably the most even
distribution of happiness.

§ 9. The wages of women are lower as a rule than those of men.
This is due to a variety of causes.

Partly it is due to their lower physical strength and less general
efficiency. They are in many sorts of work less productive than
men, aii3 therefore paid less highly — an instance of inevitable
differences in wages, such as would persist even if choice of occu-
pations were entirely free.^

In some degree, choice of occupations is not entirely free for
women. Custom and lack of training long have shut them out
Jrom some occupations. But in modern times, and especially in
a country like the United States, obstacles of this sort are becom-
Jng steadily less and probably have no longer any far-reaching
effect. Education for women is widespread and accessible and
tradition does not stand obstinately in their way for any occupa-
tion for which they are really qualified. Some women, indeed,
may be said to be in a non-competing group, having an unfortu-
nate place within the occupations of their own sex. Such are
needlewomen, able to do this familiar work of their sex and
unable to do anything else. Not so very long ago such work held
the same place for women that common day labor does for men.
It was the one thing every woman could do, and the only thing

1 To cite one item of characteristic testimony: among the shirt-waist workers of
New York "the testimony of both employers and employees was unanimous that if
a man and a woman, who had worked the same number of years at the trade, sat
side by side at the same machines, and had been paid precisely the same rate per
piece, the man would earn anywhere from 25 to 75 per cent more than the woman.
The explanations were that a man worked faster, was stronger and more enduring;
that women couldn't do the higher parts of the work; that a man works harder and
faster and longer because he has to, has a family to support, 'while a girl is only
working until she get.s married.' " Mr. Woods Hutchinson in The Survey, January
22, 1910.

150 THE DISTRIBUTION OF WEALTH [47-§9

that most women could turn to when they had to earn their living.
But the range of available occupations has greatly widened during
the last generation or two, and there is less congestion of work-
seeking women in any one corner.

Most important of all, in the modern competition of women
for work, is the circumstance that as a rule they have to support
themselves only, and often not even that. Most women em-
ployed in factories or shops are at work for but a limited time,
looking forward to marriage. They live in their homes, and their
earnings are part of the family earnings. They are "subsidized."
Not a few married women are subsidized in the same sense; they
earn extra pennies. For a man, wages must normally be enough
to enable a family to be supported and reared. The great niajority
of working women are not in this case. Hence they are willing to
work for wages less than would suffice to maintain a family; and
there being many of them, they must offer their services on terms
that will secure the employment of all. Some among them, it is
true, do have to support a family — widows, elder sisters, and the
like; and these must accept the same wages as the rest. Con-
versely, among men, bachelors get the same wages as fathers of
families. Such disparities between needs and earnings are the
inevitable outcome of competitive industry.

Since women work for lower wages than men, it might be ex-
pected that they would displace the men wherever they could do
the work. So far as the women are really as efficient as men, this
result ensues; in such occupations for example as typewriting,
stenography, light factory work, much selling over the counter in
retail shops. The men who formerly did this work must find some-
thing else to do; and tho the shift is not often easy or quick, it
usually takes place in the end without serious loss. Sometimes,
however, while women displace men in part, they cannot do so"
entirely. A certain proportion of men must often be maintained.
Thus in the composing room of printing establishments women can
do much of the work as well as the men ; they can operate some of
the typesetting machines as well, and can set most type as well.
But for the heavier or more exacting work men must be kept, and

47-§9] DIFFERENCES OF WAGES 151

they then are employed side by side with the women. The situation
is similar in the public high schools. Most high school teaching
is done, at least in the United States, by women. But some men
there must be, if only for the better maintenance of discipline;
and indeed the juster opinion is that secondary education would
be much improved if the proportion of men were greater. When
men and women thus work side by side, doing apparently the same
work, they yet receive different wages. The specious cry of
"equal pay for equal work" is sometimes raised in such cases;
tho in fact the work is not equal, for the men could not be com-
pletely replaced by women without loss in efficiency. Where
work (that is, eflSciency) is in fact equal, the action of competition
will in the end make pay equal — equal at the lower level, if
enough capable women can be found, and equal at the higher
level if men must still be enlisted. This, we say, will be the out-
come in the end. But, as in all such adjustments, there may be a
period of transition and experiment, during which the practises of
industry have not yet accommodated themselves to the forces of
competition; and during such a period the tradition that women's
wages are lower than men's doubtless has its effects on relative
wages.

The emplojTnent of unmarried women is in the main a gain for
society and a gain for the women. This is even more true of
women from the well-to-do classes than of their poorer sisters. It
is better that they should be at work, rather than idling, during
the period when they are looking forward to marriage; and what
they produce, even tho it be not turned out with great efficiency
or for wages as high as they would like, adds to the social income
as well as their own income. Their being at work is often op-
posed by the men, and by some well-meaning reformers, on the
ground that it takes the bread away from some one else — a phase
of the pervasive fallacious notion that the community is worse off
if its labor force is utilized to the utmost. ^ What is true of women
awaiting marriage is even more true of women who do not marry
at all; their own happiness as well as their usefulness in society is
1 See below, Chapter 52, § 3.

152 THE DISTRIBUTION OF WEALTH [47-§9

immensely promoted if they have stated work, paid for at its
market value.

But women's work, and especially the work of young un-
married women, must be safeguarded in such a way as to con-
serve health and character. There should be stringent regula-
tion as to the permissible age, the hours of work, ventilation and
sanitation in workshops. No utilization of productive forces~can
be more wasteful than that which impairs the moral or bodily
soundness of future mothers. The circumstance that they are
usually poor bargainers — partly for the very reason that they are
at their tasks temporarily — renders them liable to exploitation
and makes legislative regulation of their labor the more imperative.

The employment of married women or widows, having minor
children, is almost always bad. What it adds to social income is
much more than offset by the social loss from unkempt homes and
from lack of care for the young. It must be regarded, where
necessary, as one of the harsh necessities of an individualistic so-
ciety. Some charitable organizations have adopted the policj^ of
deliberately paying penniless widows, not for work outside the
home but for staying at home and caring properly for their fami-
lies. It has been under consideration in Germany that the great
system of workmen's insurance, which now provides for the con-
tingencies of sickness, accident, infirmity, and old age,^ shall be
extended to provide for widowhood also. Thru some such meas-
ure there may be found a way of mitigating this bitter hardship.

1 See below, Chapter 60.

CHAPTER 48
Wages and Value

Section 1. "Expenses of production" and "cost of production" again con-
sidered. If there were perfect freedom of choice among laborers, value
would be governed by cost, 153 — Sec. 2. There being non-competing
groups, demand (marginal utility) governs relative wages. How this
principle applies to a grade or group; marginal indispensability, 155 —
Sec. 3. Qualifications: earnings may be so divergent as to cause seepage
from one group into another; the standard of living may affect numbers
within a group, 158 — Sec. 4. The lines of social stratification are stable;
hence changes from the existing adjustments of value are not usually
affected by them, 159 — Sec. 5. The theory of international trade
brought into harmony with the theory of value under non-competing
groups, 161 — Sec. 6. Analogies between international trade and do-
mestic trade, 162.

§ 1. In the present chapter we return to the theory of value
and its connection with the theory of distribution. So close is
that connection that the two subjects might be properly treated
as one. It is chiefly for convenience and clearness in exposition
that they have been separated in this book.

Let the reader recall the distinction indicated by the phrases
"cost of production" and "expenses of production." i By ex-
penses of production we mean the outlays that must be made to
bring a commodity to market — what must be paid for wages,
materials, and the like. Since the materials themselves are made
by labor, and the outlays of capitalists are resolvable into a suc-
cession of advances to laborers, the main expenses of production
in the end are simply wages.2 By cost of production we mean
efforts and sacrifices — mainly labor. The distinction between
expenses and cost — between wages and labor — is an obvious
one and an important one, tho unfortunately not indicated by any

1 See, especially, Chapter 12, § 1.

2 Compare Chapter 5, § 5; and Chapter 38, } 4.

153

154 THE DISTRIBUTION OF WEALTH [48-§ 1

well-established phraseology. In everyday language people mean
by "cost" employer's outlays; and this current usage was accepted
in most of what has preceded. In what is to follow, it will be
helpful to keep these two notions distinct, and "cost" will be
used in the sense of labor or effort.

If competition between laborers were perfectly free — if there
were no non-competing groups — expenses of production, so far
as they consisted of wages, would perfectly measure cost or effort.
There could then be no differences of wages, except such as served
to equalize the attractiveness of different employments. Higher
wages in any one occupation would then signify that the work in
it was harder, more disagreeable, in less esteem; in other words,
that it involved greater effort or irksomeness, that is, greater cost.

Under such a supposition, it would be possible to maintain a
labor theory of value: that the value of commodities measured or
embodied the labor given to producing them. Higher value would
be the result of more outlay in wages, and more outlay in wages
would mean either more labor or labor of a more irksome kind;
that is, higher cost. This conclusion would assume also, to be
sure, that competition among capitalists was free, and that all
capitalists' outlays in the way of wages were weighted, or added to,
in the same proportion, in order to yield a return on these outlays
in the form of interest. As this weighting, or addition for interest,
would affect all commodities equally, value would remain undis-
turbed; since value is only the expression of a relation. If ten
per cent for interest were added to the wage bill for each and every
commodity, no one commodity would be affected more than any
other, and each would exchange for the same quantity of any other
as before.! For the validity of this conclusion, it must further be
assumed that temporary fluctuations, or "market values," may be
disregarded. With free competition both of labor and of capital,
supply would be so adjusted in the end that no one set of laborers
or capitalists would secure higher rewards than any other set.

1 The reader conversant with the history of economic theory need not be re-
minded of the qualification of this proposition which was so much dwelt on by
Ricardo and his followers. See Ricardo, Political Economy, Chapter I ; J. S. Mill,
Political Economy, Book III, Chapter IV.

48-§2] WAGES AND VALUE 155

Supply being so adjusted, value would be regulated fundamentally
by quantity of labor, that is, by cost in the sense of labor exerted.

§ 2. In fact, however, as we have seen, the movement of labor
is not free. Looking to this circumstance alone, and disregarding
for the moment the same possibility as to capital — that is, as-
suming capital to compete freely — let us consider how value
would be adjusted. Suppose a non-competing group of workmen
which comprises a single trade, say glass blowers; what will de-
termine the value of the commodities made by them?

The answer is simple: marginal utility or marginal vendibility;
the reader will bear in mind the distinctions and qualifications
suggested by this turn of phrase.^ That will determine both the
wages of the glass blowers and the selling price of the window,
glass and other articTes'made by them. The quantity of such
articles put on the market will be limited by the number of work-
men in this group. AsTKe capitalists (by supposition) compete
among themselves, they bid for the services of this particular group
of laborers until nothing is left to themselves but normal profits and
interest. A current high rate of wages for such laborers will estab-
lish itself. Every capitalist will regard his outlay for such wages
as part of his "cost"; that is, of what we here call the "expenses"
of production. The selling price of his wares seems to him to be
based on what he has to pay to his workmen. People are con-
stantly saying that they are "compelled " to pay the ruling rate of
wages or the ruling price for an article, forgetting that one of the
things that establishes the ruling prices or ruling wages is their
own willingness to pay rather than go without. It is the bid-
ding of the capitalists for workmen that causes the high rate of
wages; but that bidding rests on the high prices which buyers pay
for the wares — that is, on the desirability of the wares to them.
Not quantity of labor, but utility, then would govern value: not
the conditions of supply, but those of demand.

This simple case gives the key to the phenomena of value under
the conditions of non-competing groups. But before It can be ap-
plied, sundry qualifications and amplifications must be considered.

1 See Chapter 9, § 4.

156 THE DISTRIBUTION OF WEALTH [48-§2

In the first place, it is rare that the workmen in any single trade
are able permanently to shut out competition. The case of glass
blowers has been adduced, by way of illustration, because it ap-
proached that possibility. Glass blowing long was one of the few
trades which preserved down to the most recent time the charac-
teristics of a highly specialized handicraft. In general, workmen
are partitioned into groups, not trades. There may indeed be tem-
porary variations of wages, and these of a considerable sort, because
of sudden changes in the demand for one or another kind of labor.
Activity in the iron industry, for example, or in building opera-
tions, may cause unusually high wages for the needed mechanics.
Such variations endure longer than economists have been apt to
suppose; and the workmen themselves, as well as their employers,
often speak and act as if they would last indefinitely. In fact, un-
usually high wages of this sort attract other workmen from the
same group in society, and so set in motion forces that bring them
down to the level common for the group. Wages tend to be ad-
justed roughly to the same level for all workmen in any one social
and economic layer.

The influence of demand in determining the range of wages in
any one large group is far from simple. Labor of almost any kind
has a derived utility. The glass blower's labor has a utility derived
from that of the glass he makes; that of the ironworker a utility
derived from that of the crude or finished iron. But it is an arti-
ficial simplification of industry to think of the glassware or iron as
made by the glass workers or ironworkers alone. The iron, for
example, is made, not by the puddlers or rollers only, but by them
in combination with the miners who dug the ore, the railway work-
ers who helped to carry it, the common laborers who are employed
in each of the stages — not to mention the managers, foremen,
trained engineers. Only in comparatively rare cases — as with
the services of physicians or domestic servants — do the workers
supply single-handed the utilities on which their pay rests. Or-
dinarily, workmen of different kinds and grades combine to make a
commodity. All are equally indispensable; utility and marginal
utility are attributes of the commodity as such: how say whether

48-§2] WAGES AND VALUE 157

the skilled mechanic or the common laborer has the greater share
in yielding the utility?

The principle of marginal utility is here applicable under the
guise of marginal efficiency or marginal indispensability. Common
unskilled labor, for example, is cheap because there is plenty
of it. If there were very little of it, it would be in the high-
est degree indispensable and would be paid for at a corresponding
rate. Being plentiful, it is applied not only to operations that are
indispensable, but to others that are less and less vital, until
finally its marginal application is reached at the point where it is
least needed. While in some directions it adds enormously to
the output, or to the joint productivity of all the labor with
which it is combined, in others it adds less. It is its marginal
effectiveness that determines the pay which the whole must accept.
So it is with skilled labor. In some directions it is in the highest
degree important; the loss, were it taken away, would be very
great. It is the loss, or diminution in output, which would en-
sue if the last installment of it were taken away, that determines
the remuneration of any one kind of labor.

The principle, it is obvious, is essentially the same as that applied
to capital : ^ the contribution or addition which the marginal in-
stallment of capital makes to the output determines the return on
all capital. Similarly, the marginal contribution from any grade
or group of labor determines the remuneration of all within that
grade. Both for capital and for groups of laborers this principle
works out its results by a slow-moving but persistent and powerful
process. The market variations of wages, the struggles and de-
bates of the day, seem to be carried on quite without regard to it.
But the "fair" wages to which appeal is constantly made in cur-
rent contentions are in reality the wages which this slow-moving
process tends to bring about.

The ultimate determinant of value, then, where there a re non-
competing groups, is marginal utility, not cost in the sense of labor
or effort. Between the members of any one group, it is true, ex-
changes are conducted, and remuneration is determined, on the

1 See Chapter 38, § 5.

158 THE DISTRIBUTION OF WEALTH [48-§3

basis of cost. Skilled workmen in buying one another's products,
and lawyers and physicians in buying one another's services, ex-
change in proportion to labor exerted, and earnings within each
group are determined by an equalization of effort. Between groups,
however, this is not the case. The range of pay in the " liberal " pro-
fessions and in the occupations of the well-to-do generally, is high
because their members are limited in number compared to the
manual laborers, and the marginal efficiency of their services is
therefore high. So it is as to mechanics and skilled workmen of all
sorts: their scarcity, relatively to the demand for their services,
gives them an advantageous position and a comparatively high
remuneration. Expenses of production, or outlays paid to secure
labor, are thus the results of value rather than the causes of value.
§ 3. Some qualifications to this conclusion must be noted, in
another direction. The remuneration of a group may be so high
as to attract laborersTrom another group. The barriers betw^een
groups are not impassable, and with the progress of society they
tend to become less and less so. The greater the difference in re-
muneration, the greater the inducement to get over the barriers,
and the more likely a movement of some laborers — the alert and
ambitious — into the higher ranks. So far as the obstacles to
movement are the result of environment and nurture, the differ-
ences between non-competing groups are thus subject to a check.
So far as differences in inborn gifts underlie them (an uncertain
matter, as we have seen), no such check can be in operation.

But even within a group numbers may increase, thru the growth
of population. We may conceive that a high rate of pay among,
say, skilled laborers would lead to early marriages, more births,
and so eventually to an increased supply of such laborers. Con-
versely, we may conceive that if the rewards in a given group —
say in the liberal professions — were low, marriages would be de-
layed, births diminished, and the supply of such labor lessened.
Movements of this sort would depend on the standard ofJ[iying
jsdthin the group. A standard of living so tenaciously held as to
affect natural increase may be a force in the background, fixing a
sort of supply price and in the end affecting relative wages more

48-§4] WAGES AND VALUE 159

fundamentally than marginal efficiency. There is evidence that
a force of this sort acts on the nmnbers of the well-to-do in modern
countries, and aids in keeping them in their favored position; and
there is evidence, too, that the same force is coming into operation
in the upper tier of manual workers. But on this topic, and on the
mode in which wages are affected by the increase of numbers and
the standard of living, more will be said later. ^

§ 4. In the first volume of this book,2 value was treated as if
dependent on expenses of production, or on cost in the ordinary
commercial sense. It has been pointed out that the treatment is
inadequate. These very expenses, being mainly resolvable into
wages, depend on the play of value. Nevertheless, the general
principles, as they were stated before, are not so profoundly modi-
fied by the theory of non-competing groups as at first may seem to
be the case. It still remains true that varying exp>enses of pro-
duction are the causes of most changes in value.

WTien once the broad lines of social classification are estab-
lished, and the earnings of different groups adjusted to their num-
bers and their marginal efficiency, relative wages become compar-
atively stable. As Ricardo said, "the scale, when once formed, is
liable to little variation. "^ Changes in demaJid__cajise_JahjQr_ta-
shift from one occupation to another withm each grade, but rarely
cause^TTolTceable change in the demand for all the laborers in the
grade. Hence variations in expenses of production and variations
in cost of production ordinarily run together^ The employer is
"right in thinking that the wages he must pay to the unskilled, to
mechanics, to trained engineers, are settled once for all by forces
with which he has nothing to do. The forces determining them are
so broad and pervasive that his particular demand, tho it forms
part of the whole demand acting on each group, is lost in the total.

Only long-continued a*nd far-reaching changes in demand affect
the relations between non-competing groups; and only then do ex-
l>enses of production (that is, relative wages) appear as results,

1 Compare Chapters 53 and 54, on Population.

2 Chapters 12, 13, 14.

» Ricardo's Works, p. 15.

160 THE DISTRIBUTION OF WEALTH [48-§4

not causes, of changes in value. If, for example, the arts of pro-
duction should be so modified that common labor would need to be
applied less and less; if machinery were so perfected that ordinary
delving and hewing were done by intricate apparatus made and
guided by skilled mechanics — the relative situation of these two
groups would be changed. Unskilled laborers would be less
needed, and if their numbers were the same, the marginal eflSciency
of their labor would be less. The converse would happen as to
skilled laborers : they would be more in demand, and the marginal
utility of their labor would be greater. Possibly some such change
is slowly taking place in the countries of advanced civilization.
Common labor, it is true, can never be dispensed with ; but in many
directions the need for it seems to be becoming less.^ If wages for
this group are to rise, it must be chiefly by a decrease of supply
rather than by an increase of demand; by that process of escape
into other and better-paid groups which is the natural result of
universal education and democratic freedom.

To repeat, such shifts in the economic relations of the social
groups take place so slowly that they may almost be disregarded.
Possibly the time will coms when the social stratification of our
time will have been obliterated; when all sorts of work will be re-
warded in proportion to the sacrifices involved ; when all sorts will
be in equal esteem ; when the common laborer and his children will
have the same opportunities for education and advancement as
the mechanic and the lawyer. Then expenses of production or
relative wages will have very different aspects from what they have
now. Tho real differences in wages may still persist; because of
the inborn differences of men, they can hardly fail to be much less
pronounced than they now are. Under existing social conditions,
however, such possibilities may be disregarded. Variations in re-
ward are the stable results of the generally constant demand for
the different kinds of labor. Changes in value are commonly due
-tQ^hanges in the quantities of Jhejiifferent,idndajQf..liL

1 The demand for unskilled labor seems to be greatest when plant and machinery
are being constructed. Once the railways, canals, factories, are in operation, the
demand is more largely for a grade of labor above that level.

48-§ 5] WAGES AND VALUE 161

for, that is, to changes in cost; tho the general scale of values is the
result of demand and utility, not of labor applied.

§ 5, Similar reasoning is applicable also to the theory of inter-
national trade. That theory, as it was stated in the preceding
Book on international trade, rested mainly onjijabor theory of
value.^ It_assumgd_that~^ose things-were cheap in a given coun-
try, and hence likely to be exported froi»-that~eountry> which
were produced with comparati^•ely little labor; while those were
dear, and were likely to be imported, which were produced with
comparatively much labor. At first sight, it seems that all these
conclusions fail if we adopt the principle of non-competing groups
and of marginal utility as the ultimate determinants of value.
Things are cheap, and likely to be exported, not simply because
their cost in labor is low, but because of the complex social con-
ditions that determine within a country relative wages and rela-
tive prices. Yet the correction called for in the theory of inter-
national trade is, after all, not far-reaching.

The correction would be vital if the phenomena of social
stratification were very different in different countries. Then it
might happen that one kind of labor — say skilled mechanics' —
was cheap in one country and dear in another; whence it would
follow that the former country would export the products of such
labor. If another kind of labor — say routine factory labor —
were cheap in the second country, this country in turn would ex-
port the products of that labor. But in fact the phenomena of
social stratification are not widely divergent. Non-competing
groups on the whole are arranged in the same series of grades in
different countries. Such at least is the case in the countries of
advanced civilization; they show essentially the same cleavage
between the soft-handed and the hard-handed classes, the same
steps from skilled mechanic down to common labor. Hence, as
between the civilized countries, the broad social demarcations are
more important within their own borders than in the exchanges
with each other. The international exchanges still rest mainly
on comparative efficiency of labor. True, it will happen more
1 See especially Chapters 34 and 35.

162 THE DISTRIBUTION OF WEALTH [48-§6

frequently than the older economists thought that peculiar vari-
ations in wages — wages in some one grade or occupation lower
in one country than in another — will explain the exportation of
a particular commodity. The so-called parasitic industries of
Germany and England supply illustrations. Certain sorts of
educated labor, again, are comparatively cheap and plentiful in
Germany; such is the situation with German compositors trained
to set up books in the ancient languages, and with German makers
of some musical instruments. But these are not the ruling or typi-
cal cases. The main currents of international trade are still
determined, between the civilized countries at least, by the com-
parative efficiency of labor in producing the imported and ex-
ported commodities.

§ 6. The exchanges between different countries are analogous
to the exchanges between non-competing groups within a coun-
try; and the resemblances illustrate the play of the value-deter-
mining forces so well that they deserve some fuller consideration,
even tho at the expense of prolonging still further the present
digression from the subject in hand — distribution.
/ ^^ As between nations, so between social groups, the range of
t^ money incomes is the instrument and the decisive test of gain;

/and that gain is realized in the purchase of the things _^pr services
provided by other groups. An American or Englishman secures
the greatest advantage of international trade when he buys tea,
coffee, spices — that is, things made by low-wage labor in tropi-
cal countries. Similarly, the lawyer or business man secures his
greatest gains from the exchanges between social groups when he
buys things made, or services provided, by those who are in the
lower groups. His money income goes far in the purchase of the
services of domestics — of choremen and chorewomen, maid-
^ servants, grooms, and coachmen. But it is of no special advantage
"^ in paying the bills of physicians "ancfTIentists: these are in the
same group with himself and their services must be paid for at
the higher rate there prevalent. If the labor of the physicians
/' and dentists were peculiarly efficient, their services would be cheap,
f/ , while yet their incomes would be high in accordance with the

48-§6I WAGES AND VALUE 163

standards of their social group. Not being eflBcient in any unusual
degree, their services are dear; precisely as, in any country of high
money incomes, those domestic commodities are dear in which
there is not special efficiency of labor.

The analogy between nations and non-competing groups may
be carried further. The rates of exchange in both cases are
^settled by broad_causes, acting slowly and little liable to disturb-
ance except (n-er long periods of time; and hence they are assumed
by most persons, and indeed by most economists, as matters of
course. That money incomes should be comparatively high in
the United States and England and France and Germany, is com-
monly accepted as part of the order of nature. The fact that the
money incomes of physicians and lawyers and the upper tier of
business men are comparatively high is accepted in the same un-
questioning way, because of the familiarity and the permanence
of the differences. In both cases the differences are due, none
the less, to causes which are to be found proximately in the con-
ditions of demand between groups and between nations. Lying
back of these canditions of demand may perhaps be found deeper
^^^earfses — inborn and ineffaceable differences in intelligence and
character. We have seen how difficult it is, as between social
groups, to decide whether acquired or inborn traits determine the
lines of social divisions. So between nations it is not easy to say
whether the advantages which one country may possess are due to
unalterable racial qualities or to the accidents of historical devel-
opment and acquired skill. PrQhably_the racial causes tell more
in settling the differences and the resulting"exchariges~15etween1a
civilized nation and a barbarous or semi-civilized; whereas be-
tween the civilized nations themselves acquired traits are of more
importance. However this may be, the differences exist, and not
only exist but maintain themselves thru generations and cen-
turies; as do those between social groups within a country. At
any given time, and for considerable periods, they must be ac-
cepted as settled facts and thus as causes, not analj^zed as results.

CHAPTER 49
Business Profits

Section 1. Business profits rest on the assumption of risks. The term "prof-
its," 164 — Sec. 2. Position of the business man as receiver of a residual
income. Irregularity and wide range of this income, its relation to prices.
Tho irregular, it is not due to chance, 166 — Sec. 3. The part played by
inborn ability; that played by opportunity, environment, training, 169 —
Sec. 4. The qualities requisite for success: imagination, judgment,
courage. Mechanical talent not so important as might be expected.
Relations of the business man to inventors. Diversity of qualities among
the successful, 170 — Sec. 5. A process of natural selection among busi-
ness men. Natural capacity tells more than in most occupations, 173 — •
Sec. 6. Motives of business activity and money-making. Social ambi-
tion the main impulse; other motives are also at work, 175 — Sec. 7.
What changes would occur if business ability were very plentiful and
capacity for muscular labor very scarce, 177.

§ 1. We return now to the main course of the argument, re-
suming the subject of distribution. Business profits present many
of the problems presented by differences of wages, and are best ^,
regarded as simply a form of wages. Yet they have many peculiar-
ities and call for separate consideration. Various phrases have
been used to designate this share in distribution : " wages of man-
agement," "net profits," "business earnings," the reward of the
"entrepreneur" or "undertaker" or "enterpriser." "Business
profits" indicates the sort of income now to be considered, and
"business man" similarly indicates what kind of person secures it.

In common speech, "profits" and "business profits" are usually
stated in terms of a percentage on the capital employed. A man
is said to make profits of ten per cent or twenty per cent on his
capital. If part of the capital is borrowed and stipulated inter-
est is paid to a creditor, the amounts so paid are deducted from
the gross profits. No such deduction is commonly made, how-
ever, for interest on that capital which is put in by the business
man himself, not borrowed. Yet if interest be regarded as the

164

49-§l] BUSINESS PROFITS 165

mere return on capital, and business profits as earnings which are
essentially wages, the deduction should be made in the second case
as well as in the first. The capital invested by a business man
and managed by himself would secure the current rate of inter-
est if lent to someone else and managed by someone else. Only
that amount which is over and above interest on the owner's
capital should be regarded strictly as business profits.

The essential distinction between interest and business profits
is recognized in everyday discussion quite as often as it is ignored.
It would be admitted by all, as a matter of course, that there is a
difference as regards the reasonableness or probability of a given
rate of return. If the rate of interest is six per cent, the rate of
profits, it is agreed, ought to be higher; and it is expected that in
fact it will be higher. The reasoning of the street and that of the
economist would be more easily brought into accord if business
profits were usually spoken of, not as a percentage, but as a lump
sum, a total accruing each year or each six months, like the in-
come of an architect or lawyer or physician. But various causes
prevent this usage; not merely the tradition of older days, when
the business man usually managed his own capital and borrowed
comparatively little, but other more substantial causes, such as
the all-pervasive conduct of business in the corporate form and,
not least, a real connection between amount of capital and the
gross sum of business profits. Of these matters more will be said as
we proceed. During the first stage in the analysis it is best to
draw a clear line of distinction between the interest on capital and
the business profits of the manager.

Everyday speech not only fails often to distinguish between
business profits and interest but confounds with profits such things
as rent and monopoly gains. A patent worked by its owner is
spoken of as yielding large profits. Royalties paid on a patent
or a copyrighted book are often termed profits. Similar language
is used regarding the gains accruing from a valuable urban site.
The adoption by economists of the terms of everyday fife leads to
frequent misunderstandings, and sometimes to real ambiguities;
for it cannot but happen that the economist himself at times will

166 THE DISTRIBUTION OF WEALTH [49-§2

use words in the vernacular sense. He will speak of high " profits,"
for example, when he has in mind merely good fat returns of one
sort or another. In the present discussion, and in general thru this
book, " business profits " will be used in the sense already indicatedi^-
namely, earnings over and above interest, over and above rent pr_
monopoly gains.

The independent conduct of industry is the salient characteristic
of the business man's work. J3e assumes thfe risks of the outcome of
industrial operations; whereas the salaried person or wage earner
has a definite amount promised him in advance for settled duties.
In this respect it is immaterial whether the business man conducts
operations on a large scale or on a small. The village cobbler
and the owner of the large-scale shoe factory, the petty shop-
keeper and the great merchant, the peasant proprietor and the
estate farmer, alike are business men and earn business profits.
The physician or lawyer who is engaged in the independent prac-
tise of his profession is, from this point of view, in the same class;
for his position evidently differs in a similar way from that of the
physician or lawyer who is engaged at a fixed salary. But usually
we think in connection with business management chiefly of those
who conduct operations on a considerable scale, who manage sub-
stantial amounts of capital, who hire others to work for them and
under them, who have to make plans of some complexity, whose
own work is mainly or exclusively the direction of affairs. We
think, too, of the more common industrial operations in trade and
manufactures. We shall best approach the special problems of busi-
ness profits by first considering these familiar and typical cases.

§ 2. The business man stands at the helm of industry and
guides its operations. Into his hands first flow the proceeds, and
he distributes to others their share. He pays to the hired workmen
their stipulated wages. Similarly, to those who lend him capital
he pays stipulated interest. It is his weighing and guessing of the
money-making possibilities of different sites that determines the
rent of urban land, and he pays to landowners their rents. After
making these various payments he retains in his own hand, what
is left. His income may therefore be described as ; Residual, )

49-§2] BUSINESS PROFITS 167

This position as residual claimant explains one striking char-
acteristic of business profits — the irregularity of the income. In
one year the business man may earn nothing, may even lose.
Another year he may gain great sums. The variations from year
to year of the same individual's profits arise from the business
man's assumption of industrial risks. Tho some hazards are so
regular, in their occurrence over a large number of cases, that they
can be insured against (fire and loss at sea), most must be borne
once for all by the individual who first assumes them ; such as those
from fluctuations in demand, inventions and new processes, ups
and downs in general prices. The net income of the business man
is inevitably fluctuating.

The business man more especially feels the effects of changes in
prices. When prices rise, he gains for a while; when they fall he
loses for a while. This is true of changes in the price of partic-
ular commodities, as regards the business men who have to deal
with those commodities; it is true of changes in general prices, for
business men as a class. Hence many people get the impression
that buying and selling, and skillful manipulation of prices, are of
the essence of business. It has already been pointed out ^ in what
way rising and falling prices affect the relations of business men as
employers with the laborers whom they employ. There is a close
dependence of business profits on prices, the business man being
the buffer for the first effects of all changes in the value of money.
But this is often a temporary relation; it affects the fluctuations in
his income, but does not determine in the long run its amount nor
indicate its source.

So great are the risks of business that many people, again, look
upon it all as a game of chance. Some wdn, someTose -^Tt Ts'TrnT**
a great lottery. And there are not a few individuals who actually
enter on business operations in this spirit, with as little close cal-
culation or careful management as a gambler uses. But it requires
no refined observation to show that success is not entirely a matter
of luck. True, there are gains in one vear, losses in another. Some-
times it even happens that permanent success is won by chance.
1 See Chapter 22, § 6.

168 THE DISTRIBUTION OF WEALTH [49-§2

A turn in the market, a new commodity, a new mine, may yield a
fortune — the business man's goal. One who has thus won a prize
may have the good sense to stop, and to withdraw with his winnings
from the uncertain arena. But usually he tries again and still again.
Then over a series of years it appears that some individuals show a
steady balance of gains, while others in the end lose and disappear
from active business. The elements of success are various —
shrewdness in meeting risks as well as skill and ability in organiza-
tion. But continued success is not due to chance. It is due to the
possession by some individuals of qualities not possessed by others.

Again, these qualities are possessed in varying degree, or at least
with very varying results, by different individuals. The great
range of this income is even more striking than its irregularity for
any one person. Some men seem to have a golden touch. Every-
thing to which they turn their hand yields miraculously. They
are the captains of industry, the "big men," admired, feared, and
followed by their business community. Others, of slightly lower
degree, prosper generouslj^ tho not so miraculously — the select
class of "solid business men." Thence by imperceptible grada-
tions there is a descent in the industrial and social hierarchy, until
we reach the small tradesman, who is indeed a business man, but
whose income is modest and whose position is not very different
from that of the mechanic or the clerk.

A wide range in the earnings of individuals doing the same sort
of work is a peculiarity of all intellectual occupations. Tho some
mechanics are more skillful and better paid than others, the dif-
ferences are not comparable to those between lawyers, physicians,
artists, business men. This is due to the fact that the differences
between men in intellectual endowments are vastly greater than
the differences in manual vigor and aptitude. Tho not every man
can be made by training and practise a skilled mechanic, very
great numbers can be brought to the highest possible expertness.
It may be that many more men could be made by training into
serviceable physicians and lawyers and business men than in fact
are so made; but the number who can attain the highest possible
pitch of skill in these occupations is very small indeed.

4&-§3] BUSINESS PROFITS 169

§3. _The differences in the long-run earnings of different busi-_
ness men raise the same questions as were considered with refer-
ence to ordinary wages. Are they due to differences in inborn
abilities? or are they the result of training and environment? Do
the more prosperous business men spring from the general non-
competing group of the well-to-do, with all the advantages of that
class? or is their success irresi>ective of their start in life, and due
mainly to natural endowments?

Some familiar phenomena point to the explanation on the
ground of inborn differences. Poor boys rise to fortune. In the
United States the farming class has been a great nursery of fortune
builders. On the other hand, the sons of these very captains of
industry commonly drop from the posts of leadership. Notwith-
standing all the advantages of training, notwithstanding the in-
heritance of means and of favoring opportunities, they are apt to
resign the active conduct of business to men who again have arisen
from the ranks. Cases of this sort, to be sure, are not always so
significant of the non-inheritance of business ability as they seem
to be. The failure of the rich man's sons to emulate his achieve-
ments may be due to lack of motive, not lack of capacity. The
spur of need and of unsatisfied social ambition is lacking. None
the less, there are cases in plenty where those to whom the manage-
ment of an established business is bequeathed fail to maintain it
even tho they try. Again and again old-established firms whose
founders have passed away go to pieces under the management
of the heirs.

But here, as with other occupations, there is danger in fasten-
ing attention on the conspicuous phenomena alone. Captains of
industry are doubtless born. So are great poets, musicians, men
of science, lawyers. Tho there may be occasional suppressed
geniuses among the poorer classes, ability of the highest order usu-
ally works its way to the fore. Talent and good capacity, on the
other hand, are much less rare, and they need to be nurtured. A
favorable start may bring success to one man of good ability; its
absence may prevent another no less able from rising. Beneath
the highest tier of the extraordinarily capable business men, there

170 THE DISTRIBUTION OF WEALTH [49-§4

is a great stratum of prosperous and well-to-do persons, to whom
the advantages of capital and connection have been of cardinal
importance.

,£a£itd^and[,=Sftaiigctipn — these are the two factors which may
make a business career, whose absence may mar it. Every busi-
ness man must have the command of means, his own or borrowed.
True, if he has the highest abilities, lack of means will not long
embarrass him. His start may be slow, but he w^ill soon have
savings of his own, will borrow easily, and before long will find
associates who are not only willing but eager to intrust him with all
the money he wishes. It is otherwise with the man nearer the
average. If parents or friends supply him with the command of
capital, he has a great advantage over the less favored of the same
ability. So it is with connection — not merely acquaintance and
relationship, but all the varied influences of environment. He who
is born in the well-to-do classes is surrounded from the outset by
the business atmosphere. Traditions, advice, opportunities, come
to him spontaneously. Whatever abilities he has find a favoring
ground for their development.

Set training doubtless counts for less in the business_carefir
I than in the other occupations of the well-to-do. Tho it is probable
that in the future business training will be less haphazard than it
'K has been in the past and will be in greater degree the object of me-
thodical instruction, set teaching will never play the part which it
plays in the professions. The career will be always comparatively
easy of access. The obstacles to be surmounted will be chiefly
those from lack of means and from all the vague but potent influ-
ences of environment.

§ 4. The business man of the first order must have imagination
and judgment; he must have courage; and he must have adminis-
trative capacity.

Imagination and judgment — these are needed for the general-
ship of industry. The successful business man must be able to
foresee possibilities, to estimate with sagacity the outcome in the
future. Especially is this necessary in new ventures; and it is in
new ventures that the qualities of generalship are most called for

49-§4] BUSINESS PROFITS 171

and the greatest profits are reaped. Countless schemes for
money-making are being constantly urged on the business cQia=.„.
munity. Most are visionary. Among them the captain of in-
dustr3rwin pick out those that really have possibilities, will reshape
and develop them, and bring them eventually to success. Some-
times he errs; there could be no great successes unless there were
occasional failures; but the right sort of man has a balance of
profitable ventures. Not infrequently those are supposed to have
the requisite judgment who in fact do not possess it. Personality^,
tells^^but may be deceptive — a vigorous presence, incisive
speech, kindling enthusiasm. Time and again an individual with
such a personality secures a hold and a following, and is enabled to
embark on large ventures. Yet finally he comes to grief because in
the end he proves not to have the saving quality of judgments

Courage and some degr^ee of .yenturespmeues^ are obviously es-
sential to the successful business man : so much follows from that
assumption of risks which is of the essence of his doings. But cour-
age and imagination and personality will not avail in the end un-
less there be sound judgment.

Executive ability is probably less rare than the combination of
judgment with imagination-. But it is by no means common. It
calls on the one hand for intelligence in organization, on the other
hand for knowledge of men. The work must be planned and the
right man assigned to each sort of work. The selection of efficient
subordinates is of the first importance. A vigorous constitution —
vigorous in its capacit}^ to endure prolonged application and
severe nervous strain — is almost a sine qua non, as it is with the
military leader.

A business man almost always has to do with the physics and
mechanics of industry. Every director of large enterprises must
choose between competing mechanical devices, must watch the
course of invention, must be in the fore with improvements. It
might be supposed, therefore, that men of mechanical talent
would become the leaders in industry. Yet this is by no means
the common case. Most frequently the inventors, engineers,
and mechanical experts are in the employ of the business man.

172 THE DISTRIBUTION OF WEALTH [49-§4

Occasionally an individual appears who has in high degree both
the business quahties and the inventor's quahties. Such were
Stephenson the Enghsh engineer, and Werner Siemens among Ger-
mans. Such also were some of the New England pioneers in the
textile manufactures during the first half of the nineteenth cen-
tury: Lowell, Batchelder, Bigelow, and others. But the union of
two diverse kinds of ability in one person is no more common here
than in other walks of life. LTsually the sort of judgment, insight,
courage, persistence, which are needed for the development and
wide use of improvements are not possessed by the inventor him-
self. Watt, the inventor of the steam engine (or at least its suc-
cessful perfector), needed the judgment and resource, as well as
the capital, of his business partner, Boulton. Ericsson was an in-
ventive genius of the first order: his screw propeller revolution-
ized marine transportation, and his Monitor influenced to hardly a
less degree the development of modern warships. But he pinned
his faith also on the caloric ship, regardless of the fact that the
required bulk of the machinery made it commercially impossible.
Edison was rightly called a wizard; but he failed conspicuously
in some notable ventures, such as the utilization of magnetic iron
ores and the construction of standardized cement houses.^ In
selecting among the numberless projects constantly pressed on his
attention, the business man exercises one of his most characteristic
functions.

Too much stress must not be laid on any enumeration of the
business man's qualities. All sorts and conditions of men prove
to have the qualities needed for pecuniary success, — the cautious
and the daring, the sober and the enthusiastic, the loquacious and
the taciturn, those given to detail and those negligent of detail.
The different aptitudes appear in every kind of combination.
Some heads of large organizations keep every thread in their own
hands, and not only plan the large outlines of their ventures, but
look to every detail. Others intrust almost all administration to

1 The biographies of inventors, such as Church's Life of Ericsson and Dyer and
Martin's Life of Edison, are full of passages on the vagaries of the tribe. I venture
to refer the reader to what I have said in the first chapter of my own book on
Inventors and Money-makers.

49-§5] BUSINESS PROFITS 173

subordinates, and keep themselves free to think, plan, confer.
There are those who keep strictly to "their business" — the par-
ticular branch of industry in which they have embarked; and again
there are those who launch freely into new and varied enterprises.
No one key opens the doors to success.

The differences are equally striking in qualities not directly con-
nected with pecuniary success. Some business men are of intel-
lectual bent, others are dullards in everything but business. Some
deal generously with their employees, others constantly scheme
to overreach them. Some are high-minded and public-spirited,
others mean and selfish. Fifty years ago writers on economic and
social questions were prone to celebrate the virtues of the class.
In recent years "business" has come to be in bad odor; it is as-
sociated in many minds with grasping monopoly, mere manipula-
tion of securities, tyranny over laborers. In truth, the business i
man at his best is an admirable figure in our modern world, and at
his worst is a very ugly one. The variety among the men who
prove to have the money-making capacity is a standing cause of
wonder.

§ 5. Among all these different sorts of persons, a process very
like natural selection is at work. To predict who has in him the
qualities for success is much harder than is prediction with regard
to most occupations. The aptitudes and abilities which must be
possessed by one who would succeed in law, in medicine, in engi-
neering, in teaching, show themselves at a comparatively early
age, and a friendly observer can often give good advice as to the
choice of these professions. But the qualities that make for suc-
cess in business management not Infrequently develop late, or at
least show themselves late and only under actual trial. Surprises
are more common in this walk of life than in any other. A con-
stant process of trial is going on. Those who have the requisites
for success come to the fore, those who lack in some essential drop
to the rear.

The drift of all this is that in the business career, as compared
with most others, inborn capacity counts more, training and en-
vironment less. Environment and ease of start seem to be of

174 THE DISTRIBUTION OF WEALTH [49-§5

consequence in what we may call the middle range of the occu-
pation — the businesses of moderate scale, requiring a substan-
tial capital and yielding respectable middle-class income, but
calling for no unusual degree of judgment or administrative
ability. The growth of large-scale operations in every direction
has made businesses of this sort relatively less important and nu-
merous than they were half a century ago. No doubt, they are
still numerous and important; and, as to them, there may be some-
thing like a caste or non-competing group. They tend to remain
in the hands of those who have the advantages of capital and con-
nection. So far as they are concerned, it may be true that there
are plenty of persons in the so-called lower group of society and in
the working classes who could take charge equally well. But in
the upper range of the business world, in the large enterprises
which dominate more and more the industry of modern times,
native ability tells.

Native ability is recruited from all classes. There are conspicuous
cases of men rising from the ranks. Yet most of those who come
to the fore have probably begun with the associations and envi-
ronment of property and of business. The commonest case is that
of the young man born in the middle class and imbued with its tra-
ditions and ambitions, inheriting vigor and judgment, but not en-
ervated by the inheritance of large means. As has already been re-
marked, the farming class in the United States, which belongs in
its traditions and outlook rather to the possessing than to the non-
possessing class, has been in this country a great nursery of busi-
ness ability. Possibly there is a fund of such ability hidden and
smothered among the hired workingmen. But the ease with
which capable men make their way, even from the poorest be-
ginnings, speaks against the supposition. So simple is access to
this career, so common is the rise of the capable from the ranks,
so constant and searching the process of natural selection in the
business world, that we may regard it as probable that all who
have marked natural gifts are enabled to exercise them. It is
almost certain that such gifts have a preponderant influence in
determining business success.

49-§6] BUSINESS PROFITS 175

§ 6. .TJjje_aim of the business man is to " make money," and the 1
chief motive which stirs him to making it is social ambition. '

The successful business man is the backbone of the well-to-do
and possessing classes of modern society. His ambition is to
accumulate, not merely to earn a living. The lawyer, the phy-
sician, the teacher, is reasonably content if he succeeds in support-
ing and rearing a family according to the standards of his class, and
in making some moderate provisions for the future; tho, being in
close association with the business set, he may be infected also
with the fever of accumulation. But the business man cannot
escape that infection. The aim of all in his class is to gain more
than enough for support. To get together a competence or a for-
tune is the one test of "success." He must be able in his later
days to live at leisure on his settled income, or at least transmit
to his descendants the opportunity of leisure. We do not com-
monly think of the money-maker as a person who sa\es. Not
infrequently he is a liberar spender. But he spends less than he
makes. His one aim is to make a great deal more than he spends
and to put it by. His accumulations, tho they may involve
little conscious sacrifice, are none the less real savings, and con-
stitute probably the most important source of the community's
supply of capital. Tho no statistical or quantitative measure-
ment is feasible, it is probable that the larger portion of the
extraordinary growth of capital during the last two centuries has
come from the competences and fortunes of the business class.

Every successful business man thus leaves behind him a trail of
accretions to the well-to-do classes. His children start with ad-
vantages of education, environment, easy command of capital.
Their occupations, their ambitions, their standards of living, are
on a new plane. If they inherit ability, it finds scope for exercise
at once. If they have only moderate capacity, the best is made of
this by training. Often the riches which they inherit prove a
treacherous gift, preventing the use of good natural powers and
encouraging sloth and dissipation. There was a tradition in older
days that new-made wealth did not remain long in the same family.
It was said to be but three generations from shirt sleeves to shirt

176 THE DISTRIBUTION OF WEALTH [49-§6

sleeves. No such generalization would be tenable to-day. The
machinery for safely investing and keeping accumulated property
is highly developed and is at any one's command. They who once
possess can continue to hold, and persons who have been lifted among
the soft-handed classes cling to their place with extraordinary
tenacity. While there is a continuous movement upward — not
great in volume, but steady and considerable — there is no appre-
ciable movement downward.

The most powerful spur to the business man's activity, to re-
peat, is social ambition. The deep-rooted impulse of emulation
"leads hirn to try and swing himself into the ranks of his "betters."
The pride of commanding the services of others, the instinctive
craving for external marks of distinction and superiority, have
been gratified in modern times most commonly and most readily
thru money-making.

Other motiyeg have played their part. A true taste for the re
finements of an easier and ampler life, an appreciation of what is
intrinsically and permanently beautiful, has sometimes been a
motive to pecuniary gain; tho it is to be suspected that genuine
feelings of this sort are less common among the business men them-
selves than among their descendants, and not too common among
the latter. The love of power, which is closely allied to the in-
stinct of emulation, is a strong spur to unceasing accumulation.
Mere megalomania sometimes appears among the captains of in-
dustry — a desire to bring larger and larger domains under subjec-
tion. With all this goes the impulse to activity. Idleness soon palls.
Many a business man whose wealth far exceeds the ambition of his
early days continues none the less to scheme and to work, from lack
of anything else to do. He has learned to play the engrossing game
of money-making; he can play no other that satisfies him for long;
he continues to make money in order to escape being bored.

The desire for wealth which possesses the business class is thus
not a simple motive, but one very complex. It is much to be wished
that other and nobler motives could be substituted, and that the
same courage, judgment, and strenuous work could be brought to
bear for rewards of a different sort and with less unwelcome con-

49-§7I BUSINESS PROFITS 177

sequences in the inequalities of worldly possessions. Something
of the sort is dreamed of as feasible by those who would completely
overturn the regime of private property. Not high money gains,
but a ribbon, a laurel wreath, the spur of fame, should suffice to
call out the best energies of the industrial leader. What may be
these possibilities, we shall have occasion to consider elsewhere.*
Certain it is that in the past the coarser motives have mainly pre-
vailed. In them and in their power over the mass of mankind is
the psychological lever which explains the great upward economic
movement of the last two centuries. It is probable that motives
of the same sort will long continue to operate and will long
continue to be indispensable for sustained material progress. The
business man as we know him, with his virtues and his faults, his
good and his evil effects on society, will long be a factor of the first
importance in the distribution of current earnings and in the shap-
ing of social stratification.

§ 7. By way of bringing into sharper relief some of the con-
clusions reached in this chapter and those preceding it, let us
make two extreme suppositions: first, that capable business.pien
of the highest order are very plentiful; second, that stout, able-
bodied, unskilled laborers are very scarce. In other words, let
us suppose that the conditions of supply for these two sorts of
service are precisely the reverse of what they are at present.

If capable business men were very plentiful, every species of
enterprise would be conducted with the utmost judgment, vigor,
and intelligence. The smallest retail shop would be managed
with the same ability as the largest trading or manufacturing
concern. At present, the highest ability is turned to those great
enterprises in which it tells most; precisely as central sites in cities
are turned to those kinds of business for which their advantages
tell most. With an indefinitely large supply of first-rate busi-
ness ability, this sort of human power would be directed not only
to the channels in which it was most effective, but to others in
which it was less effective. The gain, or addition to the output,
resulting from this application under the least favorable circum-

1 See Chapter 67, § 3.

178 THE DISTRIBUTION OF WEALTH [49-§7

stances — in other words, from its marginal effectiveness —
would determine the remuneration for all persons having such
capacity. We may assume, for simplicity's sake, all these to be
of equally high capacity. In the next chapter, the consequence
of differences among them will be considered ; for the present argu-
ment, it is not material whether we assume complete equality or

. admit some differences of degree. All those of high efficiency would
be immensely more plentiful than men of similar ability now are,
and their gains would be very much less than are now the gains of
such men.

The general efficiency of all the labor of society under such
conditions would be very much greater than it now is. Every
business, from the largest factory to the smallest shop, would be
so managed as to secure the utmost return for every scrap of
expenditure. All goods and services would be more plentiful.
But the share going to the business men would be less. If we con-

! ceive the process to be carried to its farthest limit, and good busi-
ness men to be as plentiful as common unskilled laborers now are,
their reward would be on very much the same level as that now
current for common day wages.

Turn to the other supposition. Suppose the human race vastly
deteriorated in its physique; the great majority of men incapable
of holding the plow or lifting the pick. Then the few who were
still able to perform sustained manual labor would receive high
rewards. No kind of labor is so little to be dispensed with. As
the huge warrior was the admired hero in the days of Achilles,
so in a society where common labor was scarce the much-envied
person would be the brawny workman. He would be highly
paid, because the marginal utility of his labor would be great;
and that which is scarce and is paid for at a high rate commands
general esteem. No doubt the muscular laborer would look down
with contempt on the rest of mankind, dependent as they would
be on him for the necessaries of existence; precisely as the capital-
ist business man now regards with contempt the day laborer, de-
pendent on him for the opportunity to make a living. Social
stratification would be turned topsy-turvy.

49-§7] BUSINESS PROFITS 179

Brains being scarce by nature, such a complete reversal of posi-
tions is beyond the range of possibility. But some approach to a
position midway between the extremes is not inconceivable. Bus-
iness ability may become much more common than it is now. In
the course of generations, the supplies of the different sorts of pro-
ductive capacity may be greatly changed; and then the variations
m earnings and the consequent differences in social station may be
correspondingly changed.

CHAPTER 50
Business Profits, continued

Section 1. Analogy between business profits and rent. A similar analogy
in other occupations. How far the element of risk vitiates the analogy,
180 — ■ Sec. 2. The difference in business abilities explains differences in
cost of production. The conception of the "representative firm" as
settling normal expenses of production, 183 — Sec. 3. One of the mani-
festations of business ability is in the selection of good natural resources.
In the end, an important d fference between economic rent and differential
business profits, 185 — Sec. 4. The connect on between the return on
capital and business profits. Relations between owners and managers of
capital at different times. Modern tendency towards a separation of
functions and rewards, 187 — Sec. 5. For considerable periods, command
of capital brings in a given enterprise the probabihty of larger profits; but
not in the long run without business ability, 189 — Sec. 6. For industry as
a whole and capital as a whole, there is a connection between interest and
business profits. How they may diverge in the end, 190 — Sec. 7. A
view of business profits which distinguishes them sharply from wages, as
arising solely in a dynamic state, 192 — Sec. 8. Another view, which
lays emphasis on risk, and distinguishes between the wages of salaried
managers and the "profits" of independent business men. The salaried
manager often rewarded de facto in proportion to "profits," 193 — Sec. 9.
Legitimate and illegitimate business profits. Their restriction within the
legitimate limits depends on the removal of monopoly gains and the
maintenance of a high plane of competition, 195.

§ 1. In the preceding chapter the earnings of business men have
been treated chiefly in their bearing on the problems which are
connected with differences in wages and with the social consequences
of such differences. We may proceed now to the relations between
profits on the one hand, and rent, wages, and interest on the other;
and to various ways of making money that are doubtfully to be
classed under the head of business profits.

An analogy between business profits and rent has often been
pointed out. High capacity in a business man is like high pro-
ductiveness in fi site. The effectiveness of the labor and capital

180

50-§ll BUSINESS PROFITS (Continued) 181

managed by a capable man is greater than that of labor and capi-
tal managed by one less capable ; just as labor applied on good soils
yields more than labor applied on poor soils. If there were an
indefinitely extensible supply of able business men, no one of them
could secure high earnings. In the same way, good land would not
yield a rent if there were an indefinite supply of it. This mode of
treating business profits was developed most systematically and
emphatically by Francis A. Walker, and it became a corner stone
of his theory of distribution.

The same analogy exists in the differences between the earnings
of men of varying gifts in other occupations. The talented sur-
geon or physician earns more than his colleagues because he is more
efficient; and so the lawyer, the engineer, the architect. In any
group of men who compete with each other at the same sort of
work, the more efficient — that is, the more productive — earn
more in proportion to their efficiency. So far as the differences
are due to inborn gifts, the results are in the nature of rent.

To this it has been objected, most effectively by Professor Mar-
shall, that allowance should be made for the element of risk, and
that, when such allowance is fully made, the analogy to rent is
shorn of most of its significance. Tho there are successful lawyers,
there are also briefless barristers. When there are blanks as well
as prizes, it may well happen that the prizes do not suffice to offset
the blanks, and then the earnings on the occupation as a whole con-
tain no surplus and there is no element of rent. This, it is said, is
peculiarly the case with business profits. Success in business is
highly uncertain. Prediction about any individual who enters it
is extremely difficult, especially in the early stages of a career.
It has been supposed that only one tenth of those who try to es-
tablish businesses of their own succeed in the end. The estimate
is but guess work, and very likely exaggerated. But it points to a
fact. In view of the risks and theobvious possibilities of failure,
must there not be some prizes to maintain the resort to the occupa-
tion? When regard is had to business work as a whole and busi-
ness profits as a whole, can the high reward of the fortunate few be
regarded as a real surplus?

182 THE DISTRIBUTION OF WEALTH [50- § 1

There is weight in the objection; but it is not conclusive. It is
true that business ventures are uncertain as to their outcome, not
only because it is of their essence to assume risks, but because, for
new aspirants, it is peculiarly difficult to say in advance whether
they possess the qualities which fit them to meet and overcome the
risks. On the other hand, the extent of the risks assumed is easily
exaggerated. The very fact that no previous expensive training is
required lessens the sacrifices and disappointments of those who
try and fail. True, they may lose some of the means which they
owned or which have been intrusted to them ; and this loss is some-
times large. Usually, however, the first steps in business are
on a modest scale, and experiment on a modest scale suffices to test
whether there is the requisite capacity. If there is failure, the un-
lucky aspirant falls back into the ranks of the hired class, and be-
comes a clerk, bookkeeper, superintendent. His earning power is
less than he had hoped, but it is not reduced to zero.

There may seem to be a difference in this regard between the
business calling and the professions that require set training. The
expensive and elaborate preparation for a legal career may prove
to have been thrown away. The would-be lawyer may not have
it in him to attain success in the law. But the risk of this in most
professions is not comparable to the risk of failure in active busi-
ness. Ordinarily he who has a good training for a profession is
reasonably sure of getting a living from its practise. He may not
win one of the prizes, but he is likely to secure a modest income,
sufficient to make the investment in his education worth while.
Such is the situation with physicians, engineers, architects, teach-
ers. The risks are perhaps greater in the law, as the prizes are also
greater. Great pecuniary success in the law depends not only on
high intellectual qualities, but on the business qualities also. Some
professions there are, again, for which a long and elaborate prep-
aration is required, and in which the outcome is yet highly un-
certain. Painting, the composition and performance of music,
opera singing, are such. Considerable promise and the presence of
a true vein of talent may end in nothing but virtual failure in these
arts; for only a very high pitch of ability and achievement brings

50-1 2] BUSINESS PROFITS (Continued) 183

a valued success. Even here, there is the humdrum routine of
teaching to fall back on — sadly disappointing to the ambitious
artist but usually sufficing to eke out a living. In any case, the ar-
tistic callings are exceptional, resorted to by comparatively few
and affected largely by other motives than those ordinarily leading
men to their choice of a career. On the whole, in the so-called
professions, the risk of failure is not great. _Investment in an edu^
cation usually brings its return.

T^hus, for somewhat different reasons, the element of risk does
not play so vital a part, either in business or in the professions, as
to neutralize the significance of individual differences in earnings.
In business, the initial stake is not so great; in the professions, the
winning of a fair return is not so uncertain. Some men are born
more capable than others, and the higher range of their earnings,
due to unusual gifts, is analogous to rent. Since inborn differences
play a relatively more important part in business profits than in
other earnings of the well-to-do, the analogy to rent is closer.

But this sort of reasoning can throw light only on the differences
of business profits, and especially on that upper range of incomes to
which hitherto we have chiefly given attention. In the lower
ranges of business earnings as well as professional earnings, the
forces at work are the same as those governing wages in general.
IJence the rent theory of profits can throw no light on the funda-
mental questions. These are inextricably connected with the
general problem of wages.

§ 2. The differences in the abilities of business men engaged in
the same occupation constitute the main explanation of a phenom-
enon which has puzzled many observers — the variations in the
expenses of production between competing establishments. In
the discussion of value,^ we considered industries having constant
returns and commodities whose value is determined by expenses of
production uniform for all competitors. But it has been repeat-
edly pointed out that in fact no such uniformity exists. In no
considerable industry of modern times are competitors on the same
plane. Some produce more cheaply than others, having better

1 See Chapter 12.

184 THE DISTRIBUTION OF WEALTH l50-§2

plants, better organization, command of more efficient or cheaper
labor or of cheaper materials, more "strategic" location.

If such differences were permanent and unalterable, they would
bring all industries into the class of diminishing returns and would
make the principle of rent applicable universally. ^'But they are
not permanent or unalterable, except so far as good sites or cheap
raw materials are limited. Most of the circumstances which are
commonly referrbd to as showing wherein different enterprises have
varying expenses are due at bottom to the personal qualities of their
business leadersr"1[fseme have better plajjts or nioreajy^antageous
locaTions than others, it is because_they .have been planned with
greater skill and-Jotesighjfe. Especially under those conditions of
rapid advance, in the-^rts-whieh -characterize ^odern~ times, op-
portunities for improveme»ts in the industriatjoutfit— are first
availed of with shrewdness and daring by the captains of industry,
and then imitated by others of less tho still of notable capacity.
Whenr.the great mass of those enf^edi?! a ^en. industry succeed
in adopting the improvement oPthe leaders, these leaders devise
still further improvements; and the differences in facilities and ex-
penses of production are thus maintained indefinitely.

To fit this situation into our reasoning on value and expenses of
production, we may adopt Professor Marshall's notion of the "rep-
resentative firm" — one not far in the lead, not equipped with
the very latest and best plant and machinery, but well equipped,
well led, and able to maintain itself permanently with substantial
profits. Side by side with such representative firms are the ex-
ceptional leaders. Side by side with them are also the weak and
the struggling — some under inept management and doomed to
failure, and others under good management but still in the early
stages of scant capital and unestablished connection. Prices tend
to adjust themselves to the expenses of production at the hands of
the representative firm. When conditions are normal and settled
in the industry, that firm earns "fair" profits — such business
profits as business men of good ability secure in industry at large.
Their superiors earn much more. Their inferiors earn less; per-
haps go to the wall, perhaps rise slowly to better fortune.

50-§3] BUSINESS PROFITS (Continued) 185

If now an ill turn is encountered by such industry — if demand
should suddenly fall off, or heavy taxes should be imposed by the
state — the first effect will be to cause the weak and struggling
firms to disappear, the representative firms to lose money or at
'"least to fail to make money, the leading firms to submit to lessened
profits. Tlie ultimate efi^ect will be that some of the representative
"^rms^will withdraw, some perhaps will fail. Some of the leaders
will transfer their energies into other directions. Indeed, a keen
eye for the prospects of an industry, a shrewd selection of those
industries about to enter a period of prosperity and a quick aban-
donment of those threatened with reverses, are among the quali-
fications of the money-maker. The converse takes place if an in-
dustry has a good turn, thru an unexpected increase of demand or a ,
rapid cheapening of its raw materials. Then every one engaged in it
makes money, even the ill-equipped. The able and well-equipped,
who happen to be in the best condition for taking advantage of the
favorable conditions, may roll up fortunes in short order. How
soon and how easily the readjustment to normal conditions will
take place depends on the extent of the irrevocably invested plant,
on the predictability of demand, and in some degree on the personal
characteristics of the active leaders in the industry. As in all mat-
ters that depend on human impulses and human calculations, no
mechanical regularity in the phenomena is to be expected. It is
only in the long run that able business men secure incomes in ac-
cord with their ability ; it is only in the long run that they and their
imitators transfer their energies from unprosperous to prosperous
industries; it is only in the long run that the representative firms
and their expenses of production prove to have a dominating effect
on the range of prices.

§ 3. The differences between individual producers not only have.,
an analogy to rent but have their effects on rent and on distri-
bution. A capable business man who happens to own an advan-
tageous site may be said to get two sorts of rent — that from the
exceptional site and that from his exceptional ability.

We might expect these two sorts of gain to be quite disconnected.
The able man, it would seem, can apply his ability at the margin as

186 THE DISTRIBUTION OF WEALTH [50-§3

well as above the margin. In fact, he usually applies it above the
margin. One of the manifestations of ability is the prompt and
full perception of the possibilities of the good sites. They usually
get under the control, by purchase or by lease, of the capable man-
agers, and are exploited to better advantage by these than they
would be by the less capable. In agriculture, the better farmers
buy or rent the better lands, and secure a combined rent of ability
and of fertility (or situation) greater than could be secured by
ability alone or fertility alone. This is strikingly the case with
urban rent. The expensive business sites are almost invariably
utilized by the upper tier of business men — the captains of indus-
try and the solid merchants of the great cities. The more expen-
sive the site, the more likely is it to be in the hands of a man of
exceptional gifts. There is a sort of pitting against each other two
kinds of rarities — the sites and the men. If business men of
marked ability are very numerous, they bid against each other for
the central sites and urban rent rises to a level by so much higher.
If there are fewer of them, they are able in a greater degree to retain
in their own hands the gains which can be reaped on those sites.

One word more as to the resemblance between business profits
and rent. All differences in wages which result from the non-com-^
peting groups and which thus are not of the equalizing sort, may
be said to be analogous to rent. The carpenter earns more than
the day laborer because the supply of his services is limited and be-
cause the utility of his services is greater. There is thus in all real
differences of wages an element similar to rent. But there is an
important distinction between these cases and the rent of natural
agents. In the one, human action and human motive alone are in
operation; in the other, nature's limitations are the essential factor.
The carpenter and the business man put forth their powers because
of a reward, and are stimulated to put them forth the more as the
reward becomes higher. The differences between good sites and
bad sites are irrespective of such motives. And in its social aspects
this distinction is all-important. It is jiot impracticable for society
to appropriate in some way economic rent and monopoly gains.
But the appropriation of the extra gains which human beings se-

50-§4] BUSINESS PROFITS (Continued) 187

cure because of their possession of unusual faculties Avould check
the exercise of those faculties. It would perhaps be going too far
to say that it would quite prevent their exercise. Other motives
than those of pecuniary gain may conceivably be made more effec-
tive than now. But as men are, and as private property and com-
petition now influence them, nearly all need the spur of material
reward to bring into full exercise their abilities. The extra gain is
a price which society must pay in order to secure the extra service.

§ 4. If business profits are in some respects analogous to rent,
they are in other respects closely related to interest.

We have tacitly assumed that so much of a business man's in-
come is to be regarded as profits as is in excess of interest on the
capital which he manages. If he happens to borrow his capital,
that is clearly true. He then pays interest to another, and only
his net earnings over and above interest go to him as business prof-
its. Usually his capital is partly borrowed and partly his own (or
that of relatives or friends, put at his disposal from other than cold-
blooded pecuniary motives). On that part which is his own, he
must indeed remember that interest could be got at current rates
without the risk and labor of actual management; and therefore he
must reasonably reckon only the excess over such interest as his
earnings of management or business profits. This way of regarding
the situation is followed in an arrangement found in many firms
which have silent or inactive partners. Out of the net earnings of
a given period, say a year, interest is first allowed on the capital
put in, whether by the active partners or by the others. The ex-
cess, after paying all interest, then constitutes the business profits
proper. Out of this, there is first allotted a fixed payment in the
nature of salary to the active partners. The remainder is divided
between active and inactive partners in proportion to capital pro-
vided by them, and constitutes a return for risk, general oversight,
and judgment.

Such a sharp distinction between the constituent parts of gross
profits is of course more likely to be made where there is a corre-
sponding division of functions — where some provide the capital,
others do the active work of management; where some share the

188 THE DISTRIBUTION OF WEALTH [50-§4

risks, others do not. In the eighteenth century the common form of
business organization, the private firm or partnership, was not such
as to suggest the distinction. Then the investor, the person look-
ing to a return in the way of interest only, had little to do with busi-
ness ; his investments were in land or in public funds. The business
man borrowed occasionally from banks or professional money
lenders, but had no permanent associates divorced from the
management. Hence the economists of those days regarded
business profits as one homogeneous return secured by merchants
and capitalist employers. Among the British economists, this
mode of treatment continues nearly to our own day. Adam
Smith regarded gross profits as the return both to capital and
to the managers of capital. He remarked that double interest
was regarded as a fair, moderate, reasonable profit. High profits
and high interest went together; and he adduced the historical
fluctuations in interest as indicative of the fluctuations in profits.

In modern times the growth of corporations has brought about a
vast participation by investors in business enterprises, a division
of function between business men and investors, and hence greater
attention to the really different nature of their doings and earnings.
Many corporations borrow on long time in the form of bonds,
whose holders are supposed to be free from risks and to receive pure
interest, while yet they are permanently associated with the enter-
prise. The holders of stock are something more than investors
pure and simple. They are, in a way, silent partners; they exer-
cise judgment and assume risk. The actual work of management
is in the hands of salaried managers, who in addition may or may
not be stockholders.

This relation between the different persons concerned appears
most clearly in the early stages of enterprises, especially of large-
scale enterprises. The investor who is looking for a return in the
way of interest pure and simple, does not take shares in new under-
takings ; he buys " solid " bonds. Those who " go in " for new ven-
tures are largely the experienced business men and the clientele
which such business men gather about them. They "go in" largely
on their judgment of men. If John Smith, whom they believe in.

5(>-§5] BUSINESS PROFITS (Continued) 189

fathers a scheme, they often take shares without very deHberate
consideration of the prospects. They expect to secure more than
interest on what they invest; otherwise they would not assume
the risks. As time goes on, if the venture has proved success-
ful, and dividends at a good rate have been secured for a consider-
able period, they sell out to investors at a premium. If the enter-
prise is then a thoroly settled one, these investors may take vir-
tually no risks, and their return does not exceed bare interest; tho
some degree of risk, even if slight, is not to be avoided in holding
of stock. The active business man or venturesome investor w'ho
has thus sold out at a profit then turns to still other new enterprises,
and may repeat the process indefinitely. His returns are to be
considered mainly business profits, while those of the investor,
whether bondholder or owner of "gilt-edged" stocks, are mainly
interest, with some admixture of capitalized rent and monopoly
gains.

§ 5. For short periods, even for periods of considerable length, i
business profits and interest are often closely connected. Large,
command of capital commonly brings to an individual enterprise!
not only returns in the way of interest proportionate to the amount
of capital, but a better chance for large profits.

For an individual, the larger or smaller capital which is at his
command, and the consequent larger or smaller scale of operations,
have an important influence on his net earnings. At first sight,
these seem to constitute the dominating factor. The business men
who produce or sell smaller quantities get the same prices as those
producing or selling greater quantities; the expenses per unit of the
large-scale producer or merchant are usually less than those of his
smaller rival; it seems to follow that, merely because he has more
capital, his gains are larger. If the management of a great busi-
ness called for no more ability than that of a small one, and if the
command of abundant capital came solely by inheritance or favor,
the consequence would certainly follow. But in the long run the
connection between extent of capital and volume of profits proves
to be by no means automatic. Large-scale operations require
more executive capacity than small ones, more insight and judg-

190 THE DISTRIBUTION OF WEALTH [5(>-§6

ment, more courage. In the end command of capital comes not
by accident but according to ability. At the start, and in ordinary
times, it is as easy, or at least seems as easy, to manage a large busi-
ness as a small one. Hence the importance of capital and connec-
tion in the earlier stages of every business man's career. Hence
too the more enduring influence of capital and connection in those
businesses which never reach a very considerable scale, or never
get beyond the simplest conditions of management. But with al-
most all enterprises conditions change as time goes on, new meth-
ods or processes are devised by the keen-minded and venturesome,
and adaptation to new competition must take place. Then only
the able and enterprising continue to control large enterprises and
large capital. The less capable fail to make the profits they expect.
If, as not infrequently happens, they persist in trying to manage
what overtops their capacity, bankruptcy ensues and their all is
swept away.

The adjustment of the scale of operations and of consequent prof-
its to individual capacity is much affected by custom, established
reputation, and good will. A firm which has been built up by an
able founder runs on for a long time of its own momentum. This
is particularly true of trading, both retail and wholesale, where
connection and reputation count much in holding customers. It
is often true of manufacturing, where trademarks may play an im-
portant part. It is most of all true of banking, where reputation
and good will are of the essence of profitable operation. Those who
succeed to well-established enterprises can continue to reap large
gains even tho they have no marked ability. But the dominant
influence of inborn gifts shows itself in time. Old firms decay, un-
less regenerated by fresh blood. New firms rise, and a different
generation of business men comes into control. Among these may
be the capable sons of capable fathers, inheriting ability as well as
capital and connection. But most of the new men are not the de-
scendants of the old. They rise by force of character from small
beginnings. Into their hands comes the control of large capital
and the grasp of large business profits.

§ 6. The same close connection over limited periods, and the

50- §6] BUSINESS PROFITS (Continued) 191

same divergence over longer periods, appear in the relations be-
tween interest as a whole and business profits as a whole. The factor
that most directly and continuously acts on interest is the amount
which business men can afford to pay and which competition
compels them to pay. The process by which the return to capital
is settled works out its results thru its influence on business profits.
The advances to laborers are made by the active capitalists — the
business men — and the ensuing increase in the output comes first
into their hands; for they act as intermediaries between hired
workmen and the investors. When gross profits (in Adam Smith's
sense of the term) are high, they are able and willing to pay higher
interest or higher wages, or both; and conversely they are able to
pay less when gross profits are low. Improvements in the arts
w^hich increase the marginal productivity of capital tend in the
first instance to raise both business profits and interest.

As time goes on, however, the parallel movement is likely to be
modified. The mode in which the gain shall be divided between
the two depends on the conditions of supply for business capacity
and for investors' savings. If savings, and so the command of
capital, are abundantly put at the business man's disposal, a larger
share goes to his profits. If, on the other hand, a great number of
capable business aspirants bid for the savings, a larger share goes
to interest. If both capital and business power are plentiful,
wages tend to rise; the incomes of the possessing classes as a whole
tend to become less, and the inequalities of wealth are by so much
mitigated.

In modern times it is probable that business profits have suc-
ceeded in retaining a comparatively large share of the gains from
the great advances in the arts. Savings and capital have re-
sponded very rapidly and amply to increased possibilities for in-
vestment. The rate of interest has remained, when long periods
are considered, fairly stable, notwithstanding the enormous ad-
vances in accumulation and the enormous improvements in the
utilization of capital since the Industrial Revolution set in. All the
civilized countries have gone thru great bursts of progress, during
which the productiveness of labor has been rapidly increased and

192 THE DISTRIBUTION OF WEALTH [50- § 7

the opportunities have been favorable for large gross profits and
high interest. Such was the experience of England during the
first three-quarters of the nineteenth century; of Germany during
the last quarter of that century; of the United States during almost
the whole of her history. Tho interest has gone up in all these
countries during the accentuated periods of these movements, it has
fallen again with each slackening. But business profits, for those
possessing the qualities of leadership, have been large thruout,
often portentously large.

§ 7. Some different views of business profits — views which
bring into deserved prominence certain peculiarities — may now
be considered. They distinguish business profits sharply from
wages. In them, what a business man gets is regarded as a com-
posite income even after cutting out such constituent elements as
should properly be regarded as either interest or rent. Part of
what he gets is still thought to be simply wages ; but part is neither
wages, nor interest, nor rent; it is different from any of these; and
this peculiar element is alone regarded as "profits."

Among these views one lays special stress on the consequences
of changes in the arts. Business profits are treated as accruing
solely from such changes. If changes in the arts were to cease, if
competition were to work out its results perfectly, if prices were to
conform closely to expenses of production, the managers of industry
would receive nothing but wages — wages determined in the same
fashion as other payments for labor. But in a dynamic state — a
state of unstable equilibrium, of transition, of advance — there is
opportunity for business men to secure something more. By
taking the lead in utilizing inventions or improving organization
they make extra gains, which last so long as they succeed in hold-
ing the lead. Business profits, so considered, are ever vanishing,
ever reappearing. They are the stimulus to improvement and
the reward for improvement, tending to cease when once the
improvement is fully applied.

Whether the term "business profits" should be thus limited is
primarily a question of phraseology. The emphasis which this
view puts on the relation between improvements and the business

50-§8] BUSINESS PROFITS (Continued) 193

man's gains is just. The large and conspicuous gains are in fact
associated almost invariably with advances in the arts, with bold-
ness and sagacity in exploiting new enterprises and new methods.
None the less, this mode of sharply separating business profits from
wages seems to me artificial. Even the routine conduct of estab-
lished industries calls for judgment and administrative capacity,
and so for the exercise of the same faculties that are more conspic-
uously and more profitably exercised under conditions of rapid
progress. To separate even roughly the earnings of a successful
business man into two parts — one wages, the other "profits" in
the sense of gains from progress — would seem to be quite im-
practicable. Looking over the whole varied range of earnings
among those engaged in the business career, it is simplest to
regard them all as returns for labor — returns marked by many
peculiarities, among which the most striking are the risks and
uncertainties, the wide range, the high gains from able pioneering.

§ 8. Another view, in some respects similar, separates business
profits from wages by considering as wages that amount which the
individual would have been paid if hired by some one else. An in-
dependent business man's actual earnings are likely to exceed that
sum; the excess is business profits. Here emphasis is put on the
element of risk. Profits differ from wages in that they are the re-
sult of the assumption of risk and the reward for that assumption.

The question here again is one largely of phraseology; but un-
derlying it is the substantial question whether a satisfactory line
of demarcation can be drawn, and "wages" in this sense really dis-
tinguished from "profits." Salaried posts of management have
a very wide range — foremen, superintendents, general managers,
presidents. A process of transfer is constantly taking place be-
tween the salaried ranks and the independent business managers.
Both are affected by causes of the same sort. A capable man will
make large gross profits for himself, or will be paid a good salary if
others hire him. It may even happen that he will really earn
more if hired by others; he may have executive ability, yet lack
sagacity and judgment.
The growth of large-scale operations and of corporations has in-

194 THE DISTRIBUTION OF WEALTH [5(>-§8

creased the employment of salaried men in posts of leadership, and
has brought also an adjustment of their pay to the qualities re-
quired for leadership. The desirability of stimulating salaried
officials to the best exercise of their powers has led to all sorts of
devices. On the continent of Europe, and especially in Germany,
Qardihmesjdire, common; that is, a share in the profits, additional to a
set salary. In England and in the United States it is common to
pay the managing head of a great corporation a very large salary
once for all, with the tacit understanding that he must make the
profits large enough to justify his salary. If he would keep his
place, he must make money for his employers. This is especially
the case in the United States, where larger salaries are paid than in
other countries, more power and more responsibility are placed in
the hands of managers and presidents, and more is expected from
them in the way of " results." The extraordinary sums paid to the
heads of great American enterprises — $50,000 a year, $100,000 a
year, even more — tho they may stand in some instances for mere
; nepotism, in the main represent an endeavor to get from salaried
' persons the same keenness and ability which their own immediate
interest would bring out. There is always the possibility of the in-
dependent exercise of such ability, and the employing corporations
must bid rewards on the same scale as those which it would so yield.
This sort of de facto profit-sharing explains why, even under cor-
porate organization, private industry is usually more efficient, or
at least has greater probabilities of progress, than public industry.
It has been maintained by eminent economists that when once the
conduct of affairs is in the hands of great corporations, the essential
advantage of private industry is lost; for such corporations, like
government, must intrust the actual management to salaried offi-
cials and therefore lose the spur of the owner's direct interest and
oversight. But governments cannot deal with officials with the
freedom of private corporations. They cannot pay salaries so high
or so elastic; sundry political forces make it impracticable. Tho
there is a glitter of fame from public emploj^ment which may enlist
capable men even with a moderate salary, the same keen exercise of
the business faculties has rarely been stimulated. For the most

50-§9l BUSINESS PROFITS {Continued) 195

effective organization of the forces of production, private owner-
ship and management, even with salaried managers, has unques-
tionable advantages.

§ 9. The tenor of the preceding discussion has been to justify
business profits as due in the main to efficiency and ability. The
community on the whole gets an equivalent for the business man's
earnings; indeed, must allow some such earnings in order to secure
the useful services rendered. But it is often maintained that such
justifiable earnings form only a part of business incomes and that
the total incomes much exceed the range of the worth-while returns.
The contention has truth; there are illegitimate as well as legiti-
mate business profits. To put it in other words, a good deal of
"business" is unproductive; it serves not to add to the well-being
of the community, but to get something away from other people.

Sometimes the case is simple. Gambling speculation, such as
that of the "bucket shop," is clearly unproductive. Corrupt con-
tracts with government officials, such as can be sublet by the cor-
ruptor to another who actually does the work contracted for, are
in the same class. The deliberate manufacture and dishonest
puffing of a noxious (or even harmless) "patent medicine" is to be
similarly regarded.

Commonly, however, useful and harmful activity, legitimate
and illegitimate profits go together. Take such a case as a subsidy
obtained by corruption and not needed to promote the industrj^ in
question. The business man's labor in securing the subsidy
serves to rob the public ; but his labor in guiding the industry may
be effectively directed and in its results serviceable. A consistent
free trader would say that labor given to manipulating tariff legis-
lation in favor of protected industries was the reverse of productive;
but the persons in charge of the industries may manage them well.
An employer may take advantage of the helplessness of women and
children, of the ignorance and bargaining weakness of unorganized
workmen of any sort, and may secure their labor at less than "fair"
rates; 1 at the same time he may organize that labor with high
efficiency.

» Compare Chapters 67 and 58.

196 THE DISTRIBUTION OF WEALTH [50-§9

There are numberless ways in which the predatory exercise of
business power is mingled with activity that is useful. Such are
fraud and adulteration in the making of goods; vociferous tooting
of an article no better or worse than its rivals, but foisted on a gulli:^.
ble public at a high price by mendacious advertising; cheating of
laborers, thru "company stores" or in the letting of company tene-
ments, thru fines nominally for poor work (weavers), thru over-
charges (on miners) for materials and supplies. One of the most
conspicuous and far-reaching forms of predatory business work is
in the abuse of positions of trust by directors and managers, often
closely associated with stock exchange speculation. The same man
may violate fiduciary obligations and gamble with loaded dice on
the stock exchange, yet be a captain of industry. American in-
dustrial history is full of men of this type, and our great fortunes
are due in no small measure to this tainted sort of business activity.
The proximate aim of the business man is to make money. All is
fish that comes into his net. Unless restrained by law or public
opinion or moral scruples, he will turn to anything that promises
a liberal surplus over expenses.

The restriction of business profits within "legitimate" bounds
depends on two things: on the one hand, full and free competition;
on the other hand, the maintenance of competition on a high plane.

First, freedom of competition. Monopoly profits are not " ille-
gitimate" in the sense in which those are which result from sharp
practise and cheating; but they are "illegitimate" in being greater
than necessary to induce the exercise of the full productive facul-
ties. Setting aside such cases as patents and copyrights, they
mean that the public pays more than there is any need of paying.
Shrewd understanding of the possibilities of monopoly and skillful
management of monopoly industries have been great sources of
business men's incomes and fortunes; and this without violation of
law or of the proprieties of business life. The regulation of mo-
nopoly industries is among the most urgent of social problems and
is essential for keeping business profits within the limits of the
reasonable or legitimate.

The maintenance of a high plane of competition depends partly

50-§9] BUSINESS PROFITS (Continued) 197

on law^ partly on public opinion and the pervading moral spirit.
The aim of the law 13,^01 should be, to make men's relations with
each other such as to promote the general good and to inhibit pred-
atory doings. This is the basis of the main provisions of the law
of private property — protection to property holders, punishment
for physical violence and robbery, free contract, definition and pre-
vention of fraud. As industrial conditions change and as men's
consciousness of common interest enlarges, the legal relations are
modified. Slavery, which was part of the established order of
things not only in ancient times but till nearly our own day, is now
forbidden in all countries that pretend to be civilized. The same
is true of serfdom. Competition and bargaining between men,
and the exercise of force, are not allowed to proceed on this basis
or to this extreme. Characteristic of our own day is the regulation
of the terms of dealings between employer and employed — laws
for regulating the mode of paying wages, the hours of labor, mini-
mum wages, as well as those regulating truck shops, "company
stores," and the like possible sources of profit felt to be illegiti-
mate. Pure food laws belong in the same class. So do the
improvement of legislation regarding stock companies, the defini-
tion and enforcement of the liabilities of directors and managers,
the prevention of swindling in promoting and floating corpora-
tions. The aim thruout is to compel all persons, and especially
the leaders and managers of industry, to conduct their operations
under such conditions as will direct their energies to productive
and serviceable emulation only.

PubUc opinion is also an important factor, both in leading to
legislation and in adding to the effect of legislation. The more the
anti-social effects of predatory activity are recognized and frowned
upon, the more will business energy turn to ways of true service.
Opinion among business men themselves and in the whole social
stratum in which they live has been too much dominated by mere
money-making — the worship of the millionaire. The more these
classes are permeated by intelligent insight as to what business men
really do, and high standards as to what they should do, the better
will be the working of the system of private property under the

198 THE DISTRIBUTION OF WEALTH [50-§9

business man's guidance. Widespread teaching of economics,
such as is carried on at present in our American universities and
colleges and schools, ought to contribute much to this end.

At the best, however, there will always be a residuum of dubious
business profits. So long as there is freedom of investment and of
contract, there will be foolish investors, hapless speculators, short-
sighted bargainers. Shrewd and strong persons will take advan-
tage of the ignorant and weak. There will always be operations in
which it is difficult to draw the line between fraud and sharp bar-
gaining. There will always be men to whom moral scruples mean
little. Some things of this sort are the inevitable concomitants of
the regime of private property, which even at its best can be justi-
fied only by a balance of good over evil.

CHAPTER 51
Great Fortunes

Section 1. The development of large-scale production and the growth of
numbers have been the fundamental causes of the growth of great for-
tunes, 199 — Sec. 2. The scarcity of high business ability explains great
fortunes accumulated out of business profits, 200 — Sec. 3. Influences
of a different kind are urban site rent, the exploitation of rich natural
resources, monopoly gains. Unearned and fortuitous fortunes, 202 —
Sec. 4. Unearned gains are mingled inextricably with earned, 203 — Sec.
5. Large fortunes as a spur to productive activity. The building of
plants and of fortunes out of accruing profits, 205 — Sec. 6. The need of
better direction of economic and social forces, 207.

§ 1. Great fortunes are among the conspicuous phenomena of
modern times. In very recent days they have become porten-
tously great. Thru most of the nineteenth century, a milHonaire
was reckoned the possessor of a great property; but within the last
generation multi-millionaires have become common. Accumu-
lations of ten, twenty, fifty, even hundreds of millions are familiar.
True, standards have changed. Allowance must be made for the
depreciation of money; the five millions of 1920 mean not much
more than the million of 1890. Properties of all sizes, from small
thru moderate up to great, have multiplied, and the average has
probably become larger. But when all is said, the number and the
size of the exceptionally large fortunes set us aghast. How ex-
plain them, and what of good or evil find in them? It is the first
of these questions, explanation and analysis, that will be chiefly
considered in the present chapter; the larger one of weighing the
balance for and against will engage our attention further as we pro-
ceed. ^ And much of what is now said must be in the nature of
summary and amplification of the preceding discussion of distri-
bution at large.

Fundamental among the causes of great fortunes is the develop-

1 See Chapter 55, on Inequality, and Chapters 66, 67, on Socialism.

199

200 THE DISTRIBUTION OF WEALTH [51^§2

merit of large-scale production. Manufacturing, trading, trans-
portation, have been conducted since the Industrial Revolution on
a scale never before known and with opportunities for profit never
before known. Hardly less important has been the growth of
numbers. In the civilized countries population took a great burst
during the nineteenth century. Unprecedented numbers of people
were supplied with steadily greater abundance of goods, and the
capable or fortunate leaders and innovators took their toll. These
general movements, so familiar and long-continued as to be taken
usually as matters of course, underlay the growth of the great
fortunes.

Following the scheme of distribution which has been elaborated
in the preceding chapters, the causes of fortunes may be classified
more in detail as derived from one or the other of the follow-
ing sources: business profits; economic rent; monopoly gains;
illegitimate or predatory profits. Each of these may be taken
up in turn.

§ 2. Simplest of all is the case where a fortune has been accumu-
lated out of business profits. It is a common case. Every day we
see large profits and large accumulations in the strictly competi-
tive businesses. Such are any number of manufacturing industries
— shoemaking, textiles, pots and pans, collars and neckties.
Sometimes the making of an apparently insignificant article, a
small specialty, becomes the basis of a fortune : when the article can
be sold to tens of millions of customers there is the opportunity for
large turnover, for the economies of large-scale production, for
profits great in the aggregate tho small on each item. Mercantile
operations belong in the same class. The modern jobbing firm can
cover a vast territory and reach an immense number of people.
Often merchandising has been supplemented with manufacturing.
A distributing business, once established with its circle of habitual
customers, sets up a manufacturing adjunct and combines the prof-
its of the two operations. Some older fortunes got together in
this sort of combination are supposed by their inheritors and pres-
ent possessors to have a reputable flavor not attaching to properties
perhaps of larger size but of new-fangled origin. Banking is an-

51-§2] GREAT FORTUNES 201

other field of the kind often regarded as more distinguished. Here
too there are pure banking firms, and on the other hand some that
have Hnked their fortunes intimately with manufacturing or min-
ing ventures.

The characteristic features of fortunes of this sort are that they
are secured under the conditions of open competition, that they
are essentially due to ability and efficiency on the part of the found-
ers, that they may be fairly said to be earned No restraint on
competitors, no monopoly privilege attaches to them. The field is
free for all; there is an unending procession of new entrants, con-
stant withdrawal of fortunes, constant making of new ones. True,
when once a large concern has been set going, it keeps on for a time
by mere momentum. Prestige, established connection, brands,
trademarks, enable profits to roll up thru an apparently automatic
process. This is particularly the case, as we have seen, with bank-
ing operations; it is hardly less so with manufacturing enterprises.
But in the end the master mind must be there; if not, the business
begins to run down. The founder and owner may run off for weeks
and months, and things go on as well without him. But the very
fact that they do so shows how well he has built and organized.
This sort of care-free management never is possible in a budding
enterprise. And the death or definitive retirement of the founder
sooner or later leads either to decay of the business or to the passing
of control to new and again capable hands. It is the scarcity of
high business ability that explains the fortunes; and it is this which,
under the canons and presumptions of private property, justifies
them. Under the existing economic and social regime, the purpose
and the trend are that reward shall be in proportion to efficiency;
and the ground of justification for a high reward is that it stimu-
lates efficiency. Certain it is that the bait of a fortune has been
a tremendous incitement to enterprise, energy, persistence, the
manifold improvements in the arts which have made the possi-
bilities of production what they are in the modern world. Whatever
be one's belief on the need of this sort of motivation for the future
no sober observer, no thoughtful socialist, can question that it has
been powerful in the past*

202 THE DISTRIBUTION OF WEALTH [51-§3

§ 3. Questions in many ways different are raised by the for-
tunes accumulated under non-competitive conditions.

Such for example are those derived from rent in its most con-
spicuous form — urban site rent. Reference has already been
made to the extraordinary windfalls which some ducal families in
England pocketed when leases of London sites fell in. Not dis-
similar have been the fortunes of such American families as the
Astors, who also profited marvellously by the growth of urban
population and the accretion of urban rent. In most countries,
certainly in the United States, this particular form of gain has been
diffused thru many hands; yet in plenty of cases it has left great
amounts in the possession of individuals and families.

Analogous, yet not quite the same, have been the fortunes resting
on such natural resources as ores, forests, oil. They are not quite
the same because here we have more of the elements of invest-
ment, deliberate development, enterprise, risk. Often it would be
difficult to say precisely how much of a fortune derived from these
sources is earned, how much unearned. But of the latter sort there
have been plenty enough. Above all, the volume of the gains has
been enlarged by the exploitation of rich natural resources. Un-
expected growth of population, unexpected improvement of trans-
portation, unexpected advances in the arts have caused mines and
forests to yield surpluses of gain far beyond what the early pro-
prietors could have expected and far beyond what could by the
utmost stretch be imagined as necessary to induce their full de-
velopment.

Next among the fortunes due to non-competitive conditions are
those from monopoly. So far as resting on a patent or like legal
protection, they may be said to be earned. The law here ex-
presses the deliberate conclusion of the community that prizes are
needed to evoke invention. But the control of great industries
which has resulted from the sudden growth of large-scale produc-
tion and the concentration of an entire industry in a few huge es-
tablishments, perhaps a single one, has given rise to surpluses far
beyond those of competitive businesses. In essentials, the public
service industries, so called, belong in this class; it is the technical

51-§4] GREAT FORTUNES 203

advances which have led to operation on the great scale in rail-
ways, street railways, gas, electricity, and so to single-handed con-
trol and to monopoly gains.

In a third class, a sort of omnium gatherum, may be placed a
series of fortunes having varying degrees of demerit but all alike in
that there is no connection, or but the remotest, with operations
useful to the community. Sometimes there is plain violation of
existing law, as when great tracts of timber land are filched from the
community by base fraud or forgery. ]\Iore often, in cases of the
fraudulent kind, there is nominal compliance with the law, but
violation of its spirit and connivance with semi-corrupt officials.
Tainted in the same way by unmistakable fraud are the fortunes
secured by stock-jobbing speculators who gamble with loaded dice:
insiders in a great corporation who play the game against the out-
side public in violation of fiduciary obligations. Here, as in the
case of timber thieves, there is plain violation of law, no pretense
that the canons of the existing system have been observed. Specu-
lative dealings not of this tainted sort have already been consid-
ered ;i they are not wholly devoid of advantage to the public, but
the price paid by the public must be admitted to be high when the
twists and turns of trade land a million or millions in the hands of
a daring adventurer. Again fortuitous gains like those which are
bred by a great war, are not to be readily associated with activity
that promotes the general good. Some ventures of peace which
rest on the deliberate use of mendacious advertising belong in the
same dubious class.

§ 4. The puzzling thing is that thru their whole range the un-
earned gains are mingled inextricably with those that are earned.
Business profits of the sort that may be termed legitimate and even
honorable are intermingled with the doubtful and disreputable
gains. It has been remarked in the preceding chapter that men
who are extraordinarily different in other respects may be alike in
possessing high business capacity. A man may be a land-swindler
or stock-speculating railway manager, and none the less have the
business virtues — enterprise, vigor, judgment, organizing power.

1 See Chapter 11, §§ 1, 5.

204 THE DISTRIBUTION OF WEALTH [51-§4

And even where there can be no reproach on the score of lack of
probity, there are still gains not to be described once for all as earn-
ings. Such are those arising from the seizure of natural resources
and of unearned increments. The same qualities that make a man
a good business leader make him a good business chooser. He has
a keen eye for the economic possibilities. He judges shrewdly of
mines, timber tracts, oil, urban and surburban sites. Social insti-
tutions as they stand invite him to pick up the most he can find —
the law, the accepted canons of conduct, the pervading attitude
toward money-getting. At the same time, toward making the
best of that which nature offers, his skill and management are es-
sential. How discern w^hat is ascribable to his judgment and his
management, what to nature's gift? It is easy to see that often
the final fortune is greater than can be reasonably ascribed to the
special effectiveness of the man's labor; but it is immensely difiicult
to draw the line in a given case.

Another circumstance promotes gathering accumulations and
/gives to him who hath. The prospering business man can wait.
Midway in his career, when he has reached the stage of large means
and large credit, he looks about for ventures outside of his first and
more immediate business. He foresees what the future will bring;
he buys cheap lands, cheap mines, cheap stocks; and then — to use
the jargon of the street — he sits on them. In time his foresight
will be justified by the event; not without fail, for there are risks and
disappointments in these ventures; but the far-seeing and discrimi-
nating in the end reap ample return for their patience and acumen.
Nothing so well illustrates all the complications of fortune build-
ing as the history of American railways during the nineteenth
century. Here we see able management, brilliant enterprise,
speculative ventures, shrewd pickings, dishonest filchings. A great
continent was opened, an unexampled sj'stem of transportation
created. Extraordinary natural resources were uncovered; railway
units of prodigious size built up; railway management of a special
type and special effectiveness developed ; consolidation was carried
out and immense power, approaching monopoly, acquired by the
railway kings; through it all, increasing speculation on the stock

51-§5] GREAT FORTUNES 205

exchange, gambling by the multitude, shrewd purchases at bargain
prices by the able and fortunate few, more or less of inside manage-
ment and deliberate wrecking. The same round — not quite the
same, but of the same kind — was repeated in the late growth of
the great industrial combinations and trusts. A like extraordinary
jumble and a like climax — an array of conspicuous fortunes.

§ 5. What grounds there are for justifying large fortunes has
been sufficiently indicated in the preceding pages. These prizes
are a potent spur to productive activity; they promote new enter-
prises and improvements in the arts, lead to the increase of capital.
Money-making is part of the individualist system. Such as that
system is, good or bad on the whole, likely to endure or certain
to disappear, it stands; and in it and in its forward move-
ment the potentiality of fortune-building is imbedded. Great
advances in the arts of production are to the common interest.
The public has been unable to achieve them for itself — why, it
concerns us not here to inquire further. So long as reliance is
placed on private initiative and individual gain, wide disparities
in earnings will persist, and great fortunes will emerge. And, as
has been more than once said in these pages, the accumulation of
savings and the increase of capital are promoted by some measure
of inequality. So great a degree of inequality as exists, so many
and so great fortunes, are not indeed indispensable. But the plain
fact must be faced that without marked inequalities in earnings
and possessions the material progress of the modern world would
not have taken place; nor is there any clear indication that this
condition of progress can be dispensed with in the future.

The building-up of great plants and great enterprises out of the
net gains of a business is one phase of this matter of the increase of
capital in connection with large fortunes; and it illustrates the
complexities of the whole problem.

The stout defenders of things as they are often depict this
process as if the owners of the properties were not getting their
profits at all — as if they never got them. It is often suggested,
too, that the procedure is really an altruistic one: the surplus is
set aside for the public benefit. And there is a modicum of truth

206 THE DISTRIBUTION OF WEALTH [51-§5

in all this. The owners in fact are not getting the income, at least
not for the time being. They are setting aside part of a potential
income and saving it, not enjoying it. There has been occasional
debate among economists whether savings are income, and the
sound conclusion is that fundamentally they are not. In the last
analysis income is what is enjoyed or consumed; that which is set
aside and invested is no part of current income. Further, it is
true that a public benefit accrues from investment. All invest-
ment in capital is to the public advantage; the building-up of the
community's material outfit promotes the common good. It may be
said, too, that the building-up of plant out of accruing profits is in a
special sense advantageous. In this way only is the growth of many
a great productive unit possible. New and untried industries, en-
largements and technical advances of a novel kind, take place most
commonly in just this way. Funds for them cannot be readily
secured by public subscription. " Outside ' ' investment is attracted
only after some proof of success has already been given. The
process of putting earnings back into the business does mean that
great efficient establishments are enlarged and the cheap and
abundant production of goods promoted.

But the eventual outcome is the emergence of a fortune, per-
haps a colossal fortune. Eventually the owners do get the benefit
of their earnings. Talk about their altruism may be swept aside.
The plant at last is capitalized for all that has been put into it, very
likely for more ; the melon is cut. Often it is the descendants of the
founders who reap the final harvest. It boots.then little to inquire
just in what way the saved earnings and surpluses of a past gener-
ation were secured, — whether by sheer ability and efficiency, or by
such qualities mingled with intrigue, trickery, perhaps dishonesty;
how far due to deliberate planning, how far the mere result of grow-
ing population and wealth. It is impracticable to make a separa-
tion, and it is too late to undo thru any sort of expropriation the
laches of the past. There the fortune stands, a warning that a repe-
tition of this round must be guarded against for the future, and a
problem of its own for the present; at the moment, nevertheless, a
firm part of the social structure.

51-§6] GREAT FORTUNES 207

§ 6. The objectionable aspects of large fortunes are more obvious
than their causes and the possible grounds for justifying them.
The evils center about inequality, and most of all about that sort of
inequality, the result of the institution of inheritance, by which a
few live in conspicuous luxury and idleness. Princelings and ducal
personages were thought by the protagonists of the modern indus-
trial system to be peculiar to the outworn system of feudalism and
privilege. Precisely such puppets emerge under the "simple and
obvious system" of natural liberty. No stretch of psychological
analysis concerning the spur of ambition, the spice of constant
emulation, the staleness and flatness of uniformity, can prevail
against the universal conviction that the maximum of human hap-
piness is not promoted by great, glaring, permanent inequality.
The readiest immediate means of meeting this situation is heavy
taxation on the inheritance of great fortunes: the carving out of
large slices for the public as transmission takes place on death.
But this is not an entirely simple matter. It raises one of the many
problems concerning the working of the institution of property. Of
these more will be said shortly ;^ for the present, we are concerned
chiefly with the bare analysis of the situation. Great fortunes and
their causes illustrate better than any other single aspect of modern
life how disordered is its movement, how unconscious it is of any
goal, how disturbing are its phenomena. Nothing raises more
difficult questions, nothing shows more plainly the need of girding
ourselves for a better direction of the economic and social forces.

1 See Chapter 55.

CHAPTER 52

The General Level of Wages

Section 1. The fundamental question on the general level of wages is raised
by the case of hired laborers, 208 — Sec. 2. The notion that lavish
expenditure creates demand for labor and makes wages high. Conse-
quences of investment as compared with "expenditure," 209 — Sec. 3.
The fallacy of "making work." Why hired laborers universally desire
that employment should be created and dislike labor-saving appUances,
210 — Sec. 4. The theory of the specific product of labor as determining
wages, 213 — Sec. 5. Wages depend on the discounted marginal product
of labor. Explanation of "margin" and of "discount." Advances to
laborers, 214 — Sec. 6. Some qualifications. (1) The current rate of
interest is assumed to be settled hy time preference; otherwise there is
reasoning in a circle. (2) A broad competitive margin is assumed, other-
wise there is no settlement either of interest or of wages, 216 — Sec. 7.
The mechanism of advances to laborers, the flow of real income into their
hands, the reservoir of existing supplies, the replacement of what is
advanced, 218 — Sec. 8. With the increasing complexity of production
interest tends to be a larger part; wages a smaller part, of the total income
of society, 221 — Sec. 9. The theory of general wages, tho it seems remote
from the problem of real life, is of high importance for the great social
questions, 222.

§ 1. Wages are so immensely varied that it may seem idle to
aim at any generalizations regarding them. They range from the

earnings of the highly paid business manager or professional man
to those of the mechanic and common laborer. Notjess varied are
the methods by which those earnings are got. The simplest
method, and that which we most commonly associate with the term
"wages," is the payment of stipulated amounts by an employer.
The earnings of the independent worker — whether he be business
man, lawyer, farmer, craftsman — are almost always more irregular,
and almost always include some elements (in the way of interest or
rent) which are not return for labor. Still different is the position
of the metayer tenant and of the fisherman working for a share in
the catch.

208

52-§2] THE GENERAL LEVEL OF WAGES 209

It will be best to concentrate attention on the simplest case —
that of hired laborers, paid once for all by the day or by the piece.
This mode of remuneration brings up the "wages question" in the
narrower sense. It is the mode of remuneration becoming more
and more common with the spread of large-scale production. It
raises the fundamental question concerning the causes determin-
ing the general range of wages.

§ 2. First, somejerroneDUs notions may be disposed of. Oncof
these is that lavish expenditure creates a demand for labor, and is
good for laborers. On this ground luxury and extravagance of all
sorts have been commended, expressly or by implication. The fal-
lacy which underlies it has often been pointed out. That which is
saved is spent quite as much as that which is not saved. Most peo-
ple think only of the first step in the process of saving and invest-
ment — as if it were merely a matter of putting money by, and
leaving it in a bank or other safe place. The money which is put by
is turned over to some one else, usually to a person engaged in oper-
ations of production. It is simply spent in a different way. It
leads equally to the employment of labor, and is equally the means
by which the employers and workmen get command of the things
they wish to buy. The difference between expenditure on
luxuries and investment is merely a difference in the direction in
which, labor shall be employed.

That difference in direction, of course, may have permanent
consequences. It may mean that some sorts of labor are more
in demand, others are less in demand. If we imagine that the
laborers hired in constructing mansions or pleasure yachts, or in
prodigal entertainment, belong to one non-competing group, and
that those hired in building factories or railways belong to another,
a change in the direction of demand may permanently influence
relative wages. But such a permanent change is very improbable.
Temporary changes in wages, on the other hand, caused by shifts
in the demand for labor engaged in various directions, are not only
possible, but are among the most common of economic phenom-
ena. These shifts are quite as likely to be from one sort of
immediate e^jpenditure to another sort — from bicycles to automo-

210 THE DISTRIBUTION OF WEALTH [52-§3

biles — as from such expenditure to saving and investment. They
do not influence for better or worse the total demand for labor.

Looking not to the immediate effects, but to the eventual results,
of investments as compared with "expenditure," we may agree
with the older economists who maintained that saving was advan-
tageous to laborers. Investment uSTially leads to the increase and
Improvement in the apparatus of production — the tools, machin-
ery, factories, materials. The eventual result is the production of
more consumable commodities than would otherwise be procured.
Were tools not successful in bringing about this result, they would
not prove profitable and would not be made. The consumable
commodities presumably are, in greater or less part, such as the
laborers themselves buy; and by their greater abundance and cheap-
ness the laborers gain. On this ground it may be said that invest-
ment as compared with immediate expenditure is better for the
laborers as a whole. In the first stages they are neither injured
nor benefited; in the end they are likely to be benefited.

§ 3. Still another notion, cropping out continually in all sorts of
forms, is that it is advantageous that employment be created or
maintained for laborers. A great fire or a great war is sometimes
thought a godsend to the workingman. A heavy snowstorm is wel-
comed because it brings employment. And, conversely, improve-
ments and labor-saving machinery are thought to diminish em-
ployment; do they not dispense with the services of many work-
men? Laborers themselves are almost invariably desirous of
"making work." They believe that a more difficult way of doing
a thing, one that calls for more labor, is better for those who have to
sell the labor. Few persons maintain views of this sort deliberately
and steadily; yet there are few who do not sometimes fall into ways
of speech that imply them.

It is obvious that mankind cannot be made better off by causing
work to be less productive, or by requiring additional labor for ac-
complishing the same thing. If there were constant snowstorms
and a need of giving unremitting labor to snow-shoveling, so much
less labor could be given to operations bringing positive and sub-
stantial results. The labor which is given to replacing wealth de-

52-§3] THE GENERAL LEVEL OF WAGES 211

stroyed by fire or war might have been given to the creation of so
much new wealth. The abundance of consumable commodities,
on which all material prosperity is bottomed, evidently depends
on getting as much done as possible with as little labor as possible.
How then can people talk so persistently about the advantages of
creating employment?

The explanation is to be found partly in the consequences of the
division of labor, bringing as it does a difference between the
causes acting on general prosperity and those acting on particular
groups; partly in the necessitous position of most hired laborers.

Where there is no division of labor and no exchange, this notion
can never arise. No farmer working for himself will think for a
moment that it Is for his advantage to choose that way of doing a
thing which involves most labor. He will welcome every labor-
saving appliance. But when there is division of labor and ex-'
change, every individual's earnings depend not only on the quan-
tity of things which his labor produces, but on the terms of sale for
those things. It may be to his individual advantage, and still
more often may seem to his advantage, to produce less and sell for
more ; even tho it be obvious that if all men did this, all would be
worse off. And similarly it may be to his advantage that his labor
should be more in demand, even tho the cause be something that
lessens the total income of society. A great hailstorm with many
broken windows means a demand for glaziers. If this sort of de-
struction went on all the time, the number of glaziers in the com-
munity would accommodate itself to the situation. More persons
would do this sort of work, and less persons would be available for
doing other things. The glaziers themselves would not benefit in
the end ; unless indeed they happened to constitute a non-compet-
ing group and so to possess a labor monopoly. But for a time those
glaziers who happened to be on hand, ready to do this particular
sort of work, would gain by an increase of demand for their
services. Most men see only immediate effects and draw general
conclusions from temporary phenomena. They suppose, or talk as
if they supposed, that what is good for a limited number of work-
men for a short time is good for all workmen for an indefinite time.

212 THE DISTRIBUTION OF WEALTH [52-§3

Most important of all, however, in explaining the common atti-
tude of workmen is their position as hired laborers. For them it is
of first importance that they be employed. Where permanence of
employment is assured, they are rarely opposed to labor-saving
appliances. But when they are engaged on a given job, and will no
longer be wanted when that job is done, they wish that it shall con-
tinue. No doubt, in the interest of general efficiency in production,
it is desirable that this job shall be disposed of as quickly as possi-
ble and that their labor shall then be turned to something else. But
where that something else is not immediately in sight, it is natural
that they should wish the existing employment to hold out as long
as possible. It is the difficulty of transition to another employ-
ment that explains the desire to make work, or to keep work going.
It is that same difficulty of transition that goes far toward explaining
the disadvantages of the workman in bargaining with his employer,
and constitutes one of the main justifications of labor unions.^

The situation is essentially the same where the workmen of a
given trade are confronted with some improvement that causes
labor to be more productive. For them, it may mean less employ-
ment and the necessity of either accepting less wages or moving to
some other occupation. The inventions of the linotype and the
typesetting machine greatly increased the output of labor in print-
ing. They diminished also — for a time at least — the demand for
compositors. Some of the older members of the trade who could
neither operate the new machines nor turn to anything else found
themselves in a sad position.

It happened in the printing trade, and indeed has often hap-
pened in other cases, that the total number of men employed in it,
and so the demand for labor in its former employment, did not be-
come less at all, or less for a short time only. The cheapening of a
commodity may mean an increase in the market demand such that
the total sum spent on it may be as great as before, even greater
than before.2 With lower prices for books and newspapers, it is

1 See below, Chapter 57, on Labor Unions.

2 That is, in technical language, the elasticity of demand may be greater than
unity. See Chapter 10, § 2.

52-§4] THE GENERAL LEVEL OF WAGES 213

entirely possible that many more will be bought, and more persons,
not less, employed in printing them. It has been maintained that
such is the common effect of inventions and labor-saving appliances.
But this is quite too optimistic a view. The outcome evidently
depends on the elasticity of demand for the particular commodity.
Only when, with a lowering of price, demand extends very rapidly,
is it likely that there will be no displacement of labor.

§ 4. Very different in character from the confused and fallacious
notions just discussed is the view, held by many able economists of
our day, that the fundamental determinant of wages is the specific V<(v
product of labor. As between labor and capital, each is supposed
to contribute a share of its own to the output. There is a specific ^
product ascribable to capital, and a specific product ascribable to
labor. Each tends, under competitive conditions, to get as reward '**-^
what it adds to the product. It is a natural corollary that such
distribution of rewards is in accord with justice; tho this follows only
if it be granted — by no means a matter of course — that distribu-
tion in proportion to efficiency is always just.^

To enter on a detailed discussion of the reasoning which has been
applied to this mode of treating wages would pass the bounds of the
present book. The main ground on which it is open to question
has already been indicated.^ It assumes a separate productivity
of capital as well as labor. But capital is itself made by labor; it
represents a stage in the applications of labor. If one person
makes a tool and another uses the tool, the two combine in making
the consumable thing. Thru this time-using and elaborate process
more consumable things ore likely to be made than w^ould be made
in a simpler process; and this increase in the output goes far to ex-
plain why there is a return interest) to the owners of tools. But
to explain how a return to the owners arises is not the same thing as
to demarcate a separate product. There is no separate product of
the tool on the one hand and of the labor using the tool on the other.
There is a joint product of all the labor applied — earlier labor as
w^ell as later labor. We may disengage the causes determining why

1 See what is said under the head of Socialism, Chapter 66, § 3.

2 In Chapter 38, § 4.

214 THE DISTRIBUTION OF WEALTH [52- § 5

and how the laborers who use and make the tools get wages, from
the causes determining why and how the owner of the tools gets
interest; but we can disengage no concretely separable product of
labor and capital. It is on this ground, here stated as concisely as
may be, that I would turn to some other mode of analyzing the
causes which underlie the general rate of the return to labor.

§ 5. The simplest and clearest mode of stating the theory of
general wages is, in my judgment, to say that wages are determined
by the discounted marginal product of labor. Let attention be given
to the two elements in this somewhat cumbrous formula: "mar-
gin" and "discount."

What is meant by marginal product will be obvious enough. It
appears most clearly as regards agricultural produce and the theory
of rent applicable to such produce. Wages and interest are deter-
mined at the margin of cultivation. Any excess secured on land
better than the marginal land goes to the landowner and does not
affect the returns of other persons. The same principle is applic-
able to monopoly gains and to all differential gains. The laborer
who deals with the owner of good land, or with a monopolist, must
accept what can be paid him by the marginal landowner or the
competitive producer. Any extra or differential returns go to the
fortunate owners of those instrmnents which have been sheltered
by nature or by social institutions from unfettered competition.

Discount implies an advance. Let it be recalled that produc-
tion takes time; that the materials and machinery needed in the
time-using process are made by laborers. Wealth is unequally dis-
tributed, and the immense majority of the laborer? have not the
wherewithal to support themselves during the prolonged period.
Their remuneration is advanced to them gut^of a surplus possessed
by some one else. The operations of the capitalists consists in a
succession of advances to laborers.^ The capitalist class secures
its gain thru the process of handing over to the laborers less than
the laborers eventually produce. The product of labor is dis-
counted by the capitalist employers.

This view may be stated, in more technical terms, by saying that

1 Compare Chapter 5, § 5; Chapter 38, § 4.

52-§5] THE GENERAL LEVEL OF WAGES 215

labor is a "future" good in the same sense in which a machine or a
store of material is a future good. It is a means by which "pres-
ent" goods (consumable commodities, or, more strictly, satisfac-
tions) are eventually got. The essence of the explanation of in-
terest is that present goods are preferred to future goods; that pres-
eiiFmeans, or sources of satisfaction in hand, will not be exchanged
at par for sources of satisfaction that are to accrue in the future.^
The same proposition is put in still different terms by saying that
"saving" or "postponement" or "waiting" ordinarily involves a
sacrifice, and will not be incurred unless there is a reward. The i
theoryof wages is thus strictly consistent with the theory of interest. '

In this process of discounting, the whole series of productive
operations must be regarded. The "practical" man will readily
accede to the notion of a discount, as regards the particular seg-
ment of industry with which he is familiar. It will be obvious to
him that the laborer cannot be paid as much as the product will
sell for; otherwise nothing will be left for the employer and capital-
owner. But the advances to laborers are needed for a much longer
period than that which must elapse until the mere stage of sale-
ability is realized. The product which is sold is likely to be itself
some sort of "capital good"; it represents only one stage in the
series of advances. The person selling machines or materials re-
discountSj so to speak; the capitalist-employer who buys them
recoups the original employer, and then, in the course of the next
stage of production, adds further advances of his own to other la-
borers. Not thru one stage only — not merely in the payment of
wages by the individual employer until he sells his goods — but ^
thru all the stages, from the first gathering of materials and the
first fashioning of tools up to the final emergence of satisfaction-
yielding "real" income, advances to workmen as a whole are made
by the capitalists as a whole, and discounting takes place at each
successive stage.

This discount we may assume (provisionally) to take place at the
current rate of interest. Evidently the simpler the processes and
the more predictable their outcome; the more effective, too, the

> Compaxe Chapter 40, § 4.

216 THE DISTRIBUTION OF WEALTH [52-§ 6

competition among capitalists — the closer will be the correspon-
dence between future product and present wages. The discount
then will be easy to calculate. Where the process is complicated,
long-stretched-out, and uncertain as to its outcome, the relation
between wages and product is a very loose one. Such an opera-
tion as the construction of the Panama Canal illustrates the maxi-
mum of uncertainty in the relation between product and wages.
It took years to build the Canal; it will take further years before
its effects on the ocean routes and on the cost of transportation
are worked out; and still further years before these changes affect
the international division of labor and the ultimate increase of
product due to increased geographical specialization. Those en-
gaged on construction work at the Canal could not receive wages
determined by the discounted value of the product of their own
labor. They received the current discounted value of similar labor
in those routine industries where experience had indicated the
output. The Panama Canal, as it happened, tho begun as a pri-
vate enterprise, was carried to completion by the United States
government, with virtually no regard to pecuniary profit. Under
such circumstances the particular product of the laborer could have
hardly the remotest bearing on the wages paid them. Even where
there is private investment and the ordinary calculation of prob-
able output and expected profit, every venturesome operation,
above all if it involves the making of new plant, is conducted under
the wage rates determined by the experience and the traditions of
industry at large. In such operations the business man exercises
his most characteristic functions, and, if successful, procures his
highest returns. He not only discounts, he speculates; and he pays
to his laborers the rate of wages fixed in those operations in which
the discount, on the basis of the current rate of interest and of the
ordinary return to the ordinary business man for his own labor, is
comparatively simple and calculable.

§ 6. Two qualifications must be borne in mind in this reasoning;
one with regard to the discount, the other with regard to the margin.

(1) It was assumed in the preceding section that the discounting
takes place at the current rate of interest. Here we must be on our

52-§6] THE GENERAL LEVEL OF WAGES 217

guard against reasoning in a circle. In previous chapters, interest
has been accounted for, in part at least, by the fact that there is a
"productivity" of capital; it results from the application of labor
in more productive ways. If this were the whole theory of inter-
est, we should reason in a circle in saying that wages are determined
by a process of discount. If interest depended simply on the excess
of what the laborers produce in the future over what is advanced to
them in the present, the rate of interest then would result from the
process of advances to laborers ; it could not also regulate or deter-
mine the amount of those advances.

But, as has already been pointed out in the previous chapters,^
the conception of the "productivity" of capital explains only the
demand price of capital. The conditions of supply and the equi-
librium of demand and supply are also to be considered. If there is
a regulator of interest in the way of a general or marginal time
preference — a minimum return necessary to induce saving and
accumulation on a large scale — then and then only have we an
independent determination of interest, and so a tenable theory of
wages as the result of an operation of discount. The chief evidence
which we have of such a fundamental supply price has been found
in the steadiness of the rate of interest during the modern period.
At all events, unless there be such a basic and independently de-
termined rate of interest, the conception of discounting labor's
product can lead to no consistent conclusion on the apportionment
of returns between laborers and capital-owners.

(2) A competitive margin is assumed, at which the process of
discounting is carried on with some approach to certainty- At
that margin there is nothing in the nature of rent or monopoly gain ;
nor is there exceptional profit by a business man of unusual capa-
city. We suppose a representative firm, carrying on its operations
at the margin of cultivation, securing for its owners and managers
ordinary business profits and interest on capital, but nothing
more. What is paid in wages here settles wages in the more prof-
itable establishments also; and what is paid in wages here is settled
by the process of discounting.

1 See Chapter 39, especially §§ 4, 5.

218 THE DISTRIBUTION OF WEALTH [52-§7

Here, again, the theory of wages connects itself with other parts
of the theory of distribution. The distinction between interest on
the one hand, and rent and monopoly gains on the other, depends
on the assumption of a competitive rate of return for capital — on
the existence of a broad margin where those returns only are secured
which are necessary to induce the investment and management of
capital. If there be no such margin, there is no ground for distin-
guishing between interest and the other returns to the owners of
capital and land.i And if there be no such margin, there is no
ground for saying that wages are in any determinate relation to the
product of labor. If the return to the owners of capital is only a
matter of accident, or the result merely of power in their hands, the
amount which they will advance to laborers is subject to no con-
trolling tendency. The most that can then be said is that the gen-
eral level of wages will depend on the relation between the number
of the laborers and the amounts which the capitalists are induced
to advance.

There is doubtless a lessening range of competition in modern
times. The margin is far from coextensive with the field of indus-
try; rent and monopoly profits play a larger part than in previous
generations. There is thus a wider divergence between wages and
the total discountable product of labor. The concentration of the
control of capital, and the growth of combination and monopoly,
suggest that competition may be in process of complete disap)-
pearance. If so, all our reasoning as to a normal rate of interest
or a normal rate of wages falls to the ground. Distribution then
becomes nothing more than a struggle between hostile forces.
But the same considerations which lead to a conclusion that there
is a competitive region in which the return to capital is settled, lead
to the conclusion that in this region the return to labor is also set-
tled. A very large part, probably the larger part, of modern indus-
try is still conducted under the leveling conditions of competition;
and there is an approximation of wages, by way of discount, to the
product at this margin.

§ 7. The fluctuations of wages above and below the general level

1 See Chapter 46, § 3.

52-§7l THE GENERAL LEVEL OF WAGES 219

determined by the discounting of the marginal product are much
affected by the conditions under which the advances are made.
Here, as elsewhere in the economic field, the working of the funda-
mental cause is obscured by the more superficial factors.

The employers pay wages in money. The money is used by the
laborers in buying goods and services — chiefly goods. Both the
extent and the continuity with which money advances are made,
and the state of the supply as to the goods bought with the money,
affect the fluctuations in the level of wages.

The store of things from which come real wages — that is, the
goods bought with the money wages — reaches the laborer's hands
thru a flow; as indeed all income reaches the consumers thru a flow.
We may use the simile of a reservoir, constantly drawn on, con-
stantly refilled. The stocks of the retail dealers constitute the
supply immediately available. Back of these are the stocks of the
wholesale dealers; back of these, again, the goods in process of man-
ufacture among the "producers." The very buildings and ma-
chinery may be said to contain — much as the raw materials do —
the potentialities of future consumable goods. The whole stock
of wealth in its various stages may be regarded, in the language of
Bohm-Bawerk, as one great subsistence fund, of which a part only
is available at once, the larger part being gradually made available
by the steady pushing of the unfinished goods toward the stage
where they are ready for enjoyment. So conceived, the whole mass
may be described as a reservoir, from which the community is con-
stantly drawing a stream of finished goods (and so of enjoyments),
and into which its labor is constantly replacing what is drawn off.

The flow of finished goods or available real income is evidently
elastic. The rate at which the reservoir can be tapped is subject
to considerable variation. In one sense, the income of the whole
community may be said to be predetermined ; more cannot be got
during a given period than the existing apparatus of production isi
capable of yielding during that period. In a sense, too, the income
of any particular class in the community may be said to be pre-
determined, in so far as the inflowing goods are already adapted to
the traditional tastes of different classes. But there remains a

220 THE DISTRIBUTION OF WEALTH [52-§7

considerable degree of adjustability — more or less rapid flow,
diversion of goods and materials toward one or another set of con-
sumers — and hence a response of real wages to variations in the
money advances from the capitalists.

The money advances from the capitalist-employers, again, are
affected by their expectations of gain. In times of hopefulness
and activity, money wages will be paid out more freely, and the
available supplies of goods will be drawn on with corresponding
freedom. In times of uncertainty and depression, the movement
will be a sluggish one. In good times, tho prices usually advance
faster than money wages, employment is more certain and con-
stant, and real wages (commodity wages) on the whole tend to
become larger. The business men and the investors secure between
them the excess of product over and above what has been advanced
to the laborers. If the excess is large, and if competition among
employers and investors is active, they will be led (especially in
brisk times) to make larger advances, and wages will gradually rise.
If the excess, tho large, is secured under conditions of monopoly,
or with the use of limited natural resources, the capitalist class
will reap extra gains; but wages will not be affected.

In the long run, the amount which can be drawn from the reser-
voir by the laborers will depend on what they put into it, as well as
on the competition of the capitalists among themselves. A high
general rate of wages for hired laborers thus depends on general
high productivity of industry — or, more precisely, on high mar-
ginal productivity — and on active competition among the owners
of capital. Where laborers are not hired, but work for them-
selves, the relation between their reward and the productivity of
their labor is obviously more direct and certain. The broad differ-
ences of wages which appear in different countries are explicable
by this main cause. If wages are higher in the United States than
in England and Germany, higher in these than in Italy and Austria,
higher in all European countries than in India, China and Japan,
the explanation is to be found in the varying productiveness of labor
in the several countries. So it is with the great changes in wages
from time to time. Since the middle of the nineteenth century

52-§8] THE GENERAL LEVEL OF WAGES 221

there has been a rise in general wages (commodity wages) in all the
countries of advanced civilization. The basis for that rise has
been the steadily growing productiveness of labor, due to the
manifold advances in the arts.

§ 8. Returning now to the conception of a discount and to the
relations between wages and interest, it is to be noted that a high
absolute rate of wages usually is found where the proportion of
total wages to total interest is comparatively small. The amount
of income of the interest-receiving classes depends on the quantity
of the advances made by them, and on the rate of the discount —
that is, the rate of interest. With the same rate, their income
tends to be larger as production becomes more "capitalistic" —
that is, as it spreads over more time w^ith the increasing use of plant
and the increasing elaboration of materials. Just as discount
figures more largely in the present value of a five-year note than in
that of a one-year note, so interest figures more largely in a com-
munity where the period of production is long and the capital per
laborer is large. The inequalities of income tend in this sense to
become greater as total income becomes larger. True, within the
capital-owning class itself, inequalities will not necessarily become
greater; for the number of persons owning capital may increase as
fast as its amount increases and ownership may be no more concen-
trated. But the absolute amount of income going to this class
tends to increase, and its share of total income tends also to in-
crease; whereas for the laborers, tho their aggregate income may
increase, their share of the total income of society tends to decline.
Hence it is that wages are high in those communities in which the
accumulation and investment of capital are great and in which the
total return to capitalists is large. Plant, machinery, huge collec-
tions of materials, an elaborate apparatus of production, are the
means by which high productivity of labor is normall}^ secured.
It is true that in new countries other conditions may bring about
high wages. Labor in them is likely to be confined largely to agri-
culture and other extractive industries in which virgin resources
are turned to account and in which there is comparatively little use
of elaborate fixed capital. Such was the situation of the United

222 THE DISTRIBUTION OF WEALTH [52-§9

States during the first century of its history; such is that of Canada,
Austraha, New Zealand. But in old countries the cause by which
high wages are made possible — a high productivity of industry —
is that very employment of much capital which brings a large
return to the capital-owning class. Great Britain iias higher wages
and a larger capitalist income than the countries of the Continent;
in all the European countries both are larger than Japan, China,
India. In general, the forces which make the total income of
society high and the general level of wages high, cause the propor-
tion of income which forms return on capital to become large.

This tendency, inherent in the growth of capitalistic production,
becomes accentuated in the degree to which there is departure from
competitive conditions. Monopoly gains and economic rent also
increase the proportion of total income which goes to the possessing
classes. Such gains, even tho they have not become so all-pervad-
ing as to wipe out the whole regime of competition, have become
of wider extent in modern times. In the main, they too are large
where prosperity is widely diffused, where the general productive-
ness of labor is great, and where the rate of wages is high. Like the
growth of interest pure and simple, their increase is the consequence
of large-scale production and of advancing population. They are
more readily subject to regulation and curtailment than interest,
and hence are not so inevitably the consequences of modern indus-
try. But some degree of accentuation in inequality seems una-
voidable from this cause also. An enlargement of the leisure class
and a diminution of the proportion of income going to the laborers
are the natural concomitants of material progress under the sys-
tem of private property.

§ 9. The doctrine stated in this chapter, that wages depend on
the discounted marginal product of labor, will seem to many per-
sons a dim and abstract one, remote from the problems of real life.
Any theory concerning wages at large must deal with distant forces
and nebulous consequences; it has of necessity an appearance of
unreality. Partly for this reason many economists have refrained
from undertaking a general statement. Yet this defect is inherent
in almost all the doctrines on the ultimate causes of large economic

52-§9] THE GENERAL LEVEL OF WAGES 223

phenomena. The same apparent lack of connection with the de-
tails of industrial life appears in the proposition that interest is
determined by the relation between marginal productivity and
marginal saving; that the quantity of the circulating medium de-
termines the general range of prices; that the equilibrium of inter-
national demand determines the varying money incomes and price
levels of different countries. All these propositions search out
truths which are of direct and practical concern, even tho they
state tendencies which are slow moving and loom up indistinctly.
Like the others, the doctrine here presented concerning the general
level of wages considers ultimate forces; and these are the very
forces which must be scanned and weighed in any endeavors to
raise the general rate. An all-embracing and considerable advance
can come, under the regime of private property, only if produc-
tivity is increased, if the margin is keyed up, if the discount is
narrowed by the accumulation and competition of capital. Every-
thing that raises the productive margin, that lessens the rate of
discounting, tends to raise wages; and in the last resort it is only
in these ways that a general advance can be brought about.

Is there under these conditions the possibility of a large improve-
ment in the condition of the mass of mankind? The usual rate of
wages for ordinary labor in the United States was during the first
decade of the twentieth century not far from $800 a year. This is
much better than savagery, much more than what most men have
been able to get at almost any time in any country. Yet it is
much less than is needed for a life that seems to the more fortunate
minority worth living. It gives little margin above the bare physi-
cal needs, little chance for leisure, for spontaneous activity, for cul-
ture, for full development of personality. If no more is in pros-
p>ect, the institution of private property stands not only on the
defensive but in a position that cannot long be defended. Yet
something better is by no means incompatible with the system.
We may hope for a gradual rise in v\^ages, under the influence of the
forces considered in the preceding pages, above all from the for-
ward march of the technical arts. Great as the advance of the
arts has been during the last century or two, it is likely to be even

224 THE DISTRIBUTION OF WEALTH [52-§9

greater during the centuries to come; and the main strength of the
individualist and capitaUst system is that it promotes industrial
progress more effectively than the rival system of collectivism. It
is at least an open question whether it will not bring in time a dif-
fusion of comfort and economic security among the masses greater
than can be attained under any other form of industrial organiza-
tion.

That this end may be reached, it is necessary, first, that very
considerable modifications shall be made from the traditional rules
and limits of the system of private property; and second, that the
numbers of the manual laborers shall not increase so fast as to
swallow up all the possibilities of gain. The fii'st of these con-
ditions will be considered in the two later Books, on Problems of
Labor and of Economic Organization. The second, that of popu-
lation, will be considered at once, in the chapters immediately
following.

CHAPTER 53
Population and the Supply of Labor

Section 1. The Malthusian theory, how far strengthened by biological
science, 225 — Sec. 2. The maximum birth rate, the minimum death
rate, the consequent possibihties of multiplication. In what sense there is
a tendency to rapid multiplication; the positive and preventive checks,
226 — Sec. 3. The actual birth rates and death rates of some countries in
modern times. A high birth rate ordinarily entails a high death rate.
Explanation of exceptions. The situation in the United States, 230 —
Sec. 4. Does a high birth rate cause low wages, or vice versa? Inter-
action of causes. A limitation of numbers not a cause, but a condition,
of general prosperity and high wages, 236 — Sec. 5. The standard of
living affects wages, not directly, but thru its influence on numbers.
Fallacies on this subject, 237 — Sec. 6. Mode in which the modern
decline in the birth rate has taken place, 239.

§ 1. The supply of labor depends on the increase in the num-
bers of mankind. The problems concerning the growth of popu-
lation bear not only on the distribution of wealth, but on other
parts of economics also, not to mention wider social questions; and
there is divergence of practise among economists as to the place
which they should have in the exposition of the subject. Popula-
tion is considered in this book at a later stage than is often assigned
to it. Although discussed in the following pages mainly in con-
nection with the theory of distribution, it will lead to some digres-
sions from that topic.

A long controversy has been carried on regarding the Malthusian
theory. In the early part of the nineteenth century ^ IMalthus set
forth that the cause of low w^ages and poverty lay in the large num-
bers of mankind ; that there was a tendency of population to press
upon subsistence and keep wages low; that a rise in w^ages could

1 The second edition of the Essay on Population (1803) is that in which Malthus
stated his doctrines in the form in which they continued to be maintained by him
and his followers.

225

226 THE DISTRIBUTION OF WEALTH [53-§2

not take place unless the tendency to increase among the laboring
classes was checked; that in the absence of a check no plans for
improvement in the condition of the mass of men had any prospects
of success; and that for these reasons all proposed reorganizations
of society were doomed to failure. Moreover, Malthus was not
hopeful that any salutary check would in fact be applied. It can-
not be said that he was hopeless; but the drift of his teaching, and
certainly the point of view of his followers, was that the number of
laborers was likely to increase very rapidly and that wages would
probably be kept down to a subsistence level. In this state of
facts he found a serious obstacle/atmost an insuperable obstacle,
to any great improvement in the material welfare of the mass
of mankind.

Some parts of Malthus's teaching have been sustained by the
course of thought since his time. Man is an animal, physiologi-
cally like any other; and the possibilities of his increase in numbers
are as unlimited as they are for any form of life. It is an odd cir-
cumstance that Darwin, reading Malthus's Essay, was led to the
reflection that not man only, but any sort of creature, has the pos-
sibility of indefinite increase; and hence reached the conclusion that
there is an unceasing struggle for room and sustenance, and a sur-
vival of those best able to cope with their surroundings. Darwin's
own wider conclusion then reenforced Malthus's views as to the
human species. The elephant can double his numbers every one
hundred years, man every twenty-five years; cats bring forth six-
fold twice or thrice a year, and fishes can reproduce hundreds and
thousands of their kind each season. Any species that multiplies
at its maximum rate must eventually outrun the means of subsist-
en|^

§ 2. Let us look more closely at the possible increase in human
numbers and compare it with the rates of increase which we actu-
'ally find. The possible increase must depend on the possible ex-
cess of the births over the deaths. The maximum birth rate in a
normally constituted population is at least 45 per 1000; that is, for
every 1000 living persons there may be as many as 45 births each
year. If a population were made up solely of men and women of

53-§2] POPULATION AND SUPPLY OF LABOR 227

the reproductive ages, the rate might be for a brief time very much
higher. If a population contained merely an abnormal propor-
tion of persons of these ages (as is the case in regions where there is
a steady influx of immigrants), the rate again might be considerably
higher. Even for a normally constituted population, with the due
proportion of children and aged, the figure 45 is below the physio-
logical maximum. That maximum is probably as high as 50 per
1000, possibly higher. For the present purpose, that of comparing
possible increase with actual increase, it will be best to take the
figure which certainly can be reached — say 45 per 1000 in each
year.

On the other hand, the minimum death rate is certainly as low
as 15 per 1000 each year. Here, too, a normally constituted popu-
lation must be assumed. A population having an undue share of
persons in the prime of life would easily show a lower death rate;
while one having — say as the result of emigration of the able-
bodied — an undue share of very old and very young would hardly
be able, even under the most favorable conditions, to show a rate so
low. In a normally constituted population a rate as low as this is
certainly possible. Some such figure as 15 per 1000 would be
found if all preventable causes of death were done awaj^ with; if
there were no deaths from curable diseases, and none due directly
or indirectly to poor nourishment, insufficient care, unsanitary
surroundings; if the end came only in peaceful old age, or from
disease which could; be prevented by H«rcare and ae^^nedical skill.
Indeed, if all these possibilities were realized, the rate would cer-
tainly be lower. There are populations in which a rate nearly as
low is, in fact, found ; and it is certain that in these there are many
deaths which could have been prevented. Medical science, more-
over, is rapidly advancing. It has very greatly lowered during the
past generation the death rate from infectious and contagious dis-
eases; it may reduce as markedly that from organic and degenera-
tive diseases which are most fatal to adults. The minimiun death
rate may be expected to become lower and lower.i

1 Newly settled regions, and rapidly growing cities, into which persons in the
prime of life are fiocking, show death rates as low as 12 or 13 per 1000. These rates

228 THE DISTRIBUTION OF WEALTH [53-§2

No race or country concerning which we have accurate infor-
mation exhibits either the maximum birth rate or the minimum
death rate as here stated. But for the broad conckisions with
which we are concerned, it is not necessary to be precisely accu-
rate about these extremes. It suffices to indicate how wide is the
possible variation between the birth rate and the death rate, and
how great is the possible increase of population. If births are 45 per
1000 annually, and deaths 15 per 1000, the excess of births over
deaths, or increase of population, is 30 per 1000. With this rate
of increase, numbers will double every 23 years. Malthus him-
self deduced a similar possible rate of increase from what he found,
or thought he found, in an actual case. " In the Northern states of
America . . . the population has been found to double itself, for
above a century and a half successively [that is, from 1650 to 1800],
in less than twenty-five years." Malthus thought that an increase
even more rapid might take place, and that the doubling period
might be as low as fifteen years. This probably exaggerates the
potentiality of increase. But it is certainly within the bounds of
possibility that the numbers of mankind should double within such
a period as has just been indicated — in a quarter of a century or
thereabouts.

Not only is there a possibility of so rapid an increase as this; there
is a tendency toward it. By tendency here we do not mean what
is often meant by the term — probability that in the long run a
given result will be reached. This is the sense in which we can say
there is a tendency that commodities, freely produced, will sell for a
price determined by their expenses of production. In speaking of
the tendency of the population to increase at its maximum rate, we
mean something difi^erent — that there are forces in pperatipn
which, unless counteracted, will bring, about the stated result. In
the same way we say that there is a tendency for all bodies to fall

are sometimes paraded as evidence of unusual healthfulness; they are due (when not
explained by inaccuracy of the figures) to the absence of the normal proportion of
children and the aged, among whom mortality is greatest.

It is reported that in New Zealand a death rate of only 10 per 1000 was found
during a ten-year period (1887-1896), and was not accounted for by any very
exceptional age distribution (Newsholme's Vital Statistics, p. 88). Such a rate
is extraordinarily low, and raises suspicion of defective counting.

53-§2] POPULATION AND SUPPLY OF LABOR 229

to the earth; not that they are in fact hkely to do so, but that they
will unless something prevents. The tendency of population to
increase results from the reproductive instinct and the love of
parents for their offspring. These are universal and powerful
forces. They operate without restriction among animals. Each
species of animals tries to multiply at its maximum; tries, that is,
in the sense that it will do so unless by an intervening cause num-
bers are kept down.

But no species of animal can, in fact, increase at its maximum
rate. If it did so, it would in time crowd out all others and alone
would occupy the earth. Nor is man an exception. A continual
doubling of his numbers every quarter of a century cannot take
place. Only under exceptionally favoring circumstances can such
a rate be long maintained, WTien a civilized population, having
the tools and knowledge acquired during slow centuries of growing
civilization, suddenly comes into possession of a new country, it
finds for a while limitless room for growth. Such was the situa-
tion in the North American colonies during the period to which
Malthus looked for an example of the possibilities of increase.
Such has been the situation of the people of the United States dur-
ing the greater part of their history, of the Canadians, the Aus-
tralians, the Argentines. These are rare cases in the history of the
human species. They are analogous to the comparatively^ rare
cases where a new animal — a moth, a bird, a mammal — migrates
into a country hitherto strange to it, and can multiply for a while
without finding its food scarce or its enemies too strong. In any
long-settled country mankind cannot increase at anything like
the maximum rate. The fundamental reason for this is to be found
in the tg^ndency to diminishing. returns from the soil. On any given
area, that tendency shows itself for all agricultural produce. It
may be counteracted in some degree by improvements in the arts.
But a continuous doubling of numbers every quarter of a century
must eventually encounter the obstacle of increasing difficulty in
securing the food supply.

The tendency toward increase in population must then be coun-
teracted ; and it may be counteracted in two ways, to w^hich Mai-

230 THE DISTRIBUTION OF WEALTH [53-§3

thus gave the names PQ^ti^^and preventive^checks. By positive
checks he meant those which cut down numbers aheady brought
into the world — starvation, disease, war, misery in all its forms.
By preventive checks he meant those which prevent numbers from
being brought into the world. The first operate thru a high death"
rate, the second thru a low birth rate; in other words, the first thru
an excess of deaths, the second thru a limitation of births.

It would not be going very far astray to say that the extent to
which one check or the other check prevails is a test of the advance-
ment of civilization. The question is, to be sure, not one of yes or
no, but one of more or less. Mankind rarely exercises the power
of reproduction to the full. Some limitation of births appears in
ever^-society w^hich has progressed beyond the very lowest stage.
As civilization advances, more and more forethought is exercised.
Among all peoples, there is some operation of the positive check
also. Except among a small stratum of the well-to-do, more beings
are brought into the world, even in the most advanced countries,
than can survive. Numbers are kept down in part by a death rate
needlessly high — that is, a death rate above the minimum from
old age and irremediable disease. /^The more there is limitation of
births, the higher is the plane of ciyilizatioi;^; the more excess of
deaths, the lower„.'-1

§ 3. With these general principles in mind, let a look be taken
at the birth rates and death rates found in our own day in some
of the principal countries. In the following table the maximum
birth rates and the minimum death rates are first given, for ready
comparison ; then follow figures for the rates in some selected coun-
tries. The " doubling period " means the number of years in which
population would double if the given excess of births were steadily
maintained.

Note the wide divergence in the birth rates. Roumania and
Hungary and Saxony have rates not very much below our sup-
posed maximum. Other countries have markedly lower rates.
France, which comes at the bottom, has a birth rate about one
half that of Roumania and Hungary. On the other hand, there
are divergences almost as striking in the death rates. The death

53-§3l POPULATION AND SUPPLY OF LABOR

231

rate in Roumania and Hungary is nearly 30 per 1000, or twice as
high as the minimum. At the lower end of the list, the death

Birth and Death Rates
Annual Averages per 1000 of Population, for the Period 1891-1900

Maximum and Minim.um

Roumania

Hungary

Saxony

Bavaria

Italy

England and Wales

Sweden

France

Births

45 (Max.)

40.7
40.6
39.5
36.5
34.9
29.9
27.2

Deaths

15 (ilfira.)

29.3
29.9
24.0
25.4
24.2
18.2
16.1

Excess of
Births

30 (Max.)

11.4
10.7
15.5
11.1
10.7
11.7
11.1
0.7

Doubling

Period
(in Years)

61
65
45
62
65
59
62
990

rate sinks to much more moderate figures — little above 20 per
1000 for France, and noticeably below that figure for England and
Sweden.

In general, a high birth rate is accompanied by a high death rate.
Such is the case in all the countries in the upper part of the fist
— in Roumania, Hungary, Saxony, Bavaria, Italy. This cor-
respondence of high birth rates with high death rates means that
Malthus's warnings and forebodings are applicable. Here are
countries in which population is pressing on subsistence. It is
tr\dng to increase faster than the means of support make possible,
and the positi\;;e check is in operation. Not the positive check in
its most extreme form; the birth rate is not at the maximum; some
limitation of births there is. But more children are born than can
survive and become adults, and more persons become adults than
can survive to a peaceful old age. The populations are ill-fed, ill-
clad, ill-housed, ill-warmed, ill-cared-for in sickness. Hungary
and Roumania are in the worst case; Saxony, Bavaria, and Italy are
in a bad case. In all these countries, an indispensable condition
for a permanent improvement in the condition of the mass of the

232 THE DISTRIBUTION OF WEALTH [53-§3

population is a lowering of the birtli rate — a relaxation of the
pressure on the means of support.

In such countries the death rate is always highest among the
very young. Under the best conditions, the period of childhood
is one of great sensitiveness to physical ills. Even where the gen-
eral death rate is very low, as in the Scandinavian countries and
in some Australian states, ten per cent of the children die before
completing the first year of life. Between ten and fifteen per cent
die in England, France, and Massachusetts and New York.
Twenty per cent and more fail to live one year in Austria and Hun-
gary, twenty-five per cent in Russia; there are extreme cases where
one third of the babies have died. Again, taking the children
under five years of age, we find that out of every 1000 born, there
died before attaining the age of five :^ —

in Bavaria 393

in Austria 389

in Italy 378

in France 251

in England and Wales 249

i 1 Sweden 222

A high death rate among children, such as appears in the coun-
tries having the high birth rates, means simply that babes are
brought into the world who cannot survive. It means suffering,
with never a chance of a happy outcome. Those children who do
survive and grow to mature age must face low wages and hard con-
ditions of life; yet they in turn marry early and procreate freely-.
\ The round of misery goes on without ceasing^ U~bt. ~-| 7 //
Consider now some of the other countries. Note first that the
rate of increase — the excess of births over deaths — is quite as
high in England and Sweden as in the other countries. It is about
11 per 1000 annually. But both birth rates and death rates are
lower in Sweden and England. Tho the birth rates are higher in
Hungary and Bavaria, their populations are not in fact increasing

1 Figures of this sort can be found in any book on vital statistics. Those here
cited may be found in Newsholme's Vital Statistics, p. 130 (taken from Bertillon),
Bailey's Modern Social Conditions, p. 224, and the Massachusetts Registration
Reports. For a comparative survey, with figures for the United States, see E. B.
Phelps, in Publications American Statistical Association, December, 1910.

53-§3] POPULATION AND SUPPLY OF LABOR 233

faster. They are trying to increase, but are kept down by the
positive check. In England and Sweden the people are not trying
to increase so fast; the birth rate is lower; the preventive check is
in operation to a greater degree. Obviously, the condition of Eng-
land and Sweden is much the happier. They escape an immense
amount of avoidable suffering. If their birth rates were to rise
to those of the other countries, their death rates would almost
surely go up in some corresponding degree. Numbers would not
increase more rapidly, but would simply be prevented from in-
creasing thru a different and more miserable process.

The fact that population advances with some rapidity in these
happier countries, and yet does not bring with it high death rates,
is accounted for in various ways. In Sweden it is due chiefly to
emigration. Such figures do not necessarily state what is the
actual gain in numbers in the several countries; they indicate only
what gain would have taken place by internal growth. The final ,]
effect on nmnbers depends also on the inflow and outflow — on j
imjnigration and emigration. The emigration from Sweden dur- \
mg the period under consideration was large relatively to the popu-
lation. Except for this, either the death rate would have been
higher or the birth rate lower; for Sweden is not a country with
such possibilities of expanding production as to enable its numbers
to grow as they would have done by natural increase alone. It is

to be noted that some of the other countries also have found an

outlet in emigration — notably Italy. Had it not been for a
great stream of emigration, Italy also would have had a death rate
even higher than that which she shows; or else her birth rate would
have been smaller.

England, too, has found some outlet in emigration; but not to a
great extent during the decade to which the figures apply. In the
main, her excess of births over deaths has meant an actual increase
of the number in the country. Numbers have been able to grow
because England's powers of production have kept pace with them. I
This could hardly ha\'e been the case if England had supported
them and supplied them with raw materials from her own soil.
But she is a great manufacturing country, obtaining food and ma-

234 THE DISTRIBUTION OF WEALTH [53-§3

terials in exchange for exports of manufactures as to which there js_
no obstacle from diminishing returns. Exchange of this kind was
the basis of England's advance in population and wealth during
the nineteenth century. So long as it continues, and continues for
expanding numbers, she can maintain a high birth rate and yet
a low death rate. When growth of this sort slackens — when it
becomes more difficult to buy ever increasing food supplies by ex-
porting manufactured goods — England must either have a lower
birth rate or a higher death rate. The former alternative will
almost certainly be chosen; indeed, a slackening in the rate of
growth has already shown itself. As will appear more fully in the
sequel, this is the mode in which the populations of all advanced
countries are likely to accommodate themselves to conditions of
greater pressure. '

France is the classic country of the preventive check. Her popu-
lation has been practically stationary for several decades; or rather,
it has failed to grow by natural increase. Such slight gain in total
numbers as appeared has been due to immigration. The death
rate in France is not as low as it might well be. In part, it is true,
her comparatively high death rate may be accounted for by the
mere fact of her population having been for some time stationary.
This brings about an age distribution with a large proportion of
older persons, among whom the death rate must be higher. But
it is also true that France, tho a great and prosperous country, yet
has — what country has not? — strata in her population, both
industrial and rural, in which the conditions of life are hard and the
deaths are largely due to preventable causes. None the less, her
birth rate on the whole is low, and her population does not press
hard on her resources. Especially in the rural regions, the popu-
lation of France is eminently thrifty, self-respecting, careful of the
future; not in every respect a condition thoroly satisfactory, but
vastly happier and more prosperous than that of Italy, Hungary,
or Saxony.

For the United States as a whole, trustworthy figures of births
and deaths are lacking. The Census authorities state a birth rate
of 35.1 per 1000 for this country in the decade 1890-1899, and a

53-§3]

POPULATION AND SUPPLY OF LABOR

235

death rate of 17.7. But both figures are open to suspicion. The
death rate is stated on the basis of inadequate census returns; and
the birth rate rests on compHcated calculations, in which the uncer-
tain death rate enters. It is to be expected that a country whose
opportunities for economic growth are such as the United States
possesses, should have a high birth rate; while general prosperity
and ease would lead one to expect a relatively low death rate. But ,
the United States is a very heterogeneous country, and any general
averages for its vital statistics, even if based on accurate figures,
would be of uncertain significance. The birth rates, for example, '
of the colored population, especially in the South, are high; the
death rates here are also high. The colored population is in a con-
dition analogous to that of Roumania and Hungary. The white
population of the Soutk also has a high birth rate, and a compara-
tively high death rate, tho by no means so high as that for the
negroes. In the Central, and Western parts of the country the
birth rate probably is relatively high, the death rate low. In the
Eastern states, and especially New England, the birth rate is com-
paratively low. Thus in Massachusetts, in which state alone ac-
curate registration has been continuously maintained, the birth
rate has been for some decades not far from 25 per 1000. The
death rate in that state has been low, from 17 to 19 per lOOO.^ But
here again the population is not homogeneous, and the figures need
to be interpreted. Massachusetts has had a steady flow of immi-
grants; hence her population includes an unusual proportion of peo-
ple in the prime of life, which in part accounts for the low death
rate. On the other hand, there is a marked dift'erence between the

1 The birth rates and death rates in Massachusetts have been as follows,
arranged for quinquennial periods: —

5 years ending 1880
5 years ending 1885
5 j'ears ending 1890
5 years ending 1895
5 years ending 1900
5 yoars ending 1905

Births

Deaths

24.2

18.8

25.0

19.8

25.8

19.4

27.6

19.8

27.0

18.0

24.2

16.4

236 THE DISTRIBUTION OF WEALTH [53-§4

foreign born and the native born. The birth rate is very much
higher among the foreign born, while among the native born it is
remarkably low — a phenomenon of which more will be said pres-
ently. The variations between different parts of the United States
are as great as those between different European countries.

§ 4. High birth rates, high death rates, backward industrial
conditions, low wages — these commonly go together. But
which is cause and which is effect? The unqualified Malthusian
view is that the pressure of population, indicated by a high birth
rate, is the cause from which all the evils flow, and that the one ef-
fective m,ea,ris of improvement is a lowering of the birth rate. But
the situation is not quite so simple as this.

High birth rates and misery are largely interacting causes. A
high birth rate commonly ^^afijp, in an old country, mi^^r}-; and
migfiry, in turn, often in£j;g§^s the birth rate. When a people is
poor and sees no prospect of escape from poverty, it is in danger
of becoming demoralized. Multiplication takes place without
thought of the future, since the future seems in any case without
hope. That very multiplication shuts the door to hope. In mod-
ern times, such a fatal round of interacting causes often appears
in manufacturing districts where there is much employment of
women and children: as, for instance, in the textile districts in
Saxony of which Chemnitz is the center. There women and chil-
dren offer themselves for employment because people are many and
wages are low. The very opportunity for securing employment,
on the other hand, promotes multiplication, since the income of the
family is eked out by the earnings of mother and offspring. Where
such conditions have established themselves, the way of escape to
something better is hard to find. The causes of demoralization
and niisery become cumulative. Even in countries where the gen-
eral conditions are good, there is commonly a low-lying stratum of
the population in which there are high birth rates, high death rates,
pressure for employment, low wages — connected phenomena, yet
no one the certain cause of the other.

None the less, it is clear that restraint on the increase of numbers
is one essential condition of improvement. Stated in this way, the

53-§5] POPULATION AND SUPPLY OF LABOR 237

Malthiisian propositijsiiisJiiiipregnable. A limitation of numbers
is not a cause of bigli wages, but it is a condition oi tbe maintenance
pf hi^h wage^. y^

High wages depend fundamentally on high productivity of in-
dustry. In new countries, where the increase of population is not
confronted by limited natural resources, and where capital also in-
creases rapidly, the laborers may multiply fast without having to
face harsh terms. A long period may elapse before signs of pres-
sure appear. But in countries already well peopled, the fundamen-
tal limitation from diminishing returns on land is ever present.
Unless there be some exercise of the preventive check, no measure
toward general improvement can be effective.

But mere exercise of the preventive check can accomplish noth-
ing. Only if there be the other conditions needful for prosperity

— improvements in the arts, increasing capital, greater produc-
tivity of industry — will the general social income, and wages as
part of that income, show a tendency to rise. Then restraint on
multiplication, tho not in itself a cause of gain, will enable the gain
to be maintained. It is certain that if population increases at its
maximum rate, or anything like that maximum, high birth rates
will bring not only high death rates, but low wages also. But if
there be forces in operation which raise the productivity of indus-
try, a lowered bhth rate will enable more favorable conditions to
be attained and held.

§ 5. The standard of living is often spoken of as the fundamental
cause determining wages. There is a sense in which it is a fun-
damental cause. Yet it acts, not directly, but thru its effects on
numbers. A high standard of living does not in itself increase
wages. It may serve to lower or to keep low the birth rate, and
thereby create one of the conditions on which maintenance of high
wages usually depends. But unless other conditions are present

— a large demand for laborers, which comes at bottom from a large
productiveness of industry — a high standard of living brings
nothing to pass.

There are curious fallacies on this subject. A notion is preva-
lent among many workmen of the upper tier (mechanics and the

238 THE DISTRIBUTION OF WEALTH [o3-§5

like) that cheap Hving is bad for them and free expenditure good.
They suppose that if they economize (use cheaper food, for exam-
ple) advantage will somehow be taken of them and their wages re-
duced; whereas if they "live well," their wages will be kept up.
Hence persons who propose economical ways of using and cooking
materials for food are suspected of being in a covert conspiracy to
bring down wages. Nothing is more irrational. Every way of
getting as much as possible with your income — of so directing
expenditure that the maximum of utility is secured for each out-
lay — serves to increase the effectiveness of the forces which make
for prosperity. What laborers get depends in no direct way on
what they spend, or on their standard of expenditm-e. It depends
on their numbers as one factor; and the standard of living has an
effect on their wages only in so far as it has an effect on their num-
bers. Some economists have been no less guilty of confusion on
this topic than the laborers themselves. They have discussed the
standard of living as if it were a force acting directly; whereas it
acts only indirectly.

This proposition, like so many others in economics that are es-
sentially true, needs some qualification. Tho a high standard of
living exercises an influence on wages chiefly thru its effect on num-
bers, it does have some effect also on the bargaining process. The
first step in the settlement of the wages of hired laborers is a con-
tract with an employer. All sorts of factors bear on the contract;
not only labor organizations — of which more presently ^ — but
estabHshed traditions as to what are "fair wages" or "Hving
wages." These are vague and often question-begging phrases;
men's notions of what is just pay or living pay are usually settled
simply by the rates to which they are habituated. But the fact
of habituation counts as one of the elements in bargaining. An
established standard of living will cause workmen to stick more
stubbornly to a demand for what they regard as decent wages.
Within the debatable ground subject to the higgling of the market,
a high standard of living thus may have some direct effect on the
outcome.

» See Cnapter 57.

53-§6] POPULATION AND SUPPLY OF LABOR 239

Tho a high standard of living, showing itself in a lowered birth
rate, establishes itself with difficultj^ in a population steeped in
poverty, the difficulty of raising the standard is not so great as
many of the older writers supposed. They thought that a real
advance could come only by some sudden uplift, giving time for
the establishment of new habits. From this point of view, the
outlook gave little hope; for nothing is more difficult to bring about
than a sudden change in social and material conditions. Happily,
this opinion has been shown bj^ the course of recent history to be
unfounded. During recent generations, there has been in the
more advanced countries a slow and gradual improvement in wel-
fare, and with it a slow and gradual fall in the birth rate. All the
leading countries show a declining birth rate, side by side with a
death rate declining still more. The change is most unmistakable
(as will presently appear) among the well-to-do, but it appears also
in the upper strata of the workingmen, and, more faintly, among
the lower tiers of the laborers. It is gradually affecting all classes
and all countries. It is both a cause and a result of greater pros-
perity, and both a cause and a result of a higher standard of liv-
ing. It bids fair to have more and more important consequences
as time goes on.

§ 6. The birth rate in all civilized countries has shown a decline
since the middle of the nineteenth century. Thus in England it
was 35 per 1000 in the decade from 1850 to 1860; in 1900-1905
it was about 27 per 1000. In France during the same period
it went down from 26 per 1000 to 21. In Germany the decline
was less striking, but none the less unmistakable, from 36 or
37 to 33 or 34. There is evidence that a similar change went on in
the United States thru the nineteenth century. ^ In other words,
there has been an application of what INIalthus called the preven-

1 Figures on this subject can be found in anj' statistical compendium. For a
careful discussion and selected figures, see MajT's Statistik und Gesellschaftslehre,
Vol. Ill, pp. 113-114; and for the United States W. F. Willcox's paper inthePuWi-
cations American Statistical Association, 1911, No. 2. Professor Willcox has brought
out the surpri.sing fact that the decUne in the United States has not been of recent
origin, but has gone on continuously since 1800. See also two admirable papers,
one by Messrs. Newsholme and Stevenson, the other by Mr. Yule, in the Journal
Royal Statistical Society, 1906, pp. 34, 88.

240 THE DISTRIBUTION OF WEALTH [53-§6

tive check. But the change has taken place by a process different
from that which Malthus recommended and expected. Mai thus
desired that the time of marriage should be postponed and that
marriages should take place at a later age. Were this done, the
marriage rate would decline, because of the deaths of some persons
who might have married; a change, however, which would be
slight unless the postponement was very marked. The birth rate
too would decline somewhat, because of the shorter duration of
fertile married life and because of the lesser fertility of the later age
periods. But it is not by these measurable physiological influences
that the result desired by Malthus has come to pass. ■sJCitg^.^iJn
cause has been deliberate interference with the natural and
biological processes. The marriage rate in most countries, tho it
shows a slight tendency to decline, has varied little. It is usually
not far from 8 per 1000, and very nearly the same in France, in
Germany, and in England ; yet these countries have very different
birth rates. Nor has the average age at marriage shown a sensible
change. It is the number of children per marriage, varying tho it
does from country to country, that tends to become smaller in al-
most all countries; unless indeed, as in France, it has reached a
minimum where it just balances the number of deaths. There is
no question that this general situation — marriage rates virtually
stationary and yet declining birth rates — is due to deliberate
abstention from propagation. Married couples have fewer chil-
dren than before, by deliberate intent. The tendency is more
marked in some countries than in others; more marked, for ex-
ample, in Protestant countries than in Catholic. It appears among
the well-to-do more unmistakably than among the poor, yet it is
spreading to all classes. It raises some large questions, both as
regards the general problems of population and as regards those of
social stratification. To these questions we shall turn in the next
chapter.

CHAPTER 54
Population, continued

Section 1. Differences between social strata in birth rates, and their relation
to varj'ing standards of living, 241 — Sec. 2. The main cause of the
general tendencj' to lower birth rates is social ambition. Its connection
with private property and individualism. Illustration from native-born
and immigrants in the United States, 245 — Sec. 3. Is the preventive
check being carried too far? Eugenics and race suicide, 249.

§ 1. Between the several social classes or non-competing groups
there are variations in birth rates and death rates no less marked
tBaiT the variations between different countries. Differences
within any one country are even more significant then the differ-
ences between countries, for they bring into fuller light the nature
of social stratification and the connection between standards of
living and ruling rates of income. The statistical evidence on this
part of the subject is comparatively meager; on the other hand,
the observation of everyday life goes far to make plain the general
situation.

First, consider the nature of the statistical evidence. Marriage
takes place later among the well-to-do classes than the working-
men. The average age at marriage of bachelors and spinsters {i.e.
for first marriages) was found to be in Great Britain, in 1890: ^ —

Miners

Artisans

Shopkeepers

Professional and independent classes

1 The often-cited figures of Ogle, in Journal Royal Statistical Society, 1890,
pp. 274-275.

241

242

THE DISTRIBUTION OF WEALTH

[54-§l

Another indication of the same situation is found in the fact that,
in Great Britain at the same date, out of every 1000 miners who
married, 704 were under 25 years of age, while out of every 1000
persons of the professional and independent classes only 151 were
under 25.

The later age of marriage in itself tends to bring a smaller birth
rate among the well-to-do. But the birth rate is smaller to a de-
gree far beyond what is explained by this circumstance alone.
The discrepancies between the social classes are striking. In Ber-
lin an elaborate examination showed that the married women in
the poorest quarters had nearly twice as many births as those in
the richest, and that the inverse relation between birth rate and
prosperity held thruout the scale. For every 1000 married women
of child-bearing age (15-45) there were in 1900: —

236 births in the poor st quarters
212 births in the next poorest quarters
191 births in the next poorest quarters
180 b-rths in the next poorest quarters
161 births in the next poorest quarters
127 bi ths in the richest quarters

It is not often that direct comparison of this kind (between the
number of married women and of births) is feasible. But it has
been frequently shown that in comparison with the total number
of women (married and unmarried) of child-bearing age, the num-
ber of births is large for the poor, small for the rich. This result
appeared for all the German cities from the investigation just re-
ferred to; thus, to take one example, in Hamburg the births per
1000 women of child-bearing age (15-45) were 59 in the richest
quarters, 151 in the poorest quarters. An older and much-quoted
set of figures for various European cities gave the number of births
(per 1000 women aged 15-50) thus: —

London

Very poor quarters

Poor

Comfortable . .
Very comf oi table .

Rich

Very rich . . .

Pabis

Berlin

Vienna

108

157

200

129

164

114

155

153

10-

147
140
107
107
87
63

54-§l] POPULATION (Continued) 243

In Boston the average birth rate for the whole city was, in 1900-
1904, 27 (per 1000 inhabitants); in the ward inhabited chiefly by
the rich it was only 13 per 1000; in wards of the poor it was from
28 to 36 per 1000. In the ward where the newly arrived Italians
cluster, it was 46. ^

It is part of the same phenomena that in the United States the
birth rate is much lower among the native born than among the
foreign born. The native born are on the whole those of larger
incomes and better social station. In Michigan, for a period of
25 years, from 1870 to 1895, the number of children per 1000 women
between the ages of 15 and 45 was for the native-born women about
120 (ranging from 111 to 127) and for the foreign-born women
about 230 (ranging from 221 to 235).

Similar figures as to varying death rates are not easy to get; but
they are not needed to show the salient facts. The higher death
rate among the poor, especially for infants and children, is too sadly
familiar. Every poor quarter swarms with children, and in every
poor quarter the chance of survival to maturity is less than in a
well-to-do quarter.2

These variations are the evidences and the consequences of dif-
ferences in the standard of living; and they bear the same relatioiT
to the standards of living among social groups as the similar varia-
tions do to the standards of living in different countries. The rea-
son for low remuneration in any given group is that the numbers in
that group are large relatively to the demand for the services
yielded ; in other words, because the marginal utility or vendibility

1 The figures for Berlin and Hamburg are from Momberfc, Siudien zur
Bevolkerunasheu'eginig in Deutschland, pp. 149, 150. An excellent survey of all
the e^adenoe on this subject for various countries is ?iven in Mombert's book. The
figures for Paris, Berlin, etc., are Bertillon's, in the Bulletin de Vlnstitut Internal,
de Statistique, Vol. XI, Part 2, p. 163; those as to Boston from Wolfe, The Lodging
House Problem in Boston, p. 128. Figures such as Bertillon's exaggerate the differ-
ences, because rich quarters contain many unmarried women servants, whose pres-
ence brings down the birth rate in comparison with the total number of women of
child-bearing age.

2 The following figures are for London in 1903. They give the birth and death
rates by groups of the population of London, Group 1 being the poorest, Group 6 the
richest (the test of riches and poverty being in this case the proportion of servants
kept) . Both crude and corrected rates are given for births and for deaths ; the crude

244

THE DISTRIBUTION OF WEALTH

[54-§ 1

of the group's members is low.^ But the numbers in any group
remain large or small according to multiplication within the group.
Not solely, it is true, according to this factor; there is transfer from
group to group, and especially some swelling of the numbers in the
higher ranks thru inflow from the lower. Yet in the main each
group is recruited from its own members. Certainly in the low-
est of all, that of unskilled laborers, growth proceeds almost wholly
from within. The wages of day laborers are low because there are
so many of them ; and there are so many of them because, notwith- ^
standing low wages, they continue to marry and multiply, and
as a rule marry early and multiply fast.

Here, again, the relation between standard of living and wages
is not direct, but indirect. The mere fact that the well-to-do are
habituated to comfortable living and wish to maintain comfort-
able living, does not make earnings large. But the fact that there
are comparatively few physicians, lawyers, architects, engineers,
business men of the upper tier — this serves to keep high the in-
comes of the class. The wages of common laborers are not low
because they are used to coarse food and cheerless living; it is the
maintenance of their numbers in face of these dismal conditions
that keeps wages low. There is a correlation between standard of
living, birth rates, supply of workers, and, finally, earnings.

It is possible to conceive of the standard of living as not influenc-
ing wages thru the ultimate effect on numbers, but as fixing wages

rates being per 1000 of population, and the corrected rates taking account of vari-
ations in marital conditions and of the distribution of the population by age groups.

Group 1 (poorest)
Group 2 . . .
Group 3 . . .
Group 4 . . .
Group 5 . . .
Group 6 (richest)

Crude
Birth Rate

35.0
38.3
26.0
25.9
25.1
18.2

Crude
Death Rate

18.4
14.4
14.6
12.1
14.8
13.0

Corrected
Birth Rate

31.6
25.8
25.6
25.5
25.3
20.4

Corrected
Death Rate

19.1
15.0
15.3
12.7
15.5
14.6

See the paper by Newsholme and Stevenson, already referred to, in Journal Royal
Statistical Society, 1906, p. 71.

> See above, Chapter 47, §§ 1, 2.

54-§2] POPULATION {Continued) 245

at a precise point — as having a determinative influence similar to
that which cost of production has upon the long-run value of com-
modities. Thus a given group — say that of the upper set of
manual workmen, the mechanics and skilled craftsmen — may be
supposed to have a specific standard of living, to multiply fast when
earnings exceed the amount so defined and to check multiplication
when earnings fall below it. But such a conception of the situation
is true to the facts only in a very vague and uncertain way. Other
circumstances than a foreseen and calculated rate of remuneration
affect marriages and births. The influence of the purely economic
motives is irregular, often only half-conscious. They are more
likely to serve in checking multiplication than in increasing multi-
plication; they are more likely to keep wages from declining than
to prevent them from rising. ^Mien a moderate increase of wages
in a given group is made possible by greater demand for its serv-
ices, it is not to be thought probable that higher birth rate and
internal growth will check the advance. It is much more likely
to be kept within limits by seepage from without — by the success
of some individuals from other groups in finding their way into the
more prosperous employment. Not only for the population at
large, but also for the several classes within it, it is safer to say that
a high standard is a condition of the maintenance of high earn-
ings than that it is a cause.

§ 2. The general decline of the birth rate in advancing coun-
tries; the accentuation of that decline among the well-to-do; the
probability, almost certainty, that v/ith wider diffusion of pros-
p>erity the tendency will spread more and more to all classes — all
this is due mainly to sQLial„and indystcidi-aaibition. Some writers
have discussed the change as if it were automatic, as if the lower
birth rate among the well-to-do were the natural and necessary
consequence of their having a larger income. The connection
between income and birth rate is the other way ; rising prosperity is
rather the effect than the cause of declining pressure. The funda-
mgiiig,! cause is the wish of eac^ family to promote its own material
welfare. Malthus spoke of the desire of each individual to im-
prove his condition as the vis medicatrix of society. Certainly with

246 THE DISTRIBUTION OF WEALTH [54-§2

reference to the growth of population, he spoke with truth. When
some chance of better conditions is visible; when a better-paid oc-
cupation, education, some savings and some accumulation appear
within reach ; when it is seen that more mouths to feed mean a les-
sening possibility of utilizing such an opportunity — then the pro-
pensity to multiplication as more and more held in check. The
causes of the declining birth rate are to be found in the intellectual
and material forces which have so wonderfully stirred the people
of western civilization during the last century: the spread of edu-
cation, newspapers and books; cheap mqvemgnt by railway and
steamship; the quickening of stagnant populations by the new
modes, of employment, by large-scale production and the factory
system, by the changes thru emigration. Not all of these forces
have been steadily at work in the same direction. The factory
system has seemed at times simply demoralizing, tho in the long
run it also has had an awakening and uplifting effect. Where the
ownership of land has been widespread, or the conditions of tenure
secure, the agricultural population has responded most surely to
the new opportunities, as in France, the United States, western
Germany. Where the agricultural workers are divorced from the
land, as in eastern Germany, England, southern Italy, Austria,
and Hungary, they have needed a stirring from the other world,
thru emigration, to rouse them to the outlook for improvement.
Thruout, it has been awakened ambition in the ittdhddji&l that has
caused the standard of living to rise.

Malthus was induced to write on the question of population be-
cause he believed that here was an insuperable obstacle to Utopian
schemes. His followers steadily maintained that the tendency of
population to outrun subsistence was an obstacle in the way of
socialism. The obstacle may not be insuperable; but it is certain
that in a socialistic society it will have to be overcome in a way
very different from that which has in fact appeared in modern
communities. On tlie one hand, inequality and the familiar spec-
tacle of a higher economic and social stratum ; the stimulus of self-
interest, on the other hand, for one's self and one's children —
these are the factors which have limited the movement of popula-

64r-§2]

POPULATION (Continued)

247

tion, spurred ambition and imposed restraint, and so sustained the
advancement and dijffusion of material well-being. Individualism
is at the root of the phenomenon. *^

All these individualistic forces have been most strongly at work
in the United States. Nowhere has there been more freedom of
opportunity, more spur to individual ambition, more stirring from
education and from the consciousness of larger possibilities. Hence
it has happened that in those parts of the country and in those
social strata where the pressure of advancing population por-
teticlecl danger, pressurehas begun to relax. ""^

"In New England, for example, the native-born population has
long been multiplying at a very slow rate. The gross increase in
the population of New England has indeed continued to be con-
siderable; but the increase has come by the steady inflow of immi-
grants and by the large birth rate of foreign-born parents. The
striking difference between the fecundity of native women and for-
eign-born women has already been noticed with reference to Mich-
igan. In Massachusetts it is even more striking; the birth rate
among the foreign born is three times that among the native born,
as the following figures show : ^ —

Annual Bikth Rates

Native parents . .
Foreign-born parents

1883-1887

17.1

48.4

1888-1892

17.1

49.6

1893-1897

17.0

52.1

These figures are for the crude birth rate (births per 1000 of popu-
lation) and exaggerate the difference in the fecundity of the two
classes; for among the foreign born the proportion of persons in the
age of reproduction is greater. But even comparing the births in
proportion to women of child-bearing age, the rate of increase
among the foreign born is twice that among the native, the figures
being: —

1 R. R. Kuczj'nski, in Quarterly Journal of Economics, Vol. XVI, pp. 143, 146,
183. Cp. some equally striking figures given by A. A. Young for New Hampshire
in Publications American Statistical Association, September 1905.

248

THE DISTRIBUTION OF WEALTH
Birth Rates fer 1000 Women aged 14-49

[54-§2

1883-1887

1888-1892

1893-1897

Native mothers

63.7
124.5

G2.8
133.6

62.6

Foreign-born mothers

139.4

The careful statistician from whom these figures are quoted
concluded (in 1901) that the native-born population of Massa-
chusetts was not maintaining itself; if the birth rate which prevailed
during 1883-1897 were to continue indefinitely, this population
would becQrftg_extinct. Doubtless, it will iiatjsQntMmeindefinitely4
a readjustment to conditions of stable numbers, probably of num-
bers increasing somewhat, will come; but a low^birth rate will
almost surely maintain itself permanently.

In the native-born farming population of the central region of
the country, the same relaxation of the rate of growth is showing
itself, tho not so strikingly as in New England. There, too, the
average number of children per marriage tends to decline, because
parents are solicitous not only to maintain, but to raisejtJja»-B©eiftl-«
and economic .position of their children.

This movement is steadily extending, and is gradually affecting
not only those who are usually thought of as being in a more special
sense " native born," but the descendants of the immigrants as well.
/The influence of free institutions and of free opportunities is to les-
Isen, possibly to destroy, the caste-like character of social classes.
They lift the second generation of those who immigrate into the
United States out of the lowest of the non-competing groups. In
that second generation the birth rate, which had been high among
the first arrivals, begins to fall. In the United States the rate of
pay for common laborers and unskilled factory workers is kept low,
not by a continuing high birth rate within the country, but by a
high birth rate and low standard of living in the foreign sources of
supply. It is in European countries that the millions are born
who steadily replenish the lowest stratum. Once they are settled
here, the leaven of social and economic ambition slowly but surely
affects them. It makes well-nigh certain a relaxation of the rate

54-§3] POPULATION {Continued) 249

of growth In population. As, in the course of time, natural re-
sources come to be more completely preempted and the possibility
of increase is subjected to the conditions of an older country, the
Malthusian difficulty, there can be little doubt, will be staved off
by the increasing application of the preventive check.

§ 3. The question which now faces the advanced countries, and
especially the more prosperous classes in those countries, is whether
the pEgyentjvexheck^^is not likely to be carried too far. The popula-
tion of France as a whole barely maintains itself; it is probable that
the French well-to-do fail to maintain themselves at all. The na-
tive-born population of Massachusetts probably fails to maintain
itself; it is not to be doubted that this is the case among the well- .
to-do in that state. The main cause of the phenomenon is an j
excess of social ambition — forethought to the point of timidity. J
People's nations as to what is a proper mode of living steadily be- I
come more exacting, and the expea^e^pf maintaining..a.iaajily on |
the conventional scale becomes greater. Marriages take plajce at ■
a comparatively late age, and the proportion of those who do not /
marry at all is considerable. \Miere there is accumulated property,
large families are a\'£)ided lest the inheritance be split up among
too many. The vejUMJBi^.seem to multiply i6a^tu'api.dJy of all. j

This tendency brings evils. It takes away part of the stimulus ^
which comes from competition and pressure. Children who are
too carefully reared, too elaborately educated, tooffully assured of
support from inherited means, la^gmuyy^e. It would seem, also,
that the children of parents who have led a nervously exhausting
life, especially if the parents have married late, lackvi^OT. A
population which marries earlier and, multiplies more rapi3ty, and
whose newly accruing members are thrown more upon their own
resources, is likely to be more progressive.

Further, the more prosperous strata among the population are
those in which intellectual gifts are most likely to appear. They
are prosperous in the main because they have such gifts. No doubt
there are plenty of commonplace persons in the favored classes
among whom multiplication is so markedly restricted. But the
able and the intelligent are also preponderantly among them.

250 THE DISTRIBUTION OF WEALTH [ 4-§ 3

Hence in this tendency among the well-to-do there is a danger that
the quality of the population will deteriorate. Less of the gifted
are born, and those who are born are less stimulated by active com-
petition to exercise their gifts to the utmost. The lower strata of
the population, on the other hand, multiply most rapidly. Tho
some individuals of high qualities emerge from among them, the
great mass are mediocre and perpetuate mediocrity. Those few
whose unusual abilities enable them to rise, succumb to the social
ambitions and inhibitions which prevail in the prosperous class,
and, like their new associates, fail to propagate freely.

More and more thought has been given of late years to the
strange contrast between our care in breeding animals and our
carelessness in breeding men. The human race could be immensely
improved in quality, and its capacity for happy living immensely
increased, if those of poor physical and mental endowment were
prevented from multiplying. But it is very uncertain how far it
will prove possible to select for propagation. Tho the great broad
fact of heredity is unmistakable, the details of the laws of inheri-
tance are but dimly known to us, above all in their application to
man. More light will come in time from what is called eugenics;
that is, from systematic inquiry as to the transmittal of inborn
and acquired traits from generation to generation, with a view to
the possibilities of selection and breeding. In the present state of
knowledge, no individual differentiation is feasible; least of all do
we know what are the conditions which lead to the birth of indi-
viduals having extraordinary gifts. And even if more accurate
knowledge comes to be attained, any system of restriction and se-
lection would probably be inconsistent with that striving for free-
dom of opportunity and for individual development which is the
essence of the aspiration for progress. It is difficult to conceive
any such system which would not imply the sacrifice of present
happiness by countless individuals, for the sake of a cold and dis-
tant ideal of ultimate racial improvement. Only some very lim-
ited applications of the principle, in extreme cases, seem now within
the bounds of possibility. Certain types of criminals and paupers
breed only their kind, and society has a right and a duty to protect

54-§3] POPULATION {Continued) 251

its members from the repeated burden of maintaining and watch-
ing such parasites. vSome sorts of disease and taint are inherited,
and it is merciful ahke to would-be parents and possible offspring
to put a check on their transmission. Beyond this, there is little
prospect, under any social system which we can conceive, that
mankind will deliberately select a portion among its members as
alone privileged to perpetuate the race.

Too much stress should not be laid on what is called " race sui-
cide." The extent of the drift toward restraint among the well-
to-do is often exaggerated. Tho prudence might possibly be car-
ried to the point of impending annihilation among the higher
strata, it will probably not be. Rapid multiplication and large
families in these classes are indeed not likely. But a maintenance
of their numbers and a moderate increase are by no means improb-
able. Something will depend on the ideals which influence their
lives. rri'^iQlous,.iambition, the love of vulgar display, the exag-
geration of artificial distinctions, all tend to hesitation in marriage
and timorousness in begetting offspring. Higher ideals and am-
bitions tend to the earlier founding of families and to less limited
fecundity.

On the other hand, the good sides of restraint on multiplication i
should not be forgotten. For mankind as a whole, declining birth /
rates and lessening pressure on population mean progress, a^adfo,
terioration. The prevalence of habits of prudence among all strata
means a gain in human happiness. Possibly the time will come
when this sort of prudence will be carried so far that population in
the advanced communities will no longer increase at all. Then a
low birth rate will be balanced by a low death rate, avoidable suf-
fering and disease will be reduced to the minimum,||^ average
duration of life will be longer. Progress then will perhaps be less:
or at least it will be in a different direction, with differeTit coiise-
quences, and under different impulses. There is no reason why the
arts of production should not continue to advance, and certainly
no reason why the intellectual and moral life should not move up-
ward. The struggle and competition of rapidly increasing num-
bers are not essential for happiness, nor is an approach to stationary

252 THE DISTRIBUTION OF WEALTH [54-§3

population in itself a cause of unhappiness. In a stationary state
— to quote the eloquent words of the most wide-minded of the
earlier economists, John Stuart Mill — " there would be as much
scope as ever for all kinds of mental culture, and moral and social
progress; as much room for improving the Art of Living, and much
more likelihood of its being improved, when minds ceased to be en-
grossed by the art of getting on. . . . Only when, in addition to
just institutions, the increase of mankind shall be under the delib-
erate guidance of judicious foresight, can .the conquests made from
the powers of nature by the intellect and energy of scientific dis-
coveries, be made the common property of the species, and the
means of improving and elevating the universal lot." ^

1 Political Economy, Book IV, Chapter VI, § 2.

V«^.

CHAPTER 55
Inequality and its Causes. Inheritance

Section 1. The fact of inequalit}^: distribution has a roughly p5Tamidal form.
Figures indicating the distribution of income for Prussia, for Great Bri-
tain, for London, 253 — Sec. 2. The distribution of property, as indicated
by probates in Great Britain, by tax statistics in Prussia, 257 — Sec. 3.
The distribution of income in the United States, 258 — Sec. 4. Is in-
equality becoming greater? 263 — Sec. 5. The causes of inequahty:
differences in inborn gifts; the maintenance of acquired advantages thru
opportunity and above all thru inheritance, 265 — Sec. 6. Inheritance
to be justified as essential for the maintenance of capital under a sj'stem
of private property, 267 — Sec. 7. Possible limitations of inheritance,
thru taxation and in other ways, 268 — Sec. 8. Proposals for the radical
restriction of inheritance, 269 — Sec. 9. The grounds on which private
property rests. The utilitarian reasoning, 273 — Sec. 10. The leisure
class; its economic and moral position, 275.

§ 1. The overshadowing fact in the distribution of property and
income is inequality. How great is the inequahty, and what are
its causes?

On this subject our information was until very recent times sur-
prisingly meagre. It is still far from complete or exact. What we
have is based mainly on income tax returns; but these exist for a
few countries only, and in them need correction and explanation.
Nevertheless, familiar observation, supported and supplemented by
such figures as we have, suffices not only to assure us of the fact of
inequality, but to show its general range and character. We know
that the number of the rich is very small ; that the number of per-
sons who are well-to-do and comfortable, tho considerably larger,
is still small; and that the persons with slender incomes are the
most numerous of all. With only one exception of importance,
to be noted presently, distribution, both of wealth and income, has
a form roughly pyramidal. To put the analogy more carefully, its
form is like an inverted peg top — the lowest range small, then a

253

254 THE DISTRIBUTION OF WEALTH [55-§ 1

very large extension, and thereafter steady shrinkage as the high-
est point is approached.

It will suffice to give a few typical figures. The best tax statis-
tics, of a kind to show the distribution of income among individuals
of a large country, were those of Prussia in the days before the war
of 1914-1918.1 The following figures are for the year 1908; almost
any other year of that period would show the same results.

Out of a total Prussian population of 38,000,000, no less than
18,000,000 (8,330,000 taxable persons) were not affected by the
income tax, because the income of the several taxable persons was
supposed to be less than the exempt amount — 900 marks.2 There
were taxable and assessed, because having an income exceeding the
exempt amount, 5,872,000 persons. Among these, incomes were
distributed as follows (in round numbers) : —

Taxable Persons

5,284,000, or 90 per cent, had incomes of

411,000, " 7 " " "

76,600, " 1.3 " " "

83,200, " 1.4 " « «

18,000, " .25 " " "

3,800, " .05 " " "

If the line between those who were well-to-do and those who were
not be drawn at 3000 marks, it appears that approximately no more
than ten per cent of the taxed belonged to theVell-to-do classes.
The figures, be it observed, take account only of the persons who
came within the income tax limits and in fact were reached by the
tax. As many more, roughly speaking, had incomes below the
exempt amount. Of the whole number of families, about five
per cent were well-to-do.^

The British income tax* gives materials from which an estimate
can be made, sufficiently accurate for the present purpose, of the
characteristics of the distribution of incomes in Great Britain.
The following figures are for 1904: —

1 Compare what is said below, in Chapter 69, of income tax methods.

2 In considering these figures, regard must of course be had t© the monetary scale
of pre-v/ar days.

8 See Schmoller's estimates (for the year 1899), in his Grundriss der Volkswirth-
schaftslehre, Vol. II, pp. 139-140.
* See below, Chapter 69, § 3.

900 @

3,000 marks

3,000 @

6,500 "

6,500 @

9,500 "

9,500 @

30,500 "

30,500 @,

100,000 «

over

.^00,000 "

55-§l]

INEQUALITY AND ITS CAUSES

255

The number of families having incomes under £160 was 6,775,000

The number of incomes between £160 " £700 " 830,000

" " " " £700 " £2,000 " 122,000

« " " " " £2,000 " £5,000 " 324,000

" " " " " £5,000 " £50,000 " 14,200

« " " " over £50,000 350

The result may be stated in another way: in a population of
43,000,000, about 5,000,000 belong to families having an income of
£160 a year or more, and these 5,000,000 have about one half of the
total income of the British people; the remaining 38,000,000, with
incomes of less than £160 per family, have the other half of the total
income. Such figures cannot pretend to rigorous accuracy. Per-
sons who are disposed to defend and justify existing inequalities
usually reach estimates showing a smaller number of very great
incomes and a larger number of middle-class incomes. The details
of the calculations are of interest and importance for statisticians,
but are of little consequences for the purpose of a broad survey.
The figures cited give a sufficiently truthful pictm-e of the inequal-
ity in the distribution of income in advanced countries.^

Servant-keeping class, total . . .
Subdivided thus:

a. SerA^ants" kept, 1 , . . .

6. " " 2 . . . .

c. " " 3 . . . .

d. " « 4 . . . .

e. " " 5 . . . .
/. " " 6 . . . .
g. " " 7 . . . .
h. " " more than 7

Class keeping no servants . . . .

NuilBER

Per Cent op

OF Persons

THE Population

476,250

11.0

222,000

5.51

144,000

3.4

57,700

1.3

18,800

0.4

^11%

13,300

0.3

7,100

0.2

3,000

0.1

4,350

0.1

3,372,000

80.1

1 The figures are derived from those submitted (but not vouched for as statis-
tically accurate) by Mr. A. L. Bowley ; to be found in the Report of the Committee on
Income Tax, Pari. Doc. 1906, Vol. IX, p. 229. My grouping of the figures of in-
comes above £160 is somewhat different from Mr. Bowley's, and I have added Mr.
Chiozza Money's estimate of the total of families ha\-ing an income of less than
£160. The dividing hne is put at this point (£160) because of the exemption
of incomes below it. See also Mr. Chiozza Money's Riches and Poverty (1900),
p. 41, and passim, and the Parliamentary Report just cited, in which there is a mass
of information.

Useful summaries of the statistical information for all countries have been con-
tributed by Dr. Robert Meyer to the successive editions of the HandwQrterbuch der
Staatswissenschaften, sub verb. "Einkommen."

256

THE DISTRIBUTION OF WEALTH

[55-§l

An entirely different basis for gaging distribution was used by-
Mr. Charles Booth. In his monumental researches on London,
not being able to secure direct information about incomes, he re-
sorted to the test — obviously a significant one — of servant-keep-
ing. There is the broad line of demarcation between the class
without servants and that with them; and, in the latter class, sub-
/ division according to the number of servants. It appeared that
I four fifths of the population of London (80.1 per cent), or 3, 372,000
persons in all, belonged to the non-servant-keeping class. The
' upper or servant-keeping class numbered 476,000 persons, or 11
' per cent of the population (the remaining 9 per cent of the popu-
lation included the servants themselves, and inmates of hotels,
lodging houses, and institutions, and others not readily brought
within the scheme of classification) . The upper class proved to
be divisible into sections, according to the number of servants per
household (see table on preceding page).i

On the basis of direct observation, Mr. Booth classified the popu-
lation of London as follows : —

Class A (lowest)

" B (very poor)

" C and D (poor)

" E and F (comfortable, working)

" G (lower middle)

« H (highest)

Number of
Persons

38,000
317,000
938,000
2,166,000
500,000
250,000

Per Cent op
Population

0.9

7.5

22.3

51.5

11.9

5.9

These figures serve to indicate the exception, intimated a few
moments ago, to the statement that distribution has a completely
pyramidal shape. It is pyramidal only until the very lowest tier
is reached. In that tier, numbers are not larger than in the tier
preceding. Not the very poor, but the comparatively comfort-

1 Life and Labour of the People of London, Second Series, Vol. I, p. 5 seq. (edition
of 1903). For brevity 1 have described section a as keeping one servant, section b
as keeping two servants, and so on. In Mr. Booth's careful analysis, section b in-
cludes some small families with but one servant, as well as large families with two
servants; section c some small families with two servants, aa well as larger families
with three servants; and so on.

55-§2] INEQUALITY AND ITS CAUSES 257

able working class, constitute the largest single element in the popu-
lation of London. Such would seem also to be the case in Prussia,
if we admit that the income tax statistics are at fault in ascribing an
income of less than 900 marks to a great number who in fact have
an income so large. Probably the same result, as regards the lowest
class, would be reached if we had trustworthy information or indi-
cations on the distribution of incomes in any of the advanced coun-
tries, such as Great Britain, France, the United States.

§ 2. The situation as regards the distribution of ownership of
property is essentially the same. One or two sets of figures will
suffice for illustration. The British inheritance taxes have been
carefully administered on the same basis for many years ; not thru-
out with the same rates of taxation, but in a manner to show for a
long period what are the numbers of estates of varying sizes. Tak-
ing the ten years from the fiscal year 1899-1900 thru the fiscal year
1908-1909, we find that, on the average, there were probated each
year estates as follows : ^ —

Small estates, not exceeding £500 48,000

Estates from £500 to £1,000 9,933

1,000 " 10,000 16,484

" " 10,000 " 25,000 2,311

25,000 " 50,000 911

" " 50,000 " 75,000 286

75,000 " 100,000 140

" " 100,000 " 150,000 135

" " 150,000 " 250,000 88

250,000 " 500,000 51

" " 500,000 " 1,000,000 18

" over 1,000,000 7 to 8

For Prussia there were figures of a similar sort, published in con-
nection with the Erganzungssieuer, a tax based on the income tax
returns, but levied with respect to property, not income. In 1908,
there were in round numbers 1,500,000 persons assessed as having
property of 6000 marks or more; these persons and their families
numbered 5,350,000 in all. Among the persons assessed :2 —

1 I have calculated these averages, for all except the smallest estates, from the
figures given for the several years in the Statistical Abstract for the United Kirigdom.
For the smallest estates, the Statistical Abstract docs not give the full total, since it
takes no account of estates less than £100 net. The figure given above (the first
in the table) is in round numbers, and is not statistically accurate; but it is accurate
enough for the purpose in hand.

2 1 take these figures from the Vergleichende Uebersicht submitted to the Prussian

258 THE DISTRIBUTION OF WEALTH [55-§ 3

marks

731,700 persons

had property from

6,000 to 20,000

262,300

11 i(

20,000 " 32,000

203,800

((

U li

32,000 " 52,000

160,500

a u

52,000 " 100,000

79,900

U ((

100,000 " 200,000

43,360

u u

200,000 " 500,000

12,600

u u

500,000 " 1,000,000

5,300

ti «

1,000,000 " 2,000,000

3,000

" over

2,000,000 marks.

The results are in both countries essentially similar to those for
incomes. The number of millionaires is very small indeed ; that of
the rich remains still small ; the numbers become larger as the prop-
erties become less; the very least properties are the most numerous
of all. Just how far down in the scale the same tendency would
extend, it is impossible to say; but it is certain that the persons
having properties below the limits in these tables greatly exceed in
number those within their range. In Great Britain, only one out of
six adults left at death as much as £100 of propertj^ and only one
out of twenty left as much as £1000.^ In Prussia about one out of
seven in the population had 6000 marks or more ; six sevenths were
not affected by the property tax, because their property was less
than 6000 marks. 2 Those who possess any considerable amount
are but a small minority of the population in any of the countries
of advanced civilization.

§ 3. For the United States we have usable figures on the dis-
tribution of income, tho we have none such on the distribution of
ownership. The income figures are based, as in the case of Euro-
pean countries, chiefly on tax returns. The establishment of an
income tax by the federal government in 1913 ^ led to the publica-
tion of statistics showing the size and number of the several incomes
on which tax was levied. For the first five years during which the
new system was applied, the statistical results were known to need

Landtag for the fiscal year 1908-1909. They give the assessments made for the
triennial period 1908-1910.

1 Mr. Chiozza Money, in his Riches and Poverty, pp. 51, 72, overstates the case,
remarking that only one out of ten in the population leaves any property at death.
As Mr. A. L. Bowley has pointed otit to me, the significant proportion is not to total
population, but to the adult population; hence the proportion stated in the text —
one o\it of six adults.

2 The total population of Prussia in 1908 was 38,000,000; the families of the
1,500,000 persons assessed for property tax numbered 5,350,000 heads.

3 See below, Chapter 69, § 5.

5^§3] INEQUALITY AND ITS CAUSES 259

much correction if they were to be used as indications of the actual
state of distribution. As in all cases of tax levy and administra-
tion, greater success was attained in reaching the taxable sources
as time went on. In 1918, when the country was in the throes of
the GreatWar, a special effort was made by the authorities to secure
full statements, and the spirit of public service roused by the war
led to more ready response from the taxpayers than would have
been got in ordinary times. Even so, the returns were in many
respects incomplete. The period during which the system had
been administered was still very brief; moreover, the ill-
drafted statutes left much room for evasion, partly permitted
by the law, partly unlawful. The figures compiled by the
Bureau of Internal Revenue, tho less untrustworthy than might
have been feared, called for much revision and readjustment before
they could be used as indications of the actual distribution of in-
comes. But they were carefully analyzed by a group of competent
statisticians, and were corrected and supplemented by the use of
data from various other sources. They thus served as the basis for
a conspectus which may be regarded as fairly accurate. ^

The number of individuals having incomes of given sizes in 1918
was judged to be as follows: —

Incomes up to $2,000 32,078,411 persons

" from 2,000 to 3,000 . « . . . 3,065,024

" 3,000 " 10.000 1,970,991

" 10,000 " 50,000 233,181 "

" 50,000 " 200,000 18,956

« 200,000 " 500,000 1,976

" 500,000 " 1,000,000 369 «

" 1,000,000 and over 145 "

Another mode of showing the general situation is to state the
proportion of total income which goes to the well-to-do on the one
hand, to the great mass of the community on the other. Individ-
uals whose incomes v.ere within the $2,000 class (receiving that
amount or less) constituted 86 per cent of the whole number; they
received 60 per cent of the income. Those with incomes exceeding
$2,000 constituted 14 per cent of the whole number and received 40

1 Income in the United States: its Amouiit and Distribution, 1909-1919. By the
staff of the National Bureau of Economic Research, New York, 1921.

/
V J

260

THE DISTRIBUTION OF WEALTH

[55-§3

per cent of the income. Putting the dividing hne between the well-
to-do and the others at $3,000, it appeared that those having in-
comes within that figure constituted 94 per cent of the whole, and
received 73 per cent of the income ; while those, with incomes of more
than §3,000 were 6 per cent of the number and received 27 per cent
of the income. Stated in a slightly different way, the topmost 5
per cent of income receivers, the most prosperous tier of society, re-
ceived 26 per cent of the total income; the absolute amounts being
60.5 billions of dollars of total income, of which this fortunate tier
received 16 billions.

A more detailed representation is given by the appended dia-
gram. On that the width of the several parallelograms shows the

number of persons re-
ceiving the incomes
indicated on the mar-
gin. Each upward
step marks a change
of SlOO in income.
The figure, it will be
seen, conforms closely
to the inverted peg-
top tyipe. The very
widest parallelogram,
indicating in what
single stratum are the
largest number of in-
come receivers, is not
the lowest of all; it is
that for incomes be-
tween S900 and SIOOO.
Above and below this
are the fixed strata
with incomes from
8800 to §1200 inclu-
sive), all wide, all indicating large numbers. The strata narrow as
greater incomes are reached, and the number of persons having

2000

^.u^•a::.9 of pdkons ■

55-§3] INEQUALITY AND ITS CAUSES 261

incomes as great as $4000 already becomes slender. The figure
,has not been extended beyond this range, because almost at once
it would become a thin line. That line, if plotted on the same
scale, so as to indicate all incomes up to the very highest, would
be thousands of feet long. The point of the peg-top would be
immensely elongated and extremely attenuated.

In drawing inferences from such data as these^ account must al-
ways be taken of monetary standards and of the ranges of prices and
money incomes. Some qualifications are obvious. Others are less so;
they call for the critical application of general economic principles.

An obvious correction relates to the extraordinary change in
monetary conditions which took place between the early years of
the century, to which the figures for Great Britain and Prussia
refer, and the year 1918, for which we have the American figures. ^
An American income of $3,000 in 1918 meant no more than one of
$1,500 in 1913. Almost equally obvious, in comparison between
countries, is the need of allowing for international differences.
Roughly speaking, a British income of £160 (about S800) signified,
say in 1913, the same social standing, tho probably not so much
general purchasing power, as an American income of $1,500 for
that year, or of $3,000' for 1918. In interpreting the British
figures for 1913, the sum of £160 may be taken as the dividing
line between the well-to-do and the great mass of the population.
The much larger sum of $3,000 may be taken as the correspond-
ing line for the United States in 1918.2 As is indicated by the
statistics already given, and as will appear more fully from others
presently to be cited, the proportion of income going to the well-to-
do is larger in Great Britain than in the United States.

Another correction is of a more troublesome sort. It bears on
the interpretation of the money income and the social position of a
class which is large in the United States and has no counterpart in
Great Britain — the independent farmer. The millions of Amer-
ican farmers have incomes which usually are much below the well-

1 Compare what is said on this topic in Chapter 23, § 6.

2 Similarly 3,000 marks in Prussia for 1908 correspond roughly in social signifi-
cance to S3,000 in the United States for 1918.

262 THE DISTRIBUTION OF WEALTH [55-§3

to-do line, and indeed seem to be below the average of working-class
incomes. I say seems to be ; for the method of calculating the farm-
er's income requires explanation and raises questions. The price
of the farm produce consumed by him and his family is reckoned as
part of his income, and constitutes a considerable item. The only
way to measure its amount is to ask what price would this produce
yield if sold by the farmer and not consumed by him? If his
farm supply of butter, eggs, fruit, vegetables, poultry and meat
(not to mention the rental of his dwelling) would have sold for $300,
his direct money receipts should be supplemented by $300 in order
to show his effective money income. But — and here comes
the troublesome point — this extra $300 means much more
in commodities, in "real" income, than the same sum means
for the workingman dweUing in a city. What the farmer
could have sold at his farm for $300 would have cost the urban
dweller much more — doubtless twice as much on the average.
The spread between the price got by the producer (using that term
in the everyday sense) and that paid by the consumer is a standing
source of wonder to economists; it is perhaps largest for farm
products of the kind here under consideration. When judging of
the farmer's income, then, we must apply a factor of correction
similar to that needed in international comparisons. Tho the
money income of an American mechanic be twice as high as that of
an English one, and thrice as high as a Frenchman's, his real income
is by no means higher in the same degree. Similarly, tho the Amer-
ican mechanic's income be fifty per cent larger than that of the
American farmer, the real income of the two may be substantially
equal. These are matters to which little regard is paid in popular
discussion, least of all as regards comparisons within a country.
They illustrate the need of discrimination in the use of statistics,
especially of statistics which purport to give the total of a people's
income and the division of that total among different strata.^

1 Applying this correction to the peg-top figure on p. 260, we should have to
conceive tax income strata below (say) $800 to be much narrower than there shown,
and those above $800 and up to (say) $1500 much wider. By so changing the figure
we should represent with much closer approach to accuracy the distribution of
"real" or commodity income.

55-§4] INEQUALITY AND ITS CAUSES 263

§ 4. Another question is whether inequality is becoming greater
or less ; whether it is true, as often alleged, that the rich are becom-
ing richer and the poor poorer. Here again we have not much pre-
cise information. But the general trend of such data as we possess
indicates that while the rich are probably growing richer and cer-
tainly not less rich, the poor are not becoming poorer.

A careful comparison made for G^eat Britain for the years 1880
and 1913, showed that during the interval (about a generation)
the average incomes of the wages-receiving classes had risen 45
per cent, those of the well-to-do classes (having incomes above the
sum exempt from income tax) 30 per cent. Of the total income of
the British people, almost exactly the same share (not quite one
half) went to the well-to-do in 1913 as in 1880. That fraction, be
it observed, is larger than the corresponding one for the United
States. There, as appears from the figures just given, the propor-
tion of total income going to the distinctly well-to-do is about
one quarter of the total. This marked difference between the two
countries is mainly due to the great size and the general prosperity
of the independent farming class in the United States. In Great
Britain — to retiu-n to the trend of change as it appears in that
country — the absolute number of the prosperous had nearly
doubled, while the number in the wages-receiving class had risen
by less than a quarter. The most noticeable change in the appor-
tionment of the population between the several strata was in the in-
creasing share going to a class intermediate between the prosper-
ous and the receivers of wages — to persons with small salaries,
shopkeepers, and the like, having incomes below the exempt
amount but above the usual range for artisans and laborers. A
larger proportion of the population had been able to achieve an
ascent to the levels of the intermediate and the prosperous classes.
Those who remained poor, on the other hand, had yet become some-
what less poor.i

A similar trend appeared in Germany about the same period.
Here again the tax statistics are sources of fairly precise informa-

1 See the analysis by A. L. Bowley, an admirable example of statistical technique.
The Change in the Distribution of the National Incomes, 1880-191S (1920).

264 THE DISTRIBUTION OF WEALTH [55- § 4

tion. They indicate that in Germany too the incomes of the poor
were rising. There was, further, a steady movement upwards, a
certain proportion of persons constantly swinging themselves into
a more prosperous tier. The comfortable working class and the
lower middle class became not weaker, but stronger. There was no
tendency toward the disappearance of the middle class, nor any
tendency toward the complete absorption of the high incomes by a
decreasing number of very rich persons. Germany during that
period was advancing faster than Great Britain, being in a stage
which her rival had come thru half a century before. It is to be
expected that a rapid burst of material progress shall be accom-
panied, while it is going on, by special gains on the part of the busi-
ness class and so of the well-to-do in general. Hence we find in
Germany indications of an increasing concentration of income and
property in the hands of the very prosperous classes, yet with a
growth of the numbers within that class, and not at the expense of
a deterioration in the condition of the less prosperous.

For the United States we are less informed about the trend of
inequality — whether becoming more or less — than about the ex-
isting situation. But it is altogether probable that during the gen-
eration preceding the European war the course of development was
in general like that of Germany; for both countries were in a similar
stage of rapid industrial growth. The accumulation of conspicu-
ous great fortunes led to a belief in many quarters that inequality
was becoming much more accentuated. But the country is vast
and its population enormous; the persons of the middle class,
whether in its lower or upper range, tho not so conspicuous as the
rich, are very many. It is possible that the numbers and the in-
comes of the millionaires increased faster than the numbers and
incomes of those simply rich or well-to-do; for the topmost class
was swelled not only by the working of the modern tendency to
large-scale industry, but also by the peculiar conditions of Amer-
ican corporations, by the wider range of privately managed indus-
tries, by the extraordinary pace of material progress. It is prob-
able also that the pressure on the very lowest class from inflowing
immigrants prevented participation by that stratum in the general

55-§5] INEQUALITY AND ITS CAUSES 265

advance to the same extent as in other countries. Whatever be
one's surmise on the effects of the special factors that appeared in
the United States, it is improbable that the main lines of change \
were different from those of countries having like industrial charac- '
teristics.i

§ 5. Such are the broad facts as to inequality. How are they to
be explained? and how, if at all, to be justified?

The causes of inequality are reducible to two — first, inborn dif^;

ferences in gifts; and second, the maintenance of acquired advan-
tages thru environment and thru the inheritance of property. The
origin of inequality is to be found in the unequal endowments of
men; its perpetuation in the influence of the inheritance both of
property and of opportunity, and also in the continued influence
of native ability transmitted from ancestor to descendant.

No doubt at the outset all differences arose from the inborn
superiority of some men over others. The savage chief excels his
fellows in strength and in cunning. Thruout history the strong
and able have come to the fore. They continue to do so in the
peaceful rivalries of civilized communities. In our present society,
the differences in wages — that is, in the incomes from all sorts of
labor — are the results, in large degree at least, of differences in
endowments. The striking case in modern times is that of the busi-
ness man. Especially in the upper tier, high native ability explains f
the exceptional earnings of the fortunate few among the business
class. In other occupations, tho training and environment count
for much, inborn gifts are still of dominant importance in explain-
ing the largest incomes from labor.

But at a very early stage in the development of society, this orig-
inal cause of difference is modified, often thrust aside, by the per-

1 On the tendencies in distribution shown by German figures, see the well-known
paper by Professor Adolf Wagner in the Zeitsc.hrift d. Preuss. Statist. Bureau, 1904,
p. 92, and passim. His conclusions are confirmed by Robert Meyer, in the Hand-
wdrterbiich der Staatswissenschaften, Vol. Ill, p. 688 (third edition, 1909). Cp. Som-
bart, Dcut'ichc Volkswirtschaft im 19. Jahrhundert, p. 506.

The well-known proposal of Professor Pareto to state the general tendency in
mathematical terms is in his Cours d'^Jconomie Politique, Vol. II, Book III, Chap-
ter I, where are also figures from various sources. It is subjected to searching criti-
cism in A. C. Pigou, The Economics of Welfare, Part V, Chapter II.

266 THE DISTRIBUTION OF WEALTH [55-§5

petuation of established advantages. In the feudal system, and
in any society organized on a basis of caste, inequality is main-
tained by force of rigid law. In the supposedly free and competi-
tive society of modern times, advantage still tends to maintain
itself. It does so in two ways — thru the influence of environment
and opportunity, and thru the inheritance of property.

Environment and opportunity have already been considered.^
Tho it is not certain to what degree social stratification rests on
factitious advantages, to what degree on the inborn moral and in-
tellectual qualities of the several classes, it is clear that the artificial
causes play a great part. A multitude of forces tend to keep a per-
son in the social grade of his parents. Only those of exceptional
gifts rise easily above it, and only those of exceptional defects fall
below it.

More important, how^ever, is the direct inheritance of property.
Its influence is enormous. Obviously, this alone explains the per-
petuation of the incomes derived from capital, land, income-yielding
property of all sorts, and so explains the great continuing gulf be-
tween the haves and the have-nots. It serves also to strengthen
all the lines of social stratification, and to reenforce the influences
of custom and habit. Persons who inherit property inherit also op-
portunity. They have a better start, a more stimulating environ-
ment, a higher ambition. They are likely to secm'e higher incomes,
and to preserve a higher standard of living by late marriages and
few offspring. The institution of inheritance promotes social
stratification thru its indirect effects not less than thru its direct.

Nothing illustrates so fully the combined influence of inborn gifts,
of property inheritance, and of perpetuated environment, as the
position of the person dominant in modern society — the money-
making business man. In the first stages of any individual busi-
ness man's career, the possession of means counts for much. After
the initial stage, native ability tells more and more. By whatever
ways he gets his start, the leader of industry prospers and accumu-
lates; and, as he accumulates, is again favored more and more by
large possessions. When he dies, he leaves a trail of descendants,

1 Chapter 47.

55- §6] INEQUALITY AND ITS CAUSES 267

who perhaps inherit abiHty and almost certainly inherit property.
With property they inherit a new environment and new opportuni-
ties. It may indeed happen that the property will be dissipated
thru lack of thrift or judgment, or subdivided among heirs into
minute portions. But neither of these results is probable; and even
if they occur, the descendants have ambitions and surroundings
very different from those of the poorer class from which the ances-
tor may have sprung. In every way inequalities, even tho they
arise at the outset without favor, tend to be perpetuated by inheri-
tance and environment.

§ 6. What can be said in justification of the inheritance ^f prop-
erty^ which acts so powerfully to maintain inequality?'

Inheritance arose historically from the sense of the unity of the
family. The ancestor in early times was not so much the im-
mediate owner of the property as the head and representative of the
family which owned the property. Its devolution to the surviving
members was no change of ownership, but a transfer to new repre-
sentatives of the continuing owners. But this explanation of in-
heritance, tho historically sufficient, serves little to explain the in-
stitution as it stands now, still less to justify it. The ground on
which inheritance is now to be defended is frankly utilitarian. In
a society organized on the basis of private property, inheritance is
essential to the maintenance of capital.

It may be open to question how far inheritance is necessary for
the first steps in accumulation. The motives that lead to money-
making and to the initial stages of saving and investment are va-
rious: not only the safeguarding of the future for one's self and
one's dependents, but social ambition, the love of distinction, the
impulses to activity and to domination. For sustained accumula-
tion and permanent investment, however, the main motives are
domestic affection and family ambition. The bequest of a compe-
tence or a fortune, tho often a dubious boon for the descendants, is
a mainspring for its upbuilding by the ancestor. If we were to
put an end to inheritance, decreeing that all estates should escheat
to the public at death, the owner would commonly dissipate his
property. One of the motives for its first acquisition would be gone,

268 THE DISTRIBUTION OF WEALTH [55-§7

and certainly the chief motive for its maintenance. Why accumu-
late and invest for the benefit of the community at large?

This is the ground for maintaining that the taxation of inheritance
should be kept within limits. As will appear later, the transfer of
property at death gives a convenient occasion for the levy of taxes
and for the application of progressive rates.i But such taxes tend
to trench on capital. Unless kept within moderate limits, they are
paid out of the principal of the estate, not out of income; and this
lessening of the individual's "capital" presumably leads to a corre-
sponding lessening of social capital. More than this: the higher
they become and the nearer they approach to confiscation, the
more probable it is that the original accumulation of capital will
be checked.

§ 7. It does not follow that inheritance should be unre-
stricted. Some limitations can certainly be imposed which do
not affect the essential efficacy of the institution. Others, tho
they may lead to a curtailment of capital, may bring countervail-
ing advantages. By lessening inequality, they may bring social
gains outweighing the material loss.

There is no reason why intestate succession should proceed in-
definitely to the most distant kin. Where a man does not trouble
himself to make a will, it may fairly be presumed that his property
was not got together with an eye to distant heirs. Neither his ac-
cumulation nor that by others will be checked if the public appro-
priates a great slice, even the whole, of such windfalls. On similar
grounds it is justifiable to make succession taxes heavier as the
degree of relationship to the decedent, whether testate or intestate,
becomes more and more remote.

A different proposal, and one having a different object, was made
long ago by John Stuart Mill: that the amount transmissible to
any single heir or devisee be limited. Let a maximum be fixed
which a person can acquire by devise or inheritance or by donation
inter vims. The sum might be fixed at a million dollars or much
less or something more; the precise amount would depend on the

1 Sco Chapter 69, § 6, and in general what is said in Chapters 68 and 69 on Pro-
gressive Taxation.

55-§8] INEQUALITY AND ITS CAUSES 269

degree to which the ruling public opinion had become impatient of
persisting inequality. Subject to this important limitation, the
successful money-maker would be free to dispose of his property.
He might divide it among many recipients or erect a monument for
himself by large gifts for public purposes. Left in command over
his fortune to this extent, he might refrain — so the proponents
expect — from dissipating it during life. The accumulation of
capital would not then be checked. But the devolution of very
great fortunes and the perpetuation of an upper crust of plutocrats
would be prevented. The greatest and most glaring of inequalities
would come to an end.

The ground here is uncertain. It is true that the money-gather-
ing motives, strong in themselves, would still be stimulated by the
liberty to dispose of unlimited means in some way or other. Yet
the restriction of the amount transmissible to immediate descend-
ants might often operate to promote reckless expenditure during
the owner's lifetime. We should have to fall back on the reflection
that extreme inequality of permanent possessions is not only an ill
in itself, inimical as it is to the largest possibilities of well-being, but
is dangerous as a rule for the supposedly fortunate beneficiaries.
And there is the further consideration that what might be lost to
capital thru this reckless expenditure might readily be made up
from the growth of accumulation elsewhere. It has been re-
marked 1 that the forces that make for accumulation and savings
proceed apace in modern societies and seem likely to provide
in abundant and even superabundant measure the wherewithal for
the upbuilding of their material outfit. Tho a few great properties
might be curtailed of their conceivable maxima, the great bulk of
savings would go on as before, and in the aggregate probably would
provide enough. The loss would not be greater than society could
afford.

§ 8. More radical in character, and calling for quite diflFerent

measures in their execution, are proposals looking to the complete ,

appropriation of devised property by the public after the lapse of

a cotipTe of generations. A novel and ingenious scheme is that of
\

1 See Chapter 39, § 6.

270 THE DISTRIBUTION OF WEALTH [55- § 8

an Italian writer. ^ Successive stages of levy are suggested, to ap-
ply to everything above a decent or reasonable exempt minimum.
Let one third of the property {i.e. of the excess over the minimum,
the "taxable" amount) be taken by the state on the first devolu-
tion; another third on the second devolution; the remainder on the
third and last. The owner (testator) might dispose of as great an
aggregate as he pleased, and to as few or as many as he pleased.
After the first devolution, and presumably during the first genera-
tion, most of the property would still remain in the hands of the
beneficiaries. A smaller part would remain to them in the second
stage, and finally in the third (or fourth or fifth, according to the
stages selected) everything would go to the public. The assump-
tion is that the testator is more concerned about his children than
about his grandchildren, and progressively less concerned about
remoter descendants. So long as most of his property can go to
those whose prosperity he has at heart, he will keep it intact. Ab-
rogation of the privileges of distant descendants will not influence
him.

It is a variant of the same line of thought, involving the same
questions of principle, when it is suggested that nothing but a series
of life-interests be allowed to pass by inheritance. Let the testator
dispose of the income of his property as he pleases for two, three,
four lives — as many as really signify to him. Thereafter the
public is to take everything.

Of all such schemes it is to be remarked that they necessarily lead
at an early stage in their operation to control and even management
of the property by a public authority. They might succeed in
keeping in operation the forces that bring alDOut the upbuilding of
large properties by the original money-makers. But evidently
there is nothing in them to induce the successive beneficiaries to
maintain the properties intact. The several inheritors, and espe-
cially the last in the series, would be tempted to dissipate what
was left in their hands. The state must keep control over the

1 E. Rignano, Un socialisme en harmonie avec la doctrine iconomique libirale
(1909). The French version is the only one I have seen. The proposal is explained
and considered by H. Dalton, The Inequality of Incomes, Chapter IX.

55-§8] INEQUALITY AND ITS CAUSES 271

principal, in order to make sure that it remains unimpaired. Un-
less this were done, the probabilities are overwhelming that the
capital sums in the hands of the individuals and the corresponding
material outfit of the community would waste away.

It is not at all unthinkable that the state should see to it that
there is no such wastage. A public office might be created, charged
with the administration of the subject estates. It could pay to
the several beneficiaries annual incomes according to their ordained
shares. It would gradually become the owner of a greater and
greater mass of property, which could be put thru loans at the dis-
posal of the managers of industry. Private management might
conceivably persist under such an arrangement. And the accumula-
tion of large properties, even of fortunes, might still go on. But the
wealthy leisure class would not be perpetuated thru the centuries.

A proper public office — this is the essential. There would have
to be a vast and elaborate organization, a staff of able, high-minded,
permanent officials, complete separation from the ordinary financial
operations of the government. And here we face the difficulty
which confronts us in every proposal for social betterment. Is the
public equal to the proposed tasks? Has it the needed intelligence ,
and self-restraint? Is there good ground for expecting that great ]i
funds coming into the hands of public officials w^ill be well handled?
The history of public finance gives little encouragement. Capital
sums which come into the hands of the state are usually "bor-
rowed" by the state itself. They are turned over to some depart-
ment or bureau, and then spent. The money sums are dissipated;
no permanent material gain accrues, still less any spiritual gain.
It is easy to conceive how they might be advantageously spent by
the bureau to which they are assigned, for useful public works,
needed housing projects, great educational facilities. But it is
far from easy to prevent their dissipation in the ordinary course
of public expenditure. The public treasury is like an individual.
What an individual earns bj- hard work, he is likely to watch with
care, to conserve, to invest. "\Miat comes to him thru windfalls, \
he will probably spend with little thought and perhaps with much \
hilarity. What the public treasury gets by methods that seem to be \

272 THE DISTRIBUTION OF WEALTH [55-§8

burdenless, and which at the moment are quite burdenless for the
great majority, is apt to be thoughtlessly applied to any and every
fad. The sums secured thru taxation which is felt to be bui*den-
some will be applied much more critically and wisely. In both
cases, gains easily got are quickly spent. v

And even if the sums secured by the gradual appropriation of
inherited property were rigorously maintained for investment, how
wise is that investment likely to be? The American business man
would shrink with horror from the prospect of a vast public bureau,
virtually a loan bank, making advances by millions and billions to
borrowers singled out by elected or appointed officials. Not merely
the economic problems and economic possibilities have to be con-
sidered, but the far-reaching questions concerning the character of
the community, its ability to reject demagogs and to enlist good
public servants, its intelligence in holding fast to good policies
and good legislation.

This sort of problem and this sort of doubt face us in every direc-
tion. The problem is one of the capacity of a democratic commu-
nity not only to govern itself within the range of the traditional
functions, but to perform with success functions much more
varied, more complicated, more exacting. It is easy to sketch
attractive general principles ; it is very difficult to devise the ma-
chinery and organization for their execution in detail; it is most
difficult of all to assure the public intelligence and public spirit
which alone can supply the motive power for successful operation.

There is little prospect that limitations on inheritance at all so
revolutionary as discussed in this section will be applied in the near
future, just as there is little prospect that the framework of the
institution of private property will be completely made over.
What is more probable is a further extension of the principle of
progression in the taxation of inheritance, a cutting down of great
fortunes by this process, some new and troublesome problems of
public finance. Not least, there will be a tendency to curtailment
of the community's capital, compensated by the net social gain
thru the mitigation of inequality and offset, let it be hoped, by
the growth of capital thru the ordinary channels.

55-§9] INEQUALITY AND ITS CAUSES 273

§ 9. What now of the ulterior question — the basis of the whole
regime of private property? Something may be said on this topic
here, even tho the consideration of the closely related topic of
socialism is postponed to a later stage. ^

The theory that property rests on labor, and therefore on what
is conceived to be the " natural " right of each man to that which he
has produced, has gone into the lumber room of discarded doctrines.
It was elaborated by Locke, accepted more or less thru the eigh-
teenth century, and used freely by the English economists of the
first half of the nineteenth century. But it plays little part in
modern discussion. "Natural" rights have quite gone out of
fashion. Where there is a highly complex division of labor, such
as characterizes existing society, it is impossible to distinguish how
much any one individual has contributed to the whole output —
to say, this is his specific output, therefore rightly his property.
Even if it were possible so to distinguish, no natural or inherent
right would thereby be established. Least of all is it possible on
such reasoning to justify inheritance. As the institution of inheri-
tance can be sustained only on a basis of utilitarianism, so can that
of property in general.

>The utilitarian reasoning may be summarized as follows:

Men will not labor steadily and effectively except in their own
behalf. LgJ^^^-^frsitlilgome, the sense of common interest weak.
Labor will not" be exerted continuously and vTgorousTy excepfTor
indiiddMLbei?efit.C.It is,s±renumis-an4 well directed in proportion
to the expected return. ^ -^ ''-' '"'^ '-^'<~-

This indeed is the crux of tfte whole matter. If it be believed
that the sense of common interest is deep and keen; that most men
will be actuated by a strong motive of service for all their fellow-
men; that they will be as active in promoting the well-being of dis-
tant strangers as of their kith and kin — then one's attitude
toward all social and economic problems becomes fundamentally
different. The truth, in my own view, is that tho men are neither '
exclusively self-regarding, as the extreme hedonists assume, nor
imbued with a motive of service at all adequate as an impelling

1 See Chapters 66 and 67.

274 THE DISTRIBUTION OF WEALTH [5&-§9

force for sustained productive labor, they are much nearer the
first extreme than the second. How great are the possibiHties of
modification in human traits thru education, environment, a finer
pervasive social atmosphere, we do not know nor need we here
speculate. It may be granted that the possibilities are consid-
erable; but they will develop slowly. Men are now actuated, in
the ordinary course of their daily lives, chiefly by those motives
of narrower range which we call self-regarding, and they will long
continue to be so actuated.

Inequality arises, even under the simplest conditions, from the
unequal endowments of men. It becomes accentuated with the
growing complexity of the division of labor. Wliere there is no
division of labor, every man is led to do that which brings to him
for his own uses the largest direct return to labor. In a varied
society, he is led to do that which brings indirectly the largest re-
turn; that which others value highly and for which they will pay
highly. Competition and self-interest thus promote not only the
vigor of labor, but the effective organization of production. Above
all, as the industrial situation becomes complex, the middleman
appears — the employer, merchant, banker; indispensable figures
for the progress of industry. Inequality becomes more marked as
increasing complexity gives play to very varying abilities. Wliether
due to differences of inborn gifts or to the developing differences
that arise from acquired advantage, it remains an indispensable
spur to the full exercise of each man's capacities.

Wide variations thus arise, in earnings, possessions, available
surplus. The essence of capital is surplus. ^ Accumulation takes
place by many individuals, and surplus means are utilized by those
who see time-using ways of directing labor with effect. Sustained
accumulation and investment on a large scale will not take place
unless there be an inducement. The phenomenon of interest on
capital appears. Not less than interest, inheritance, whatever its
historic origin, operates as an indispensable stimulus to the saving
of private means and the increase of social capital.

So the leisure class emerges — the result of inequality, accumula-

1 Compare Chapter 5, § 3.

55-§ 10] INEQUALITY AND ITS CAUSES 275

tion, interest, inheritance. The immediate effect of idleness on the
part of a fraction of the community is obviously to lessen the total
available labor force; the great mass must work not only for their
own maintenance, but for that of this privileged fraction. But the
prospect of being a member of the leisure class has proved a won-
derfully powerful bait to effective exertion and permanent in-
vestment. False as the ideal of exemption from labor seems to the
thinking few, and doubtful as may be the happiness of those born
to a life of leisure, the hope of privileged position for one's self or
one's kin has been the main motive force for the material progress
of society.

Property in land is part of the mechanism for stimulating effec-
tive labor and effective investment. Production cannot be carried
on without land; all plant must be established on a site. Full title
and ownership to land have been indispensable to the growth of
capital. Such unqualified property right may not be essential in
an ideally constructed society; and the possibilities of restriction
in existing societies may be greater than is commonly supposed;
yet, historically, absolute private title to land has been the sure
means of securing its effective use. Thus rent develops as
an element in distribution, in part intermingled with return
on capital beyond possibility of discrimination, and in any
case an inevitable outgrowth of the system of property in its
cruder stages.

§ 10. The reasoning of the preceding paragraphs, followed with-
out flinching and without qualification, would lead to the con-
clusion that desert on the part of members of the leisure class is not
necessary to justify the existence of the class. Its position of ease
and comfort is a bait to stimulate ambition and accumulation.
Direct service by the survivors and descendants of fortune founders
would seem to be immaterial. Yet the current notions of justice,
vague tho they are, connote some closer relation between service
and reward; and the question persists whether the personal
qualities of the privileged and their immediate contribution to the
common welfare must not be considered in any solid justification
of existing inequality.

276 THE DISTRIBUTION OF WEALTH [55-§ 10

The question is answered in the affirmative by many thinkers,^
who hold that there must be a continuing service from the class as
a whole, if not from each and every member. It is pointed out that
tho the origin of inequality is to be traced to the unequal endow-
ments of men, it is to be sought also in varying services. In the
earlier stages of developing stratification, social classes — whether
priestly or feudal or industrial — sprang up because some indi-
viduals were in a greater measure serviceable to the general body.
Not merely predatory strength and cunning, but abilities exercised
in a manner to advance the common good explain the universal
differentiation of society. But during the later stages, when the
superior classes have attained an established position of privilege,
it becomes doubtful whether ability and service are maintained and
whether the justification of inequality still holds.

Such questions go to the foundations of the theory of ethics. On
strict hedonistic principles, it may be consistently maintained that
personal desert is immaterial. The coolly calculating economist
may accept the idle rich as inevitable adjuncts of a system which
is itself founded on the intellectual and moral limitations of men,
and he may leave their way of life to the preacher. I will not under-
take to say what are the last criteria of justice, for individuals or for
society; but it is obvious that the justification of inequality and of
all its consequences becomes more effective when the leisure class
is of service directlj^ as well as indirectly. Tho the mere existence
if a capitalistic aristocracy operates to spur ambition and to con-
serve capital, its position is immensely stronger if the individual
members contribute actively to the general well-being, thru con-
tinued industrial leadership, thru the advancement of science, liter-
ature, and art, thru genuine public service.

Whether contributions of this sort will, in fact, be rendered, de-
pends not only on ability (and this again on heredity), but on the
public opinion of the privileged class and indeed of society at large.
It cannot be said that the habits and ideals of the rich give great
promise. t

1 See, for example, Schmoller, Volkswirtschaftslehre, Vol. I, pp. 409-411. Cr>-
Paulsen, Ethik, Book IV, Part III, Chapter III, § 3 (p. 713, ed. of 1889) : and Dewey
and Tufts, Ethics, Chapter XXIII, §§ 1-3.

55-§ 10] INEQUALITY AND ITS CAUSES 277

Rapine, avarice, expense.
This is idolatry; and these we adore.

Nor are the ideals of the great mass of the people essentially dif-
ferent. They are not at heart censorious of the rich, but rather
envious, and ready to imitate bad ways. How far the spread of
better education and the democratization of society will affect the
prevailing ideals, it would be rash to predict. Something is gained
if the situation is laid bare; and herein the growing attention to
economic and social subjects promotes improvement. A wide-
spread understanding of economic principles, of the broad facts of
social stratification, of the singular position of the privileged few,
of the public loss from useless lives, of the fallaciousness and empti-
ness of the talk now common on social subjects among the well-to-
do — such knowledge may do something to spur the fortunate to
lead lives of service. Certain it is that the opinions of most per-
sons, and especially of those imbued with some sense of social obli-
gation, will be affected by the immediate and visible contributions
which the members of the leisure class may make to the general
good.

References on Book V

On the theory of distribution in general, as on that of value, the first
book to be mentioned is A. Marshall, Principles of Economics, Books IV,
V, VI (6th ed., 1910). A compact and able theoretic analysis is in T. N.
Carver, The Distribution of Wealth (1904). On the national dividend and
its distribution, and also on the topics in the subsequent parts of the present
book, a searching treatment is in A. C. Pigou, The Economics of Welfare
(1920). Entirely different in method, with a wealth of historical and sta-
tistical analysis, is G. SchmoUer, Grxmdriss der Volkswirtschaftslehre, Books
III, IV (1900-1904; French translation, 1905-1908). Still different, and
proceeding from a new point of view, is J. A. Hobson, Work and Wealth,
(1914), a book which justifies its sub-title — "a human valuation."

Among the many modern books on capital and interest, Bohm-Bawerk,
Positive Theory of Capital (English translation, 1891), has greatly influ-
enced recent economic thought . A revised edition of the German appeared
in 1909. Not inferior to this in intellectual incisiveness, but marked, like
it, by some excess of refinement and subtlety, are I. Fisher's two volmnes,
The Nature of Capital and Income (1906), and The Rate of Interest (1907);
and G. Cassel, The Nature and Necessity of Interest, English translation.

278 THE DISTRIBUTION OF WEALTH [55-§ 10

London, 1900. On the theory of interest a brilliant statement of the equali-
zation of choice between present and future is in P. H. Wicksteed, The
Common Sense of Political Economy (1910). An able book by a French
thinker is A. Landry, L'mteret du Capital (1904). J. B. Clark, The Distri-
bution of Wealth (1899), sets forth a theory of wages and interest as the
specific products of labor and capital; I find myself unable to accept the
reasoning, but to some economists it seems conclusive. An attempt to
recast the theory of distribution and value on new fines is Fetter, Eco-
nomic Principles (1915). On the theory of business profits an able dis-
cussion, with a point of view different from my own, is by F. H. Knight,
Risk, Uncertainty, and Profit (1921).

J. Bonar, Malthus (1885), gives an excellent account of Malthus's writ-
ings and of the earlier controversy about his doctrines. A. Dumont,
Depopulation et civilisation (1890), not a book of the first rank, states the
modern French view, laying stress on "social capillarity" as explaining the
decline in the birth rate, and enlarging on the desirability of an increasing
population. E. Levasseur, La Popidation Frangaise (1892), Vol. Ill, Part
I, gives a good summary statement on the increase of population com-
pared with the growth of wealth. G. Mayr, Statistik und Gesellschaftslehre:
Vol. 11, Bevdlkerxmgsstatistik (1897), Vol. Ill, Parti, Moralstatistik (1910),
gives a model summary of statistical data and a judicial statement on ques-
tions of principle.

On inequality, a survey of the literature and of the principles involved,
without attempt at statistical information, is in H. Dalton, Some Aspects
of the Inequality of Incomes in Modern Communities (1920).

BOOK VI

PROBLEMS OF LABOR

CHAPTER 56

The Wages System. Strikes and the Right to Strike

Section 1. Introductory. Character of the questions in this book: they
involve the weighing of conflicting elements, and are affected by social
sympathy, 281 — Sec. 2. The wages system necessarily involves restric-
tions on the individual's freedom, 283 — Sec. 3. It has material draw-
backs and spiritual drawbacks, yet brings a net balance of gain, 284 —
Sec. 4. A strike is not a mere cessation of work, but a fighting move.
It is the set-off against the power of discharge, 287 — Sec. 5. Should
the right to strike be restricted? 290 — Sec. 6. Employee representation:
its possibilities and its hmitations, 295.

§ 1. The subjects to be taken up in this Book and in that to
follow differ in important respects from the subjects of the preced-
ing Books. They call in less degree for mere description and analy-
sis, in greater degree for a judgment on the value of existing insti-
tutions and for advice on reform. Hence the conclusions depend,
more than with previous matters, on a weighing of pros and cons.
Many of the doctrines laid down hitherto have been definite and
positive. They are either true or not true. Such for example is
the case with the principles of exchange, of international trade, of
the value of money and the range of prices, of rent, and interest
and wages. No doubt questions of policy have also been con-
sidered, and necessarily have led to some balancing of conflict-
ing considerations; as for example with regard to banking legisla-
tion or the circumstances under which protective duties may be
advantageous. But such balancing is peculiarly necessary for the
social questions which are now to be taken up. With respect to
almost all of them, something is to be said on both sides; in favor
of one course of action as well as in favor of an opposite course.
No law can be laid down on them, and no conclusions proved by
irrefragable reasoning or convincing testimony. Almost invariably
there will be room for some difference of opinion. Of this there is

281

282 PROBLEMS OF LABOR [56-§ 1

ample evidence in the wide divergences of conclusions, and in the
bitter controversies on problems where the facts are undisputed.

Again, the conclusions reached on such questions are immensely
influenced by the point of view. It makes ali the difference whether
the problems are approached in a spirit of sj'mpathy or of indif-
ferentism. A great deal depends on the warmth of one's social
feelings. Some men are born with a spirit of fervid altruism, some
with but the slenderest strain of a moral sense. Between persons
of widely differing temperaments there is little common premise
for argument. There is no convincing a person whose whole point
of view is different from your own. Largely, no doubt, the per-
vading moral atmosphere tells. Most well-to-do persons, tho by
no means selfish or indifferent, are affected by their class feeling,
and are unconsciously disposed to be antagonistic to measures look-
ing toward equalization of opportunities and possessions. It is
true that they are not so critical and antagonistic as they were
fifty or a hundred years ago ; for the spirit of the time is becoming
kinder, more reformatory, more widely sympathetic. None the
less, an underlying opposition to schemes for social equalization
appears among the possessing classes, and not least among the busi-
ness men who now give the tone to these classes. On the other
hand the representatives of the less prosperous strata of society
are instinctively in an attitude of opposition. Most things in the
existing order of property and competition are repugnant to them,
regardless of the beneficial effects of that order and the inevitable
concomitants which the benefits entail. Here again is a cause of
differences in opinion not to be reconciled.

In this Book labor problems will be dealt with; in the next, prob-
lems of public control and the reorganization of industry. Both
sets of problems center about the inequalities of wealth and the
ways of mitigating them. I shall try to consider these knotty mat-
ters as objectively as possible, not unimbued with the spirit of so-
cial sympathy, yet constrained to face the limitations imposed by
men's rooted habits and traditions, by the defects of governmental
machinery, most of all by the moral and intellectual weaknesses
of human nature.

56-§2] THE WAGES SYSTEM 283

§ 2. Most labor problems center about the relation between
employer and employed. They arise in connection with the wages
question in the narrower sense — the question of the remuneration,
not of all laborers, but of those hired by the capitalist employer.
The wages sj^stem in this form is so familiar that its existence is
commonly accepted as a matter of course. Something needs to be
said at the outset on the grounds for its existence, on its benefits
and its drawbacks.

The wages system as it stands is the outcome of the division of
labor; and its present most pressmg"probIems are due to the in-
creasing complexity which characterizes large-scale production.
In ever growing measure the modern development of industry has
necessitated organization, direction, discipline, — single-minded
management. There^ must be a guiding__and coordihatjng au-
thority^- The liberty of the individual workman is necessarily
restricted. He cannot have the freedom in settling his daily rou-
tme^which is possessed by the independent artisan or the farmer.
He must work as part of an organization, and his tasks, his
hours, his speed, must conform to the plan of the whole. He must
obey orders.

This limitation of freedom is often regarded as a special char-
-acteristic of enfpldying capitalism and private property. But it
is the inevitable result of highly organized production. It is as
pressing under public ownership of industry as under private; it is
an essential condition of the success of any cooperative organiza-
tion by the workmen themselves ; it could not but be as marked in
a completely socialist society as under the existing regime. What
is true in regard to its bearing on the present wages system is that
this system has made the necessity plain and unmistakable; for it
alone has developed the methods of large-scale production and thus
arrived at the advantages as well as the disadvantages of the com-
plex division of labor. In saying this, I do not overlook the wide
range of public industry. Public industry hitherto has developed
no system or plans of its own — it has copied the essential achieve-
ments of private industry. It, is private management that has
pointed the way and perfected the methods of securing the

284 PROBLEMS OF LABOR [56-§3

needed organization, discipline, leadership. In so far, private man-
agement, and with it private property, are indispensable. Most
persons of the well-to-do classes think of the private organization
of industry as inherently and forever indispensable. Itjs not so;
but the unification of control and the restriction on individual
^ liberty which characterize it are not to be escaped. In this sense
) a wages system cannot be done away with.

§ 3. The wages system thus entails serious drawbacks under any
form of organization. Whether under private ownership and
management or any of the non-private forms, the interest of the
laborer in his work cannot be as direct, as strong, as personal, as
when he works for himself and under no one's direction. But the
drawbacks are beyond doubt greater under control by capitalist
owners. Capitalist control may indeed justify itself and continue
to hold its own thru special effectiveness in securing the essential
advantages. None the less the drawbacks must be faced and every
means of mitigating them sought.

The drawbacks are of two kinds: material and spiritual. The
output of material goods is smaller than it might be. The spiritual
ills are greater than they might be. The happiness of living is
marred by many incidents of the wages system as it stands.
\^.. The failure to secure the maximum of effectiveness and of prod-
uct is patent. The universal testimony is that hired workmen
do not do as much as they readily could. To state it more accu-
rately: unless the economic dominance of the employer is great
and his power of enforcing strenuous labor is exercised to the ut-
most, the workmen fail to do their best or anything like it. It is
not merely a matter of " making work" — of this something is said
elsewhere ^ — nor is it primarily a matter of lazy repugnance to
work. These factors enter, but they are not the most important.
The main thing is that hired men are directly interested, not in their
work,„but in their wages. What they turn out inures"l;b the em-
ployer, not in any visible way to themselves. The far-away pros-
pect of an ultimate enhancement of the social dividend, their own
eventual participation in that dividend, have no effect on their im-

1 See Chapter 62, § 3, and Chapter 57, § 4.

56-§3] THE WAGES SYSTEM 285

agination or their conduct. There is an obvious contrast with the
attitude of the farmer or artisan who becomes the owner of
that to which he apphes his labor. Naturally the evil is less where
production is of a routine kind, where output can be accurately
gauged and controlled, where machines set the pace. It is sur-
prisingly large even under these conditions. It is greatest where
much must be left to individual discretion. And it is great thruout
the range of the wages system.

This, be it observed^ is not a net loss. It is a deduction from a
conceivable maximum. It is a drawback, but one that is out-
weighed by the gains from division of labor, organization, manage-
ment. While the laborers do indeed produce less than if they did
their best wholeheartedly, they produce more than they could
without the wages system. Were it not for this net gain, the system
would not have developed. The capitalist can pay the hired work-
man, even tho he works with half spirit only, more than the latter"
can earn while working independently. The cobbler cannot do as
well for himself as he can when hired by the shoe manufacturer.
t The spiritual loss has received more attention of late years —
'^ one of the many signs of growing attention to the relation between
psychology and economics. We are slowly becoming awake to the
plain and simple fact that the happiness of all men is immensely
promoted if their daily work be made interesting and pleasurable.
Even at its best the wages system tends to choke that source of
happiness. At its worst, man's interest is not at all in his daily work ;
his spirit and his personality are elsewhere. The^more the " drive "
method is followed, in an endeavor to secure by threat or force that
which is not spontaneously given, the more is the possible material
increment from the drive offset by the spiritual loss of the driven.
There is danger of exaggeration, however, in all this; and more-
over there are some questions connected with it concerning which,
in the present state of our knowledge, we must speak with caution.
The exaggeration comes because those who descant on the losses
of human happiness are themselves persons with a bent, a marked
personality. They are thinkers, speculators, writers; they have
in themselves something of the spirit of poets, musicians, artists,

286 PROBLEMS OF LABOR [56-§3

inventors. No doubt some spark of individuality and creative
instinct is in each and every one of us. Only in a small minority,
however, does it call insistently for expression. Most men prob-
ably are not made unhappy by simple and monotonous work or by
direction and command. The charm of life which the medieval
artisan is supposed to have had is much exaggerated ; and so is the
loss of happiness from prescribed tasks. The temper in which power
is exercised is more inimical to happiness than the fact of power. .
;: Questions of a different kind, on which we must speak even more
/guardedly, are those on the relation between the present distribu-
tion of control and the qualifications of the persons who now exer-
cise the control. That there are differences between individuals in
their powers of leadership is not to be contested. Some are born
to command, others to obey; some are happy in commanding,
others in obeying. But are those in command of industry pe-
culiarly fitted for leadership? And are those who now follow them
designated by nature for obedience? Much of the ordinary talk
of the well-to-do implies that this sort of natural and supposedly
proper division of places now exists. Those who urge sweeping
changes, on the other hand, commonly ignore the very existence of
the problems of differentiation and selection. Elsewhere, when
considering a related topic,^ I have pointed out how inconclusive is
our information on the whole question of social stratification. It is
by no means certain, (even tho some evidence points that way,)
that the possessing classes and those who manage industry for them
are by nature different from the rank and file of hired workmen.
The present distribution of functions may not be in accord with the
abilities and the personalities of the several participants. Nor, on
the other hand, is it at all certain that a radically different^ sociaI"~
system would bring a better adjustment of tasks to abilities, a
fuller attainment of this condition for human happiness.

In any case it is to be remarked that on the spiritual side, as.well
as on the material, the loss of human happiness under the wages
system is again no net loss. The fact of everyday choice indicates

1 Business profits and the distribution of managing ability among social classes;
see Chapter 49, § 3.

56-§4] THE WAGES SYSTEM 287

that it is not so. The cobbler's work may be more interesting,
more consciously creative than that of the machine hand; mo-
notony and routine may make the factory dull and lifeless. Never-
theless, the cobbler will leave his bench and take his place in the^
factory if his factory earnings are higher — higher perhaps by a
small margin only. The_agricultural worker, tho he be an owner
oj a secure tenant, drifts to the town; and this is not simply because
of the diversions and crowds (which serve in some part to offset
submission to orders and to monotony of tasks) but because his
earnings are larger. The gain in output and thereby in earnings
from highly organized industry is so great as to offset not only the
material loss arising from uninterested labor but such spiritual loss
as comes from repression of personality. In both regards the prob-
lemjsjiow to minimize the losses; how to avoid the disadvantages
of complex industry while retaining the advantages.

It is sometimes urged that there is no such choice as has just
been mentioned. Under the wages system, it is said, there is com- „
plete lack of choice. The laborer must accept employment and
submission; he cannot escape by betaking himself to work under
other conditions. And true it is that when once the transition to
the new order is accomplished, once the system is established, he
has usually no alternative. But that it has been established at all
is due fundamentally to choices which have been repeatedly exer-
cised. True it is, again, that the history of modern capitalism is
full of incidents that spell compulsion — an ousting by stress of
need from the simpler, perhaps more attractive conditions of an
older day. These, none the less, are exceptions. The main driv-
mg force that caused the older conditions to be superseded has -"-■
been the flocking of multitudes of men to workshops, factories,
towns and cities, because life there has seemed to them, on the whole,
more attractive. Not t\Tannical power, not wage-slavery, but the
silent^stained exercise of preferences explains the modern indus-
trial order and the existing wages system.

§ 4. I pass to some other aspects of the wages system on which
there is loose thinking and vague talk: strikes and "the right to
strike."

288 PROBLEMS OF LABOR [50-§4

Tho it be the choice of more attractive conditions which explains
the drift of laborers into the wages system, it is none the less true
that, once the system is established and all pervading, the choice
becomes for the time being a restricted one and always remains a
difficult one. The men can choose only between one empJoyer-^nd
another; between work at wages and no work at all. In the right
of discharge, in the power of saying whether a man shall be hired or
not hired, retained or turned oflP, the employer has a fearful weapon.
He can deprive the laborer, for the time being at least, of his means
of support. The alternative of looking elsewhere for employment
is more or less precarious. Against the weapon of discharge the
laborer exercises that of the strike.

A strike is commonly spoken of as if it were a mere refusal by
individuals to accept the terms of an offer to enter on a contract of
labor. This statement is sometimes varied by describing the
strike not as an individual but as a collective refusal to enter on
such a contract. It is more than either of these. JLt_isL_,a .con-

y^ certed withdrawal from work with "the design of-securing-xeturn
to the same employment under better conditions than are offered
at the time by employers. The betterment of the conditions may
be in various directions: to get higher wages, to prevent a, reduc-
tion in wages, to change hours or other conditions of work.
But the intent always is to secure satisfactory terms while retain-
ing the positions, not to leave the positions and go elsewhere. A
strike is a concerted withdrawal for the purpose of bringing pres-

ff' sure to bear toward holding the same job.

This is not merely a matter of definition. It is one of recogniz-
ing what people really mean and intend, even tho they do not
formulate with precision what they have in mind. In any consid-
eration of proposals to restrict the right to strike — of the legal
or the moral aspects of the problem — care must be taken to un-
derstand the exact situation.
// Restriction of the right to strike has often been J)ppQsed — to
give an example of befogged controversy • — on the ground tlia^^it
would condemn men to a sort of slavery. To deny men the right
to strike, it is said, is equivalent to holding them against their will

56-§4] THE WAGES SYSTEM 289

to their places. Nothing of the sort is ever contemplated by those
who propose restriction; nor is it the liberty of choosing another
occupation which is in fact desired by those who go on strike. The
essence of the strikers' aim is to retain the same positions. The
strike is conceived to be successful when the strikers, after having
left in a body, are reinstated on the terms desired by themselves.
If another employment has to be sought, the strike^ is deemed to.
]ia\ e failed, exen tho the new employment be in fact secured, nay
even tho the strikers in the end prove to be better off at their new
places. In other words, the strike, to repeat, is a way of exerting — '
pressure toward hjoldjng the ,^old_4Qb-. The pressure means
damage to employers, perhaps to the public, probably at the
outset to the strikers themselves; these being in their own eyes
inevitable incidents, e\ en tho regrettable, of struggling for retain-
ing their places on acceptable terms.

The familiar attitude of strikers toward newcomers and com-
petitors — " strike-breakers ' — makes plain what is the real intent,
the real situation. The strikers, so far from quitting their jobs
and saying that others are free to take them if the offered terms are
found satisfactory, aim above all to prevent others from replacing
them on any terms whatever. Persuasion, appeals to class feeling
and class loyalty, physical violence, are resorted to in order to keep
away the interlopers. A peaceful and satisfactory conduct of a
strike takes place, in their opinion, when no endeavor is made to
fill the vacant posts and when both sides settle down to a process
of dull waiting and sustained negotiations.

The strike, then, is a tactical procedure, a fighting move. It is
mainly cherished, mainly used, because it constitutes by far the
most effective weapon which hired laborers possess. It is the one
great set-off against the powerful weapon which is in the employers'
hands — the right of discharge.

How great is Jhe power whirhJlie right of discharge_puts into the-__
employers' hands is little understood by those outside the indus-
trial struggle^ _'I3ieJearof being turned on the streets is always in _^
Jthejmck of the hired workman's mind. Much is said in all the
books on economics"about his bargaining disadvantages, his com-

290 PROBLEMS OF LABOR [56-§ 5

parative immobility, the obstacles in the way of his readily turning
to another employment ; much is also said, and with truthj about_
the influences of those underlying forces which determine wa^es and
serve in the end to check the bargaining advantages of the employer^^
No general statements can picture adequately the ordinary states_
of feeling: constant uneasiness, easily intensified to terror, on the
part of the men; consciousness of power and determination to hold
power among the so-called masters. Thejrightjo discharge pn
the employer's part probably is an indispensable part of the pres-
ent order of industry. Tho some limitations on it may be set,
tho abuses may be checked, it is essential to discipline and to effec-
tiveness in production. But liability to abuse there is. The un-
qualified right is cherished by employers not merely because es-
sential for discipline, but in no small measure because it satisfies
the instinct for domination. That very spirit of domination brings
about a state of opposition among the workmen, and this in turn
a cherishing of their own instrument of offense and defense — the
strike. Without that weapon they feel themselves helpless. And
since men tend to make the means an end, the strike and the right
to strike become matters not merely of tactics and expediency but
of principle. As the right of discharge is regarded by employ er§^ as
an inalienab;e right, so that of striking comes^toJ)e_regarded by
the men.

§ 5. How far the right to strike shall be allowed to go, what
degree of pressure the law shall permit to be exercised by strikers
on those ready to take their places, in what form the power of the
law shall be applied — these are questions of the greatest intri-
cacy and difficulty. The law itself, both statute law and judge-
made law, is in a state of flux and transition. And there is no
underlying set of principles so settled as to constitute a firm founda-
tion for legislation and adjudication. In the last analysis all de-
pends on one's attitude toward the existing industrial order. He
who expects and desires far-reaching changes toward th? remodel-
ing of the social structure and the lessening of inequality, will favor
a wide extension of the right to strike; since this is a means of cur-
tailing the power of employers and perhaps paving the way toward

56-§5] THE WAGES SYSTEM 291

their eventual disestablishment. He who regards private prop-
erty and employer management as indispensable and unalterable
will insist that strikes must be curbed. On this matter, as on many
considered in the pages that follow, most people — legislators and
judges not excepted — reason from premises which they have not
formulated and of which indeed they are hardly conscious. Their
attitude is determined once for all by their prepossessions.

Yet there are some considerations important for the legislative
problems involved which should be observed irrespective of one's
views on the aim and ultimate outcome of social and industrial
development.

Consider the strike not as a mere withdrawal from work, but as
a tactical move designed to bring complete cessation of operations.
Those operations may be of vital concern to the community; as
for example, in the case of railways, urban transportation, light,
water. Stoppage may mean peril, even disaster. On the other
hand, in those very operations the tenure of the employees may
be comparatively secure and the power of discharge regulated and
restricted. Such is likely to be the case in industries which are di-
rectly under public management. Public officials rarely have an
unfettered power of discharge. By custom or law the employee who
is turned off has a right to hearing and to some sort of trial. Some-
thing of this sort — some check on the arbitrary determination of
the very fact of employment — should be made a part of the or-
dinary Industrial procedure. It Is but one phase of what is de-
sirable on a larger scale and on wider grounds, , participation by
the hired workers In the settlement of the conditions under which
they work. The possibilities and also the limitations of such par-
ticipation will be considered presently. Assume for the moment
that it exists in effective form. Then the strike and the right to
strike have a different aspect. The strike Is no longer indispensable
as a weapon for securing a hearing, for combating absolute control
over employment. The community Is entitled to protect itself
against efforts to stay the operation of vital industries. The w^ork-
men may be required not to strike, in the sense of not deliberately
striving to bring the industry to a standstill. Precisely what

292 PROBLEMS OF LABOR [56-§5

forms of compulsion shall be applied, is not so easy to say : whether
to make the mere concerted cessation of work a punishable offense,
or only the overt endeavor to prevent others from engaging in the
work. The question of principle is on the right to strike : shall it_
be restricted at all where the employer and employee are no longer
separated as hostile parties dealing with each other at arms' length
and where the employer himself is restricted in the use of his main
weapon of domination?

This question of principle is most clearly presented in the indus-
tries managed by government. The community, by the very
circumstance of putting them under public management, has ex-
pressed its conviction of their special importance for the public
welfare. Here it would seem incontestable that on the one hand
the men should be given a standing in the administration of em-
ployment, on the other hand that they should not be given a free
hand in stopping the wheels of industry.

In cases where there is not public management and yet an in-
dustry whose continued operation is of the first concern to the
public, the Hue between public and non-public industries is not
easily drawn. ^ Often there is a sort of half-way arrangement —
private management controlled and regulated, as in the case of the
so-called "public utilities." Are the same considerations applic-
able to these industries under direct government management?
The public is quite as much concerned in the continuous operation
of a railway owned by a corporation as of one publicly owned. The
conditions of employment and the right of discharge, again, may
not be essentially different from what they are under government
management; tho in this respect the same protection of the men
against arbitrary acts is by no means so readily instituted or so
easily maintained. On the other hand, it may be reasonably con-
tended that in putting or leaving an industry in private hands the
community has assumed the risks and the consequences of that
form of Industrial organization. Privateownership^_carneaJsdth-"
it the seeds of conflict — the inevitable clash between those who
employ and those who are employed. Disguise it as we may,

I Compare Chapter 64, § 1.

56-§5] THE WAGES SYSTEM 293

smooth over to our utmost, adjust where we can, there the conflict
is, ever hable to break out. To this danger we may submit only
because the system on the whole is supposed to bring advantages
more than countervailing. If private management of j-ailways is
preferred to public, the ground must be that on the whole it works
better; that the spur of self-interest, the incitement to enterprise,
the freedom from political entanglement, cause transportation to
be better conducted. If coal mining is left in private hands, it is
because there also private industry is believed to supply the com-
munity better than public industry would. The private employer,
however, regards the business as his own, its methods of man-
agement as subject to his own judgment only. It is almost in-
variably urged by him and his spokesman that the effective
working of the business machine depends above all on unfettered
freedom in the selection and tenure of employees. So long as
this attitude prevails, the workman will feel in turn that he must
retam his weapon of defense, the strike, even tho it entail injury
to a wide circle of persons. If the public wishes to secure the
gains which accrue from private property and private manage-
ment, it must accept the offsets which arise from strife and
stoppage. To restrict the right to strike and leave absolute con-
trol of employment to private managers is to give strength to one
side and take it away from the other.

All the preceding has been stated in general terms — terms too
general to meet the diversified conditions of actual affairs. There
are gradations, from well-administered public industry thru quasi-
public and publicly controlled corporations all the way to the far-
thest extreme of unfettered private ownership and management.
Public industry itself is by no means invariably conducted in a
spirit of consideration for the rank and file of the staff. It hap-
pens often enough that the officials in charge accept the point
of view and the methods of private industry, and are equally in-
tolerant of any derogation of their power. An attitude of this
sort is defended on the ground that it is essential for the main-
tenance of ^isciplirie; nor can it be said that this is always a mere
pretext. At all events, where such a state of affairs exists, the

294 PROBLEMS OF LABOR [56- § 5

strike is not to be ruled out as ipso facto a punishable offense, on
the ground that the industry is a public one. On the other hand
it is quite conceivable that a quasi-public corporation — private in
ownership but publicly controlled — may operate under a modi-
fication of the ways of private industry not only as regards charges
and profits, but as regards labor policy as well. The conditions of
employment, the power of discharge, the discipline of the staff,
may be subject to such regulation as would be expected under ideal
public management; and this may be part of the very terms under
which private management is authorized. When this is the case,
the strike becomes an inadmissable weapon. The public has then
protected the employees and it is in turn entitled to protect itself.
The reader might gather from the preceding discussion the im-
pression that discharge and strike should be treated as cards of
equal value in the game — the one to be set off against the other,
and given up if the other also is given up. No such mechanical
method of dealing with the problem can meet its complexities or rec-
oncile the convictions and prejudices of the contending parties.
Xhe right to strike is cherished by workmen not merely as a means
of defense under unequal conditions. More or less consciously,
more or less widely, it is regarded as the entering wedge for radical
readjustment. Even if employers were to consent to restrictions
on their power of discharge, contests would remain, strikes would
brew. And on the other hand, discharge is but one of the matters
in which the employer's absolute rule is to be questioned. Dis-
charge is conspicuous because it is the outstanding weapon. But
all the conditions of employment may be subjected to some degree
of control if control is to be applied to the workman also. Not_
only hiring and firing, but standards of wages, piece rates, appor-
tionment of tasks, the powers of foremen, shop rules, may come to
be settled not by the employer at his untrammeled discretion, but
by conference, agreement, contract. When such methods of set-
tlement, such participation in the contract of employment, are es-
tablished and in effective operation^, the strike may be subjected
to greater restriction than can be imposed in their absence. It is
quite conceivable that in its militant sense — the endeavor to stop

56-§6] THE WAGES SYSTEM 295

operations until the strikers get their terms — it shall be made un-
lawful.

§ 6. The tenor of the preceding discussion is in favor of what is
vaguely called "industrial democracy." Works Councils, Indus-
trial Councils, Shop Committees, Employee Representation —
these are the names of various arrangements for participation by
the employees in some at least of the problems of management.
Each particular scheme is apt to be considered by its ardent pro-
ponents a panacea, capable of removing all social ills. No device
has this wonder-working power. The best hope for the future
lies_hi_a successioa^of reformatory steps, each needing to prove
itself good in actual experience. Among the steps deemed prom-
ising is the establishment of employee representation in the mak-
ing and especially in the administering of the labor contract. The
plan has possibilities, but has limitations also. Something can be
accomplished by it, but too much must not be expected.

In the first place it is doubtful whether much will be gained as
regards those evils of the wages system which were considered in the
earlier sections of this chapter. Neither the material nor the spir-
itual drawbacks of the system are likely to be removed, perhaps
would not be greatly lessened. It is hoped by many advocates of
"industrial democracy" that, once representation on councils or
boards is established, the attitude of employees toward their daily
work will be revolutionized. The men will feel it to be their own,
will put whole-souled energy into it, will be free and joyous in the
exercise of their faculties. This seems to me quite Utopian, just
as similar expectations have proved to be with regard to profit
sharing and like devices. The fact that a man has a vote in
choosing a labor representative on a council or that he attends an
assembly where labor problems are considered, is not likely to
affect sensibly his attitude toward his everyday tasks. It may
indeed have some effect toward strengthening other factors work-
ing in the same direction, such as a well-devised and well-admin-
istered system of piece or task wages, and, not least, a steady
policy of patience, consideration, goodwill, on the emploj^er's part.
But in itself this bit of participation will have a negligible influence.

296 PROBLEMS OF LABOR [56-§6

The factory hand or the railway fireman will go his way with his al-
lotted work much as before, one among hundreds or thousands,
disposed primarily to "get by" in conformity with the regulations
and to receive his stipulated pay, unaware from day to day that
anything has happened to affect the status of the employee class.

Least of all can any modification be expected in the morale of
the workmen if these devices are used as maneuvers against their
own organizations. Precisely this is in the minds of many em-
ployers who set up shop councils. They expect the new arrange-
ment to supersede existing unions of their employees. The ex-
pectation is not often overtly stated; the intrinsic advantages of
the new arrangement and the desire to^^o "what is,rigiitll_are_/^
dwelt on. Doubtless an increase of working effectiveness, a stim- .^.^^^
ulation of the men's individual efficiency, are hoped for; a better
a,nd hapjpier attitude toward the daily task is occasionally thought
of. Yet in many cases, perhaps in most, employers expect and
intend, in the United States at least, to circumvent and replace the
labor unions. So long as this is the case the movement in my
judgment will come to nothing. Employee representation and
the labor unions are by no means incompatible. On the contrary,
the successful working of any system of representation depends on
the very existence of organization among the men, and probably
on organization outside of the system itself. But the employer
commonly believes the two things incompatible; and the employee
himself is prone so to believe. As long as mutual suspicion exists^
and the real aim is disguised, no scheme of the kind will have the
desired results. Moreover, a policy of opposition, disguised tho
it be, cannot be concealed. It will out, however denied and how-
ever covered over. A real spirit of meeting the men on their own
ground and with a frank recognition of their own methods of
joining together for their own ends — this is indispensable.

On the other hand, with every factor favorable, it is improbable
that any scheme of representation or participation will extend its
scope so as to cover the whole plan of management. It is likely to
be restricted to labor management in the narrow^er sense — prob-
lems of employment and discharge, rates of pay and standards of

56-§ G] THE WAGES SYSTEM 297

work, the relative wages of different groups of workers, grievances
p)etty and serious, discipline overdone or tyranny meanly exer-
cised. The other and often larger problems of management and
administration will hardly be affected. Probably they should not
be. There is a curious range of extremes in the expectations en-
tertained regarding the possibilities of arrangements of this type.
Hardheaded employers of the ordinary money-hunting type look
at them as sops to Cerberus, specious concessions meant to keep
down the spirit of unrest. Imaginative and idealistic persons
urge their installation as the entering wedges toward a new social
order. They regard the councils and committees as the first stages
toward complete control by the rank and file over the establish-
ments in which they work. Neither party is likely to witness the
outcome it expects. The fundameiitaJ4)roblenis of management will
long remain in the hands of a select few. The half-autocratic
powers which the capitalist employers have possessed will indeed
be curbed. They will be under control not only as regards labor
relatious, but as regard prices and the public interest generally.
But it is improbable that there will be a revolutionary change in
the main features of the existing industrial organization. The
experiences of cooperative production point to nothing so conclu-
sively as to the improbability of any early passage of complete
control into the hands of the manual workmen. Cooperative pro-
duction would really be industrial democracy. The instances in
which it has been successfully carried out are, however, so extraor-
dinarily rare that they serve only to make conspicuous the gen-
eral failure. The dreams of radical reformers now turn rather to
socialism — a complete overturn of the existing order — mdus-
trial democracy in quite a different sense. The possibilities of com-^
plete reorganization in any form will be considered in later chap-
ters. ^ For the present we are concerned with the wages system as
it stands, its defects and the ways of remedying them. Among f
the remedial measures is this of employee representation : not a CL^
cure-all for the social ills, but of promise toward smoothing the
working of the industrial system as now established.

1 See Chapter 61, on Cooperation; and Chaptors 66 and 67, on Socialism.

CHAPTER 57

Labor Unions

Section 1. Bargaining power of laborers strengthened by unions. Weakness
of the single laborer. Immobility of labor; lack of reserve funds; perish-
ability, 298 — Sec. 2. Monopolistic tendencies of trade unions of skilled
workers; not often of permanent importance. The open union, such as
alone can develop among the less skilled, a potent instrument for good, 301
— Sec. 3. Closed shop or open shop? A strong prima facie case for the
closed shop with the open union, 304 — Sec. 4. The danger of a check
to progress and efficiency under the closed shop. Limitation of output;
piece work; the standard rate; labor-saving appliances; discipline, 306 —
Sec. 5. A division between open shop and closed shop not unacceptable.
Grounds of employers' opposition often untenable. The question of
union leadership crucial, 310 — Sec. 6. The scab and the use of violence.
The tie-up, 313 — Sec. 7. The unionist movement likely to extend, and
entitled to sympathy, 315.

§ 1. The labor-union movement is modern. It is mainly a eon-
sequence of the Industrial Revolution — of the factory system and
the concentration of industry. The number oT persons employed
in a single enterprise and under a single employer has tended to be-
come larger and larger. Hence personal ties between employer
and employee have relaxed or disappeared, and bargaining has
become more impersonal and cold-blooded. At the same time
concerted action by employees has become easier. Combined
with this economic tendency has been the growth of democracy
and of the aspirations that go with democracy. The union move-
ment is one of the most important signs of social unrest and social
progress. The laborers have become increasingly dissatisfied with
a condition of dependence. They wish not only for higher jyages,
but for emancipation from semi-patriarchal conditions. They de-
mand that wages shall not be settled once for all on the employer's
offer, but by a contract in which their own action shall play an

effective part.

298

57-§l] LABOR UNIONS 299

We may proceed at once to the most important economic ques-
tion presented by labor unions — their possible effect on wages.
On this subject it might have been said fifty years ago that the
opinions of economists and of trade-unionists were far apart; for
many economists then maintained that unions could have no effect
qn wages, while the unionists themselves ascribed every actual rise
in wages to their own efforts. The labor leaders are still disposed
to lay undue stress on the effects of concerted action ; but a middle
ground would now be taken by most economists.

It is certain,^nd^ indeed obvious, that the bargaining power of
hired workmen is strengthened by their acting in a body. Where
an employer deals with a hundred workmen, he may be said to be
hcundredfold^tronger in his bargaining position than a single work-
man. The difference to him whether one of his men goes or stays
is only the difference between 100 and 99. But to the workman the
alternative is between employment and — for the moment, at
least — unemployment. True, the w^orkman may turn elsewhere;
and it may be contended that, if he offers his labor at the market
rates, he will get employment from some one else. Probably he
will; but only after an interval, and with more or less uncertainty.
It need not be said again how powerful is the weapon which the
employer possesses in the threat of discharge and the workman's
fear of losing his job. Where, however, all his workmen present a
demand at once, and propose to quit work at once, he is in a cor-
respondingly difficult position. Then he, too, will have to stop,
and for the moment will lose Jm job ; and he will soberly consider
whether he can find another set of men on the same terms. If he
offers the market rate, doubtless he can secure another hundred;
but, like the individual laborer, only after an interval, and with
more or less uncertainty and temporary loss.

The advantage possessed by the large employer becomes clear
when his position is contrasted with that of one hiring but a single
person, or very few persons. The typical middle-class house-
holder, with one or two servants, needs each servant as much as the
servant needs him or her. If the mistress gives notice, doubtless the
cook can find another place at the going rates; but not at once or

300 PROBLEMS OF LABOR [57- § 1

without inconvenience. If the cook gives notice, doubtless the
mistress can find another at the going rates; but not at once, and
with no less inconvenience. Hence in a country like the United
States, where the number of well-to-do persons who demand do-
mestic service is great and growing, and the number of those willing
to give such service is limited,^ wages are not only high but are kept
at the high market level without organization among the sellers of
labor. If the persons wanting such service commonly maintained
ten, twenty, a hundred, domestics apiece, the situation would be
different. The single servant would then be weak as a bargainer;
and tho the general level of wages would doubtless not be affected,
the probability that in each case the actual pay would conform to
the general level would be less.

The disadvantage which the laborer usually has to face in bar-
gaining is due not only to the fact /that he is immobile '■'— cannot
quickly find the best market for his labor — buffo lack of hisj:e>-
serve fund^ and to tlie perishability of his commodityT In all these
respetrfes the differencdiDetween employer and employee is often one
of degree only; it is none the less of vital effect on their relative
positions. Tho the workman, as well as the capitalist, may have
reserve funds on which to fall back while waiting and bargaining,
they are usually much less than those of the employer, and in the
case of most unskilled laborers are virtually non-existent. So with
perishability. There is a sense in which the employer also is like
the vendor of a perishable commodity. Machinery and tools de-
preciate while idle, thru the mere lapse of time and thru obso-
lescence; stoppage of production, for a "going concern," means
some definite loss. But it is even more true of the laborer that
working time lost is irrevocably lost. As regards some sorts of
exacting mental labor, a period of rest perhaps adds in the end to
vigor and efficiency; but this possibility is negligible for most physi-
cal labor. If a man is out of work for a day or a week, so much of
his earning power is gone once for all.

Organization and concerted action among workmen enable them,
to no small degree, to lessen their disabilities. Labor unions can

I Compare above, Chapter 47, § 1.

57-§2] LABOR UNIONS 301

do much to mitigate the immobiHty of labpr^ by collecting infor-
mation aFout the demand ajid^bxajdlng. their members in reaching
the right places. Public and private agencies act toward the same
end; tho p^i^'ate agencies, managed for profit, are themselves likely-
to take advantage of the laborers' weakness. Labor unions, by
accumulating funds, give their members a better chance to hold
out in the process of bargaining. Most important of all, concerted
action in stopping work makes the employer feel that the workmen
are as necessary to him as he to them.

Labor organizations are thus effective toward securing "fair
wages"; that is, the current or market rates determined under the
conditions of competition. They aid in enabling the laborers to
get, in each particular case, the wages determined by the full com-
petitive demand for the special sort of service; and they aid in
bringing the general level of wages to the full discounted value of
the product of labor in general'. Under the regime of private prop-
erty and competitive industry, this is doubtless all that unionism
can achieve in raising wages: But it is a great deal. The cur-
rent or fair rate of wages is not determined automatically or with
any accurate demarcation. It is always the result of barg:aining, _^_;2^
There is always a debatable ground, and a chance for maneuver*
ing by both parties. _^_^^_^.

§ 2. The concrete problems connected with laboi/ unions relate
always not to wages in general, but to the wages of 'S "paj-ticular
group. And they relate usually to the trade union as distinguished
from the more generic type, the labor union. The trade union,
still the most familiar and effective form of organization, is made
up of workmen belonging to one trade or to a group of trades closely
related. The wages of each such group in the specific case depend
on the play of demand for the special kind of service rendered.
Limit the supply of workmen in a given trade or group, and the
chance is bettered for getting higher wages in that set. This is
what the trade union invariably desires to bring about. The most
effective organizations are those of the skilled workmen — the
machinists, bricklayers, carpenters, plumbers, and the like. These
are in any event more or less in a non-competing group. Their

302 PROBLEMS OF LABOR l57-§2

semi-monopolistic position, tho threatened by the spread of educa-
tion and of the machine processes, is still strong, and is sought to
be maintained by various devices. The number of apprentices is
limited. Admission to the union is restricted by high initiation
dues. In some of the rougher trades, brutal violence is threatened
against would-be competitors. Trade schools are opposed. The
unionists try to maintain themselves in a favored place as compared
with the rest of the laborers.

For this they are not, humanly speaking, to be blamed; but they
act against the general interest. Capitalists and employers are
no less desirous of shutting out competition and securing monopoly
profits. Either sort of combination works against the general good.
Tho unionism as a movement for uplifting the laboring class at
large and bettering the bargaining conditions for all, must com-
mand sympathy, in its particular manifestations it is too often
undisguisedly selfish, and so causes repulsion even among its warm-
est friends.

It is true that the instances of monopoly effective thru trade-
union exclusion are not many, and are tending to become less.
They occur chiefly in those occupations where the handicraft is still
dominant. Such is the case, for example, or. was until very recently,
with the glass blowers. They had a tight union, succeeded in re-
stricting apprentices, limited numbers, and secured for themselves
unusually high wages. As machine methods come to prevail and
specialized skill counts less than general training and intelligence,
it becomes more and more difficult to maintain such monopolies.
In this very trade, new inventions were introduced which accom-
plished by machinery what could formerly be done only by the
expert glass man blowing thru his tube. None the less, the
skilled workmen as a class still jealously guard, tho with lessened
prospects of success, their privileged position as against other
workmen.

It is a significant fact that this restrictive attitude has the sym-
pathy and approval of workmen in general. Most workmen are
instinctively protectionists. Not only do they fear unemployment
thru increase of competition, but they generalize from the partic-

57-§2] LABOR UNIONS 303

ular case and assume that what is advantageous to some laborers
must prove advantageous if applied to all. The bracing doctrine
that every one should do his utmost in a free field finds as little
spontaneous welcome among the employed as among the employers.

Evidently the objectionable side of unionism here considered
would disappear if there were the open union; that is, if all persons
competent to do the work were admitted freely to the union. The
union then w^ould be an organization with no flavor of monopo-
listic exclusion, but one simply for mutual aid and for collective
bargaining.

This is the usual situation in the unions of the unskilled or partly
skilled. The trade union, the earliest and most spontaneous type,
has been supplemented by a great development of labor organi-
zation in the lower ranks, both among factory operatives and
among the miscellaneous unskilled. Especially in the United
States there has been a wide spread of organization according to
mere propinquity of occupation ; as for example among the motor-
^^«aen of the street railways, the switchmen on railways, the long-
shoremen ("dockers" in England), and the freight handlers, the
teamsters, the coal heavers. These are occupations needing at
most but a few weeks of experience, to which any able-bodied man
can turn. The unions therefore in the end necessarily become open
unions, and free from the reproach of selfish exclusiveness. At the
same^time they affect just those classes of workmen who are as
individuals most helpless. Unionism among them, so long as it is
kept free from the taint of physical brutality, brings a great pre-
ponderance of gain. No doubt, their leaders are sometimes dema-
gogs, "or (worse) traitors ready to accept bribes. During the
earlier and formative stages of organization, they overestimate
the gains which the union can bring, and may be turbulent. On
the whole they are potent instruments for good. They not only
improve the bargaining position of their members, and raise their
wages so far as this factor can further the rise; they bring also edu-
cational benefits. During the last generation, workmen of these
grades in the United States have been largely foreign born, often
immigrants but lately arrived. For these the trade unions have

304 PROBLEMS OF LABOR [57- §3

been great schools, and with all their narrowness of outlook have
been helpful in the process of uplift and amalgamation.

In .the skilled trades, the policy of opening the union is always
resisted as long as possible. At the same time, many of them have
learned, and most of them probably will learn, that it is the only
safe policy. Exclusion and limitations, as means of forcing wages
in particular trades to an abnormal level, bring sooner or later their
own breakdown. Employers are put to their wits' ends to find
and train outsiders or to develop improvements w^hich will make
it possible to dispense with the skilled men. The spread of edu-
cation, and especially of manual training, combined with the steady
extension of machine processes, make the position of the monopo-
listic union more and more precarious. Where trade schools are
established — and notwithstanding the opposition of the unions,
they are steadily extending, and will extend more and more in the
future — the unions find it to be their only wise policy to admit
into their ranks the men so trained. And even without Trade^
schools, unusually high wages lead a multitude of employers to try
to get on without the expensive unionists, and tempt a multitude
of other workmen to try their hand at the well-paid jobs; with, the
result that these mutually attracted parties get together and de-
prive the union of its monopoly. Reluctantly and unwillingly,
even the skilled men are in most cases driven to the policy of the
open union.

§ 3. The most hotly debated question regarding unionism con-
cerns the closed shop. Shall all workmen be brought together in
unions, and all bargains as to wages arranged by union represen-
tatives? Shall non-union men be virtually forced to join the or-
ganizations by being shut out from employment unless they do so?
The alternative is the open shop, in which the employers deal with
their laborers individually, or at least deal with them irrespective
of their being members of the union.

Evidently the closed shop is a powerful weapon in support of the
union of the monopolistic type. If the members not only refuse to
admit newcomers to their ranks, but refuse to work in a shop with
them, the difficulties of getting outsiders, even tho these be tempted

57-§3J LABOR UNIONS 305

by exceptionally high wages, are very great. In almost all enter-
prises the employer needs a trained and coordinated staff. If the
union men leave in a body whenever he employs an outsider,
he must substitute another full complement. Even if the work is
not very difficult to master, and if plenty of outsiders are attracted
by the wages offered, it is at the least a troublesome matter to break
them in. If the trade be a skilled one and training in it hard
to secure, the union, insisting on the closed shop, has the situa-
tion well in hand. Only extravagant demands will lead the em-
ployer to break with them. Ordinarily he will prefer to join with
them, pay high wages to keep them content,, and reimburse himself
by high prices Jo purchasers. There is an obvious limit to this pro-
cess, in the conditions of demand among the purchasers ; but if the
union also limits access to its ranks by restrictions on apprentices
and the like measures, it may find in the closed shop a cause — tho
in large part also the result — of a profitable monopoly position.

Suppose, however, that with the closed shop there is the open
union. This would remove one of the evils ascribable to the closed
shop — the creation, or at least reenforcement, of a monopoly. If
alT qualified applicants were admitted in good faith to the union,
the primary effect of the closed shop would be simply to enforce^
collective bargaining. No contracts with individual workmen
would then be made. All bargains on wages and the conditions
of labor would be concluded thru union representatives.

The case, so stated, is prima facie in favor of the closed shop. So
much follows from what has been said of the gains secured thru
unions by laborers. They get better terms by bargaining in this
way. They are the most numerous and the most needy members
of our modern societies; what improves their condition increases
most surely the sum of human welfare.

Let us consider more closely, however, the industrial situation
as it would beJf^the_close_d shop^jvere universal. A great power
would be in the hands of the workmen or of their representatives.
That power would be by no means confined to questions of rates
of wages. The very settlement of wages involves many other
things; not only wages and hours, but the mode of payment, pen-

306 PROBLEMS OF LABOR [57- §4

alties, fines, and numberless details of administration and discipline.
Where a trade agreement is drawn up between the representatives
of emplo^^ers and employees, it is never a simple contract dealing
with wages alone; it covers, necessarily, a multitude of matters of
organization. In any case, if we imagine the closed shop to be
universally established, one fundamental question is settled for the
employer. He has no alternative as to whom he shall emglpy. It
must be members of the union or no one.

The question whether the closed shop, with the open union, is
to the advantage of society depends on the use which the workmen
make of the power which is given them. If used simply to streng-
then bargaining power and prevent exploitation (in the narrower
sense in which that term is here applicable), unalloyed good ensues
to the workman. If^ised to hamper industry, there is mucli
evil also; and, unfortunately, in the present state of mind of work-
men and their leaders, there is so much reason for expecting
evil of this sort that no dispassionate observer, however strong his
sympathies with laborers, can look forward to the universal closed
shop without grave misgiving. . The grounds for this feeling need
some further explanation.

§ 4. The inevitable attitude of the hired workman, as already
remarked,^ is to favor arrangements that seem to make work and
to oppose those that seem to lessen work. Every improvement,
every labor-saving device, means some shifting and readjust-
ment, and hence commonly entails hardship — perhaps tempo-
rary, but hardship, none the less. Once settled in a job, the
workman wishes it to last.

One familiar manifestation of this attitude is the_IimitatioB-of~-
output; that is, the limitation of the amount a man shall accomplish
in a given time, as, for example, the number of bricks he shall lay
in a day. Such restriction is often defended on the ground tha.tjt
prevents "driving " — the requirement of excessive stints by em-
ployers. Very likely there is a case to be made in favor of it on this
ground. In the great majority of instances, however, it is simply
a mode of making the job last, and so a check on vigor andefiiciency.

1 See Chapter 52, § 3.

57-§4] " LABOR UNIONS 307

It lessens the product of industry. Moreover, it saps the spirit of
willing and cheerful activity, and so contributes still more to those
factors — in any case many and unfavorable — that make labor
irksome.

So it is as regards piec pwnrk The workmen, individually or
when gathered in unions, oppose it. Here, too, the ostensible
ground of opposition is often that piecework leads to "driving."
The rate of pay is alleged to be based on the capacity of some un-
usually strong or skilled workman, which is then used by the em-
ployer as a ground for urging the average man to extreme exertion.
Beyond doubt it happens that piecework is thus used as a device
for getting too much w^ork, or at all events more work at the same
pay; and this supplies one instance more of the individual laborer's
disadvantages in bargaining. But, after all, the underlying feeling
about piecework is that it increases output, and so seems to lessen
the amount of work: to Jbe done. .

Something of the same sort appears in the demand for a stand-
ard rate of wages ; tho in this case much more is to be said in favor
of the trade-union policy. Strictly speaking, that policy is for es-
tablishing not a standard but a minimum rate, less than which no
member may accept. In practise, however, the minimum rate is
apt to be the uniform rate. The general drift among trade unions
isagainst differenc£s,_and so against -any higher scale of wages for_
the capable and strenuous. This drift may be due partly to a wide-
spread egalitarian feeling, a vague questioning of the intrinsic
righteousness of that adjustment of reward to efficiency which fol-
lows from the strict individualistic principle. Mainly it is due to
the same feeling that underlies limitation of output and opposition
to piece pay — a fear that the highly paid man will accotQplish
much, and so will leave less work to do for the rest.

On the other hand, the unflinching adherence to a standard rate,
and even to a unifornLiate, is. to be defended on the ground that it
strengthens bargaining power. In the absence of a uniform scale,
many an employer will try to whittle away a rate that is supposed
to be established, by special agreement made with (and in practise
perhaps forced upon) a particular workman or set of workmen.

308 PROBLEMS OF LABOR [57-§4

Any sort of discrimination or classification, tho ostensibly in favor
of the highly efficient, gives color to discrimination against those
who are supposed to be less efficient, but who in fact may be simply
less able to resist. It is probable, moreover^ that the differences
in individual capacity between able-bodied manual workmen are
not very great, and that the deadening influence which is alleged to
be exerted by the standard-rate policy is, in practise, no great mat-
ter. Hence this policy, much as it has been condemned by those
who see only the bad side of unionism, has probably done little to
fetter general efficiency, and has done something to aid the unions
to maintain themselves against covert attack.

The opposition to labor-saving improvements and machinery
rests unmistakably on the same ground as underlies more obscurely
limitation of output and opposition to piecework — namely, the
dread of unemployment. All hired workmen (barring perhaps
agricultural laborers under some conditions) dread such improve-
ments. In the old days, they rioted, and destroyed the hated com-
petitors. In modern times, a silent, stolid resistance is apt to
appear, with ahalf-conscious endeavor to prevent the new devices
from working successfully. It is true that many labor leaders and
labor unions have given up the policy of opposing improvements
and machines, and advise the members to accept them and to be-
come proficient with them; this is simply because they submit to
what experience has shown to be inevitable. If the closed shop
w^ere the universal rule, no entering wedge would exist for compel-
ling acceptance of the better methods.

The attitude both of employers and workmen, as regards inven-
tions and improvements, is naturally that of trying to appropriate,
each party for itself, the whole gain. The employers try to hire
the men at the existing rates of pay, to sell the products for the ex-
isting prices, and to pocket a higher profit. The men — once they
have made up their minds to accept the new ways — try to get for
themselves part of the gain. Neither party thinks of the public,
and each is apt to talk of the "justice" of having the benefit go to
one or the other. Justice, in the sense of promotion of general weU-
being, demands that the gain shall go to the community, in the form

57-§4] LABOR UNIONS 309

of more abundant production and lower prices; which, of course,
is the result of competition among the producers and especially
among the employers. If there is not competition, but monopoly,
the workmen might as well gain as the employers. All experi-
ence shows that the benefit from improvements, tho accruing
first as higher profits to the innovating capitalists, in time filters
thru to the community. On the other hand, but for the prospect
of higher profits (for a longer or shorter interval) employers
would have no inducement to work out the improvements. In
this sense, it may be said that the employers, rather than the
workmen, are "entitled" to the gains of the period of transition.
Stated more simply and with less misleading phrase, the truth is
that the immediate interests of the employers are more, in accord
with those of the public than are those of any one group of work-
men.

The same general remarks are to be made of the attitude of
workmen and unions toward discipline. The large-scale indus-
tries of our day call for semi-military organization — for punctu-
ality, prompt obedience, submission to orders. Discipline in the
employers' hands rests, on the power of discharge. That power
the workman naturally resents — as naturally as he resents ma-
chinery that threatens to deprive him of work. The strong union
tends to hamper it, and the universal closed shop would tend still
more to hamper it. All depends on the character, intelligence,
temper, of the men. The clannishness of class, and the sympathy
of the great majority of men in all walks of life for those who have
been " caught,"always bring a danger that the needful effectiveness
of discharge will be broken down.^

Of the various objectionable policies of trade unions, those which
hamper progress seem to have had most effect in Great JBritain,
those which fetter discipline most in the United States. In the
former country^ unions have reached their fullest development,
and collective bargaining is most widely practised. In many Brit-
ish trades, it no longer occurs to any one that the individual w^ork-
man shall bargain with the employer; all is done thru the union.

1 See, for illustration, Fitch, The Steel Workers, pp. 102-103.

310 PROBLEMS OF LABOR [57-§ 5

This growth, in many ways gratifying, does seem to have been ac-
companjed-in Great Britain by a check on progress, chiefly thru
limitation on output and silent but effective opposition to labor-
saving appliances. The failure of Great Britain to maintain her
former leadership in some industries, such as tLatjiLiron_aiid-Steel
making, is due in part to union policies which have put a brake on
progress. In the United States, this sort of influence has been
little felt; partly perhaps because of the ingrained habit of accept-
ing and welcoming improvements, but probably in the larger part
because unionism has hardly ever had complete sway in any indus-
try. A demorajization of discipline has been much more common
in this country, especially in railways and similar industries, and
has had more serious effects.

§ 5. This prolonged discussion leads, so far as the closed shop is
concerned, to a compromise result. It is undesirable, with the
present temper and intelligence of the workmen, that they should
have that degree of control which the universal closed shop would
give. Yet it is no less undesirable that the employers should have
that degree of control which the universal open shop would give.
The situation as it actually stands in many industries in the United
States is not unsatisfactory — partly open shops, partly closed
shops. The existence of the open shops prevents the union from
carrying their policies to the pomt of harmful restriction; they must
face the competition of the unfettered establishments. The exist-
ence of the closed shops prevents the employers from abusing the
advantage which the}' have in dealing with unorganized workmen;
they must face the possibility of unionization.

It seems to be better, however, that no individual shop should
be half open and half closed — employing half union men and half
non-union. Employers sometimes take the position that while
they will make no opposition to union membership on the part of
their men, they will not accede to the strict closed shop, which
would compel all to join the union as a condition of being employed.
This plan of letting the men do as thej^ please — join or not join —
rarely works well. So eager and vehement is the unionist spirit
that where the movement has once taken hold, there is constant

57-§5] LABOR UNIONS 311

nsLggiag of the non-JinioiiJiien. Their lives, and the lives of their
>35dves-and children, are apt to be made miserable. Better one
thing or the other — either the closed shop, with the possibility
that the employers will "smash the union" if it becomes intoler-
ablj^ restrictive ; or the open shop, with the possibility that the em-
ployees will strike and unionize if they are not dealt with fairly.

This sort of compromise conclusion is equally unwelcome to both
sides. Unionism is the gospel of the labor leaders. It has the
sympathy of the great mass of the workmen, whether they be
unionists or not; its universal extension is their goal. To most
employers, on the other hand, unions and closed shops are
anathema, and in fighting for the open shop they believe they are
acting not only in their own interest but for the better social
order. Even the most humane and public-spirited among employ-
ers commonly have this feeling. The bitter opposition with which
such emplo^'ersJace-the-union movement is no doubt due in part to
the mistakes and extravagances, of the workmen; extravagances
not only in their endeavors to restrict and control, but in their bear-
ing and temper. The union leader, if he thinks he has the situation
in hand, feels the itch of power, and gives his orders in terms which
the employeiifinds intolerable. In no small part the resentment
of the employer arises from his own love of power. Human nature
plays its part on both sides, often more than any close weighing of
gains and losses. The generous-minded employer, disposed to do
the best he can for his men, yet wishes to do it in his own way. He
likes to have a patriarchal position; and precisely this is what the
workmen tend more and more to resent. They wish to be dealt
with as equals, and to feel that they are in a position to command
such treatment. No doubt, the business man who is tactful as
well as humane, who meets his employees as men, and who has
enough ability and success to be able to pay full market wages
without bickering, can carry on the open shop indefinitely without
ever having "trouble." It is well that a good part of the com-
munity's industry should remain under the leadership of men of
this tj'pe. But even the best of men are better when they know
that it is politic to be good, and the best of employers run the open

■'' "i
/

312 PROBLEMS OF LABOR l57-§5

shop better when they know that the closed shop is a possibiHty,
A great many employers are not of the best type, and as regards
them the closed shop is a needed alternative.

A common contention among employers opposed to unionism
is that they will deal only with their own men, not with any out-
sider. In this respect they seem to be quite in the wrong; or, to
state it more carefully, the balance of social advantage is against
such a procedure. The workmen clearly gain by having their case
in charge of chosen representatives, whether or no these be fellow
employees; and collective bargaining and unionization up to this
point surely bring no offsetting disadvantages to society. As to the
immediate employees, there is often a real danger that he who pre-
sents a demand or a grievance will be "victimized." He will be
discharged and perhaps blacklisted; very likely on some pretext,
but in fact because he has "made trouble." Further, the ability
to state and argue the workmen's case and to negotiate with suc-
cess, is possessed by few. No doubt it often happens that the labor
representatives do not themselves have the needed ability or under-
standing and prove inconvenient persons to deal with. Some-
times, as has already been remarked, they feel the itch of power
and like to pose as persons whose orders must be obeyed. But they
are the best the men can find, and in the long run it is advantageous
that they, rather than immediate employees, should conduct ne-
gotiations. The only case in which an employer is clearly justified
on grounds of social advantage in refusing to deal with them, is
where they are corrupt. This case, unfortunately, is not un-
known — when labor leaders are willing to be bribed ; tho the
cases are quite as common where employers are willing to bribe.
The fact that a labor representative is found to be a blatant
demagog or to present impossible demands, may be reason for
promptly closing negotiations, but is no ground for refusing to
meet him if once he has been chosen by the workmen to be
their spokesman.

The question of leadership is crucial. It bears on all the prob-
lems of the labor movement; indeed it bears on all problems of
economic and social organization. Leadership depends essentially

57-§6] LABOR UNIONS 313

on the intelligence and moral qualities of the workmen themselves.
Ignorant and unscrupulous men will choose bad leaders — bad
perhaps in that they are ineffective, bad perhaps in that they are
corrupt. Yet for the very reason that this factor is fundamental,
little reference is ordinarily made to it; partly because it is so ob-
vious, partly because measures for its amelioration are necessarily
slow in operation. It is the remedies easiest to apply and promis-
ing quickest effect that most readily enlist the interest of the ardent
reformer. Such are the powerful labor union and the closed shop,
ready ways of strengthening the position of the under man. Yet
how they shall work depends in the end on the qualities of the men
themselves, as well as on the qualities of the employers with whom
they deal. The human element is not to be escaped. The univer-
sal organization of labor in all-embracing unions means enormous
power in the hands of labor leaders, just as universal combination
of employers means enormous power in the hands of the busi-
ness leaders. Neither alternative is to be contemplated without
uneasiness. The two together would portend an imminent social
conflict. As will be pointed out in later pages, there are many who
consider this conflict inevitable and are not disposed to ward
off its approach. He who looks forward to the continuance thru
some generations of the main features of the existing industrial
organization must look with misgivings at any movement which
leads to great concentration of power in the hands of men not se-
lected by the public and not responsible to the community for the
beneficial exercise of power.

§ 6. The attitude of the union members toward the "scab" is
the inevitable result of class feeling on the one hand, on the other
of that same specter of non-employment which explains the many
contradictions between the laborers' point of view and the strict
theory of the law of private property and free competition. In the
workingman's eyes, the scab is not merely, as he is in the eyes of the
law, a competitor who enters on a contract for wages which another
has chosen to reject. He takes another man's job and deprives
that other of work; he is a traitor to the cause of his class. And
yet, in the existing industrial organization, there is no other pos-

314 PROBLEMS OF LABOR [57-§6

sible way of settling wages than thru competitive offer; tempered
doubtless by collective bargaining and also by humanity among
employers, but fixed in the end thru competition.. And notwith-
standing the pressure of class feeling against the scab, this in fact
does settle wages. A demand for higher wages will not bring them
permanently, strike or no strike, if plenty of other men can be found
who are willing to do the work on the old terms. In such case an
employer's embarrassment in getting together and drilling a new
force, and the scab's fear of taunts and a beating, will enable only
a temporary victory to be won.

No one openly defends violence; and it is probably true, as the
friendly historians of the labor movement say, that it is usually a
stage of young unionism, outgrown and discarded as organization
becomes more permanent and effective. In the United States, at
least, it has lasted long in some occupations, such as mining and
street railways, and has remained (there is too much reason to
believe) a deliberate policy. Unfortunately, it is apt to be cumula-
tive in its effects; once begun, it breeds more.

When a strike occurs, especially if it be a sudden one and in-
temperately led, the employer makes the best show he can of filling
the vacant places at once. There are always some floaters, not
desirable or desired for permanent retention, who can be used for a
while as stop-gaps. There are almost always, in addition, some
really desirable substitutes; for in rapidly growing and changing
communities a state of perfect equilibrium is never reached, and
there is always some labor (as there is some capital) which has not
found its place. The question whether a force of efficient men can
really be had by the employer at the old wages will be settled only
by considerable experience. The employer may find in the end
that he cannot secure and retain good men. In the first stages of
a struggle, however, the long-run factors are little weighed. The
temper of both sides is up, and the employer, tho conscious that he
is hard put, makes a bluff. The workmen then feel keenly all their
disadvantages in bargaining. They cannot wait, especially if their
reserve funds are scant. The tactical move of the employer in
filling the places with any one that comes along is met by the tac-

-tj.U

u
57-§7] '/ '-^ LABOR UNIONS 315

ticaI,inove of violence against the hated competitor. If the work
is carried on in the open and by scattered laborers — as in the case
of teaming or railways — the likelihood and the effect of violence
are so much greater. Then develops the curious phenomenon of
the professional strike-breaker — the dare-devil, very likely dis-
reputable in character, who for a bonus will risk limb and life in the
first clash with the angry strikers. The mere presence of such a
person then tempts to violence so much the more. Worse begets
worse, and a state of something like civil war is threatened.

T^he "tie-up" is analogous to violence and often accompanied
byTtTespeciaTIy where an industry of pressing importance to the
public is affected, as a railway or street railway. The sudden ces-
sation of work, and the more or less disguised threat of brutality
against any who would replace the strikers, amount to seizing so-
ciety by the throat and calling on it to stand and deliver. Yet the
tactical weakness of the laborers, especially as regards the unskilled
or little skilled among them, and the not infrequent callousness of
the managers of the industries, lead too easily to such a policy.
The tie-ups, indefensible as they have been in themselves, have
sometimes been the only means of forcing a hearing. They have
bred in the managing class a wholesome desire to conciliate their
employees,

§ 7. The present halfway stage in unionism is not likely to per-
sist indefinitely. The movement will probably grow, and a larger
and larger proportion of hired laborers will be organized in militant
associations. So far as concerns the unskilled and little skilled,
this development is to be welcomed. They most need to be safe-
guarded against overreaching, and they most need the training in
common action and in subordination to a common end. Turbulent
and badly officered tho their unions often are, the organization of
the men (and women) makes for social betterment.

As for the minority of skilled workmen, the movement has so
much that is narrow and selfish as to command less unqualified
sympathy. The sober-minded well-wisher, glad to see the ends of
the unionists attained — higher wages, shorter hours, restriction
of the labor of women and children — would have them reached in

316 TROBLEMS OF LABOR [57-§7

ways which would benefit all workers, not a particular knot only.
Perhaps no better illustration of the difference in attitude can be
found than with regard to the demand for the same rates of wages
for men and women — "equal pay for equal work." ^ So far as
this means that the artificial barriers in women's way are to be
removed, and that they are to have equal opportunities, it is en-
titled to full support. Its advocacy by the men organized in unions
often means, however, not that they wish the women to be em-
ployed at the same wages, but that the women are to be employed
as little as possible; since, on the whole, they are less efficient, and
therefore, at the same rates, men will be preferred. What the men
really want is a limitation of the employment to themselves. So it
is as regards restrictions on the labor of women and children. With
reference to both classes, restrictions are desirable on large grounds
of social policy. But the men who demand them often have a
thinly disguised aim to seciu-e more employment of their own.
By no means all labor unions or all labor leaders are open to this
criticism. Still less are they consciously selfish. Like all men,
they are apt to believe that what is for their own advantage is for
the common good also. The fact remains that the compact and
well-organized unions of the skilled workmen are entitled, whether
in their acts or in their professions, to but a divided allegiance
from the social reformer.

The union movement now commands, more than any other, the
fervid support of the hired laborers. It is true that by no means
a majority of such laborers are now members of unions. But they
wish to be, or are disposed to be. The union policy and program
have the sympathy of the overwhelming majority. The move-
ment will almost certainly grow to greater dimensions than it now
has, and will enroll among its adherents a much larger proportion
of the laborers. And this, to repeat, is to be welcomed, notwith-
standing all the drawbacks and dangers. On the whole, unions are
the most effective instruments to which the laborers can themselves
turn for bettering their own condition. They are a potent means,
almost an indispensable one, for securing to them a "fair" share in

1 Compare what is Baid in Chapter 47, § 9.

57-§7] LABOR UNIONS 317

the national dividend, and for preventing the inequaUties in wealth
from being cumulative inrtheir^effetrte

Perhaps the greatest drawback to the movement is that the un-
questionable gains which organization can bring to laborers lead
them to overlook the source from which alone can come a large and
permanent advance in wages. The fact that the immediate con-
tentions always relate to a particular rate of wages and a particular
set of laborers leads them to think primarily and almost exclusively
of the means for bettering the chances of that one group ; and this
always suggests restriction and limitation. They are naturally
led to think and say that higher returns for everybody can be se-
cured thru limitation of output and restriction of competition.
Workmen and employers alike think of their special interests alone,
and of the ways in which higher wages or higher profits can be got
in their own corner of the industrial field. The basis for a real
gain to all the community and all the laborers is in a general ad-
vance in productive efficiency, bringing a greater quantity of tangi-
ble output. This is most likely to be secured by full competition
among both capitalists and laborers. Effective organization,
especially if it be organization in open unions among laborers, is
not inconsistent with free movement and bracing competition.
None the less, it tends to deaden individual activity and efficiency,
and to cause gain to be sought not thru increasing the output,
but thru maneuvering for a greater slice of the output. It is
only with reluctance that laborers and their leaders accept labor-
saving devices as part of the inevitable; they never welcome
them, still less promote them.

CHAPTER 58
Labor Legislation and Labor Hours

Section 1. Labor legislation, like labor organization, aims to standardize
conditions of employment. Legislation on the hours of labor for women
and children the typical case. Other sorts of restriction. Situation in
the United States, 318 — Sec. 2. Why legislation must supplement
and support the laborers' own efforts. A great moving force behind it is
the growth of altruism, 322 — Sec. 3. Limitation of hours for men com-
paratively rare. Are there grounds on principle for confining such
legislation to women and children? Constitutional questions in the
United States, 324 — Sec. 4. The demand for an eight-hour day deserves
support. Introduced suddenly and universally, the eight-hour day
would mean a decline in product and in wages; introduced gradually, and
'pari passu with improvements in production, it brings unmixed gain, 326
— Sec. 5. Minimum wages introduce no new principle, but present the
problem how to deal with the unemployable, 330.

§ 1. Any established rate of wages or other part of the labor
contract is in constant danger of being cut down by grasping or
hard-pressed employers; for the bargaining weakness of the laborers
makes it easiest to turn to this way of saving expenses. Hence
arises the constant effort of trade unions to secure the standardiza-
tion of the conditions of employment — minimum wages, fixed
hours, -settledxules. The same sort of standardization is aimed at
in labor legislation. The plane of competition is made by law the
same for all. Not only is it made the same, but it is intentionally
raised. The enlarging moral sense of the community insists that
all employers shall carry on their competitive operations on a higher
and more humane level.

The typical phase of labor legislation is that for the restriction
of the employment of women and children. The perfecting of ma-
chinery and of automatic devices has made it possible to employ
persons of slender physical strength in the most varied sorts of in-
dustries. All that needs to be done is to pull a lever, stop or start

318

58-§l] LABOR LEGISLATION AND LABOR HOURS 319

a machine, tie a thread. Wherever there are employers who see a
profit in the conduct of machine operations with cheap labor, and
a laboring class whose members are willing that their women and
children should work in the factories, shocking conditions will de-
velop. Children of tender age — but 10, 9, 8 years old — are put
to work in the mills, for stretches of 11, 12, sometimes 13 or 14,
hours a day. They are employed on night shifts as well as day
shifts. Women are employed not only for the same long hours
and for night work, but on coarse and heavy work that brutal-
izes as well as exhausts them. Lamentable conditions of this sort
appeared in Great Britain in the early years of the nineteenth cen-
tury, as the machine processes made their way; and they have ap-
peared in most countries with the spread of those processes — in
Germany, Austria, France, Italy, Russia. Where a self-respecting
population has refused to submit its women and children to such
degradation, the processes and the methods of employment have
been more or less modified, as in the United States in our earlier
days; or the industries using them have failed to take root, as in the
Scandinavian countries. The great inflow of immigrants to the
L^nited States during the last half century from countries of low
standards has so altered social conditions that the evils of children's
and women's labor have begun to appear here also with little miti-
gation, in textile mills, in mines, in glass works.

Thejnachine_ process and the factory system. are not the causes
of these evils; rather, they simply take advantage of conditions
which they find. The fundamental causes are poverty, pressure
for emplojonent, and a low standard of living. In Great Britain
the factory system in its early days found ready for its use a mass
of people demoralized by a bad poor law, weakened by a long period
of food scarcity, cut off from the land by a feudal system of land
ownership. In most countries of Continental Europe there are
similar low-lying human strata. Among these the factory plants
itself. But the modern system of production, tho it does not create
the evils, concentrates them and makes them more serious ; and no
doubt it increases them, by giving added opportunities. The very
fact of concentration, on the other hand, makes it more easv to

320 PROBLEMS OF LABOR [58- § 1]

bring remedial forces to bear, such as factory legislation, compul-
sory schooling, labor organization. It is probable that in many
cases the factory system, even in its first stages, made things no
worse for the employees; while in the end it made possible a clear
betterment.

It is not within the scope of this book to consider the details of
labor legislation. The first Factory Act came in England in 1802;
the conditions which it still permitted show how bad were those
which it aimed to bring to an end. It forbade the employment of
children under nine years of age as "apprentices" in cotton facto-
ries, restricted their time of labor to twelve actual working hours
per day, and prohibited night work. This was the beginning of a
long series of enactments extending to our own day. The Ten-
Hour Act of 1847 was perhaps the most important, restrictirig"the
hours of labor for women and young persons (13 to 18 years old) to
10 hours a day, or, as it was afterward rearranged, to 10^^ hours on
week days, and 5 hours on Saturdays. The Half-Time Act of 1844
was perhaps not less important; it provided that children (under 13
years — by later legislation defined as under 14) should work but
half the time, either full time on alternate days or half time on each
day, and that the remaining half should be given to school at-
tendance. In the United States, where legislation on this subject is
outside the constitutional powers of the federal government, the
"most important single state act — because of its influence as an
example and a model — has been that of Massachusetts in 1874, /
limiting the hours of work to ten for women and children. Both
in Great Britain and in the United States the limitation of hours
for women and children has served in effect to limit those for men
also; directly in those industries where the men are employed with
the women and children, and indirectly thru the influence of com-
parison and tradition.

Restriction of hours has been by no means the only form of legis-
lation dealing with the terms on which labor may be employed or
the mode in which industry may be conducted. Gradually a com-
plete code has grown up in the advanced countries, regulating con-
ditions of employment in all sorts of ways. Dangerous machinery

58-§l] LABOR LEGISLATION AND LABOR HOURS 321

must be fenced; mines must be ventilated, lighted, provided with
appropriate safeguards; sanitation and ventilation must be pro-
vided in factories. Industries threatening to health are specially
regulated. Thus the manufacture, importation, or sale, of matches
made with white phosphorus (which renders the workers liable to
a kind of necrosis) is now prohibited in all civilized countries. As
Great Britain was historically the first country to enter on labor
legislation, so she has remained foremost in extending and enforcing
it. The. F§£tory and_ Workshop Act of 1901, a tj^jical and in many ,
ways a model code, not only affects such matters as have been re-
ferred to, but many others also — the hours when work is to begin
and cease, pauses and rests, overtime, the dates and places of wages
payment (the payment of wages in dramshops, for example, is for-
bidden), the employer's power to impose fines for negligence or
damage, the mode in which piecework shall be computed (rates in
writing must be posted), and so on thru a great mass of detail. In
the L^nited States, the laws of the several states vary greatly; many
of them are lax; often they are ill-enforced, whether lax or stringent.
The backwardness of this country in labor legislation and in its ad-
ministration is due partly to the laissez-faire traditions of former
days, but even more to the fact that grave evils are of compara-
tively recent date.^ The changed social and industrial conditions
of the last generation or two, the influx of immigrants and the
growth of manufactures, have rapidly thrust labor problems on us
in a new form; and they have not yet been adequately faced. -The—,-
jealousy between different states, and the fear in each state of ham-
mering its industries in the competition with other states, are serious
obstacles to remedial legislation. In this matter, as in others, the
inevitable persistence of particularist jealousy raises the question
whether the constitutional powers of the federal government
should not be enlarged.,.,,....,. ..

For the effectiveness of a system of labor legislation, stringent

1 It is true that hours were very long in the Massachusetts cotton mills, for ex-
ample, before the Civil War. But until the influx of the Irish after 1846, there was
no permanent mill population ; the employees were chiefly women who came to the
factories for a year or two in order to accumulate some savings. And the pace in the
factory probably was slower than in modern days.

322 PROBLEMS OF LABOR [58-§2

enforcement is indispensable. There must be a staff of inspectors,
well trained and well supervised, and there must be ample provision
for prompt penalties on delinquents. Every movement for social
and industrial reform depends for its success on good public officials,
and the prospects for success in any country are gaged by the ex-
tent to which it provides such officials. In this respect also, our
states are backward. The new and complicated problems of mod-
ern industry have come upon them suddenly, and political tradi-
tions and political machinery have not been adjusted for dealing
with them.

§ 2. The question presents itself: why legislate on all these
matters? Why cannot the same results be reached thru the efforts
of the laborers themselves? Why do they not refuse to allow
women and children to work, stipulate for fencing machinery,
for ventilating mines, and what not?

The answer to such questioning is in part obvious. The work-
men simply cannot make stipulations as to the mode in which their
work shall be carried on. This is one of the most serious conse-
quences of their weakness in bargaining. The only way in which
pressure could be brought on employers toward improving factory
conditions would be thru the process of the men's quitting the dan-
gerous and unsanitary establishments and seeking employment in
those better equipped — a process of no avail, where all are equally
bad. Almost universally the laborer must take conditions as he
finds them. The only effective way in which the plane of compe-
tition can be raised is by the rigid imposition of the same terms on
all employers.

But it is not only helplessness that prevents the workmen from
bestirring themselves in these matters. The need of legislation is
due largely to their own ignorance and short-sightedness, and un-
fortunately, their indifference also. Ignorance and short-sighted-
ness play the chief part in preventing them from concern about the
dangers of an occupation. It was not the miners who made the
effort for compulsory use of the safety lamp, but the men of science
and the social reformers. The rank and file of men are singularly
indifferent to danger, or at least singularly slow in taking precau-

58-§2] LABOR LEGISLATION AND LABOR HOLTIS 323

tions against danger. Whether it be from bravado, or recklessness,
or simply lack of intelligence, the fact is that measures for prevent-
ing accidents must commonly be forced upon them. So it is with
the unhealth}^ trades. Those engaged in them seldom protest, but
risk their health with apparent inability to visualize the inevitable
future. The initiative in legislation on all these matters has come
mainly from social reformers, men of science, physicians.

Social reformers have also been chiefly instrumental in bringing
about legislation restricting the employment of women and chil-
dren. The laboring men (the women and children themselves
rarely are able to make their misery known or their timid wishes
heard) have been indifferent or stolid, from simple habituation to
bad conditions. Long hours, unrestricted emplo^-ment of women
and children, foul air and filth, are concomitants of a low standard
of living. They go with low wages and low intelligence, a high
birth rate and a high death rate. To lift a population from these
conditions calls for strong compulsion from the outside, not only on
the employers, but on the laborers also. The parents are them-
selves often the first to evade restrictions on the employment of
children. Legislation on labor conditions must therefore be
accompanied by other measures, above all by education. Nothing
is so effective toward cleansing and purifying such a social marasm
as the bracing atmosphere of democracy — a sense of equal
rights and free opportunity, and a stir of social ambition.

The moving force in bringing about all the mass of labor regu-
lation and restriction has been the great wave of human sympathy
which has come over the civilized world during the last century and
a half, and has so profoundly (often unconsciously) influenced the
attitude of all men on social and political problems. Altruism has
widened in its scope ; the suffering of fellow men andof women and
children distresses as it never did before. Wretchedness that was
accepted as a matter of course a few centuries ago is now not to be
endured. We hear much, it is true, of the preservation of the race.
Child labor legislation is likened to the conservation of mines and
forests. If the growth of children is stunted by premature labor,
will not the stuff of the nation deteriorate? This appeal to a half-

^...-'•'tEe

324 PROBLEMS OF LABOR [58-§3

selfish motive, to the pride of race and nationality, no doubt has
its effect. But the main force is that religion of humanity which
aims to make life happier for all. It needs but to be made known
that there is abject squalor and misery or joyless children's lives,
and an eager effort is aroused for betterment. The civilized world
is not worse than it has been; it is much better; and better most of
all in this regard, that all human suffering hurts to the quick, and
more and more of public and private effort is given to lessening it.
§ 3. Limitation of hours of labor for men has stood in all coun-
tries on a different footing from such limitation for women and
children. In England and in the United States no general regula-
tion of the hours of adult men has been undertaken. The men

ave been left in the main to make their bargains in this regard as
best they could. The same is true of Germany. In some other
countries of the Continent a maximum working day for adults has
been fixed by law for all manufactures, as in France and Switzer-
land. But the limit permitted (12 hours in France, for example,
1 1 in Switzerland) has been so wide as to make the general legisla-
tion of slight consequence. Particular industries, it is true, have
been subjected in one country or another to more stringent re-
strictions as to men's hours of work; being selected for special treat-
ment sometimes because unusually bad conditions have come to
light, sometimes because the laborers in them have succeeded in
bringing effective pressure to bear on legislators. The hours in
bakeries have been regulated in Germany and in some American
states. In France and Great Britain the hours of labor for men in
coal mines are now (1920) limited to seven; and in some of our
Western states (Arizona, Coloraclo,' I^vada, Missouri) there has
been legislation limiting the hours in all mines to eight. But these
are exceptions; for most industries there is no direct limitation on

e number of hours men may work. By far the most important
restriction is that which results from the legislation as to women
and children. So far as men are employed in the same establish-
ments, the hours fixed for the women and children are in effect fixed
for the men also, and indeed are sometimes (as in France) made
applicable by law to the men in mixed establishments.

58-§3] LABOR LEGISLATION AND LABOR HOURS 325

In the United States the provisions of the federal constitution
by which no person is to be " deprived of Hfe, liberty, or property
without due process of law,"i and similar provisions in many state
constitutions, have been construed to limit the powers of legisla-
tures as regards the regulation of men's hours of labor. " Liberty "
has been construed to include, among other things, the right to
work on any terms acceptable to the individual adult male. Some
degree of regulation is indeed permitted under a vaguely defined
"police power," whose exercise is not deemed inconsistent with
liberty. Btlt laws forbidding the employment of men for more than
ten or twelve hours (and no such law can be effective if the work-
men are allowed to contract out) are held to deprive them of liberty
to work as they may please. Laws restricting women's and chil-
dren's labor have not been held invalid, because these classes are
supposed to be amenable to control under the police power. Even
as regards men, some laws restricting hours in particular trades,
where grounds of health are supposed to justify an application of
this power (as in bakeries and mines), have been held valid. The
general doctrine, under which men may not be deprived of their
"liberty" to work long hours, results from an interpretation of the
term which is easily open to criticism. It is probable that the
judges who thus construed it were affected, more or less con-
sciously, by a general prejudice against the laborer's demands. In
any case the exact definition of so vague a principle could not but
be difiicult. The questions of constitutional law are not within
the scope of a book like the present. But the situation brings into
relief a point of principle : are there grounds, apart from constitu-
tional interpretation, for distinguishing sharply between legislation
for men and legislation for women and children?

The only ground for such a distinction seems to be that it may
be better for the men to get shorter hours by their own efforts than
by legislation. There are no tenable objections of an abstract or
general sort. The same social sympathy which leads to interfer-
ence in behalf of the women and children may lead consistently to

1 This prohibition is put on Congress by the Fifth Amendment and (what is much
more important) on the states by the Fourteenth Amendment.

326 PROBLEMS OF LABOR [58-§4

interference in behalf of the men. If it be thmightintolerable that
women should work more than ten Lours, it may be thought no less
intolerable that men should work more than twelve, or eleven, or
ten. The question is one of degree, and of balance of gain or loss :
how far the altruistic impulse can be given sway without ultimate
offsetting disadvantage.

Something is to be said in support of the proposition that the
men gain more in the end by fighting their battles themselves.
There is a bracing effect in achieving a thing for yourself. Labor
orgg,nization, labor unions, labor struggles, bring social gain not
■ only in their direct effects on the terms of employment, but in the
jiiscipline which they give. The ultimate improvement of the con-
dition of the mass of mankind depends on an elevation of chaj^g^^r
and intelligence. Tho the relegation of progress to self-help is often
but a specious means of blocking reform, it remains true that self-
help is the most effective kind of help. On such grounds the
men may be told to carry on for themselves the struggle
for shorter hom-s. But this certainly is no reason why the state
should not set a maximum, as it does in France — should not say
that there are general limits within which the struggle must be con-
fined. And there is no reason at all for opposing legislation in
industries where short hours are called for on clear grounds of
physical welfare. Thus, in Prussia, labor in mines where the
temperature is higher than 28° C. (93° Fahrenheit) may not exceed
six hours daily. Such legislation is analogous to that which com-
pels the fencing of dangerous machinery, the proper ventilation of
workshops, the detailed regulation of poisonous trades.

§ 4. The demand for shorter hours, and especially for a general
eight-hour day, is perhaps the most important item in the program
of labor organizations. Apart from legislation what is to be said
of it?

The same obvious reason which makes one sympathize with the
demand for higher wages makes one sympathize with that for
shorter hours. It means improvement in the condition of the mass
of mankind. And it means improvement at a most important
point. Specialized machinery and the division of labor tend,

58-§4] LABOR LEGISLATION AND LABOR HOURS 327

as wehave seen, to make labor more monotonous and irksome, less
attractive. The best allevialion of this unwelcome but inevitable
tendency is b^shortenfng Hoiifs and increasing the period of leisure

— leisure for rest, for play, lor domestic companionship, for the de-
velopment of higher faculties and purer pleasures. The cynical
objectors sometimes say that leisure is in fact used by the mass of
laborers for drunkenness and demoralizing idleness. But in fact
drunkenness is an accompaniment of long hours, and of the things
that go with long hours — low wages, bad workshops, degradation.
It is true that with shorter hours there should be other agencies for
betterliving: improved education, libraries, playgrounds and
health}^ amusements, substitutes for the dram shop. Shorter hours

— shorter than are now traditional — can be made to bring with-
out fail an overwhelming balance of gain in happiness.

The debatable question concerns the effect of shorter hours on
wages. Tlie demand for them is invariably combined with a de-
mand for the same wages; less work, or at least less hours, but not
less pay. Are these combine3 demands reconcilable? Will not
shorter hours lessen the product of labor — the source from which
wages must come — and so bring inevitabl}' a lowering of wages?

Shorter hours do not necessarilv lessen the output. Where work
is done by the piece, men may often accomplish as much in eight
hours as in ten. Even where work is done not by the piece, but b}'
the day or hour, this is often feasible; tho such an outcome is not
probable in the absence of the stimulus which piecework gives,
since the rooted disposition to make employment then operates
without check. Even where machinery sets the pace, a reduction
in hours may be offset by a gain in efficiency. INIachinery never
fixes the pace quite without regard to the intelligence and watch-
fulness of those who set it in motion. An alert and wide-awake
laboring force may turn out as much in eight hours as a weary one
in ten or twelve.

But all this holds good only within comparatively narrow limits.
Pieceworkers and skilled mechanics can usually do as much in eight
hours as in ten; but they cannot do as much in six. Factory opera-
tives can often do as much in ten hours as in twelve, and not infre-

328 PROBLEMS OF LABOR [58-§4

quently they can do as much in eight as in ten. It is not easy to
say whether a universal Hmitation to eight hours a day in manu-
facturing, mechanical and mercantile occupations would lessen the
national dividend. But — other things being unchanged — a re-
duction to seven or six could not fail to bring that result.

Other things unchanged : but other things may change. Above
all, the progress of invention and of the arts may increase the gen-
eral efficiency of labor, and so enable hours to be reduced without
lessening the output. This is what has happened in the civilized
world during the last half century; this is what we may confidently
expect in the years to come. The tendency in all civilized coun-
tries has been to reduce working time. Factory hours in England
and in the United States were 11 or 12 (more commonly 12) until
the middle of the nineteenth century ; they are now usually 10 iir"N
both countries, with a half holiday on Saturday in England. Un-
fortunately, there are many industries in the United States in which
the hours now are more than 10, as in the textile mills of the South
and the iron and steel industries of Pennsylvania; a result due to
the same cause which has led to the abuses of women's and chil-
dren's labor in these regions — a laboring class with a low standard
'of living. In Germany the usual hours were 12, 13, 14, even 15,
until after the middle of the nineteenth century. By the close o?
the century they were, for the majority of workmen, as low as ten,
and in few cases are more than eleven. This general reduction in
hours, pari passu with a general advance in wages, has been due to
the gain in productive capacity. John Stuart Mill, in a much
quoted passage written in the middle of the nineteenth cen-
tury, declared that it was doubtful whether all the inventions had
diminished the toil of a single human being. That douM; can no
longer be expressed ; happily it is clear that for multitudesv^f men
and women toil has been diminished.

And it will be diminished more and ought to be diminished more.
With the general increase in the productivity of labor, the work-
ing people have a choice between several alternatives: higher
wages with the same hours; lower wages with less hours; or a middle
course — somewhat higher wages and yet somewhat lower hours.

58-§41 LABOR LEGISLATION AND LABOR HOURS 329

This middle course is the one which they have chosen. " Chosen "
is a misleading word ; for obviously there has been no conscious or
deliberate choice. There has been simply a vaguely guided steady
pressure for the better conditions — for both higher wages and
shorter hours. The successful attainment of both has been due to
continued struggle and continued compromise, and at bottom to
those very labor-saving devices which the laborers themselves view
with apprehension. The gain has come by slight successive steps,
as almost all industrial changes do — first in one trade, then an-
other, first in one country, then another. The skilled mechanics get
short hours first, for the same reason that they get higher wages
first — because the demand of the rest of the community for this
sort of labor is high as compared with the available supply of it.
The fact that one group of laborers, thus favorably situated, can
secure both short hours and high wages, does not prove that all can
do the same; but none the less it is true that this aristocracy among
the laborers has been able to wrest its advantages because there
have been improvements both in the ways of doing their special
work and in those of doing the work of almost all other laborers.
When once the general level of wages has got above the minimum
for mere subsistence and physical efficiency, a diminution of the
hom-s of labor, as has already been said, is the best form of higher
wages. It makes not only for some leisure and some enjoj^ment
of life, but for better intelligence and better character. The de-
mand for a universal short-hour day is entitled to all sympathy and
support. It is a goal which the laborers are right in keeping ever
before them and in pressing for whenever favorable conditions
exist. No doubt here, as in so many cases, they that have find it
easiest to secure more. The skilled mechanics, whose wages are
already high, get the shorter day soonest, and without any reduc-
tion in pay. Those industries in which operations are continuous
night and day — as iron and steel works — and in which the
twenty-four hours are often divided between two shifts working
twelve hours each, need the shorter work period most of all. The
least that can be here regarded as decent is a system of three shifts,
each working eight hours; an arrangement common in the mines of

330 PROBLEMS OF LABOR [58-§5

our West, and to be wished for in all industries working continu-
ously. The favored mechanics, selfish and even obstructive to true
progress as they sometimes are, in this case at least set a good pace
and offer a stimulating example to the rest. ., . ^.,. -- ^

§ 5. Where there are very low earnings and the conditions that
usually accompany low earnings, such as long hours, bad work-
rooms, harsh bargaining with the weak, the question arises whether
there may not be a regulation of the plane of competition by fixing
minimum wages as well as by regulating hours of labor and the
other terms of employment.

The demand for this further form of labor legislation Is pressed
more especially for the so-called "sweated" trades. That term
is loosely used, and has come of late to have a wider meaning than
when first applied. Originally it described a system of subcon-
tract and domestic industry, work being parcelled out on piece
terms and done at the home of the workers. The making of cloth-
ing was long the tj-pical industry. Machinery and large-scale pro-
duction in great establishments, which have so completely revo-
lutionized the making of textile fabrics, were not easily applied to
the cutting and sewing of garments. The wholesale dealers and
the tailors parcelled out these tasks, especially that of sewing, to
subcontractors, and these in turn parcelled them among men,
women, and children who did the work at their homes. The
most striking instance in the United States was in the East Side of
the city of New York^ where hundreds of thousands of newly ar-
rived immigrants, largely Russian Jews, were engaged by subcon-
tractors in sewing vast quantities of clothing for the American
people. The contest between the factory and the handicraft, be-
tween the machine and the tool, did not set in here until the twen-
tieth century. At the time when these lines are written (1920) it
is still going on; subcontracting and sweating remain characteris-
tics of large parts of the industry.

Wretched conditions often appear in this organization of indus-
try; but they do not arise from it by necessity. The earnings of
^,^,^^he so-called sweated are by no means universally low. They are
so when very many compete for the work and can turn to no other

58-§5] LABOR LEGISLATION AND LABOR HOURS 331

sort of work. Such is the situation in some parts (tho not in all) of
the New York clothing trade; since the hordes of newly arrived im-
migrants are ignorant of the language and of the country's possi-
bilities, find their compatriots doing this thing, easily join
them at it, and can turn to nothing else. The subcontractor may
then be what he is pictured in popular imagination — a prosperous
and unscrupulous person who takes advantage of the helplessness
of the sweated and grinds them to long hours and pitiful wages.
But quite as often he is himself a poor devil, competing with others 4^^
no less poor, and unable to extricate himself or his employees (if
such they can be called) from the system.

WTiether in factories or in domestic work, there will be low wages ^'^^
wherever there is a low-lying non-corapetin^ £?HliP' ^^^ ^^^^ therg,
will also Be Tongliours, unsanitary conditions, overreaching of the JUj
weak and ignorant. People have come to speak of "sweating" .^"v^
wherever there are these lamentable conditions. And in all such ^r^
cases the question presents itself, how far shall the competitive pro-
cess be allowed to work out its results? May not the law set a
minimum of wages below which no one shall employ or be em-
ployed"? Shall it not be required that every one who works is to
receive at least a "living wage"?

There is much haziness in the talk about a "living" wage.
Those who use the phrase do not mean by it an absolute physical
minimum. They have in mind a standard of fit or decent living;
and such standards vary from age to age and from country to coun-
try. \^^lat is regarded as a living wage in the United States is
more than what would be so regarded in Germany or Italy. Like
standards of "just" wages, this is in reality something to which
men have become habituated and which reflects the general attain-
ment of a given stage of well-being. The feeling that none should

fall j^^g^suchj/^ving " wage rests on tbjs samejbasis^as most pfto-
ple's feelings in favor of social reform — a sympathetic wish that
all should share in the gains from progress within the bounds that
have become accepted and familiar.

^"'The demand for legislation establishing a minimum rate of re-
mimeration does not necessarily involve questions of principle dif-

332 PROBLEMS OF LABOR [5S-§5

ferent from those considered in the preceding sections; and yet, if
pushed to its farthest consequences, it might easily raise a new
question.

As with legislation on hours, factory conditions, and the like, a
compulsory minimum wages rate might serve simply to regulate
the plane of competition. All employers would be affected alike;
no one could undersell the others by cutting below the es-
tablished rate. There would be obvious difficulties of admin-
istration — attempts at evasion, to be met only by a staff of
inspectors, by publicity, by support from public opinion. Such
difficulties, serious anywhere, would be especially serious in a
country like the United States, whose methods of legislation and
administration are still crude. But they involve no new ques-
tions of principle.

A more fundamental question, yet still not of an essentially
novel sort, would be how to deal with the unemployable. There
would unfailingly be a certain number not capable of earning the
minimum — the aged, feeble, maimed, the dissolute or half dis-
solute. It would be impossible to compel employers to pay the
minimum to those whose services were not worth it. It is a fair
question whether it is not a merit in the proposal, rather than a de-
fect, that the community would be compelled to face squarely the
problems of decrepitude and degeneration. Among those who are
incapable of work or but half capable of it, two classes may be dis-
tinguished : those who are helpless from causes irremediable for the
individual, yet not cumulative as regards society, such as old age,
infirmity, disabling accident; and those helpless from causes that
tend to be cumulative, such as congenital feebleness of body and
character, alcoholism, dissolute living. The first class may be dealt
with charitably or provided for by some system of insurance. The
second class should be simply stamped out. Neither the feeble
minded, nor those saturated by alcohol or tainted with hereditary
disease, nor the irretrievable criminals and tramps, should be al-
lowed at large, still less should be allowed to breed. We have not
reached the stage where we can proceed to chloroform them once
for all; but at least they can be segregated, shut up in refuges and

58-§5] LABOR LEGISLATION AND LABOR HOURS 333

asylums, and prevented from propagating their kind. The opinion
of civilized mankind is rapidly moving to the conclusion that so far
at least we may apply the principle of eugenics and thus dispose of
what is the simplest phase of the problem of the unemployable.

There is another aspect of this problem — one which does in-
volve a new principle. What are the possibilities of employing at
the prescribed wages all the healthy able-bodied who apply? The
pefs^oiTs' affected by such legislation would be those in the lowest
economic group. The wages at which they can find employment
depend on the prices at which their product will sell in the market ;
or in the technical language of modern economics, on the marginal
utility of their services. ^ All those whose additional product would
so depress prices that the minimum could no longer be paid by em-
ployers would have to go without employment. It might be prac-
ticable to prevent employers from paying any one less than the
minimum; tho the power of the law must be very strong indeed,
and very rigidly exercised, in order to prevent the making of bar-
gains which are welcome to both bargainers. In any case it would
be quite impracticable to compel payment of the minimum to all
who applied, irrespective of their numbers.

Back of this movement, in other words, is the specter of Mal-
thusianism. The danger of pressure from uncontrolled increase of
numbers exists in modern societies chiefly for the lowest stratum.
In the United States it needs to be considered as regards the newly
arnved immigrants and their first descendants.2 No legal mini-
mum of wages can avail if numbers increase so as to bring an ever
growing competition for employment. How far this obstacle
would really stand in the way of minimum-wage schemes would
depend, as we have seen, mainly on the extent to which the stir of
ambition reached all classes, low as w^ell as high. Freedom, edu-
cation, broadening of opportunity, the vulgar as well as the refined
forms of the love of distinction — all the influences of democracy
— make it probable that increase of numbers will not destroy the
possibilities of permanent uplift. Yet, tho we may have hope and

1 See Chapter 48, § 2.

2 Compare Chapter 53, § 3.

334 PROBLEMS OF LABOR [58-§5

even confidence on this score, we cannot be sure how far the forces
of nature may be curbed.

Whether this fundamental difficulty will really present itself
depends on the mode in which minimum wages are attempted to
be fixed — whether at a rate conforming on the w hole to market
wages, or at a rate substantially higher. The probabilities are that
in this matter, as in the essentially similar one of general compul-
sory arbitration,! the divergence from exi*sting conditions will be
slight. The minimum wages fixed by law are likely to be virtually
in accord with competitive wages for the lowest group. They will
not modify the essentials of the wages scale as it is; they will rather
standardize current rates. They w^ill aim at wages which are
"just" and in accord with a "minimum" standard of living, in the
sense that they will tend to aid and strengthen the forces that pre-
vent weak bargaining and exploitation. Such at least has been the
case in the much discussed legislation of the Australian colonies,
especially Victoria, and recently (1909) in the INIinimum Wages
Act of Great Britain, It remains to be seen whether this move-
ment, like others of which enthusiastic people speak in large terms,
will be carried to the stage where it will encounter obstacles funda-
mental in the system of private property and competitive industry.

1 See the next chapter, Chapter 59, § 6.

CHAPTER 59
Some Agencies for Industrial Peace

Section 1 . Profit sharing affects profits as the residual element. Some modes
of applying it. Immediate and deferred participation, 335 — Sec. 2.
Profit sharing will not be widely applied unless it pays, by increasing
efficiency. Uncertain connection between profits and workmen's eSi-
ciency. Importance of the employer's personality, 339 — Sec. 3. Other
methods of linking employee to employer: "gain sharing" and "welfare"
arrangements, 342 — Sec. 4. The sliding scale applicable where product
is homogeneous. Not in harmony with the general principle of employer's
assumption of industrial risks, yet often helpful toward avoiding friction
and dispute, 343 — Sec. 5. Arbitration, private and public. Not applic-
able where such matters as recognition of the union or the closed shop
are in dispute; but applicable to the questions of wages and the like.
Private boards imply trade agreements and organized unions. Public
boards are usually boards of conciliation, but none the less helpful, 344 —
Sec. 6. Compulsory arbitration, carried to its logical outcome, means
settlement of all distribution by public authority, and may be the entering
wedge to socialism. Possibility that it will remain indefinitely in a half-
way stage and not proceed to this outcome, 348.

§ 1 . The rapid growth of the miHtant movement among laborers,
the increasing tension between the opposing groups of employers
and employed, the losses and disturbances from strikes and lock-
outs, have set people to considering ways of lessening the causes
of strife. Among the proposed remedial devices are profit sharing,
welfare arrangements, sliding scales, arbitration. To the main
features of these and to the principles which must be borne in mind
regarding them we may now give attention.

Profit sharing is a device for binding together the employer and
the employees engaged in a given enterprise. Trade-unionism
looks to a horizontal division: all the employees in a trade, scat-
tered in various establishments, are to be united in common action
against all the employers. Profit sharing looks to a vertical divi-
sion : the employer and the employees of the single establishment

335

336 PROBLEMS OF LABOR [59- § 1

are to be united, working together for the common welfare of their
compact group, sharing the gains and perhaps the losses. It is
conceivable that both sorts of combination, the horizontal and the
vertical, should go on side by side — that the workmen should be
united with all their fellows for common action on some matters,
and with their several employers for common action on others.
In fact they usually are found incompatible. Those employers
who enter on profit sharing are averse to participation by their
v/orkmen in trade unions, and indeed often adopt profit sharing
with the design of counteracting the union movement. The
unions, on their part, are opposed to profit sharing, or at the least
suspicious of it, because it tends to make the workman interested
chiefly in the welfare of his immediate fellow-employees, not in
that of all workmen of the trade or locality.

Profit sharing aims to distribute among the workmen some part
of that residual share in distribution which ordinarily goes to the
business man alone. In the typical profit-sharing scheme, no en-
deavor is made to modify interest or ordinary wages. The usual
provision is that interest shall be paid to capital at the current rate
(say five or six per cent) and that wages shall be paid to the work-
men at the current rates. LTsually, too, it is provided that the man-
agers, even tho they be also the owners, shall be allotted a stated
sum as salary — as wages for that labor of management and su-
perintendence which obviously is part of current work of the
enterprise. The surplus left after paying all these shares is then
to be divided between employers and employees. Sometimes half
of it goes to the one, half to the other, as in the well-known case of
the Briggs collieries in England (a case in which profit sharing was
given up because it failed to prevent strikes). Similar in principle,
but more favorable to the workmen, is the division in the famous
Leclaire house-painting establishment in Paris, where the propri-
etors get one quarter of the net surplus, the workmen three quar-
ters. In other cases, as with the Nelson Manufacturing Company
of St. Louis, the division is based on the proportion which the total
capital invested bears to the total amount paid out in wages in the
course of the year. In a French example no less noted . than

59-§l] AGENCIES FOR INDUSTRIAL PEACE 337

Leclaire's, that of the Godin metal-working estabhshment at Guise,
the division is in the proportion which the total interest paid on
capital bears to the total amount paid in wages — evidently an ar-
rangement much more favorable to the workmen. Still another
variant — and there are numberless variations in detail — is that
the same dividend shall be paid on wages as is paid on the stock of
the enterprise (it being conducted under corporate organization).
This arrangement has the advantage, from the employer's point of
view, that it gives no occasion for any inspection of the books by
way of controlling the calculations of net profits; for the rate of
dividend on the stock is a comparatively public matter in any case.
In all cases, however, the partition among the individual workmen
is according to the wages severally received by them. Each one
gets a share based on the proportion which his wages bear to the
total paid out in wages to all; so that those who are highly paid
and steadily employed get the largest amounts of bonus. Steady
employment, to be sure, is usually a condition of any bonus at all;
as a rule those only who have been members of a permanent staff
are admitted into the profit-sharing scheme.

The amount which goes to the workmen is not necessarily paid
to them in cash. A part of it, even the whole of it, may be kept
in the enterprise as working capital, but credited to the workmen,
and thereafter entitled to interest and profits like other capital in-
vested ; the interest and profits being paid in cash, but the accumu-
lating bonuses retained as additions to capital. In the great Godin
concern no part of the workmen's shares in profits was paid in cash,
but all was put into the enterprise, being used for buying shares
in it; with the result that in process of time the workmen them-
selves became the main owners, and the arrangement became one
not so much for profit sharing as for cooperative production. The
same result was eventually reached in the Leclaire establishment.
There only part of the bonus was paid in cash, the rest being turned
over to a workmen's Mutual Aid Society and invested in the enter-
prise for the benefit of that Society. Indirectly, but none the less
effectually, the workmen thru the Aid Society have become the
main owners; and this arrangement too has become one for coopera-

338 PROBLEMS OF LABOR [59- § 1

tion. In the Nelson Company, also, the workmen's share of profits
must be left in the business; and the hope and expectation of
the head of the enterprise is that here also profit sharing will
eventually be replaced by cooperation. But such an outcome, tho
aimed at in some of these conspicuous cases, is no essential part of
a profit-sharing scheme. Cooperation presents different problems ;
for it endeavors to get rid of the business man, not simply to
strengthen the bonds of interest between him and his employees.^
For the great majority of workmen the most effective way in which
profit sharing can strengthen those bonds is to pay their share in
cash once for all; and, except in France, this is the most common
plan.

Profit sharing has been practised, and is practised, on a consider-
able scale in France. The habitual thrift of the French and their
constant eye to small sums make it more attractive to many work-
men there than it seems to be in other countries; and a few con-
spicuous examples of success, as in the enterprises of Leclaire and
Godin, have contributed to the spread of the movement. In other
countries it has not had so much vogue, and on the whole cannot
be said to be extending in any noticeable degree or to promise any
far-reaching influence on industrial development.

In the United States the term profit sharing is sometimes ap-
plied to an arrangement by which employees are enabled — and
indeed tempted — to become stockholders in corporations which
employ them. This obviously is very different from the systems
just outlined. Tho like them in that there is expectation of enlist-
ing the men's interest in the general pecuniary outcome of the en-
terprise, it differs in essential particulars. No one becomes auto-
matically an interested party. Only those become participants who
elect to put aside something out of their regular earnings, or author-
ize the company to do so for them; and they are usually a small
number, and the better paid employees at that. Their participa-
tion, further, is not in the total profits, but only in that part which
is distributed at once among the stockholders in dividends. There
are different forms of the arrangement, varying as regards the ex-

1 See below, Chapter 61.

59-§2] AGENCIES FOR INDUSTRIAL PEACE 339

tent of the share in profits (sometimes preferred stock, sometimes
common stock), the number and character of the employees af-
fected, and the precautions for reserving to the employers a firm
control over the enterprise as a whole. The plan is usually adopted,
even more overtl}- than is the case with profit sharing in the more
exact sense, for the purpose of making the men conservative, check-
ing unrest, " preventing trouble." It is not often imbued with any
sincere spirit of social sympathy. Even less than profit sharing
has it a claim to be regarded as a "solution" of social problems.

§ 2. Profit sharing was at one time proclaimed as a solution of
the labor problem. It was expected to be widely adopted and to
bring general industrial peace. Slackened growth of the move-
ment, and a more critical consideration of its methods, have damp-
ened these expectations. Yet there still are earnest advocates,
who believe that it has large possibilities.

The plan will not be widely adopted unless it pays the employer.
It is true that there are generous-minded employers who will adopt
such a system, even tho it brings no pecuniary gain. This has been
the basis of some of the most conspicuous and long-continued cases.
There large enterprises have been conducted by men of strong al-
truism as well as of high ability, who have gathered about them a
staff of managers and workmen imbued with the same spirit. Un-
fortunately this spirit is rare. Were it common, the whole aspect
of the economic world would be changed. The immense majority
of business men, and of workmen too, are not disposed to hand over
to others larger gains unless they see some advantage therefrom to
themselves. So far as profit sharing is concerned, the advantage,
to be sure, is not necessarily a direct pecuniary one. Freedom from
labor trouble and strikes has come to be of indirect but considerable
pecuniary advantage. Conceivably there may be an advertising
advantage; people will be led to make purchases by preference from
those w^ho are supposed to be generous with their workmen. Some
gain of a fairly calculable sort must accrue if the profit-sharing plan
is to prevail widely.

The one important and permanent source of pecuniary gain
would be in greater efficiency on the part of the individual work-

340 PROBLEMS OF LABOR [59-§2

man. Knowing that he is to have a share in the profits, he may be
expected to work more conscientiously and more assiduously, to
save materials and to care for tools. Thus he will contribute as
much in additional output as he receives in bonus; not only as much
but perhaps even more; so that the employer, after paying the
bonus, will find output and presumably profits increased. That
there is material as well as spiritual waste under the ordinary wages
system has already been pointed out. Any scheme that really
promised to eliminate or lessen the waste would be welcome from
every point of view.

There are circumstances under which this welcome result may
accrue. Where the industry is considerably and directly affected
by the way in which the laborers do their work; where those labor-
ers are intelligent enough and persistent enough to keep to better
ways, even after the novelty of the scheme has worn off; where the
employer steadily gives them a substantial share of the accruing
gains — there the conditions are sufficiently favorable for profit
sharing. Such seems to have been the situation in Leclaire's house-
painting enterprise. There the work was widely scattered, diflficult
of supervision, and much affected by the care and skill of the indi-
vidual workmen; the employer was capable and warm-hearted,
earned the confidence and loyalty of his men, and gathered about
him a staff above the average in intelligence and character.

In most industries of modern times the conditions are not thus
favorable. It may be a question how far deficient intelligence and
farsightedness in the average workman would stand in the way, if
other things were propitious; but other things are not propitious.
In the typical modern enterprise, there is a very uncertain connec-
tion between the employee's individual care and activity, and the
general outcome of the business. Tho he do his best, profits may
be wiped out by a turn in the market or by the employer's bad man-
agement. Conversely, tho he do the usual humdrum thing, profits
may be high. This is the essential economic weakness of profit
sharing. The final outcome in the way of profits depends not only
on the efficiency of the individual employees, but on a multitude of
other factors. To this must be added the circumstance that with

59-§2] AGENCIES FOR INDUSTRIAL PEACE 341

the increasing concentration and standardization of technical opera-
tions, it becomes more and more easy to parcel out the stints and
to supervise the men. Work is commonly done in factories with
much regularity and routine. Even when there is not piecework,
it is possible to fix the normal performance for each man. The
power of discharge is a more coarse and cruel stimulant to eflSciency
than a bonus from eventual profits, but it is more direct and with
most men, unfortunately, more effective.

To repeat, unusual employers can achieve unusual results. The
spirit of the leader permeates a business enterprise, as it does a regi-
ment or a school. Even industries in which conditions seem un-
promising — where the connection between individual efficiency
and eventual profits is remote — have been conducted on the
profit-sharing plan with brilliant success by able, inspiring, high-
minded men. The list of enterprises in which the scheme has been
continuously maintained shows a surprising variety; they cannot
be said to have industrial characteristics in common. The infer-
ence is the stronger that the personality of the leaders has been the
chief factor. Where once established, the system long maintains
itself, even after the death of the founder, for the same reason that
any business organization continues to run on for a considerable
period when once it has got its impetus. Possibly the founder has
enlisted associates who are like himself in character and spirit.
That profit sharing will spread widely is not to be inferred from its
long maintenance in individual instances.

The other less immediate gains to employers from the plan are
not of so great importance as the direct effect on output and profits.
The prevention of strikes has been a strong motive with some em-
ployers. The fact that the trade unions look on it askance, and
the growth of other methods for linking the interests of employer
and employee, have made it of diminishing promise on this score.
Sometimes, as has already been noted, an advertising advantage is
supposed to be secured. A business concern turning out an article
widely used by the general public ingratiates itself by what is sup-
posed to be kindly and generous dealing with its employees. It is a
most commendable form of advertising, if the dealing be really

342 PROBLEMS OF LABOR [59-§3

generous and kindly. Unfortunately it is far less effective than
the familiar blatant sort.

The prospects that profit sharing will be universally adopted are
nil. Even the prospect for w ide spread is slight. For good or ill,
the horizontal division between employers and employees is be-
coming sharper. The decay of semi-patriarchal conditions and
the spread of the labor-union movement make against close vertical
association. This does not mean that relations are necessarily be-
coming more embittered, or that industrial peace is harder to
attain; only that its attainment will not be much promoted by this
particular device.

§ 3. Profit sharing, however, is only one way of reaching the
desired results. It is, as we have seen, not a very direct way.
Other devices to the same end may be tried, and some of them seem
to have more promise of effect than profit sharing. "Gain shar-
ing" is a generic phrase often applied to them. Piecework pure
and simple is an obvious case. Sundry schemes have been devised
by ingenious managers : premiums on output per man or per group
of men; bonuses on savings of materials, oil, fuel; and the like.
Simplest and perhaps most effective of all is general good treatment
combined with general good discipline. Some tautness of organi-
zation, some threat of punishment thru discharge, there must be
so long as men are hired by others for profit. But a humane and far-
sighted policy can do much to mitigate the inevitable drawbacks.
Prompt payment of wages at the going rates, ready attention to
complaints, straightforward and non-patronizing dealing, wise se-
lection and supervision of the understrappers, well-equipped work-
rooms, and good provisions for comfort — all these are helpful.
They are helpful most of all when guided by the right sort of per-
sonality; for, as has just been said, the personality of the industrial
leader runs thru his entire establishment.

What are called "welfare" arrangements play a considerable
part in the large-scale industries of our day. Such are schools and
libraries in connection with the enterprises; light and ventilation in
factories; decent places for the midday meal; gardens, playgrounds,
and club rooms; dwellings (when supplied by the employer) of good

59-§4] AGENCIES FOR INDUSTRIAL PEACE 343

design at moderate rentals; pension plans and mutual aid societies,
aided and subventioned by the employer; and so on indefinitely.
All these are good, not as "solutions" of the fundamental problems,
but as mitigations of existing evils. The increasing adoption of
methods of this sort is in part but one manifestation of that growth
of altruistic feelings which, as we have seen, underlies labor legisla-
tion and the whole movement for social reform. In no small de-
gree it is due also to pressure from labor unions. The fact that
workmen are formidably organized makes it pay to minimize
discontent. ^Miether due to humane spirit or to cold-blooded cal-
culation, this mode of "fighting the unions" may have oiu- cordial
sympathy. If the competition among employers and salaried
managers brings to the fore those who are not only energetic and
capable, but far-sighted and of good heart, so much the better.
Development in this direction, at all events, seems more likely to
take place than that of profit sharing in the strict sense, and it
promises more for industrial peace in the future.

§ 4. An entirely different device is that of the sliding scale. By
this, as by profit sharing, an automatic sharing^oFgoodT^sults and
of bad is sought; but in a different way. Wages are made to vary
with the price of the product, going up as the price rises, declining
as that falls. A minimum rate, below which wages shall in no case
fall, is usually set, and a price of the product is agreed on corre-
sponding to this rate. As the price rises above this point, wages
also go up, by stages agreed on in advance; and as the price declines,
wages fall, until they (perchance) reach the minimum. The
method is of course applicable only where a homogeneous product is
turned out, and where the price of that product can be ascertained
readily, say from published market quotations.

The sliding scale seems at first sight to be out of accord with the
general methods of the wages system. The principle (if principle
it can be called) underlying the usual arrangement is that the em-
ploying business man takes the risks of enterprise, and that the
employee does not. The employee gets once for all a stipulated
sum, which is independent of the price obtained for the particular
goods sold, as it is independent of the profits of the particular em-

344 PROBLEMS OF LABOR [59- § 5

ployer. If the product In the industry or estabhshment falls in
price, the employer bears the brunt of the loss. The presumable
consequences might be outlined thus : a decline in the profits of the
employing capitalists, then a reduction in the output, then a trans-
fer of workmen to other occupations, and an eventual readjustment
to the price normal for that article; thru it all, no changes of wages
from the level fixed by the general forces which determine wages.
This very statement of the presumable or " theoretical "conse-
quences of the usual wages arrangement indicates why the sliding
scale may commend itself both to employers and to workmen.
These consequences are conditioned on mobility of labor and capi-
tal. For considerable periods there is little mobility; and those
engaged in an industry often think there is less than in fact exists.
When there are lower prices and lower profits, the decline in output,
tho it comes, is carried out slowly and reluctantly. A shift of
workmen away from the industry takes place no less slowly and re-
luctantly. Employers and employees are in a sort of de facto prod-
uct-sharing situation. Both are for the time being settled in the
existing employment, and between them can get out of it only so
much as the output of the industry in gross makes possible. It is
true that a prolonged period of high prices and high wages tends to
attract capital and labor into the industry, and so to bring again
a lower range of returns; while conversely a period of low prices
and low wages has the opposite effect. These further conse-
quences, however, are commonly disregarded by "practical" peo-
ple; for they rarely look beyond the present and the very near
future. Only a small number of far-sighted business men and a few
economic students give thought to eventual results. Most persons
think of the laborers and the employers in a given industry as com-
mitted to it once for all. Friction may be avoided and the continu-
ous conduct of operations promoted if there is agreement in advance
that both wages and profits shall fluctuate, in some degree at least,
with the price of the product.

§ 5. Still another device for preventing strife is arbitration.
Why not refer disputed questions about wages and terms of labor
to an impartial judge, and abide by his decision?

o9-§5] AGENCIES FOR INDUSTRIAL PEACE 345

Arbitration may be private or public. If private, it may be spo-
radic — provided for the particular exigency; or permanent, thru
boards or judges arranged for in advance. If pubKc, it may be
with powers of recommendation only, or with powers of compul-
sion. The most widespread forms of arbitration are those pri-
vate arrangements which are permanently established and those
public boards whose powers are for recommendation only. And
these two, again, tho different in origin and in formal position, work
in practise much in the same way and with the same degree of
efficacy.

Disputes concerning wages, hours, and other matters very rarely
involve any large question of principle, or any attempt at far-
reaching disturbance of existing conditions. They turn on wages
a few per cent higher or lower, hours a little longer or shorter. By
"fair" wages most people mean the current market rate, or that
rate which would obtain if competition worked out all its results
smoothly and promptly. When emploj^ers and employees dispute
as to what is "fair," they are commonly not very far apart; and
commonly each side would lose less (certainly for the immediate
future) by accepting the terms offered from the other side than by
a strike or lockout. The frequent outcome is to split the difference,
often no great difference; and this is much eased if the whole dis-
pute be referred to an impartial arbitrator or board of arbitration.

Not only is there usually a material gain to both sides by turning
to arbitration; there is an immense gain for pride and temper.
Men who have backed their demands by threat and ultimatum find
it difficult to retreat to a halfway position, even tho they know that
it will be better to do so. The existence of a respected standing
tribunal serves in industrial conflicts as the Hague Court of Arbi-
tration serves between nations : it enables the parties to withdraw
without loss of pride from a bellicose attitude.

There are, indeed, some questions of principle which it is difficult
to refer to arbitration, and which it would be no less difficult for an
arbitrator to settle. Such are questions as to the recognition of
the union : shall the employer deal with his men one by one, or in
a body thru their chosen representatives? Here, as we have seen,

346 PROBLEMS OF LABOR [59-§5

the balance of social gain, and so the answer to the question of prin-
ciple, is against the frequent contention of the employers. But an
arbitrator would have to discuss the deepest problems of economics
and ethics to give a satisfactory answer to them, and certainly
would fail to convince both disputants even if he attempted such
a discussion. Again, as to the closed shop: shall the employer
agree to employ only union members, and discharge the non-union
men? Here the balance of social gain is doubtful, and the answer
to the question of principle hard to give. Such matters can never
be settled by arbitration. If the employees are really set on the
closed shop, they can get it only by insistence and fight; and
whether they will succeed in getting it and keeping it, depends on
the accumulating experience with the ill and good of the practise.

Most disputes, to repeat, and especially those which are likely
to be referred to arbitrators, turn on matters of less profound bear-
ing — wages, horn's, shop conditions, and the like. Agreement on
these is facilitated by arbitration thru permanent private boards
or public boards.

Permanent private boards rest on trade agreements. They de-
pend on the existence of organization among the employees as well
as employers. Thej' are an outcome of collective bargaining.
Carried out with rigorous consistency, they entail the closed shop;
since they assume that no agreements are made by individual work-
men. None the less, trade agreements may work in practise with-
out the universal closed shop, since union terms and bargains set
a standard to which the non-union establishments tend to conform.
Such compacts, as they have developed in course of trial, provide
for regular meetings, for a settled course of procedure, and for refer-
ence to arbitrators of disputed points. It is not necessarily agreed
in advance that the decision of the arbitrators shall be binding.
Their function may be that of conciliation rather than of arbitra-
tion. Indeed, it is probably better so; since in any case they can
have no power to enforce an award. Whatever the precise stipu-
lation, such compacts, to repeat, depend on permanent and well-
organized labor unions. It is in so far true that the unions make
for industrial peace. They ease the process of bargaining, make

59-§5] AGENCIES FOR INDUSTRIAL PEACE 347

for deliberate action, lessen the probability of frequent and unruly
strikes. No doubt, this combined action of employers and employ-
ees brings a further danger — that the two will unite in a tight or-
ganization, keep out other employers and employees, and levy on
the public by restricting supply and exacting a monopoly price.
The seriousness of this danger depends on the extent to which com-
petition from outside employers and non-union workmen can be
shut off. We have seen that, as between workmen, the drift of
industrial change is against the permanent maintenance of a mo-
nopoly position. As between the employing capitalists, this com-
forting assurance is by no means so clear; their striving for com-
bination raises questions of a somewhat different kind from those
here under consideration.

The same beneficial result, of lessening the number of industrial
disputes, is promoted by public boards of arbitration, such as have
been established in many of our states, in France, and in England.
These are commonly boards of conciliation as we.ll as arbitration.
They are authorized to offer their services as mediators and concili-
ators when a dispute occurs, and to make public report of their
action — sometimes an effective method of bringing public opinion
to bear in aid of a settlement. As boards of arbitration, they pro-
vide a standing tribunal to which the disputants can refer, and so
can save their pride and probably their money. Their efficacy
depends largely on the character of the individuals appointed to
this delicate task. Even with the best of appointees, and with the
best exercise of judgment on their part, there will be some disputes,
very possibly a large proportion of the whole, which will not be re-
ferred to them. Among those which are referred, or are taken in
hand without any reference by the disputants, many must fail of
settlement by arbitration or conciliation. The sj^stem is no pana-
cea against strikes or losses. On the other hand, even with limited
success it is well worth while. Tho many grave cessations of work
have taken place in spite of the standing public boards, they more
than repay the expense of maintenance if they succeed in prevent-
ing a moderate number of struggles. Arbitration is but a pallia-
tive for industrial ills; none the less it is helpful.

348 PROBLEMS OF LABOR [59-§6

Publicly appointed boards of arbitration have one intrinsic ad-
vantage over private boards. On the latter it is common to have
a member selected by the employers, another selected by the em-
ployees, and a third selected by these two (or by some other
method supposed to guard against bias) . In practise, this leaves
the decision virtually to the third member, and loses the advantage
of real contribution by all the members to fair-minded considera-
tion. Public boards, especially when appointed in advance and
without reference to the particular controversy or trade, are more
likely to bring this advantage. It is an indication of the inherent
difficulties of the situation that the contestants are apt to prefer
private boards, for the very reason that each wishes to have among
the judges at least one advocate.

§ 6. Quite a different set of problems is presented by compulsory
arbitration; that is, by tribunals to which the contending employers
and employees must submit their differences and by whose deci-
sions they must abide. Such is the system now in use in Australia.
Its essence is that judicial tribunals are constituted, to which appli-
cation for the settlement of disputes may be made by either party.
The terms fixed by the tribunal become binding on both, and failure
to carry on work under these terms becomes a criminal offense. A
strike or lockout is punishable by fine or imprisonment. ^ The tri-
bunal may consist solely of a person or persons legally trained (say
a judge of the established courts of law), or may have in addition
persons conversant with the particular industries. Obviously,
workmen can appear before such a court only as organizations or
unions; for not individual complaints are to be settled, but disputes
applicable to all. Obviously, also, these organizations must be
open unions, and the statutes or the courts must make provision
for their being open. It is hardly less essential that the employers

1 In New Zealand, where the first compulsory arbitration law was passed (in
1896), a strike or lockout became a criminal offense only if one of the parties has
made application to the arbitration court. "If both parties prefer to settle their
difficulties by a strike, the law permits them to do this." In the New South Wales
law (1901), however, every strike or lockout, prior to or pending consideration by
the court was a misdemeanor and punishable as such. In other words, in New South
Wales, all disputes had to be referred to the arbitration court. See V. S. Clark, The
Labor Movement in Australasia, pp. 189, 191.

59-§6] AGENCIES FOR INDUSTRIAL PEACE 349

should be organized, since for them also there are to be rates and
rules of general application. The system thus involves a court,
powers of coercion by that court, and the organization of both em-
ployers and employees as parties to the proceedings before it.

The settlement of wages under such a system is likely to be com-
paratively easy at the outset. The adjudicated rates of wages are
likely to be, when first fixed, somewhat higher than those previ-
ously current; but still "fair," and not higher to such an extent as
to present a real question of principle. There is usually a certain
amount of slack in industrial arrangements which can be taken up
without serious strain. As time goes on, the workmen and the
community in general will again become accustomed to the new
scale. The workmen, it is almost certain, will before long ask for
more, and then for more and still more; until finally the tribunal
will be compelled to consider how far it can go in modifying the
terms of distribution. WTiere stop? What are "fair" wages?
That question cannot be settled without settling what is fair inter-
est and fair business profits. Ultimately, the tribunal must deter-
mine what is fundamentally just; how much the owners of wealth
are justly entitled to in the way of interest; what is a just return
to the employer in the way of business profits; why some laborers
are to receive more than others, and what is just as between the
different groups.

In other words, this sort of labor legislation involves a very dif-
ferent attitude toward competition from that which underlies
factory legislation, regulation of hours, children's work, minimum
wages. These aim to modify the plane of competition. They pro-
hibit some of the labor bargains, or impose upon all employers re-
quirements as to safety, cleanliness, health. Compulsory arbitra-
tion, carried to the limit, does not content itself with defining the
bounds within which competition shall work. It supplants com-
petition. Wages, interest, profits, are not to be determined by
the bargaining of employers and employees, with liberty for each
party to desist at will and see how the other can get on without.
They are to be fixed by public authority; and this involves settle-
ment by public authority of the distribution of wealth.

350 PROBLEMS OF LABOR [59-§6

This ultimate problem may be disguised and postponed. It is
conceivable that it will be postponed indefinitely. The force of
custom is enormously strong. Possibly the workmen will never
push their demands so far as to raise the question of the ultimate
limit. They may content themselves with such minor changes as
are constantly taking place under the influence of general economic
causes and are disposed of with substantially the same results by
voluntary arbitration and trade-union activity. Such has been
hitherto, in the brief period during which it has been on trial, the
working of compulsory arbitration in Australia. With the increas-
ing political power of the laborers, their quick habituation to any
higher scale of wages, and their recurring demands for wages still
higher, it is probable that the fundamental problem will sooner or
later have to be faced, and somehow solved.

What the outcome then might be, it would be rash to predict.
Indefinite increase of all wages means a cutting down of the returns
to investors and business men, and — so we should argue on the
basis of our general theorizing on distribution — an eventual check
to accumulation and to business enterprise. This may lead to an
early reaction, and to a reduction of wages once more to rates con-
sistent with the present mode of conducting industry. Or it may
lead (and this is equally possible) to still further radical changes
— a steady assumption of many sorts of business management by
the state, and the appropriation or purchase by the state of the
capital now owned by investors and managed by business men. In
other words, it may lead to a trial of socialism, which puts into effect
without disguise the same principle — the settlement of distri-
bution by the state. Few people see that the scheme for compul-
sory arbitration points to changes so far-reaching. Nothing of the
sort was contemplated when it was established in New Zealand and
the other Australian colonies, and tho it has already become appar-
ent that much more is involved than a device for merely patching
up industrial disputes, the full possibilities do not yet loom up be-
fore the Australians. The course of their experiment will be
watched with interest by all students of social and economic prob-
lems; both to see whether the temper of the workmen will lead them

59-§6] AGENCIES FOR INDUSTRIAL PEACE 351

to press their demands to the Hmit, and what may be the conse-
quences if they do. Many years will probably elapse before this
experiment will have been carried so far as to make clear the ulti-
mate outcome.

During the intermediate stage, when no very radical changes are
attempted — a stage which, as has just been said, may be pro-
longed indefinitely — one other difficulty is more than likely to
appear: how to enforce the arbitration decisions when they prove
to be against the workmen. Enforcement against the employers
is easy enough. They have propert}^, usually ample and visible,
and they can be brought to book by fines. Against employees fines
must remain a merely nominal mode of enforcement. Quite apart
from the expense of collecting driblets of fines from scattered work-
men, the political odium of the proceeding will prevent any demo-
cratic government from pushing it far. Experience of this kind —
that compulsory arbitration works in effect one way only — may
possibly lead to a radical change in the whole system before it is
carried to the stage of bringing the fundamentals of distribution
to a test.

CHAPTER 60
Workmen's Insurance. Poor Laws

Section 1. Irregularity of earnings and its causes, 352 — Sec. 2. Provision
against accident is feasible thru insurance. The German sj^stem, the Eng-
lish, the French. The charges, tho levied on the employer, are likely to
come ultimately out of wages, 353 — Sec. 3. Insurance against sickness
no less feasible. The Friendly Societies, the German system of compul-
sory insurance. The possibility of malingering and the need of super-
vision, 357 — Sec. 4. Old-age pensions in European countries and in
Austraha. Are they deterrents to thrift? The pecuniary difficulties
not insuperable, 359 — Sec. 5. The situation in the United States as to
accidents long chaotic; the need of reform. Rapid spread of compensa-
tion for accident. The pohtical difficulties in the way of this reform and
others, 362 — Sec. 6. Unemployment, tho it tends to correct itself, is a
continuing phenomenon. Difficulties of applying any method of insur-
ance. Possibility of supplementing trade-union out-of-work benefits.
The British National Insurance act of 1911. Relief works, 364 — Sec. 7.
Poor laws: the conflict between sympathy and caution. Relief may be
liberal where no danger of demoralization exists. For the able-bodied, it
needs to be administered with the utmost caution, 369.

§ 1. Irregularity of earnings is a much more frequent cause of
distress than are earnings absolutely small. Men accommodate
themselves to almost any income not below the bare minimum.
Few men provide adequately for vicissitudes. Where the margin
between receipts and necessary expenditures is slight, any inter-
ruption of income means suffering. Even when the earnings are
such as to make possible a sufficient provision, by savings or insur-
ance, the provision is not often made. How to mitigate the con-
sequent suffering among the great mass of the population is one of
the most urgent of social problems. It is a problem, too, to which
more and more attention has been given in recent times. This
increase of attention has not been due to greater irregularity in
earnings or greater need of provision for contingencies. I know
of no satisfactory evidence to show whether the chances of illness

352

60-§2] WORKMEN'S INSURANCE. POOR LAWS 353

uncared for, of disabling accident, penniless old age, are greater
now than in former times. But the modern world is clearly more
sensitive to the evils. Here, as elsewhere, conditions accepted in
former days as matters of course are now regarded as intolerable,
and a strenuous effort is made to remedy them.

Accident, sickness, old age, unemployment — these are the main
causes of irregularity in earnings. As to all, it will be necessary to
keep in mind a large question of principle : how far can aid be pro-
vided without undermining the character and thrift of the indi-
vidual?

§ 2. Provision against accident should be arranged thru insur-
ance. The only question can be as to the best way of making the
insurance effective. By far the most important class of accidents,
tho not the only important one, is that of accidents to workmen
occurring in the course of their employment. Such will infallibly
occur ; and it is equally certain that no effective provision will be
made against them by the workmen themselves. It is even doubt-
ful whether that sort of rough provision is made which w^ould
appear in a higher rate of pay in hazardous employments. The
risks of injury in an employment are accepted by almost all work-
men with virtually no attention or allow^ance; and when, sooner
or later, the inevitable disaster occurs, they or their dependents
are left helpless.

The chance'-of- accident varies in different occupations. It is
sufficiently well ascertained in most occupations to be susceptible
of insurance, both for accidents having a fatal result and for those
bringing permanent or temporary disability. When once the pos-
sibility of dealing with them on actuarial principles is clear; when
it is certain that the workmen themselves will not insure; and when
the sense of social sympathy and duty becomes so strong that pro-
vision of some sort is insisted on — the only solution is to make
the employers responsible. Let them do the insuring, paying pre-
miums from time to time which will enable a death benefit or pen-
sion to be paid to the widows and orphans, or a pension to the dis-
abled workmen themselves. The premiums required, if paid uni-
formly by all employers of a given trade, will enter into the expenses

354 PROBLEMS OF LABOR [60-§2

of production of all and will affect in corresponding degrees the
prices of the commodities sold. Such a plan will have far-reaching__
effect only if it is made of compulsory and universal application,
and if the mere fact of employment fixes the obligation of the em-
ployer, irrespective of any agreement between him and the em-
ployee.

The desired result of assured provision can be secured either by
requiring the employers to organize directly in insurance associa-
tions of their own, or by simply imposing on them a liability against
which they can insure in companies existing for this purpose. Of
the former type of procedure, Germany supplied the earliest and
most conspicuous example; of the latter. Great Britain. The Ger-
man system, established (1884) as the first part of the Empire's
elaborate system of workmen's insurance, ^ compels the employers
in each trade to form a sort of insurance company carefully super-
vised by the government, to contribute premiums adjusted to the
risk of accident, and thereby to enable the pa^Tiient of pensions to
disabled workmen (at the rate of two thirds their former wages for
those completely disabled) and corresponding pensions to widows
and minor children. The British Workmen's Compensation Act
(1897), on the other hand, simply provides that the employer must
pay a pension (of one half the former wages) in case of disabijityr-
and in case of death a lump sum amounting to three years' wages,
with stated minima and maxima. In what manner he shall
make the provision is left to his own discretion. In practise
he almost always insures in an employers' liability company; very
few employers carry on their operations on so large a scale and
with such continuity as to make it safe to insure themselves. Sub-
stantially on the same principle is the French system (established
1898) where the pension in case of tptal disability is two thirds of
the wagies rate,- and where also the design and the effect is to com-
pel employers to carry insurance against their unqualified liability.
The German method is natural in a country where the public

1 This system forms a consistent whole, and might be dcscriljedas a whole; but
the different parts are here taken up separately, according as they involve different
phases of the problem.

60-§2] WORKMEN'S INSURANCE. POOR LAWS 355

administrative system is developed to high efficiency, and where
doigiled-super vision by government authority is helpful and not un-
welcome. The English and French methods are adapted to com-
munities whose traditions and habits are against such faj-jea-ching
government regulation. Each makes certain, tho not in the same
way or quite to the same extent, provisions against accidents
occurring in the course of employment. ^

No objection of principle can be raised against such a system.
Injuries from accident cannot be shammed, nor will they be in-
curred of set purpose. No doubt they will be incurred thru negli-
gence. The negligence is probably not made greater by the assur-
ance of prevision. It remains the sarne, unfortunately, whether
the workman knows or does not know that he will be taken care of
if anything happens. Negligence can be offset effectively only by
introducing safety appliances, by guarding machinery, by, stringent
discipline — precautions which the employer is stimulated to
adopt when he is certain that the amount of his premiums will be
lessened by them. In the legislation both of Germany and of Great
Britain it is enacted that a workman who intentionally brings an in-
jury on himself shall have no claim; but this sort of contingency
may be disregarded. Tho there is a danger that accidents and
their consequences will be made to appear more serious than they
are, in order that idleness and a pension may continue longer, the
possibilities of malingering remain small as compared with those
under insurance against sickness. On the whole, the human im-
pulse need not be held in check by a fear that the immediate relief
of suffering will be followed by demoralization of the sufferer.

Who ultimately bears the charges which under such a system are
first imposed on the employers? It is sometimes reasoned that
they will fall on consumers. Employers, no doubt, will bear them
at first, as they would bear a tax (and indeed compulsory payments
of this sort are difficult to distinguish from taxes). In the end the

1 It should be noted that the English statute gives the workman an option be-
tween proceeding under the Compensation Act and suing the employer for his lia-
bility under the law as it stood before. The trend is for less and less recourse to the
latter method, and more and more resort to the Compensation Act; and it is prob-
able that resort to employers' liability of the old sort will eventually disappear.

356 PROBLEMS OF LABOR [60-§2

charges are expected to influence prices, as will any other additions
to the expenses of production. Hence it is argued they will be
borne finally by consumers. Obviously this sort of reasoning needs
to be qualified as much as similar reasoning applied to taxes. ^ It
is true that a taxj^n any commodity raises its price, and affects the
consumers, not the capitalist producers or employers. But a tax
on all commodities cannot raise alj prices. So far as insurance
premiums bear more heavily on one industry than on another, they
will have an effect, under competitive conditions, on relative prices,
and so will be felt by the consumers of those things made in the haz-
ardous industries. But so far as they bear on all industries alike
prices will not be affected. Employers must accept the charge
once for all, subject to only one avenue of escape — they qjaj^
lower v/ages, directly or indirectly, immediately or ultimately.
Direct and immediate reductions of wages are highly improbable.
Here, as in other similar situations, there is likely to be enough
slack in the adjustment of wages and profits to enable some tighten-
ing, some drain on profits, without immediate effect on wages.
When such a system is in steady operation, however, and has been
for some time in operation, every employer knows that the act qf_,
employment involves not only wages, but these additional charges
also. His calculations must be correspondingly affected. The
outcome is likely to be that the insurance charges will ultioiaiely-
come out of the workmen's own earnings. This will not necessarily
take place by any process of direct reductions in wages. More
probable, in progressive countries like Germany and England, is a
failure of wages to advance as much as they would otherwise do.
Obviously it is no objection to an insurance system that the premi-
ums ultimately come from the beneficiaries themselves.

In case of industries having a monopoly or quasi-monopoly, this
shifting of the charges is much less likely to take place. Such in-
dustries will indeed share with others any general effects on all
j wages. So far, however, as they are subject to special charges,
j they will probably bear the charges once for all, just as they will
Vij)robably bear special taxes once for all.

1 Compare what is said below, Chapter 71 , on the incidence of taxes.

6(>-§3] WORKMEN'S INSURANCE. POOR LAWS 357

Employers on a large scale accommodate themselves most easily
to a compulsory insm-ance system. They have large resom*ces,
allow a good margin for contingencies of all sorts, commonly lay
their plans with reference to considerable periods. Smaller em-
ployers are less able to adjust themselves to additional expenses.
The rigorous application of any form of labor legislation, whether
in the way of restriction or of compulsory expense, tends to hasten
the development of large-scale production; a result which is in ac-
cord with the general trend of modern industry, yet is not welcome
to most persons who have at heart plans of this kind for social
reform.

A considerable proportion of mishaps are not provided for by
insurance tia the employers. Accidents to independent artisans,
to those in the service of petty employers exempted from the gen-
eral system, most of all, accidents not occurring in the course of
working operations, are not included. It is possible and desirable
to give an opportunity in some of these cases (to independent arti-
sans, for example) to join of their own volition the insurance sys-
tem; unfortunately this opportunity is likely to be availed of only
in a small proportion of cases. A large place is still left for private
charity and public poor relief.

§ 3. Insurance against sickness is as feasible as insurance against
accident. It is even more feasible, since longer observation has sup-
plied more adequate data on the frequency of illness in great mod-
ern communities, and on its greater frequency with advancing age ;
while the progressive gain in ways of healthful living has introduced
a factor of safety which is not found in accident insurance.

Saving against a rainy day — a rough sort of insurance against
illness as well as other mishaps — is common among the well-to-do
and the lower middle class. In the latter class and among the
skilled artisans, there has been considerable development of insur-
ance proper. The Friendly Societies of Great Britain — the Odd
Fellows, the Foresters, and other important associations — have
carried on insurance against illness (and other ill fortune also) on a
large scale. Branches or outgrowths from them, and imitations of
them, have done the same thing in the United States; and there are

358 PROBLEMS OF LABOR [60-§3

some associations of this type in most countries. They provide
commonly against disability of all sorts, whether the result of ill-
ness or of accident. The same is done by the British trade unions,
among whom the benefit system has an established and important
part, including sick pay as well as trade benefits (strike pay and the
like). It is true that the premiums or dues of all these organiza-
tions are commonly inadequate. They promise more for a given
weekly premium than they are able in the long run to furnish.
Like the "fraternal" life insurance organizations which have had
and still have such a vogue in the United States, they undertake
to pay amounts greater than their dues warrant them in under-
taking on sound actuarial principles. None the less, and notwith-
standing frequent collapses, they have done great service in miti-
gating the hardships from illness and consequent loss of earnings.
Their serious and irremediable defect is that they reach only a class
comparatively prosperous — tradesmen, persons on steady salaries,
skilled artisans.

It is this failure to reach the great mass of the people that led the
German statesmen to adopt the compulsory (and therefore univer-
sal) system for sickness insurance as well as for other forms. No
other method will bring relief with certainty to those needing it
most. The German law of 1883, the first in time of this great series
of measures, established associations, commonly organized by lo-
cality (one for each town or rural district), in which all workmen
are insured against sickness. Contributions are payable by em-
ployers, whose obligation to pay is fixed by the act of employment;
but they may deduct two thirds of the amounts from the stipulated
wages (the remaining third being a charge on the employer him-
self). The workman gets, while ill, one half his usual wages, and
in addition free medical treatment; in case of need, hospital treat-
ment.^ The ramifications and details of the system are carefully
worked out; they call for an enormous and skillfully developed or-

1 Cases of injury from accident are treated in the German system as cases of ill-
ness during the first thirteen weeks (one fourth of a year) . Only if disability from ac-
cident endures beyond thirteen weeks, that is, in case of long-continued and pre-
sumably permanent disability, does the machinery of accident insurance begin to
apply.

6(>-§4] WORKMEN'S INSURANCE. POOR LAWS 359

ganization; they secure, for practically every person employed at
wages, a sufficient provision in case of illness.

The question of principle presents itself somewhat differently
in this case. Illness may be shammed ; malingering is a clear pos-
sibility. For many a laborer half pay and no work make an attrac-
tive combination. The administration of any system of sick insur-
ance hence calls for watchfulness. The Friendly Society, whose
local lodge is made up of a comparatively small number of persons
known to each other, can supervise its benefits without cumber-
some machinery and yet with sufficient checks. A visit from a
committee of members attests sympathy and at the same time se-
cures an inspection of the invalid. The system, tho not without
opportunity for fraud, yet has a quasi-automatic safeguard against
malingering. The same is the situation where trade unions pro-
vide sick benefits. A great compulsory system, in which thou-
sands of persons (as in a city) are insured against sickness, calls for
the most watchful management — physicians' visits and reports,
elaborate records, systematic supervision, more or less of red tape.
If badly administered, it is likely to become demoralizing to the
recipients of aid, and in the end more harmful to them than com-
plete indifference and abstention from aid.

It is said that no such evil consequences have appeared on any
large scale in the German system. True, there has been malinger-
ing, and measures to stop it have had to be considered. On the
whole these drawbacks have been no greater than was inevitable;
and the social gain has vastly exceeded the loss. The adminis-
tration of the German system of workmen's insurance, as a whole,
has been in high degree efficient. Substantial aid to the afflicted
has been combined with safeguards, adequate on the whole, against
fraud. Hardly another country possesses the staff of trained pub-
lic servants needed for planning and administering so vast a ma-
chinery for social reform ; and the Germans are justly proud of what
they have here achieved.

§ 4. Old age is a contingency in this sense, that no one knows
whether he will reach it. Provision for old age can be made by
insurance, and is so made, to some degree, by the well-to-do, thru

360 PROBLEMS OF LABOR [60-§4

insurance companies. Even among the well-to-do, it is not often
made systematically. In the social tier below that of the well-to-
do, friendly societies and trade unions sometimes have a system of
superannuation benefits ; but it is effective only for an insignificant
proportion of their constituency. Among the masses of the pop-
ulation there is commonly no set provision of any sort for old age;
and when infirmity comes, the aged are dependent on the younger
generation or on charity. There is nothing more pathetic than the
position of the workman, skilled or unskilled, who has passed the
age of efficiency, has no resources, and is a burden, often borne
grudgingly, on a household with slender resources.

Old-age pensions are now provided by public authority in sundry
countries. The German system (1889) includes them, and applies
to them rigorously the principle of insurance. Employers there
pay the premiums, with the same arrangement as in sick insurance
for deducting from wages part of what they advance. One half of
the premiums can be so deducted, the other half remaining as a
charge on the employers; while a fixfed sum is contributed toward
each pension by the nation, that is, by the taxpayers. The amount
of the premiums due for each workman, and the pension payable to
him, vary according to his wages. This system requires an enor-
mous amount of bookkeeping, an enormous investment of accu-
mulating funds, and ver^^ expensive administration. Probably it
is unnecessarily cumbrous; yet the French insurance system, es-
tablished in 1910, reproduces its characteristic provisions. Much
simpler is the plan of giving to every workman or to every needy
workman, once for all, from the public funds, a pension on reaching
a given age limit. This is what is done in the English-speaking
countries which have established old-age pensions, in Great
Britain herself, and in Australia and New Zealand. In all of these,
to be sure, the pension is subject to reduction according to appli-
cant's need. Only those having no other income, or but a slender
income, are pensionable; and in the Australian states there is a
restriction also for those who have some accumulated means.

Old age cannot be shammed ; so far, an old-age pension can lead
to no demoralization. But it is maintained that it will discourage

60-§4] WORKMEN'S INSURANCE. POOR LAWS 361

thrift, since it takes away the incentive to make independent pro-
vision. Unfortunately there is in fact no appreciable amount of
thrift to be discouraged, least of all among the great mass of manual
workers. They exercise no thrift and make no provision, and they
are not likely to do so. Some small accumulation of capital funds
there may be on their part; and it is probably unwise to make such
accumulation a bar to a pension, or a ground for reducing the
amount of the pension, as is done in the Australian states. The
British regulations are in this regard better, in that they make the
possession of an income alone (not that of a principal sum) a ground
for reducing or refusing a pension. The German plan, being one
of insurance strictly, pays no attention to any income or property
which the claimant may have. He gets his pension as a matter of
right, in virtue of the premiums paid on his account thru the pre-
ceding years; and anything he has done for himself, in the way of
savings, inures to his benefit without diminution of the pension.
But, to repeat, voluntary provision for old age is a negligible ele-
ment. If there were such, it might be discouraged by old-age pen-
sions; virtually there is none.

Those who favor universal old-age pensions are influenced not
only by the growing strength of altruism, but by the belief that
such aid does not really discourage thrift or independence. It
meets a need which all know to be inevitable, which, however, few
provide for until it is nearly on them. Old-age pensions are fa-
miliar for some persons of the comparatively well-to-do classes,
such as teachers and public officials. These pensions are not found
to discourage thrift or undermine character, and they prevent much
anxiety and suffering. Why should there not be a similar balance
of good in the case of aged workmen?

Obviously, a system of old-age pensions must entail a very heavy
financial burden. Where the provision is made once for all by the
state, the needed sums must be got by taxation; and the difficulty
of getting the money is often regarded as an insuperable obstacle.
As in most matters of public expenditure, the question here is not
whether the community can raise the revenue, but whether it really
wishes to. When a country plunges into war, treasure is poured out

362 PROBLEMS OF LABOR [60-§5

on a scale that would cover, many times, the expenditure needed
for the contested social reforms. If the impulse of sympathy were
as strong as the ancient and brutal fighting instinct, we should hear
little of financial obstacles in the way of schemes for far-reaching
social improvements.

§ 5. In the LTnited States the whole movement for workingmen's
insurance or pensions long made slow headway. The situation is
in striking contrast with that in the other civilized countries, great
and small. Elsewhere there is unceasing discussion of the ways of
relief by public action, and steady progress in legislation. In this
country w^e are as backward as in many other matters of social re-
form. We are wont to flatter ourselves that our condition is a su-
perior one, and that we are not confronted with the same social and
industrial evils as older countries. The superiority is only one of
degree, and no longer a great one at that. The need for ameliora-
tion is hardly less.

So far as provision for accident goes, our case long was wretched.
There was supposed to be a liability on the employers for injuries
occurring to workmen in the course of their employment. But
the liability (varying according to the judicial decisions and the
statutes of the several states) was so hedged in by sundry legal limi-
tations, and so beset with uncertainties, that it brought a provision
only in a small minority of cases. Most cases were settled out of
court by a compromise between the parties, with outcomes varying
according to the helplessness of the victim and the astuteness of
employers' counsel. Where cases got into court, the question
whether the workman should get compensation depended on the
lottery (such it virtually w^as) of a suit at law and a trial by jury.
The lottery occasionally brought a prize to an injured laborer, in
the shape of a heavy lump sum in damages. This sort of prize
blinds the workmen at large to the immensely greater number of
cases in which nothing is got. They overestimate the prize, just
as they underestimate the chance of injury in dangerous occupa-
tions. In its general outcome, the situation illustrated strikingly
the possibilities of waste in the individualistic system. Most of
the energy of those engaged in the disposal of accident cases —

60-§5] WORKMEN'S INSURANCE. POOR LAWS 363

judges, jurymen, lawyers, casualty managers — was simply un-
productive of social gain.

This situation was so obviously bad, and the example of other
countries pointed so clearly to the remedy, that a great change set
in during the second decade of the present century. State after
state in rapid succession enacted workmen's compensation laws.
Constitutional provisions in some jurisdictions imposed limitations
and obstacles, and in particular stood in the way of an absolute and
unconditional requirement of compensation. Among the forces
that stood in the way of uniform and unconditional provision there
was also the clinging by the workmen themselves to the option for
suing their employers for damages, with its delusive possibility of
a heavy jury award. Different systems were adopted in different
states; and not infrequently the compensation was inadequate as
well as lacking in certainty. Usually the same method was fol-
lowed as in Great Britain and France : the burden of compensating
the workmen was put on the employer once for all, but some free-
dom was left him as regards the manner in which the provision
should be made. In many jurisdictions he was given an option
of insuring either in a private employers' liability company or in a
cooperative (" mutual ") insurance company controlled by the state
and competing with the private companies. There were instances
(as in California) of an all-inclusive compulsory organization man-
aged directly by the state. It was not until 1916 that the federal
government enacted an adequate law covering employees under its
jurisdiction. The rapid spread of the reform is significant: it
shows how, even in a conservatively-minded community like ours,
a gathering and cumulative public opinion brings about, when once
a first step sets the example, the rapid adoption of measures long
deemed impracticable.

The other phases of workmen's insurance present more complex
problems. Old-age pensions, on a non-contributory basis, come
next after provision against accident in ease and simplicity. But if
put on a contributory basis — which in principle is preferable —
they involve the collection of premiums over many years, the
investment of large funds, elaborate records, provisions for cases

364 PROBLEMS OF LABOR [60-§6

of changed domicile and occupation. The administrative problems
are highly complex in the case of sick insm-ance also. A compul-
sory and universal system, with its need of registration, of elaborate
checks, of medical attendance and supervision, presumably of
contributions from employees, can be set up only by well-
devised legislation, and can be effective only under administra-
tion at once stringent and humane. In the field of social reform,
as in so many others, these difficulties are especially serious in the
United States. The national government is limited in its consti-
tutional power. The states can never act in unison, and are often
deterred from proceeding separately by mutual fears and jealousies.
Their large and cumbrous legislatures, elected for short terms, do
not easily frame careful and consistent laws. The absence of per-
manent tenure in the upper administrative service causes a lack of
trained officials. All this will doubtless change gradually for the
better, and the conditions will become more favorable for the as-
sumption by the state of larger and more diiEcult undertakings.
Among such is a far-reaching system of provision against sickness
and old age; concerning whose future in this country it would be
hazardous to predict more than that in some form it is tolerably
certain to come sooner or later.

§ 6. Unemployment presents problems even more difficult than
accident, old age, and sickness.

Socialists like Marx and Rodbertus contend that a large reserve
of unemployed workmen necessarily comes into being under the
capitalist system. In answer, it may be maintained that a steady
supply of unemployed laborers tends to bring its own remedies; it
brings a competition for places, a bidding of laborers against la-
borers, a readjustment of terms between employers and employees,
and the final attainment of a stage of equilibrium when all will be
absorbed in industry. As a matter of abstract reasoning, this is
more consistent and logical than the socialist attempt to prove that
continuous unemployment on a large scale is inevitable. To put an
extreme case, if one half or one quarter of the total number of la-
borers were long unemployed, it is certain that readjustment would
take place, by lowered wages and probably altered industrial ar-

60-§6] WORKMEN'S INSURANCE. POOR LAWS 365

rangements; and before long there would be diminution of unem-
ployment, and eventually (supposing the process to work out its
results without cheek to the end) none would be left.

All reasoning that attempts to show how unemployment tends to
bring its own remedy assumes settled conditions of industry — the
absence of friction and transition and irregularity. Such condi-
tions never exist in the actual world, and never will exist, unless
indeed under a rigid socialistic regime. An automatic adjustment
of the supply of labor to those conditions under which all shall be
employed, works out in fact only as a rough approximation or
tendency; like the tendency of imports to balance exports, of
prices to conform to the quantity of money, of the earnings of indi-
viduals to be proportioned to their efficiency. In the actual world
there is but a loose conformity to these long-run tendencies. So
far as unemployment goes, tho it is true that, the greater its extent,
the stronger are the forces which tend to make it diminish, there
are abundant causes for its being a continuing phenomenon. The
steady progress of invention and improvement brings shifts in the
employment of labor; at any given moment a certain proportion of
men are being displaced in one industry and are not yet absorbed
in another. The restlessness of the workmen themselves — pro-
moted as it is by the monotony of factory work — is another cause
of shifting. The periodic maladjustments of industry and the re-
currence of stages of depression are a great and calamitous cause
of unemployment. Similar in effect, and more continuously in
operation, are the seasonal oscillations. These are sometimes in-
evitable, as in the work of the harvests. Often they are not inev-
itable, but due to the mere crudeness of our organization of pro-
duction and exchange. In such industries as the making of boots
and shoes, clothing, straw hats, and the like, there is no inherent
reason why the work should not be evenly distributed thru the
year; yet in fact busy seasons are followed by slack, and overtime
work by unemployment. Casual and irregular labor is sometimes
inevitable, as in loading and unloading freight from vessels and
railways; and it is frequent even where not inevitable, because
many employers are disposed to favor casual labor rather than take

366 PROBLEMS OF LABOR [60- § 6

the trouble of arranging for a permanent staff. So constantly are
these various causes at work that nonemployment is an unceasingly
recurring phenomenon, and in that sense a permanent one.

Any method of insurance for equalizing the burden of the irregu-
larities of employment presents some obvious difficulties of admin-
istration. The irregularities are of a sort which do not tend to
offset each other, like the chances of death and old age. They are
therefore susceptible of actuarial treatment only with a very wide
margin of "loading." That they vary from occupation to occu-
pation is not so serious a difficulty. Insurance against unemploy-
ment would doubtless have to be organized, like insurance against
accident, on the basis of occupations and with differences of rates
according to the varying risk of unemployment.

All such difficulties, however, are slight in comparison with the
fundamental one: how prevent an unemployment benefit from
demoralizing the recipient? If all men were eager in the search for
work, relief in case of unemployment, whether by insurance or any
other method, would be a comparatively simple matter. But for
most men, assured support until a job is found makes it too
probable that the job will not be sought.

One method of insurance that has had some promising results is
thru trade unions. The strong British unions offer an out-of-work
benefit (not to be confounded with their strike benefit) which has
been administered successfully and beneficently for many years.
It is conducted under conditions that go far to prevent abuse. The
officers and other members of the local union know what is the state
of trade in their district, what are the possibilities of employment,
what the spirit and habits of the recipient. They are watchful
against fraud upon the union funds. They can not only give out-
of-work pay, but make sure that all available opportunities for get-
ting work are utilized, and that benefits continue to be paid only so
long as unemployment is inevitable or at a rate declining with the
lapse of time. This mode of coping with the problems has seemed
so promising that experiments have been made toward utilizing
it in the assignment of unemployed benefit by public authority. A
number of cities in Belgium and elsewhere have adopted the

60-§6] WORKMEN'S INSURANCE. POOR LAWS 367

" Ghent system " (first developed in that place with apparent suc-
cess) of offering a supplement to the trade-union unemployed bene-
fit ; they pay say 1 franc for every 1^ francs allowed by the union.
Essentially the same system has been adopted on a national basis
in Denmark and Norway.

With this enormously difficult problem Great Britain grappled
coiuageously, almost adventurously, in her insurance act of 1911.
That great measure provided not only for an all-embracing system
of insurance against sickness and permanent infirmity, but also for
a large tho not uniA'ersal one against unemployment. Thereby
Great Britain came to provide, like Germany, for sickness and dis-
ability, as well as for accident and old age; and in this humane ri-
valry took the lead by providing for unemployment also. In certain
important occupations (such, for example, as building, the so-called
engineering trades, shipbuilding) insurance against being out of
work was made compulsory. Contributions were required in equal
amounts from employers and employees, the state also adding a
share. A system of labor exchanges had already been established
for facilitating the mobility of labor; it soon became so extensive
in its operations as to serve effectively as a test of nonemployment.
Like the German insurance code, the act of 1911 was a remarkable
piece of legislative workmanship; while its chance of successful
operation was immensely increased, as had been the case in Ger-
many, by the existence of a trained permanent administrative staff,
to which could be allowed much discretion on details. An ex-
traordinary forward step was taken in this field of social reform.

Public relief works are a tempting device. Yet they have proved
of service chiefly as safeguards against imposture; and for the latter
purpose they are of uncertain effect — they sometimes cause im-
posture. It is remarkable testimony to the general effectiveness
of the regime of private industry and to the extreme difficulty of
finding a substitute for the spur of pecuniary interest, that relief
works have rarely been successful in putting any considerable num-
ber of deserving unemployed at work on something really worth
while, and have never been successful in achieving this result for
all the deserving unemployed. It is easy to declare that, at a given

368 PROBLEMS OF LABOR [60-§6

juncture, there are both unemployed laborers, and needs to be satis-
fied for the community by the labor of somebody. To bring these
two together, and set the men to work on things they can do and on
which their labor tells to full advantage, is the most difficult task a
public official can be confronted with. Both the public employer
and the aided employee almost always feel it to be perfunctory.
Only where the simplest and most monotonous of tasks can be as-
signed — as wood sawing or stone breaking — is it possible to pro-
vide work for the unemployed and hold them to a fixed stint. Very
little work of real utility can be laid out in this mechanical way.
Most things worth doing are more complex. It is difficult at best
to find work that is thoroly worth doing; it is even more difficult to
get it efficiently done by relief operations. For one thing, the
power of discharge is lacking; and it must be sorrowfully admitted
that this power, heartless tho it seems and subject to abuse as it is,
remains essential for keeping the ordinary laborer steadily at his
task.

None the less, public works of a kind that are certain to be carried
out sooner or later, may best be set going in times when there is
unusual lack of employment. Some palliation for the recurring
stages of depression may be found by massing in such periods set-
tled public expenditures. In a country like Great Britain, for ex-
ample, the great industry of shipbuilding is especially subject to
those fluctuations which, as we have seen, are marked in the indus-
tries that make plant and machinery. i If the government must
build men-of-war, let it put the shipyards to work on them in those
times of depression when the demand for merchant shipping is at a
standstill. Similarly, a country in which railways are publicly
managed may arrange for new construction and extension at times
when private investment is halting. This calls for a firm hand in
checking the public expenditure as soon as private undertakings
.revive. Many people, employers and employees, will be certain to
clamor for indefinite continuance. Even when prudently man-
aged, this is an uncertain device, subject to the dangers of perfunc-
tory public works. Nevertheless, it is better than the common pro-
1 See Chapter 28, § 2.

()0-§7] WORKMEN'S INSURANCE. POOR LAWS 369

cedure of letting the rush of speculative activity reach public oper-
ations also, thus exaggerating both the upward swing and the sub-
sequent recoil.

Arrangements for spreading information and increasing the
mobility of laborers are good without qualification. Much more
can probably be done in this way by public authority than has yet
been accomplished. Private agencies are subject to great abuses.
They find the laborer when he is least capable of holding out and
bargaining, and when it is most easy to take advantage of his weak-
ness and ignorance. Something, too, can probably be done in
systematizing the distribution of seasonal and casual labor —
dock and railway labor, harvest hands, men engaged in construc-
tion work, Germany and England are now experimenting on a
large scale with labor exchanges; and some of om' states are also
conducting public employment bureaus. Here, again, the social
ferment is at work, and the problem is grappled with as never be-
fore. To achieve good results in bringing unemployed labor to the
places where it is wanted, and to systematize casual labor, officials
must be put in charge who are capable, well-trained, and high-
minded. Such men are wanted in every direction where the sphere
of public activity is enlarging; and the success of all work for social
betterment, most of all perhaps of work for relieving the poor and
unfortunate, depends on success in selecting and permanently re-
taining administrators of the right stamp.

§ 7. No phase of social endeavor illustrates more clearlj'- the con-
flict between sympathy and sober judgment than the poor law.
Some provision for the relief of the indigent there will always have
to be. The altruistic impulse will not permit the very last stage
of misery to be reached. The various schemes considered in the
preceding paragraphs, even tho carried to their fullest possibilities,
will yet leave untouched cases of misfortune, improvidence, wreck-
age. There will always be occasion for simple charity; and charity
always runs the danger of demoralizing the recipient.

Some sorts of relief can be given without danger of harming
character. The pauper insane were formerly cared for in local alms-
houses, often under wretched conditions. The better way is to

370 PROBLEMS OF LABOR [60-§7

take care of them with reasonable comfort in special asylums, ad-
ministered not by local bodies but by the central government, with
skilled supervision. The feeble-minded, the blind, the crippled
and deformed, those incurably ill, can be mercifully segregated
in the same way, and with the same certainty that no one will be
tempted to make himself an object for this sort of charity. It is
doubtless true that much money and effort is devoted to these dis-
tressing cases which might be turned with better results to work of
prevention, not of palliation. Schools are more effective agencies
for upbuilding than hospitals. But the appeal for aid to the sick
and wretched and maimed is not to be resisted ; and it is at least to
be said of hospitals and asylums that suffering can be relieved in
them without sowing the seeds for still more suffering.

Old-age pensions, when they are really pensions and are re-
stricted to persons in need, are virtually a form of poor relief.
They simply go by the name of pensions, administered without the
repellent apparatus of the poor laws. Whether they can be made
respectable and even agreeable in this way without undermining
thrift, has already been considered. The balance of probability
seems to be that here, as in the case of child saving, the altruistic
impulse may be allowed its way.

The case is different with able-bodied adults. Poor laws, as
regards these adults, are the most dangerous of well-meant devices.
The certainty of support is the greatest enemy to vigor and inde-
pendence. The history of the English poor law in the first third
of the nineteenth century shows how an entire stratum of the popu-
lation (in that case, more especially the agricultural laborers) can
be demoralized by indiscriminate poor relief. While the only sure
safeguard against pauperization is a general feeling of shame at be-
coming a recipient of relief, such a public opinion is itself largely
the result of the proper administration of relief.

The English poor law investigators of 1832-1834, after surveying
the experience of their country prior to the great reform of that
date, came to the conclusion that the only safe way to administer
poor relief for the able-bodied was to concentrate it in workhouses
or almshouses. Outdoor relief (that is, relief outside the alms-

60-§7] WORKMEN'S INSURANCE. POOR LAWS 371

house) was to be abolished. The principle was sound: let relief be
made effective but not attractive. For generations the abolition
of outdoor aid was regarded by the English as the only feasible
method of carrying out the principle. It was thought the sine
qua non of successful poor law administration. Such relief in fact
never disappeared in England, even for the able-bodied. Further
experience and reflection have made it less certain that it ought to
be completely done aw^ay with. The workhouse itself is often a
school of demoralization, and relief in it, expected to be so un-
attractive, ceases with habituation to be so. The keynote of
modern charity administration is differentiation in the treatment
of the various kinds of needy persons. Outdoor relief is admitted
to be a highly dangerous remedy, better discarded entirely than
used freely. Yet, with due caution, and especially as a means of
tiding over temporary straits, it serves better than an inflexible
almshouse test. Again, indoor relief, i.e. institutional care, should
be of various kinds, different for the young and old, the sick and the
well, the habitual vagrant and the workman temporarily in need.
The complex problems of charity administration, themselves the
subject of a large literature, are similar to those of workmen's in-
surance and the other phases of social reform. They show the
widening influence of altruism and at the same time the search for
rigorous and far-sighted method. Thru all runs the same funda-
mental principle: aid the weak in such a way as to strengthen
them permanently.

CHAPTER 61
Cooperation

Section 1. Cooperation attempts to dispense with the business man. Its
various forms, 372 — Sec. 2. Cooperation in retail trading, when done
by the well-to-do, of no social significance. When done by workingmen,
as in Great Britain, it has larger effects. Methods of the workingmen's
stores and causes of their success. The movement elsewhere, 373 —
Sec. 3. Credit cooperation in Germany; its methods and results. Other
sorts of societies, and development in other countries, 378 — Sec. 4.
Cooperation in production would most affect the social structure, but has
had the least development. Causes of failure; the rarity of the business
qualities and the limitations of workingmen. The future of coopera-
tion, 381.

§ 1. Cooperation among manual laborers was long regarded as
the most promising means of reaching better social conditions.
The prospects of far-reaching change by this method seem less good
now than they did to the economists of a generation ago. The co-
operative movement, none the less, remains an important one, not
only because of its extent and its substantial results, but also
because experience with cooperation is instructive concerning the
place of the business man and of business profits in modern
industry.

The essence of cooperation is getting rid of the managing em-
ployer. Laborers, or indeed any set of persons whether laborers
or not, do for themselves that work of planning and direction which
is ordinarily done by the business man. They not only do his
work; they also assume his risks. There must be in any case su-
perintendence and administration; these are delegated partly to
salaried agents, in part are undertaken by committees or officers
serving gratuitously. The cooperators as a body settle the general
policy and assume the risks of the undertaking, just as the stock-
holders do in a joint-stock company. In this last-named way,
they aim to supplant the business man in his most important and

characteristic function.

372

61-§2] COOPERATION 373

Cooperation has been tried in retail trade, in credit and banking
operations, in some phases of agricultural work, and finally in
"production." This enumeration proceeds roughly in the order
of success: cooperation has been most successful in retail trade,
least so in production. What has been the degree of success in
these several directions, and what the explanation of the differ-
ences?

§ 2. Cooperation in retail trade, or distributive cooperation, is
the simplest as well as the most successful form. A number of
persons, workmen or others, get together, subscribe a fund, buy
their commodities at wholesale, and distribute these among them-
selves. Simple as this is in outline, the business of retailing has
its complexities. Goods must be on hand in convenient quantities,
with due variety, easily found for the customer; those that become
obsolete or shopworn must not be allowed to accumulate; the pref-
erences and whims of purchasers must be humored. The co-
operative stores have found that they must assume the outward
appearance of the ordinary retail shop, with its show windows and
placards, decorations and temptations. At one time in the his-
tory of distributive cooperation in England, it was thought pos-
sible to save rent by taking premises on a back street. But it has
been found advisable to do as the private trader does — take
conspicuous premises on the main thorofares. Thus only can the
purchasers be effectively reached, and shopkeeping conducted on a
large scale and with real economy. Site rent, in other words, has
been found to be not a cause of high price, but a result of efficient
operation; and low rent has not been found to mean a real saving.

Where this sort of thing is done by persons of the well-to-do or
middle class, it has no considerable social interest. As regards
the larger questions of social reform, there is little difference
whether a shopkeeper makes his profits or a body of cooperators
save a bit by substituting for him salaried agents. This is all that
is meant by such great cooperative stores as the London Army
and Navy Stores, the Civil Service Supply Association, and others.
These excellent institutions owe their success in large degree to their
requirement of cash payments. The traditional relations between

374 PROBLEMS OF LABOR [61- §2

the ordinary English tradesman and his well-to-do customers had
long been, and indeed still are, those of servility combined with
high charges on the tradesman's side, and of delayed and irregular
payment on the customer's side combined with affected indifference
to the prices. Long credits, bad debts, high prices, and large
advance of retailer's selling price over his buying price had been the
natural consequence of this pseudo-aristocratic regime. The
cooperators, by agreeing to pay cash, made possible much more
businesslike methods and considerable economies as to bad debts
and interest.

In the working-men's stores, however, cooperation has meant
something more. These stores had a remarkable growth in the
half century which elapsed since the first small start about 1850.
They now number thousands, their members number hundreds of
thousands, their transactions run into hundreds of millions of
dollars. Their influence reaches the daily lives of a very large
portion — perhaps one half — of the working population of Great
Britain, especially in the manufacturing regions of the North of
England and Scotland. Their example has been followed on a large
scale on the Continent, and has not been without its influence in the
United States.

A type of the workingmen's store is the Rochdale Equitable Pio-
neers' Society, the earliest and the most famous of them. The
Rochdale stores, as the workingmen's stores of this type have come
to be called, sell at ordinary or current retail prices. They make no
attempt to effect a saving at this first step. Periodically, say at
the end of each quarter, they divide profits among their members
in proportion to purchases made by these. The system necessarily
involves keeping account of the purchases; a somewhat trouble-
some process, in which the British stores enlist the aid of the mem-
bers themselves. Tin tags (or, in very recent times, paper or
cardboard slips) are given to members for the amount of every
purchase, and these memoranda are turned in by them at the
close of the quarter in order to make up a record of each in-
dividual's purchases.

This practise of postponing and lumping the savings has two

61-§ 2] COOPERATION 375

advantages. It has a clear financial advantage : the gains are not
divided before they are made. Where the attempt is made to sell
at once at lowered prices, the mark may be overshot thru failm'e to
make enough allowance for expenses, depreciation, and the like.
Then, as has happened with many cooperative experiments, the en-
terprise eventually goes to pieces. But the Rochdale plan has a
much more important advantage than this financial safeguard.
The rills of gain on the several purchases, swollen at the end of the
quarter to an appreciable volume, are not so likely to be dissipated.
The chance is greater that they will be put by and saved. i\.nd the
stores themselves offer an opportunity and even temptation for
saving. The dividends, as the accumulated profits are called,
may be left at the store as capital, and when so left are entitled
to interest. At the very outset the store needs some capital, which
is subscribed by the members (usually in modest sums, the share
for each member being £1). The dividends, largely left at the
store, add to the capital. It is in this way that the capital of the
workingmen's stores, small at the start, has been brought to great
dimensions. The stores not only make savings; they act also as
savings banks.

This insinuating arrangement for thrift is intentional. The
Rochdale stores have always regarded themselves as something
more than storekeepers and penny savers. The early promoters
and spokesmen of the movement were men of noble spirit, and
looked on the cooperative store as the first stage in a great working-
men's movement. The expectations which they and their con-
temporaries cherished have somewhat abated in later days; but
there is still an atmosphere of high-minded endeavor. Thus the
stores almost invariably refuse to sell liquor, tho this might be a
source of larger profit. They make it easy for non-members to join.
Strictly, members alone are entitled to share in the dividends. But
non-members are often allowed half dividends on their purchases,
the amounts so allowed being credited as installments of subscrip-
tions to shares until the full share is paid for and complete mem-
bership so secured. Substantial sums from their profits are some-
times allotted for educational purposes and the like. At the annual

376 PROBLEMS OF LABOR [61-§2

meetings, especially those of the general cooperative congress, the
cause of cooperation and workmen's independence gets encourage-
ment and laudation ; sometimes, no doubt, in empty phrases, yet in
the main with a real spirit of social sympathy.

The causes of the remarkable success of this form of cooperation
in Great Britain are several. Not least among them are the gen-
eral influences which brought about the great progress of the Brit-
ish working classes, and especially the upper tier of skilled work-
men, during the second half of the nineteenth century. In this
progress the trade unions, the friendly societies, the cooperative
stores played their several parts; while the march of industrial im-
provement under capitalist leadership sustained it all. The re-
quirement of cash payments has been an important advantage to
the stores ; another has been the essential weakness of their for-
mer competitors, the petty retail shops. No part of the mechan-
ism of the division of labor is so inefficient as that of ordinary retail
trading on a small scale. At the same time ignorance, gullibility,
and shiftlessness enable this sort of wasteful business to hold its own
with singular persistence. The cooperative store means a resolute
effort to eliminate as much as possible of the waste. As with most
improvements, the initiation of this one in Great Britain was due
to the energy and abilitj^ of a few individuals — picked men among
the working classes — who devised and perfected the system.
That system once in working order, it was comparatively easy for
others to imitate; just as there are always plenty of business men
who can follow the new paths opened by the real leaders of industry.

The success of the British cooperative store illustrates, too, the
difficulty of getting rid of accustomed industrial ways, bad tho they
may be. Abstractly considered, it might be supposed that an en-
terprising set of retail traders could have pushed out the wasteful
petty shop, by doing business on a large scale, on a cash basis and
at lowered prices. Some displacement of this sort has in fact oc-
curred in the United States, where the bonds of custom are more
easily shaken off. In Great Britain and on the continent of Europe
habits change less easily. It required the entirely new method of
cooperation, with its appeal not only to the purse of the working-

61-§ 2] COOPERATION 377

men but to their sense of solidarity, to bring about a more rational
and economical organization of retail trade.

For many years, the cooperative store movement in Great Bri-
tain has been so strong as to go on largely by its own impetus, yet
possibly with something of artificial stimulation. The traditional
rate of dividend on purchases (something like 10 per cent — on the
average, 2^ in the pound) has probably been maintained in
part by keeping prices high, and not solely by continued saving
as compared with current retail practises and prices. The cooper-
ators seem willing to pay a little more in order to get their accus-
tomed dividend. However this may be, the cooperative stores are
an established and important element in the industrial system of
Great Britain. They have done much to promote the material
welfare of the workingmen, and somethinf^ to train them in
ways of common action.

On the continent of Europe there has also been a considerable
development of distributive cooperation. As in Great Britain, it
has been partly middle class, and so uninteresting, partly work-
ing class, and so more significant. The greatest growth of the
workingmen's stores has been in Germany and Belgium, where the
movement has been closely allied with that for socialism ; altho, as
will presently be shown, the cooperative and socialistic ideals difi^er
in essential points. The opportunity for displacing wasteful retail
trading seems no less on the Continent than in England. If as yet
it has on the whole been much less availed of, the explanation
probably is that the workingmen of the Continent have felt only
in very recent years the stir which roused the English half a cen-
tur}^ earlier. The progress of this labor movement, as of others,
has of late been rapid.

In the United States distributive cooperation has never had the
same sort of growth or importance. There have been many at-
tempts, and some successful experiments ; but nothing of any large
consequence. The lack of growth in this country is due to various
causes. Greater mobility of population, both within cities and
between separate regions, is an obstacle. The comparative ease with
which capable persons rise in the social and industrial scale often

378 PROBLEMS OF LABOR [61-§3

deprives cooperators, as it does trade-unionists, of possible leaders.
Greater prosperity and larger earnings cause indifference to small
savings. And finally, retail shopkeeping is usually conducted with
fair efficiency. The occupation is not under a ban of social depre-
ciation, as it has so long been in older countries, and therefore it
attracts more readily men of ambition and capacity. In the urban
centers much of it is carried on with more than fair efficiency. The
large shop and the department store have nowhere been carried to
so high a pitch as in the United States. None the less, a great deal
of petty and wasteful shopkeeping remains. For the working
classes, the small retail rader often is half a friend in need, half a
swindler and parasite. There is opportunity for a declaration of in-
dependence; but the ways and habits of the people seem not to
favor independence by the method of cooperation. It is striking
that the really successful workmen's stores in the United States
(not many in any case) usually have a membership made up of the
newly arrived and still clannish immigrants.

§ 3. In some other districts there has been a development of
cooperation not less striking than that in retail trading.

In cooperation for securing better credit facilities, the Germans
have taken the lead. The name of Schulze-Delitzsch is associated
with this movement in Germany, as the name of the Rochdale Pio-
neers is with the stores in England. Schulze, a native of the town
of Delitzsch, conceived the plan of uniting groups of tradesmen and
artisans for getting small loans on better terms, and led the way
with signal ability in the development of the plan. In essentials
it is simple enough. A knot of persons — tradesmen, artisans, and
the like — form a credit society, beginning by subscribing a small
Initial capital. On the strength of this, and of their own individual
liability they borrow more — two or three times more. Schulze
always maintained that for these outside borrowings unlimited
liability by each member (as in a partnership) was essential; not
only because the person lending to the society thus had the security
of being able in case of default to levy on any and every member
individually, but because this very liability made the members and
managers unfailingly watchful in their dealings among themselves.

61-§ 3] COOPERATION 379

The total sums got together, their own and borrowed, are then lent
out to the members in modest amounts at a moderate rate of inter-
est; this rate of interest being higher than that at which the loans
from outside are secured. Even tho higher in this wa}-, the rate to
members is commonly less than they would have to pay otherwise.
And this is the precise object aimed at — to enable small produc-
ers to get the advances they need, v/ithout paying the high rates
of interest which as individuals they would almost always have to
face. By combining their resources and their credit, and by man-
aging the loans among themselves, they are able to borrow at mod-
erate rates. Knowledge of each others' capacity and probity is
important, and enables the credit society to make advances and
take apparent risks which no outsider would assume except on bur-
densome terms. As with the British stores, the system, once estab-
lished and perfected, has proved capable of wide development.
The societies number many hundreds (about 900 in 1909), and play
an important part in Germany. Some among them are large finan-
cial institutions, with members (i.e. borrowers) who do business on
a considerable scale as tradesmen, merchants, manufacturers.

Tho sometimes used for considerable transactions, credit co-
operation of this sort is essentially for the small man. Its spread
and success in Germany are largely due to the fact that so much of
small-scale production still persists in that country. More or less
of it persists in any country. Large-scale operations, far spread
and growing tho they are, have nowhere swept the field entirely'.
In Germany, perhaps, more than in any other advanced country,
the artisans and small producers have held their own, not only thru
inertia, but thru an adaptation to modern methods of production
that has given them real vitality. The Schulze-Delitzsch societies
have done much to maintain them. The unflagging industry of
these Germans and their content with sparse gains, have in turn
provided a favorable soil for the credit cooperation.

Another phase of the same general movement in Germany is
associated with the name of Raiffeisen, who also was a leader in
developing an effective scheme. Raiffeisen societies are chiefly
agricultural and serve the needs of the great class of peasant pro-

380 PROBLEMS OF LABOR [61-§3

prietors in southern and western Germany. Their organization
is similar to that of the Schulze-Dehtzsch societies, which are com-
monly urban or semi-urban. Some capital is subscribed by mem-
bers; more is got outside (sometimes with government aid). The
loans to members are for longer periods than in the urban societies,
as is necessary if they are to be of real service to agricultural pro-
ducers. Their spread has been extraordinary; there are thousands
of societies, and probably one half the smaller agricultural propri-
etors of Germany are enrolled as members. Each society has com-
paratively few members, and covers a limited region; the essence of
success is neighborly knowledge and supervision.

Other sorts of societies flourish in Germany — societies for the
purchase of materials, for the sale of products, for the purchase and
use of machinery too expensive for any one member. The credit
societies, as well as these, have spread into other countries. Credit
cooperation has had a large development in Italy, where also it has
proved to meet the needs of the class of small tradesmen and arti-
sans; and it has spread similarly among the agricultural classes of
northern Italy. It is odd, and not readily explained, that in France
no one of these forms of cooperation — whether in storekeeping,
for credit, or for other analogous ends — has had any considerable
growth.

A striking advance has been made in Denmark, and to some
extent in other Scandinavian countries — cooperation among
agricultural producers, in collecting milk and making butter, curing
bacon, packing and shipping eggs. A large export trade, especially
to England, has been built up on a basis of cooperative effort. The
English naturally look on this achievement with envy, and wish
that their own agricultural producers might adopt the same
methods with the same success. But for success of this sort a sys-
tem of land ownership in small parcels is necessary, or at least one
of long-term tenancy with assured compensation for improvements;
and not only such an assured position, but habituation of the culti-
vators to it. The English system of landowning and land tenure
constitutes the great obstacle to the spread of this sort of coopera-
tion in England. Possibly in Ireland, with the ousting of the land-

61-§ 4] COOPERATION 381

lord and the transfer of the land to the cultivators, there is a prom-
ising field; and an earnest effort is now being made by the best
friends of the Irish to teach them the principles and practises of
agricultural cooperation.

§ 4. All the schemes outlined in the preceding sections are for
partial cooperation. They leave the members independent in their
main industrial activities. Very different is the case with coopera-
tion in production. Here the endeavor is made to get rid of the
business man at the vital place. Workmen get together, and pro-
ciu-e in some way (by saving, borrowing, public aid) an initial capi-
tal. They possess their own tools and plant, buy their materials,
sell the output, and divide among themselves the proceeds. They
are their own managers and their own employers; and if successful
they can secure business profits as well as ordinary wages, and,
not least, can emancipate themselves from the dependent position
of the hired employee.

Evidently, if this were done on a large scale, social conditions and
the organization of industry would be profoundly affected. The
employing capitalist would disappear. The consequent changes
would be vastly greater than those from the spread of the other
forms of cooperation. Distributive cooperation, if carried to its
utmost conceivable development (and it is far from being carried
to that stage, or likely to be) would mean simply the displacement
of the retail shopkeepers by a set of salaried agents. Cooperation
in credit touches only some fringes and loose ends of the modern
industrial s^'stem. The various phases of cooperation in agricul-
ture are designed to aid the independent farmer and strengthen his
position, not to supersede him. Productive cooperation, however,
if carried out to the full, v/ould modify social and industrial organi-
zation at a crucial point. Even if applied not universally, but on
a scale comparable to that of the other forms — if it could show
hundreds of societies, and with members by the tens of thousands
or hundreds of thousands — its spread would mean something of
high import for the present and future.

Unfortunately, cooperation in production hardly exists; or, if it
exists, only to such an extent that the thing cannot be said to be

382 PROBLEMS OF LABOR [61-§4

unknown or untried. A considerable number of experiments in it
have been made in various countries. There have been sporadic
cases of sustained success. But the record on the whole is one of
failure.

This is true even in France, where the cases of success are most
numerous. As was just noted, the other forms of cooperation seem
to find no favorable field in France; but at least the disposition has
appeared to make trial of production by united workmen. The
state has freely aided workmen in these attempts, by loans and by
contracts, from the revolution of 1848 down to our own time. State
aid is often said to be dangerous to cooperators; and probably it is
true that those cooperators are most likely to succeed who begin in
a small way on their own savings, and depend thruout on their own
industry and efficiency. Yet some societies aided by the state in
France have had a long and successful career. The same is true of
a few societies that have grown out of the famous profit-sharing
experiments.^ The striking thing is that whether aided by the state
or not, whether started from the beginning as productive societies
or the outgrowth of profit sharing, they are so few. There has been
no lack of propaganda, of opportunity, of support. The net result
is as nothing, compared to industry in general, even compared to
the growth of other forms of cooperation.

In other countries there is the same insignificance of the produc-
tive societies. In Great Britain a very few have held their own.
In recent years these have been bolstered up by the great distribu-
tive stores, which have bought by preference some products from
the producing cooperators. This sort of patronage is not neces-
sarily enfeebling, any more than is public aid. But that it is wel-
comed, or even resorted to, shows that the prospects of indepen-
dent success are not good. LTnless the cooperators can do so well
in quality and price of their goods, and in the earnings which they
secure for themselves, that they call for no favors, simply compet-
ing with capitalists on even terms, there is no chance of any large
development.

It is striking that in Great Britain the cooperative stores have

1 Sec above, Chapter 59, § 1.

Gl-§ 4] COOPERATION 383

themselves entered in another way on the field of production. The
great wholesale societies, and some of the individual retail societies,
have established factories and workshops of their own, for making
shoes, clothing, hardware, biscuits, jams, and pickles; they have
even tried tea planting in Ceylon and (with doubtful success) farm-
ing on their own account in Great Britain and Ireland. All these
establishments are managed by superintendents sent down from the
cooperative stores. The workmen in them are hired in the same
way and substantially on the same terms as in ordinary private
establishments. Obviously, this is a very different thing from true
cooperation in production, where the workmen choose the managers
from among their own numbers. The success of the stores in their
subsidiary establishments is due, no doubt, largely to the fact that
they have an assured market, and confine themselves to mal ing
staple goods by staple methods. None the less, it is surprising that
the associated workmen should have achieved success in manage-
ment by this route, when they have failed of it by the more direct
route.

The essential diSiculty in the way of cooperation in production
is that it attempts to supersede the business man where he is most
needed. Its failure is at once a result and a proof of the rarity and
the importance of business leadership. Intelligence, imagination,
judgment, courage, powers of organization and administration —
all the qualities needed for success in business management — are
possessed in the right combination by few individuals. Coopera-
tion cannot dispense with these leaders; it w^ould have to enlist
them. No spur to the full application of their powers has been
found comparable to that of individual ownership and individual
gain. Individuals of high capacity are sometimes found at the
head of cooperative enterprises, working unselfishly for the cause
and for their fellows. Such apparentl}'^ has been the case in some
of the great British stores. Such, too, has been the case in some
of the great profit-sharing enterprises. But these are exceptions.
Most men exercise their faculties to the highest pitch when work-
ing for themselves and their families. Possibly a substitute for the
driving force of self-interest may be found in an entirely different

384 PROBLEMS OF LABOR [61-§4

organization of society; of this more will be said elsewhere. Coop-
eration, put on trial in the midst of an individualistic and
capitalistic organization, has failed to enlist the needed leader-
ship.

The complications of modern industry make cooperative produc-
tion more difficult. Large-scale operation, great plant, elaborate
processes, intensify the need for managers of ability and resources.
Even in those compara^tively simple industries which are developed
little beyond the handicraft stage — and there are not a few such,
in various directions — the cooperative plan has not been found
to work. As with profit sharing, one might expect to find a greater
degree of success in these sorts of business; but neither in profit
sharing nor in cooperative production is there any clear indication
from experience that the character of the industry makes a great
difference. Tho the cooperators undertake an industry requiring
comparatively small plant and no elaborate organization, and tho
they possess in their own ranks the right man — perhaps a hidden
genius — it is far from certain that he will be put in charge by his
fellows, and kept in charge. There is likely to be jealousy, vacil-
lation, stagnation; and the industrial world is moving farther and
farther away from the methods of town-meeting democracy. The
capable man finally sets up for himself, or enters the employ of
others in an administrative post. If these difficulties are serious
in the simpler industries, they become more and more so with the
growing scale of complexity of modern business.

The conclusion both from experience and from general reasoning
is that cooperation is not likely to revolutionize the social order.
It may grow considerably in some of the ancillary operations al-
ready carried on with success. But the hopes entertained a gener-
ation ago by many economists, that it was only in the first stages
of a far-reaching development, are now cherished by few. Other
ways of mitigating inequality and widening opportunity have
come to enlist the enthusiasm of social reformers — labor
organization, labor legislation, extension of public management
and control, socialism halfway or all the way. To these the future
seems to belong, not to cooperative methods.

61-§ 4J COOPERATION 385

References on Book VI

General consideration of the topics in tliis Book is in J. R. Commons
and J. B. Andrews, Principles of Labor Legislation (2nd ed. 1920). On
many problems there is keen discussion in A. C. Pigou, The Economics of
Welfare (1920). H. Herkner, Die Arbeiterfrage (6th ed. 1920), syste-
matically covers the field. On trade imions, the elaborate book by S. and
B. Webb, Industrial Democracy (2nd ed. 1920), is of high quahty; written
with special regard to Enghsh experience, and stating without reserve the
case in fa^^or of the trade union. TJw History of Trade-Unionism (revised
ed. 1920), by the same authors, is a classic in its field. On the American
situation excellent studies on some phases are in J. II. Hollander and G. E.
Barnett, Stxidies in American Trade-Unionism (1905). Recent books on
labor organization in the United States are R. F. Hoxie, Trade Unionism
in the United States (1917), an original and discriminating book; F. T,
Carlton, History and Problems of Organized Labor (1920). An excellent
volume of selections bearing particularly on American problems is by J.
R. Commons (editor). Trade Unionismand Allied Problems (1921). On Aus-
stralasian experience see V. S. Clark, The Labor Movement in Australasia
(1906); and good compact summaries in two Research Reports, on Aus-
tralia and New Zealand, published by the National Industrial Conference
Board (1918-19). On the history of labor legislation in England, B. L.
Plutcluns and A. Harrison, A History of Factory Legislation (1903). J.
Rac, Eight Hours for Work (1894), is a good inquiry on experience to the
date of its publication. On workingmen's insurance and aUied topics
see H. R. Seagcr, Social Insurance: a Program of Social Reform (1910),
brief and excellent. More detailed and more informational are L. F.
Frankel and M. Dawson, Workingmen's Insurance in Europe (1910); I.
Rubin ow, aSocig^ Insurance (1913); W. H. Dawson, Social Insurance in
Germany (1912). W. H. Beveridge, Unemployment (3rd ed. 1912), is at
once sympathetic and searcliing. On profit sharing and kindi'ed arrange-
ments, Profit-Sharing (1918), edited by R. E. Heilman, with contribu-
tions from various hands. A good general account of the cooperative
movement is by C. R. Fay, Cooperation at Home and Abroad (2nd ed.
1920).

BOOK VII

PROBLEMS OF ECONOMIC ORGANIZATION

CHAPTER 62
Railways

Section 1. Railways an instrument for furthering the geographical division
of labor. Corollary from this that they are not to the public interest
unless they pay, 389 — See. 2. Economic characteristics of railways;
first, the great plant. Consequent tendency to decreasing cost. Hence
also frequent transition from financial failure to financial success, 392 —
Sec. 3. The element of joint cost, both as to fixed charges and operating
expenses. Charging what the traffic will bear; classification of freight, 395
— Sec. 4. Justification of charging what the traffic will bear hes in full
utihzation of the railway equipment, 397 — Sec. 5. Other consequences
of joint cost : flexibility of rates, and difficulty of deciding what is a reason-
able rate, 399 — Sec. 6. Chaotic rates in the United States, and con-
cession to favored shippers, partly corrupt, partly the result of competi-
tion, 400 — Sec. 7. "Rebates" and the grounds for prohibiting them.
Rate agreements and pools as aids in preventing discriminations. Incon-
sistency of our legislation on rebates and rate agreements, 402 — Sec. 8.
In an industrially solidified and thickly populated country the principle
of joint cost becomes less important in determining railway rates: mo-
nopoly position of railroads more important, 404.

§ 1 , The present Book is concerned with the same fundamental
problems as the preceding Book — inequality and the ways of
mitigating it. But it considers the relation of the state not so much
to the laborer as to the capitalist and employer. \Miat need is
there, what are the ways, of controlling private business manage-
ment or of supplanting it?

The railway is the most important among industries, both as
regards its effects on the economic structure at large and as regards
its own special problems. More than any other single factor, the
railway brought about the industrial revolution of the second half
of the nineteenth century. Its cheapening of transportation im-
mensely promoted far-reaching geographical division of labor,
large-scale production, impending monopoly, great fortunes. The
railway itself is a vast enterprise, with a tendency to monopoly

389

390 PROBLEMS OF ECONOMIC ORGANIZATION [62- § 1

conditions in its inherent workings; it threatens in private hands
to become an iviperium in imperio: it presents most m-gently the
problems of public control and public ownership.

Before entering on the problems of public regulation or manage-
ment, it is desirable to analyze some of the economic characteris-
tics of railways, since these matters must be understood before the
larger and more difficult matters can be intelligently dealt with.

In its most common aspect — as a freight carrier — a railway
is simply an instrument by which things are made cheaper because
transported from a place where they are made to advantage. Peo-
ple commonly forget that all agencies of transportation are but
means of furthering the geographical division of labor. An enor-
mous amount of effort is given to activities which are simply an-
cillary — which serve only to facilitate the more effective appor-
tionment of the community's labor. The railways of the United
States in 1900 employed one person for every twenty-nine who
were gainfully occupied. ^ This figure takes account only of those
employed in the current operation of the roads, not of those who
had worked on their construction ; and we shall see presently that
the amount of such previous work, as indicated by the capital in-
vestment, is exceptionally large. In estimating the total of the
ancillary activities, we should have to reckon also the millions of
teamsters, merchants, salesmen, clerks, and so on — an enormous
host, all engaged in the transfer of things from places where they
can be produced cheaply to other places where their expense of pro-
duction would have been greater. No part of this labor is so effec-
tive in promoting exchange as that of transportation by steam rail-
ways. A comparatively slight advantage in production, which in
former days would have been offset by the expense of transporta-
tion beyond a short distance, now suffices to concentrate industry
in one region, and to induce exchange on a great scale between it
and other regions.

It follows from this obvious but forgotten fact that a railway is
not economically advantageous to the community unless it pays

1 The total number of persons gainfully occupied was, in round numbers,
29,000,000; the steam railways employed a trifle more than 1,000,000.

62-§ 1] RAILWAYS 391

its waj''. This conclusion is not in accord with a common opinion.
It is often said that a railway or other means of transportation may
bring gains to the community even tho it be not profitable to its
owners. Similarly it is often argued that a government, in operat-
ing a railway, maj^ accept with composure a financial loss, because
the people as a whole have gained something that offsets that loss.
The contrary view seems the just one. No gain comes from carry-
ing a thing from one place to another unless it can be produced at
the first place so much more cheaply that it can afford the cost of
carriage to the second. Ability to stand the transportation charge
is the test of the utility of the carriage.

Needless to say, particular sections and particular individuals
may be benefited by transportation at less than cost. Early in the
twentieth century the state of New York engaged in a great enlarg-
ment of the Erie Canal, at an expenditure of one hundred millions
or more; and provided (by the hard and fast method of constitu-
tional enactment) that no tolls should be charged for the use of the
canal. With the completion of the canal it will be as if nature had
made a navigable river. Doubtless, more traffic will go to and thru
the city of New York; the rent of landowners there will swell still
further; some consumers will gain in having goods cheaper. But
it will remain an open question whether the labor which built the
canal yields its full normal result to the community. The test of its
having been worth while must be whether canal tolls, sufficient to
pay for the labor (and waiting) involved, could be borne by the
trafiic. It would be desirable, obviously, to have all transporta-
tion free, and to have every commodity produced once for all where
it could be most cheaply produced. But so long as transportation
involves labor and the use of capital, a real advantage from ex-
change is got only if at the point of consumption the total cost can
be met, including that of transportation.

It will sometimes be of advantage to open up a new country or a
new region, by railways (and the argument applies equally to wagon
roads, canals, steamship lines) which do not pay at the outset.
This case is analogous to that of protection for young industries.
Eventually the railway should pay; if the losses of the early stage

392 PROBLEMS OF ECONOMIC ORGANIZATION [62-§ 2

are not recouped, they are definite losses. It follows that where
subsidies are given to encourage railway construction, they should
be in the nature of loans, to be reimbursed when the stage of
profitable operation has been reached.

The case, in other words, is different from that of industries
which yield utilities more directly. Some industries there are in
which financial loss is consistent with public gain. A water sup-
ply may be managed by a municipality on terms and methods
which, while involving a deficit, none the less bring a real advan-
tage to the public. A superabundant supply of good water brings
hygienic gains, as well as other more direct satisfactions, not
necessarily measured by the price people are willing to pay. The
post office also may be administered with good reason on non-com-
mercial principles; for the diffusion of intelligence is a boon not
measured by its market value. The deficit which the United
States incurs from its cheap carriage of books, periodicals, and
newspapers is not necessarily a public loss, tho a similar deficit on
a parcel post for merchandise would be.

Passenger traffic presents a somewhat different case from freight
traffic. Some passenger traffic is much nearer the stage of utility
and satisfaction than freight traffic. Most of it, to be sure, like
freight traffic, is only a phase of the division of labor; such as the
constant going of people to and from their places of work. Pleas-
ure traveling alone is a consumers' utility. The only serious
ground for managing passenger traffic on non-commercial principles
is to be found in a possible immobility of labor or crowding of popu-
lation. It is conceivable that cheap fares under congested con-
ditions may bring a real social gain not measured by what the in-
dividuals are willing to pay.

§ 2. Railways have two marked economic characteristics —
not such as to make them in the last analysis different in kind from
other industries, but so great in degree as to bring railway prob-
lems into a class almost of their own. These characteristics are,
first, the great size of the plant; and second, the fact that the oper-
ations are conducted largely at joint cost. Both have important
consequences for the problems of public regulation.

62-§ 2] RAILWAYS 393

A railway's plant is large absolutely; but, more important for
the present argument, it is also large relatively to the current out-
put. As compared with the capital invested in plant, the annual
gross receipts (the measure of the output) are but a small fraction
— one fifth or one tenth, A manufacturing plant in which the
plant merely equaled in value the annual output would be regarded
as having a relatively large fixed investment. How much more
the railway, in which the plant is five or ten times as great in
value as the annual turnover!

Connected with the large plant is a great flexibility in its use,
and a tendency to decreasing cost per unit of traffic. When a rail-
way is once built, its roadbed and other fixed equipment will serve,
within wide limits, whether the traffic be large or small. An in-
crease of traffic, tho it means some increase in operating expenses
(probably even here not a proportionate increase), ordinarily calls
for no increase of plant. Hence, for the traffic as a whole, it means
decreased expense per unit. This is true, of course, only so long as
the fixed equipment does continue to suffice for enlarging traffic.
With continuing enlargement, the stage is reached where the plant
no longer suffices. A single-track road eventually may need to be
double-tracked, or the double-tracked road four-tracked, the sta-
tions and terminal facilities enlarged, and so on. Then there often
ensues an uneasy period for the railway manager. A great and
probably rapid enlargement of plant is called for, while the traffic,
tho too heav}' to be handled with the old plant, is not growing
rapidly enough to insure at once full employment and satisfactory
earnings for the enlarged plant. The railway, after having been
overworked with its former outfit, has for a while not enough busi-
ness for its new outfit. This sort of trying transition stage is most
noticeable when a railway passes from a single track to double
track, yet shows itself almost as much in the enormous new facili-
ties needed in regions of dense population and traffic by roads
already double-tracked or even four-tracked.

Thru all these changes, and with the irregularities which ensue
from the gradual growth of traffic and the occasional abrupt in-
crease of plant, there runs a tendency to decreasing cost per unit

394 PROBLEMS OF ECONOMIC ORGANIZATION [02-§2

of traffic; that is, a tendency to increasing return. A double-track
road, with a sufficient density of traffic, carries freight and pas-
sengers more cheaply than a single-track road; a four-track road
more cheaply than a double-track one. It follows that two
single-track roads over the same route are a wasteful application
of the community's resources, as compared with one double-
track road; and so on. And it follows further that concentra-
tion and monopoly promote the thriftiest ways of laying out the
railway net.

One important consequence of a railway's large plant is the fre-
quency of sudden transition from financial failure to financial suc-
cess. This is especially the case in rapidly growing communities.
When a road is first built, the traffic may not be large enough to
make operation profitable. Graduall}^ the traffic grows; and, as it
grows, the road is able to carry it with existing plant, and also with
operating expenses largely unchanged. A stage is thus reached
where the traffic and the revenue from it are such that a profit is
earned, tho just before, with a traffic but little smaller, the capital
invested had secured little or nothing. An abrupt change in finan-
cial outcome takes place, and with it a sharp change in the market
price of the railway's securities. For the same reason, fluctua-
tions in general business activity are of special effect on railways.
In times of depression and slackened traffic they cannot lessen
their heavy capital charges at all, and can lessen their operating
expenses but little. In times of revival and growing traffic their
receipts increase, without an increase in their expenses at all cor-
responding. Hence, in new countries or in countries subject to
great fluctuations in business conditions, railways and railway
securities offer peculiar opportunity for speculation and specula-
tive in\'estment, and for large gains by the shrewd and far-sighted.
These conditions exist in the United States more markedly than
in any other country, and have had much to do with the great for-
tunes made from railways in this country. Somet mes the first
investors — the "builders" — of railways have reaped large gains,
by waiting thru thick and thin until the growth of traffic has made
the enterprises profitable. Quite as often, those who have bought

62-§ 3] RAILWAYS 395

control of railways in the intermediate period of uncertainty have
made fortunes by the rapid transition from loss to profit.

§ 3. A second peculiarity, no less important in its consequences, is
the element of joint cost in railway expenses. In good pa t it results
from the first. When any large plant is used for diverse products,
the ca e is so far one of production at joint cost. So it is with a
railway. The same roadbed is used for passengers and freight,
and for the different kinds of passengers and freight. If the outlay
for plant were the only expense incurred in rendering the service,
the case would be one completely of joint cost. There are, of course,
the operating expenses in addition. But the expense of the plant
(represented chiefly by interest on the investment) forms an un-
usually large part of the total cost of transportation. In other
words, retm-n on capital is an unusually large part of the expenses
which must be recouped if roads are to be built. In so far, the prin-
ciple of joint cost is applicable.

But the operating expenses also represent in large part joint cost.
Many of them are incurred for the traffic as a whole, and must go
on whether or not individual items of traffic are undertaken. Such
is most obviously the case with the large expenditure for mainte-
nance of way. The roadbed must be patrolled, kept in order, and
repaired from the wear of exposure and use; and this whether there
be much or little traffic, one or another kind of traffic. Safety
appliances must be there in any case. Much station expense, es-
pecially at small places, is the same whether business be large or
small. So it is as to general office and administrative expenses.
All such expenses serve, for example, equally for passengers and
freight, and cannot be said to be incurred specifically for either, or
to be separable as expense for one or the other. At least one half
of the total operating expenses of a railway are impossible of appor-
tionment to any class or items of traffic, and thus stand for joint
cost.

Even as to the items of expense which are not common for the
traffic as a whole, there is often an element of joint cost for a con-
siderable block of traffic. Those operating expenses which are not
wholly joint vary in the main according to the number of trains run

396 PROBLEMS OF ECONOMIC ORGANIZATION [62-§3

and the distances run by them; that is, according to train miles.
Every train mile means so much separate outgo for wages, fuel,
wear and tear of rolling stock and of track. But a train may have
ten cars or thirty, and the cars may be full or empty. Train miles,
and consequently the immediate expenses, will be substantially the
same whether the train be long or short, full or empty; but the ton-
nage carried will be very different. It is a cardinal maxim in rail-
way operation that every train ought to have as many cars as the
engine can haul, and that every car ought to be loaded to its full
capacity. But this ideal maximum utilization of the rolling stock
— this ideal fitting of ton miles to train miles — is impossible of
attainment. There are inevitably some short trains (especially
as to local freights) and some cars empty or half full. For each
train by itself there is one cost, joint for all it carries.

The same situation is even more obviously present in passenger
service. Passenger trains must run on their schedule time. Their
expense is substantially the same whether the cars be full or empty,
whether they have the maximum number of cars an engine can
haul, or only half or a third of that number. A very great increase
in traffic entails, it is true, an increase in passenger train miles.
But a very considerable increase in passengers and in revenue may
come without any additional train miles ; that is, without any ap-
preciable difference in expense. A mail car, excursion car, sleeping
car, private car, attached to a regular passenger train involves no
additional expense; the whole train is operated at one joint cost.
On European railways, first-class, second-class, and third-class car-
riages commonly form part of the same train, and are operated
at one joint expense for the train as a whole. The apportionment
of charges among the different classes of passengers proceeds (in a
rough way) on that basis of utility or demand, which, as has been
shown, dominates where cost is joint.^

The principle of joint cost underlies the much misconceived prac-
tise of "charging what the traffic will bear." That phrase, it is
true, describes also another and very different aspect of railway
rates — their monopolistic character — of which more will be said

1 See above, Chapter 16, § 1.

62^§ 4] RAILWAYS 397

in the next chapter. As commonly used, however, the phrase
refers to the apparent failure of railway rates to conform to cost
of production ; and it calls for a word of further explanation.

No item of traffic, it is obvious, will be carried at a charge less
than the separate expense involved for it. But above the small
separate expense is the mass of joint expense; and that joint ex-
pense must be got back somehow, or else railways will not be built.
Some items of traffic will "stand" a heavier charge than others;
that is, they will continue to be offered even tho the transportation
charge be high. Other items will "stand" only a low charge; that
is, they will not come unless the charge be low. The joint expense
will be got back from the former set much more than from the lat-
ter. This is the main explanation of the classification of freight;
that is, the arrangement of articles in classes, with a higher rate per
unit of weight on some than on others. Railways in all countries,
whether under public or under private management, habitually
charge less per ton mile on cheap bulky articles than on articles hav-
ing high value per unit of weight. Thus coal, ores, lumber, are " low-
class" articles, on which rates are relatively low; textiles and gro-
ceries are "high-class" articles, and on them rates are high. The
coal, ores, lumber, will not be offered for transportation unless rates
be low; the traffic will bear no more. The textiles and groceries
will be offered even tho the charge be relatively high; the traffic
will bear it. The textiles and groceries, therefore, will contribute
much more to the general (joint) expenses than the coal and lum-
ber. In railway parlance, the "profit" on the one is greater than
on the other; which means that there is a greater excess of receipts
over separable expenses. Where both kinds of commodities are
carried on one and the same train, there are virtually no separable
expenses for either. Barring such items as loading and unload-
ing, all the expense is joint, and the principle of joint cost has
full play.

§ 4. To explain an economic phenomenon is by no means the
same thing as to justify it. People constantly confound these two
proceedings, and suppose that because an economist shows how a
given result comes to pass, he therefore implies that it is a right

398 PROBLEMS OF ECONOMIC ORGANIZATION [62-§4

result. That the principle of joint cost explains in good part the
practise of charging what the traffic will bear does not prove the
practise to be just.

As to the question of propriety or justice, there is much hazy talk
among persons who have had to give attention to railway matters
but have not been versed in general economics — such as railway
managers, and judges and public officials concerned with the en-
forcement of rate regulation. These often speak as if it w^ere ob-
viously and intrinsically "just" that a commodity having higher
value should be charged higher freight rates. It must be confessed
that some trained economists have spoken in the same loose way.
Yet no one would apply such a notion to transportation by pack
mule or wagon; the charge here is the same (aside from insurance
and the like) whether the articles be silks and precious metals or
coal and brick. Being habituated to a different mode of fixing
railway rates, people think of it as righteous; for they commonly
regard the wonted order of things as just.

The justification of charging what the traffic will bear must rest
on a further principle : namely, that it conduces to the fullest utili-
zation of the railway. More service is got by the community on
this plan than would be got on a plan of uniform rates. If all rates
were on a uniform toll plan, being the same per ton mile on each
and every kind of freight — a so-called system of "natural" rates
— bulky articles would have to pay more than now, and compact
and expensive articles would have to pay less. Of the expensive
freight, however, little more would be offered because of the
lowered rates; whereas the amount of the bulky articles offered for
transportation would be greatly diminished b}^ the higher rates.
The only way in which the bulky articles can be made to move in
great quantities is by carrying them at low rates; just as — to re-
sort again to a comparison now familiar to the reader — the only
way in which cotton seed can be disposed of is by offering it at a
price which is low as compared with the price of cotton fiber. Most
of the expense involved in carrying the bulky articles is incurred
anyhow; it is involved in the general or joint expense of building
and operating the railway. The only way to get the full utilization

G2-§ 5] RAILWAYS 399

of all this labor and expense is to fix the rates in such manner that
the transportation shall come.

The geographical division of labor has been most profoundly
affected by railways in the production of these very articles, having
great bulk and weight relatively to their value — coal, ores, lum-
ber, and the like. The vast development of modern industry
could hardly have taken place without their transportation on a
great scale at low rates. Thru the general practise of charging
what the traffic will bear, the railway plant has been made to pro-
duce its most far-reaching results.

§ 5. Some other consequences of the principle of joint cost have
been and are of large social significance.

Railway rates are necessarily flexible. Even tho rates as a
whole be so fixed as to cover the total cost, there is no clear rela-
tion between any specific rate and the specific cost of carriage. The
absence of any precise measure of cost of service makes it plausible
to adjust the charge, apparently arbitrary as it must be in any case,
according to all sorts of real or supposed benefits. "Where govern-
ments manage railways, it leads easily to the determination of rates
on other grounds than those directly related to transportation. It
may be supposed, for example (according to the protectionist no-
tions so widely prevalent), that imports are bad and should be dis-
couraged, while exports are advantageous and should be promoted
— a notion which leads naturally to high rates on things imported
and low rates on things exported. If there were clearly a financial
loss in carrying at low rates the goods destined for export, govern-
ments would hesitate as long before conceding specially low rates as
they do in granting direct money subsidies on exports. The ques-
tion of money loss or gain is obscured when no specific railway rate
can be shown to involve a direct loss. Again, low rates which
favor a particular set of constituents, or a given locality, will be
similarly easy to bring about, and may be similarly in apparent
accord with the general ways of rate making. To arrange railway
charges on a "just" basis, as is the aim of a government in man-
aging a railway, is a task of peculiar difficulty and complexity.

The same difficulty exists, of course, when a government, tho it

400 PROBLEMS OF ECONOMIC ORGANIZATION [62-§6

does not itself operate the railways, regulates the rates of private
corporations. This is what the government of the United States
sets out to do, as to the interstate traffic under its control. The
Interstate Comine' ce Act of ISSTsays that rates shall be "reason-
able.'" What is the standard or^measure of reasonableness in rates?
It is not difficult to answer this question as regards the general
range. Rates as a whole should not be higher than will suffice to
yield a normal return on the capital invested in railways, a "nor-
mal" return being understood to include not only interest, but
something in addition by way of compensation for risk and judg-
ment. Even tho no absolutely precise settlement of ^ueka rateof
return be feasible, an approximation to it can be reached -f- six
per cent, or eight per cent, or something of the sort. , But this helps
very little as regards any individual rate. Whether the individual
rate is "reasonable" is a question of its right adjustment to the
traffic demand and to the best utilization of plant and equipment.
It happens that this question of principle has not often been de-
liberately considered, either in the United States or in other coun-
tries. The general methods of railway rates, as they developed
under the tentative and profit-seeking ways of privately managed
railways, have been accepted once for all. That rates should be
lower on bulky goods is thought to be obviously "right." Simi-
larly, the existing geographical adjustments of rates, with wide
variations in different regions and between different places, have
been left in the main undisturbed. Probably this rule-of-thumb
policy has been the wisest one. Any scheme of symmetrical rates
based on supposed principles of justice or naturalness would have
fettered the fullest development of traffic by railways.

§ 6. Still another consequence of the element of joint cost, in the
United States especially, was a perfect chaos in the rate system.
This was unmistakably the situation before the enactment of the
Interstate Commerce Act in 1887; and tho matters mended there-
after, much confusion still remained. In this country, as in others,
railway rates were developed tentatively. The possibilities of car-
rying bulky goods at low rates over long distances, and of the other
adjustments of rates on different articles and to different regions,

62-§6] RAILWAYS 401

were discovered gradually. No settled tariffs of rates existed in
the early days, or, if any existed, they were disregarded. All rates
were " special" rates; that is, were reached in each case by higgling
between shipper and carrier. This method, or lack of method, no
doubt promoted flexibilitj^ in rates, high utilization of the railway
plant, and economy in its operation; but it caused also grave evils.

One^great evil was the power in the hands of railway managers.
With the widening of the market due to cheap transportation, the
price of this very transportation became of crucial importance.
Success in business was possible only to the man who got as low
rates as his competitors. Favors in rates might easily mean a for-
tune. The railway traffic manager could make or unmake this man
or that town. Such power over the fortunes of others can be in-
trusted to very few men without being abused. It constitutes
perhaps the strongest reason for public control, whether directly by
government management or indirectly by government regulation.

In the United States, the power was sometimes used corruptly.
Those in control of railways — managers and directors — arranged
for themselves, as traders and shippers, lower rates than other
shippers got. This sort of practise is not only corrupt, in that it
violates the fiduciary obligations of directors and managers — their
most obviousTegal and moral duty is to manage the railway
with the single mind to the advantage of the shareholders; it
is also inconsistent with the fundamental principle that competi-
tion should be on even terms. Here the game was played with
loaded dice.

More commonly, however, favors in rates were given not in
arbitrary or corrupt ways, but under the stress of railway compe-
tition. That competition, as has already been noted, is made pe-
culiarly severe because of the conditions of joint cost. Rather than
let any particular item of traffic go elsewhere, the railway manager
will accept any rate which yields something over the expense (com-
paratively slight) entailed by that specific item. A large shipper,
in dealing with competing railways, can play off one against
another, and secure for himself special rates. In the old days,
corruption or semi-corruption of the traffic manager — say by

402 PROBLEMS OF ECONOMIC ORGANIZATION [62-§7

offering him shares in the large shipper's corporation — played its
part. But competition between railways, and their inevitable
eagerness to "get the tonnage," were the main causes of the favors
to large shippers.

Not infrequently, in cool recognition of this situation, a railway
would deliberately select some individual shipper as its agent in
securing what was regarded as a "fair" share of the competitive
traffic. A person so favored, of course, had a great advantage
over others in the same sort of business. He could carry on opera-
tions on a larger scale, and was likely to wax strong and rich. This
was not unwelcome to the railway, so long as he enabled it to hold
the traffic as against rival roads. But eventually, in not a few
cases, these favored shippers became so strong and rich that, from
having been the servants of the railways, they became their masters.
Their operations grew to be on so huge a scale that they could
throw traffic from one road to another, and bring any and every
road to accept their terms; that is to give them lower rates than
the ordinary shipper. This was the case conspicuously with the
Standard Oil Company, which began as the favored shipper of one
of the Eastern trunk lines (first of the New York Central, then of
the Erie also) and by this advantage finally was enabled, or at
least aided, to get into its hands so preponderant a share of the
business of refining and shipping oil that it could virtually dictate
its own terms to all the railways. Such, too, was the development
of some of the great Chicago packing houses.

These extraordinary effects of railway competition showed the
modern business system at its worst. They unexpectedly and arti-
ficially accentuated the trend toward large-scale operations; they
placed a premium on untruthfulness, intrigue, bullying, spying.
Yet it must be said also that this same factor of railway competi-
tion immensely promoted efficiency in operation. Every railway
manager was put on his mettle to carry the tonnage at a profit, even
with low rates. Freight rates on American railways became re-
markably low, and especially low on that long-distance traffic
which was most the subject of competition.

§ 7. "Rebates," of which so much has been heard in discussion

62-§ 7] RAILWAYS 403

of American railway regulation, are not bad in themselves. They
are bad if not given to all shippers on the same terms. The thing
which legislation and public opinion try to prevent is inequality of
rates. Rebates and the like devices are objectionable because thej^
are the means of discriminating between different shippers. In the
earlj^ days, when railways were looked on as businesses like any
other, it was natural to leave their charges to the higgling of the
market and to accept without objection those inequalities which
higgling always brings about and at the same time ordinarily tends
to minimize. As the immense importance of railways in affecting
other businesses came to be seen, higgling and discrimination fell
into opprobrium, and rebates and the like devices were prohibited.

Rebates, again, are not welcome to railways. The railway man-
ager (unless by chance in corrupt collusion with a shipper) does not
wish to cut his rate; he wishes to get as much as possible. In the
vast majority of cases, he is forced to a concession by the competi-
tion of a rival route.

The natural step for competing railways is to put an end to com-
petition by combining to fix rates once for all. Hence railw^ay
pools and combinations appeared at an early date, as a means of
putting an end to "ruinous" or "cutthroat" competition. Such
pools are hard to hold together, at least under the English and
American law, which make them void and non-enforceable ;i but so
far as they go, they check the tendency to special rates for favored
shippers. They are thus a means of furthering equality of treat-
ment and equality of industrial opportunity. None the less, our
Interstate Commerce Act prohibited combination of any sort; and
the prohibition was made even more drastic by the general anti-
monopoly act of 1890, known as the Sherman Law. The Inter-
state Commerce Commission repeatedly recommended the repeal
of this sort of legislation, and the authorization of pools and rate
agreements. The anxious fear among our public men of being sup-
posed to favor monopolies has prevented any relaxation of the
stringent restriction; and this, even tho the recommendation is
coupled with the proviso that the rates fixed after pooling or agree-

1 Compare Chapter 65, § 1.

404 PROBLEMS OF ECONOMIC ORGANIZATION [62-§8

ment should be subject to public approval (say that of the Inter-
state Commerce Commission). In the absence of any available
means of escaping the stress of competition, railways were impelled
to combine once for all, rival roads being absorbed under single
control. The consolidation of the railway net into great systems,
which went on so rapidly during the twenty years after the pas-
sage of the act of 1887, tho by no means due solely or even chiefly
to this cause, was promoted by the fact that railways were deprived
of their best means of self-defense against competition. Our legis-
lation on railways was in this regard inconsistent with itself. It
prohibited discrimination, yet also prohibited one of the means of
checking discrimination. It prohibited combinations and pools,
yet promoted the rapid march of complete consolidation.

The great and flagrant inequalities in rates, by rebates and
otherwise, were largely brought to an end by the activity of the
Interstate Commerce Commission. An aroused public opinion has
contributed to this betterment; the elimination of competition
thru the consolidation of the railways contributed even more. So
long as railway competition persists, it will always be difficult for
traffic managers to resist the temptation of securing larger tonnage
by favors to this or that shipper; and ingenious devices will be
sought — in the way of allowances for switching or for damages,
manipulations of one sort or another — for "defeating" the nom-
inal rate. The prohibitions and penalties of legislation would be
made much more effective if railways were allowed to make rate
agreements openly. Here, as elsewhere, our public policy is still
ruled by a panic fear of monopoly and an unwillingness to face the
essential problem, how to regulate monopoly successfully.^

§ 8. The principle of joint cost, to which so much attention has
been given in this chapter, is not of the same significance in all
stages of railway development. Its importance is less in thickly
populated countries with well-established industries than in coun-
tries with thin population and industries rapidly shifting. It bears

^ This anomaly was at last removed by the Transportation Act of 1920, which
authorized tho pooling of freight traffic by railways, under the supervision of the
Interstate Commerce Commission.

62-§8] RAILWAYS 405

perhaps most on the special problems of pioneer regions; and as
these regions advance beyond the frontier stage, it ceases to be all-
pervading. The general reasoning has more application to the
United States of 1870 than to the United States of 1920; and more
to the United States in general than to the older European coun-
tries like England, France, and Germany.

The applicability of the principle of joint cost to railway prob-
lems depends in the last analysis on the existence of capacity not
fully utilized. There must be either a plant indispensable in order
that a given kind of traffic {e.g. passenger) shall be carried at all,
which yet is not utilized to the full for that traffic; or else operating
expenses (such as signalling, station, terminal expenses) which are
in the same way indispensable for a given traffic but would suffice
for the handling of further traffic if it could be secured. The most
striking illustration is that of "back-loading." Here is an almost
complete analog}^ to the case of joint cost. That case, in its sim-
plest form, appears where the physical conditions make it inevitable
that one of the joint commodities be produced in unalterable pro-
portion to any other ; so many pounds of seed are necessarily avail-
able for each pound of fibre. Precisely in the same way, where
there is back-loading, just so many train-miles or car-miles of rail-
road service are available when the equipment makes the back
journey. From this extreme case railroad conditions shade off into
those at the other extreme, where we have, not capacity knocking
at the doors for utilization, but the ordinary case of a large plant
and a high proportion of fixed charges. As railways and the re-
gions they serve emerge from the pioneer stage; as traffic becomes
denser and more regular; as the different regions served become
industrially more homogeneous; as the railway becomes able to
utilize its entire plant and its whole operating force continuously
and systematically — the special characteristics pointed out in
this chapter become less dominant. But tho less dominant, they
never cease to be important. It will always be difficult to say with
precision what is the cost of a particular item or class of traffic. It
will remain, for example, impracticable to allocate with exactness
the cost of passenger as compared with freight traffic, or to say that

406 PROBLEMS OF ECONOMIC ORGANIZATION [62-§8

a charge of two cents or three cents a mile is in any exact or even
approximate accordance with the specific cost of conveying pas-
sengers. If indeed a road were used only for passenger
traffic, and were utilized to the full for that; if no occasion
arose for turning its roadbed and facilities to freight also — then
a sufficiently close determination of passenger cost per mile could
be made, and a proper or just charge fixed accordingly. The
converse case arises when a road can be utilized (as with a coal
road or a logging road) for freight only. But where there is a
jumble of diversified traffic — and traffic not merely diversified,
but attracted to the railway only thru adjustment of rates to the
demand for transportation — then railway charges are most flexi-
ble, least reducible to a plain and simple rule.

To repeat, the cardinal element — capacity not utilized to the
full — becomes less vital in a country thickly populated and in-
dustrially solidified. In such a country the monopoly position of
a railway becomes relatively more significant for the explanation of
the special characteristics of railway rates. To this phase of the
subject attention is given in the next following chapter.

CHAPTER 63
Railway Problems, continued

Section 1. Effects of railways on distribution. An unearned increment anal-
ogous to rising rent of land, 407 — Sec. 2. Tendency toward con-
centration of ownership; how promoted by American methods of cor-
porate organization. Overcapitalization and its consequences, 409 —
Sec. 3. Stock speculation, stimulated by overcapitalization, has facih-
tated acquisition of control by the "great operators," 412 — Sec. 4.
"Inside management" and its evils, 414 — Sec. 5. What benefits have
come from private ownership in the United States, and how far railway
fortunes have been earned, 415 — Sec. 6. Increasing tendency to mo-
nopoly, and need of public control over rates, 417.

§ 1. Railv/ays have been the most important agents in increas-
ing the disparities of wealth in modern times and in bringing about
great fortunes. They have had this effect indirectly, by promoting
the general tendency to large-scale production. They have had the
same effect more directby', thriTthfe tendency to increasing gaijns
with their growth, thru the concentration of their ownership, thru
the possibilities of speculative manipulation. Their direct effects
on the distribution of wealth have appeared most markedly in the
United States, and it is with the course of development in this coun-
try that the present chapter is chiefly concerned.

First, as to increasing gains from their operation. A railway in
a growing country (and the railway itself causes a country to grow)
is largely in the position of good land. It tends to advance in
value and to secure an increment of economic rent. This tendency
is combined with that other, noted in the preceding chapter, to-
ward a rapid transition from financial uncertaintA^ to financial
prosperity. The two combine to make the railway a frequent occa-
sion pf " conjunctural gains," as the Germans call them.

In paVt, the railways' accretion of economic rent is due to purely
physicaj causes. Some lines have better natural- 1 nc^tLons than
others. The New York Central Road has an exceptional location in

407

408 PROBLEMS OF ECONOMIC ORGANIZATION [63-§ 1

the Mohawk Valley and along the eastern bank of the Hudson.
Any railway which first secures the best route along a river valley
has an advantage over later competitors in economy of construc-
tion and ease of operation.

But an even greater part Is played by general social causes.
Population clusters along the line of a railway; towns and indus-
tries attach themselves to it. Its traffic increases, while on the
whole the expense of conducting the traffic becomes less. Tho
other railways may be built in such way as to compete with it,
the established railway has an advantage which can be lost only
by very bad management or very unexpected changes in the course
of industry or invention. One great source of advantage is in ter-
minal facilities at the cities. Urban land becomes expensive, and
the railway which got its land cheap in the early days has an ad-
vantage over competitors who try to enter in later days. It is
true that this sort of advantage, like others that rest on social
causes, is subject to change and possible decline with shift^^in popu-
lation and with new inventions. The subway method of urban
transportation, which has so. profoundly affected site values in
New York, has also deprived the New York Central Railway of the
differential advantage which it formerly possessed from being the
only line with a passenger terminal in the heart of the city. None
the less, the advantages of an established railway tend in general
to increase steadily with the growth of population and industry.

The questions presented by this advance in value are the same as
those presented by the same advance in the case of urban sites and
agricultural land. The increase has been no more rapid in the rail-
ways than in the other cases, and in general has been less striking
than that in the value of urban sites. Sometimes it is proposed to
tax railways at an especially heavy rate, or to compel them to lower
their charges, because their gains are thus tending to rise. It may
be desirable to capture some of this unearned increment; but it is
not more desirable than to capture other slices of the same sort of
unearned increment. The fact that a railway has a "franchise"
or is a "public" industry is often urged as a reason for special
treatment. This is to blind ourselves with names. A " franchise "

63-§2] RAILWAY PROBLEMS (Continued) 409

simply means that, under the technicahties of om* legal and consti-
tutional system, the process of regulating incorporated companies is
less fettered in itself than is that of dealing with real property. The
franchise does not in itself bring a substantial economic privilege.
Neither is there any help toward getting at the real problem from
calling a railway a "public" or "public service" industry. These
phrases are merely a way of expressing an opinion that a given
industry needs some special sort of regulation or restriction. So far
as the increasing value of railways is concerned, the question in
principle is the same for them as for other site values that tend to
rise.

§ 2. More important in their social consequences are the^griden-
£ies_ toward unified control of railways — both toward the CQn=>
cen.ti:atioft-Qf_i:mitrol in few hands, and toward the emergence of
mpnopiily thru the elimination of competition.

The concentration of control or ownership in few hands has been
promoted by the way in which our laws have permitted the
organization of corporations and the issue of corporate securities.
Loose legislation, and (it must also be admitted) looseness in the
prevalent standards of business ethics, have here led to some of the
most unwelcome consequences of private ownership.

In strict contemplation of law a share of stock is a certificate
that the stated amount — say $100 a share — has been contributed
to the enterprise. In practise, it may or may not mean anything
of the kind, at least in the United States. Our laws have been so
framed that certificates of stock have been handed out with little
regard to actual investment. Very commonly they mean nothing
but rights to vote, and so to control; with perhaps a hope that at
some distant time in the future there will be a dividend. Among
the railways especially, a common practise has been to issue
"blocks" of securities in exchange for a given contribution to the
enterprise; say $100 in stock and $100 in bonds — or $200 in nomi-
nal value of securities — for every $100 actually put in. "Over-
capitalization" of this sort has been a well-nigh universal char-
acteristic of corporate operations in the United States. It has
led to bad results — results bad, however, not so much in the way

410 PROBLEMS OF ECONOMIC ORGANIZATION [63-§ 2

usually supposed, as in ultimate consequences on the ownership
and control of the railways.

Overcapitalization is not in itself a ready road to royal profits.
The mere printing of stocks and bonds is no source of riches. If
securities which represent no investment, or a less investment than
their face value indicates, are none the less income-yielding and
profitable, it must be because the enterprises which they represent
are profitable. The real cause of gain in such cases is either good
management or monopoly; the greatest gain comes from a combin-
ation of the two. So far as railways or other industries are mo-
nopolistic in character, successful overcapitalization — successful,
that is, in the pecuniary sense — is the result of high prices. A
monopoly will in any case set its prices as high as it can.^

To this general statement, as to almost all general statements in
economics, some qualification must be attached. It will happen
at times that overcapitalization does cause at least a clinging to
high prices. The managers of an overcapitalized monopoly may
have to face the fact that great blocks of securities are outstanding,
very likely issued by their predecessors, and now held by all sorts
of investors. They are then loth to let go any slice of its profits.
We have seen that often the monopoly principle of maximum net
profit is not applied in its full sweep, especially in industries which
are potentially subject to public control.^ Where abnormal returns
on the original investment have been made, concessions to public
opinion, in the way of lower rates or better facilities, are more
likely to come when capitalization has not been inflated.

Whether there has been in fact overcapitalization, and whether
it has served to conceal profits unduly high, is often difiicult to

1 See Chapter 15, § 6.

2 That the question of capitalization is chiefly one between investors and man-
agers, not one between these various interested persons and the public, is illustrated
by two conspicuous oases among the "trusts " — the Standard Oil and the Tobacco
combinations. The former is, from the business man's point of \new, undercapital-
ized; the latter overcapitalized. The former has been managed without manipula-
tion as regards "insiders" on the one hand, the investors and "outside" speculators
on the other. The latter has been much manipulated. Both have been highly
profitable; both present essentially the same problems as regards competition,
monopoly, prices.

63-§2] RAILWAY PROBLEMS (Continued) 411

decide. The typical railway in the United States presents a per-
plexing case. At the outset the roads were usually overcapitalized.
But at the outset, and when first put in operation, they were but
half completed. Unlike European railways, they began with a
plant and equipment adapted to a scant traffic, and largely pro-
visional. Graduall}', as the country grew and traffic increased,
they were improved by putting some share of earnings into enlarge-
ments and betterments. This process continued decade after
decade, and was combined with the direct and unmistakable in-
vestment of additional capital, thru the issue and sale of more stocks
and bonds. What the total investment finally was, and what the
relation between outstanding securities and actual investment, be-
came very difficult to say. Careful separation was rarely made on
the records between operating expenses and additions to plant.

The case is further complicated by the question of a proper
allowance for risk and for skill in management. Some railways have
been financially profitable; others not so. Some have gone thru a
long period of no returns and uncertain prospects; others have
earned good returns from the very start, some on an inflated capi-
talization. The differences are partly due to general physical and
economic causes, partly to varying judgment and skill. The mere
fact that a railway has been unusually profitable is no more a proof
of special advantage or monopoly than is the mere fact that a mer-
cantile or manufacturing enterprise has yielded a fortune. In all
such cases the quality of the management is an all-important
factor.

It is not easy to say whether railways in the United States have,
on the whole, been abnormally profitable, and hence whether their
overcapitalization has concealed a large element of monopoly
profits. Successes have been balanced by failures, eventually large
returns by long initial periods of no return at all ; while at the same
time problems of management have been such as to call for the
highest business ability. It may be true, as is commonly main-
tained in behalf of our railways, that in view of all the risks and all
the enterprise and all the skill, the gains from them have not been
greater than those secured by the investing classes in industry at

412 PROBLEMS OF ECONOMIC ORGAXIZATIOX [63-§3

large, and in that sense have not been disproportionate to the
energy and sacrifice involved.

It is doubtful whether the whole mechanism of irregular and
swollen capitalization was at any time necessary or wise. Why
not provide once for all by law that securities shall be issued only
to represent what has been invested? It is true that such a limita-
tion must have been accompanied by a liberal margin as to permis-
sible returns. The risks of investment must be offset_by_a-chance
of tempting profits. Railways in the United States never would
have been built by private capital (and public enterprise, tried at
the outset, proved hopelessly incapable of the tasks of develop-
ment) if no more than six or eight per cent had been allowed as the
maximum return. It is sometimes said that freedom, even reck-
lessness, in the issue of securities, was a useful device, in that it en-
abled the projectors to look forward to returns really tempting, and
at the same time concealed these returns from a grudging public.
Ten per cent, for example, would not have been sanctioned ; but five
per cent on a doubled amount of stocks and bonds caused no outcry.
Possibly, too, there is a seductive effect on the promoter and inves-
tor from the appearance of getting something for nothing. A more
simple and straightforward way of dealing with the issue of securi-
ties might thus have dampened in some degree the feverish specu-
lation and restless progress of railway development. But a slower
pace would have had its advantages also, and, not least, restriction
of securities would have saved great complications in the later
stages of established monopoly and needed regulation.

§ 3. Certain it is that the unrestricted issue of securities has
promoted acquisition of control by the familiar class of railway
magnates.

The separation of control from investment (and so from owner-
ship) has not usually appeared at the outset. It is often alleged
that even at the start the real promoters and managers make no
investment of their own and assume no real risks. They are sup-
posed to secure all the needed funds by the sale of bonds to confid-
ing in\estors, keeping for themselves the stock (issued for nothing),
and so reaping profits without ever having shouldered any risks.

63-§3] RAILWAY PROBLEMS (Continued) 413

No doubt they would like to proceed in this way, and sometimes
succeed. But usually the matter is not quite so simple. The "in-
siders " must set the enterprise going, must put in their money and
stretch their credit, take the securities on their own responsibility.
Usually they are associated with a banking firm, which exacts its
toll for backing and indorsing, and acts as middleman in eventually
disposing of the securities. Bankers as well as promoters neces-
sarily assume some of the risks. No doubt the purchasers of the
bonds are often deceived ; and often they deceive themselves, think-
ing that a so-called "bond" has a high degree of security, even tho
a rate of interest is offered which on its face tells of a risk involved.
As time goes on, however, with misrepresentation or without, the
prior securities, which have the first claim on the profits and involve
the least risks, get into the hands of the general investing public,
and the shares of stock remain in the hands of the projectors and
bankers.

Shares of stock mean ownership and control. In the eye of the
law, the holders of bonds are simply creditors, entitled to their in-
terest, and in due time to their principal, but quite without voice
in the management. The stockholders are apt to be a shifting and
speculative body. The stock itself in the early stages commonly
has little prospect of dividend, and is valuable for the time being
only because it secures control. It is bought and sold at low fig-
ures. It is apt to fluctuate sharply in value because of the abrupt
fluctuations in the financial prospects of railways.^ It is precisely
the sort of security that finds favor for speculative purposes on the
stock exchanges. The original promoters sell out more or less, as
they find the price to be tempting. They are concerned much
more with current quotations of the stock than with the perma-
nent prosecution of the enterprise. The original notion of a joint-
stock company — a set of persons associated in a common ven-
ture — quite disappears. Each holder tries to get the better of
the others by buying cheap and selling dear.

These are the conditions under which the "great operators"
appear and under which the vast railway fortunes have been made.

1 See the preceding chapter, § 2."

414 PROBLEMS OF ECONOMIC ORGANIZATION [63-§4

Ownership of the stock and control of the railways get into the
hands of shrewd, able, daring men. These see the possibilities of
future gain when stock quotations are low. Very likely, once in
secure control, they will see to it that the properties are eflBciently
managed, yield large returns to themselves, and even bring better
service for the community. But they come into control by the
machinery of stock speculation. Such is the explanation of the
riches of the Vanderbilts, Goulds, and their fellows. The founders
of these fortunes were not the original projectors and promoters
of the railways; they were the interlopers who secured control in
the later stock-gambling stage.

§ 4. Over and above the great fortunes and the concentrated
power over industry, speculative ownership has brought some
special evils, of the kind designated by the phrase " inside manage-
ment."

Perhaps the most striking and serious evil is the corrupt or semi-
corrupt manipulation of the railways. Those in control may
"wreck" it; may make it, in appearance or in reality, a financial
failure; may depress the prices of its securities; and then buy up
these securities at the low prices. Conversely, they may manipu-
late the accounts so as to give false indication of financial success,
raise the prices of the securities, and sell at high prices to the out-
siders ; buying in again later when the bubble has burst. A phase
of the same sort of thing appears when other railroads, or associated
enterprises such as bridges, sleeping cars, terminal companies,
freight lines, are organized or bought by the insiders, and sold to
the main railroad at a handsome profit. Sometimes the persons
defrauded by these performances are the investors proper; quite as
often they are other stock jobbers and gamblers, ready to do the
same thing if they had the wit and the opportunity. The greatest
harm from it all is a demoralization of the whole class in the busi-
ness community which has to do with railway administration.

Still another phase of inside management has been the manipu-
lation of rates for the advantage of the directors and managers; pro-
moted, as has already been said,^ by the flexibility which attaches

iSee Chapter 62, §§5, 6.

63-§5] RAILWAY PROBLEMS {Continued) 415

in any case to railroad charges. The spirit, good or ill, which ani-
mates the leaders, spreads in this case as in others to all parts of the
enterprise. Not only directors and influential stockholders, but
managers and submanagers secure their pickings. A whole sys-
tem easily comes to be honeycombed with corruption.

These evils, all closely connected with the peculiarities of corpo-
rate organization in the L^nited States, have been so glaring and
cankerous that the most ardent supporter of private industry must
sometimes stop and consider whether even the greatest benefits
can offset them. No doubt, it is possible to exaggerate the evils
which arose; and it must be remembered that they were not pecul-
iar to railways. The}' were part of the raw stage of industrial de-
velopment. Nor were they all-pervading among the railways
themselves. Tho hardly one has been without some touch of dis-
honest manipulation, many were never deeply tainted with it.
Even where the worst has been experienced, the community at
large was mainly responsible. The whole situation was accepted
as a matter of course ; partly because the economic and social con-
sequences were not perceived, but in no small degree because moral
standards were lax. In both regards, a great change for the better
set in during the last years of the nineteenth century and the first
of the twentieth. The public began to understand better what
speculative railway management entails, and to apply higher stand-
ards to business operations in general. The great moral advance
of our day has brought a higher sense of the social responsibility
and solidarity. Practises common in the last generation are no
longer tolerated. •"i"^^

§ 5. What benefits now came from all this sullied growth? 'v
No doubt, rapid railway building was promoted. Under the
stimulus of speculative construction and operation, the American
community got its railways earlier and got more of them. This
the community universally desired, and for this it was willing to
pay handsomely. Our political and industrial policy has been
dominated by an insensate desire for swift development, for un-
locking the land and its resources, for the utmost increase in num-
bers and wealth. The sober observer may question whether it

416 PROBLEMS OF ECONOMIC ORGANIZATION [63-§5

has all been worth while. A slower growth and a smaller present
bulk might have brought a better social structure. But our ideal,
such as it was, has been attained.

The march of improvement was hastened not least among the
railways themselves. And it was hastened, paradoxical as the state-
ment may seem, both by competition and by combination. The
bitterness of railway competition keyed the managers to the high-
est efficiency in operation; the lessons learned under competition
were applied with striking effect in the ensuing stage of combina-
tion. One of the causes of lowered cost of transportation was the
consolidation of the railway net and the growth of the great sys-
tems. That process was facilitated by the ease with which control
of railways was bandied to and fro on the stock exchange. The
rapidity with which the vast systems were created is extraordi-
nary. One great advance came in 1869-1873, when the so-called
trunk line systems — the New York Central, Pennsylvania, Erie,
Baltimore and Ohio — were formed. The depression of 1873—
1879 gave another opportunity, just when the stage of revival was
impending, for the creation of the great Southwestern system by
the arch-manipulator. Jay Gould. Still another opportunity came
during and after the great depression of 1893-1896, which led in a
few years to the Hill system in the Northwest, the Union Pacific or
Harriman in the Southwest, the Morgan system in the South. The
combinations of which these are typical examples vastly promoted
railway efficiency. The most remarkable achievement of the
American railways — an achievement not matched anywhere in
the world — has been the cheapening of long-distance transporta-
tion; which again has profoundly affected the geographical divi-
sion of labor, both within the country and in the exchanges with
other countries, and has increased the sum total of the industrial
output.

Historically, the course of development seems to have been con-
trolled by a fatal destiny. Given the impossibility of public
ownership and management (and for the earlier stages of railway
development in this country public operation was out of the ques-
tion) ; given the eager desire of the community for ways of trans-

■63-§6] RAILWAY PROBLEMS (Continued) 417

portation, and its willingness to encourage their construction in
every way; given the looseness of corporation laws, the universal
speculative temper, the laxness of business standards; given the
periodic fluctuations in industry, the economic peculiarities of rail-
ways, the opportunities for large-scale ventures — and the harvest
was prepared for the daring and able operator. Perhaps all the ad-
vantages from rapid construction, wide permeation of the land
with railway facilities, from competition and consolidation and vig-
orous management, could have been got in some other way; but a
train of deep-seated causes seems to have decreed that they should
come in just this way and with just these checkered results.

§ 6. The railway situation in the United States changed with the
close of the nineteenth century, and railway problems took a new
shape. The period of speculative building and promotion came
to its end. Consolidation proceeded apace, even tho no longer by
the spectacular method of single-handed capture of great systems.
Competition was fast eliminated. The railway problems came to
be in greater degree, and in simpler form, phases of the problem of
monopoly.

As to its local traffic, a railway always has a virtual monopoly.
True, there is the possible substitute of other transportation, say
by wagon. But the cheapness of railw^ay transportation is so great
that it can supersede other modes of carriage, and yet exact a
charge of its own much above a reasonable rate. Its very ability
to carry at low charges drives out competitors, and brings a situa-
tion in which its own charges may become unduly high.

Yet competitive traffic, tho limited to perhaps a small number
of points on the railway net, affects in some degree the whole.
Local rates cannot be too flagrantly out of accord with other rates,
partly because of public opinion and possible public action, partly
because local business will dwindle if disproportionately burdened.
So long as railway competition persists — and it is apt to remain
thru the early stages of development — it exercises a check, more
or less spasmodic, yet in some degree effective, on the general range
of rates.

But as the lines of transportation become established, competi-

418 PROBLEMS OF ECONOMIC ORGANIZATION [63-§6

tion tends to disappear. Pools and rate agreements are made;
eventually complete combination ensues. All the factors described
in the preceding pages contribute toward it — the severity of rail-
road competition, the economies of large-scale operation, one-man
power. Competitive bidding for traffic is superseded by consoli-
dation of the rival lines. Competitive building is superseded by
deliberate division of territory. The railway net is rapidly settling
down — not indeed to the stage where new investment is no longer
needed, but to the stage where no new great systems are being
formed, and where the traffic is apportioned once for all among the
existing systems.

As the stage of monopoly is reached, a railway is tempted to
charge what the traffic will bear in the monopoly sense — quite a
different sense from that explained in the preceding chapter.
Managed as a private or purely money-making enterprise, it will
charge the general range of rates which will bring the maximum
profit; subject to all those modifications of the theoretic extremes
of monopoly prices to which attention has already been called. On
each particular item or class of traffic it will tend to charge what
the conditions of demand make possible for that particular kind of
traffic. People constantly confuse the principle of joint cost with
that of monopoly. To charge what the traffic will bear under the
former principle is for the public interest; to charge what it will
bear under the latter is against the public interest. So far as
monopoly becomes effective, railway rates call the more for public
regulation, even tho the problem of settling what is a " reasonable "
rate in any particular case must remain a very knotty one.

CHAPTER 64
Public Ownership axd Public Control

Section 1. What are "public service" industries? The legal conception less
important than the economic; the essential earmark is monopoly, 419 —
Sec. 2. The spur of profit necessary for improvements in the arts; hence
a preliminary stage of private ownership is inevitable, 423 — Sec. 3. The
question of vested rights when pubhc ownership displaces private. "Fran-
chises" should always be for limited terms. Purchase at market value,
425 — Sec. 4. Are there criteria marking some industries as suitable for
public management? The tests suggested by Jevons; distrust of pubUc
officials underhes them all, 427 — Sec. 5. To secure trustworthy and
efficient public officials is partly a problem of pohtical machinery. Some
difficulties of public management, as regards the employment of labor and
the maintenance of progress, 429 — Sec. 6. The fundamental requisite in
a democracy is a generally high level of character and intelligence. In what
way corruption is connected with monopoly industries, 431 — Sec. 7. The
future of democracy depends on its success in dealing with these indus-
tries. Experiments in ownership to be welcomed, especially in munici-
palities. The prejudices of the business class on this matter, 433 — Sec. 8.
Public regulation the only alternative to public ownership. The two
types of regulating boards. The essential object is to limit prices and
profits. The elevation of the standards of private management, 435 —
Sec. 9. The Transportation Act of 1920. Provisions on valuation and
on rates. A half-way step toward pubhc ownership, which is likely to
come in the end, 437.

§ 1. How far shall public regulation be carried? To the point
of ownership and management once for all? These questions,
most conspicuously presented by railways, become of greater and
greater moment in the modern world, as large-scale operations
spread and monopoly conditions impend more and more.

No doubt there are some things which in the advanced countries
are by general consent no longer in private hands. Such are high-
ways and bridges, and elementary education. As the sense of the
widespread importance of some services becomes stronger, they are
conceived as no longer to be dealt with on the quid pro quo prin-
ciple; they are provided gratuitously for every individual, and the

419

420 PROBLEMS OF ECONOMIC ORGANIZATION [64-§ 1

means for providing them are raised by taxation. i They are then
necessarily suppHed by general levy and under public management.
The doubtful questions are as to those services which are still ren-
dered essentially on the quid pro quo principle, as in the case of the
post office with its rates for postage; a municipal water service
with its water rates; a state railway with its passenger fares and
freight charges. These institutions may be in private hands, and
if in public hands, they present problems very different from those
of education and of ordinary highways. And, to repeat, the ques-
tion arises, which among them are properly subjects for public
management?

The doubtful industries are those commonly designated, espe-
cially in this country, as "public service industries," such as rail-
ways, the telephone and telegraph, the supply of water, gas, elec-
tricity. The phrase "public service" is a question begging one,
implying as it does that a clear and simple line of demarcation can
be drawn between the operations that are and those that are not
appropriate for public management and control. Such industries
as have just been mentioned are "public" in two senses. The one
is legal, and comparatively easy to define. The other is economic
and more important, but more difficult of precise application; it
rests on the character of the industries as monopolies.

A railway cannot be built unless there is legislation for acquir-
ing its right of way. Without the right to take land at a valuation
— the right of eminent domain — it could be blackmailed or
blocked by any landowner along its route. A gas company, again,
needs the right to dig up the streets, an electric company similar
rights to use or cross the streets. A street-car company ipso facto
uses the public highways. Hence these are in special degree de-
pendent on public authorization, and so subjected with compara-
tive ease to public control.

But it does not follow from this characteristic alone that they
should be managed by the public, or even subjected in any special
degree to public control. The real reason for treating them as
"public service" industries, in the sense that they call for public

1 Cp. Chapter 68, § 1.

64-§ 1] PUBLIC OWNERSHIP AND CONTROL 421

control, is economic, not legal; and the fundamental economic rea-
son is that they tend to be monopolies. If competition were effec-
tive in them, as it is in the supply of boots and clothing and flour,
the fact that some use of the highways was necessary would not Le
thought to entail public regulation; any more than the fact that the
streets are used by cabs and omnibuses, hawkers and street venders,
brings these within the public service class. On the other hand,
even tho there be no need of specific authorization, no grant of
special powers or "franchise," no obvious means of control, any
industry which reaches the full-fledged monopoly stage calls for
regulation and suggests at least the possibility of public ownership.
If flour making or bread making were in the hands of a tight com-
bination, we should soon hear it dubbed a public service industry.
It is a public service industry in the sense of being of vast impor-
tance for all the public. But it does not call for regulation so long
as competition is sufficiently effective in it. Water supply is a pub-
lic industry in every sense: legislative authority is indispensable,
the industry is supremely important, it has monopoly character.

Tho the extent to which combination or monopoly will proceed
among modern industries is uncertain, it is clear that it will extend
far. That the industries now commonly called "public utilities"
belong in the monopoly class, w^as not at first seen in the L^nited
States. Competition was invoked in the early days as the means
of regulating their charges. Rival railways, rival street railways
and gas companies were welcomed, and the belief w^as entertained
that here, as in other industries, competition would suffice to make
charges reasonable. How many American cities have had compet-
ing street railways and gas companies and telephone companies,
with promises of lower charges and better service; and how
infallibly have the competitors in the end got together in a tight
combination! Notwithstanding repeated experience of this sort,
an illusory hope is still cherished in many cases as to the eSicacy
of competition. The simple and obvious fact is that monopoly
inevitably ensues. The need of regulation in some other way
than thru competition must be faced once for all.

The cause of monopoly in many of these cases (tho not in all) is

422 PROBLEMS OF ECONOMIC ORGANIZATION [64- § 1

strictly economic: namely, that the industries are conducted under
the conditions of increasing returns.^ So with the railway; tho
probably the rate of increase diminishes as the railway system en-
larges. When power superseded animals in street-railway traction,
the same became true of this industry. Electric light and power,
gas and water, all are more cheaply supplied if one unified plant
serves a single large area. In such cases the words prophetically
used by John Stuart Mill, in the early days of the present industrial
regime, are as true as they were sixtj- years ago : " When a business
of real public importance can only be carried on advantageously
upon so large a scale as to render the liberty of competition almost
illusory, it is an unthrifty dispensation of the public resources that
several costly sets of arrangements should be kept up for the pur-
pose of rendering the community this one service. It is much bet-
ter to treat it at once as a public function ; and if it be not such as
government itself could beneficially undertake, it should be made
over entire to the company or association which will perform it on
the best terms for the public." ^

The post office and the telephone and telegraph are best managed
under monopoly conditions for reasons which in part are different.
They are much more useful to the public if all-embracing and singly
managed. It is conceivable that letter service should be handled
by one set of companies in the cities, and by another set in the
country. The rates could be, and probably would be, lower in
urban districts, if these were separately supplied ; and it may be a
question whether the present uniform rate, yielding high profits in
the cities, is in accord with current traditions on the equitable rela-
tion between cost and price. But the enormous convenience of
being able to reach any and every correspondent once for all, at a
simple fixed rate, outweighs any possible doubt as to the equity of
the uniform rate.' To this, of course, must be added, in the case

1 That is, increasing returns due to "internal" economics. See Chapter 14, § 3.

2 Mill, Principles of Political Economy, Book I, Chapter IX, § 4.

3 The expense of the post office is largely for collecting, handling, sorting. These
items are the same for every letter in a given district. Mere transportation costs
comparatively little. Hence a uniform charge, irrespective of distance, is not so far
out of accord with cost as at first it seems. This was among the main grounds on

64^§2] PUBLIC OWNERSHIP AND CONTROL 423

of the post office, the educational and political gains from a uni-
form rate and an all-inclusive service. In the case of the telephone,
the advantage of unified service is most conspicuous of all. The
essence of effective telephone service is to be able to talk to any and
every subscriber. Competing telephones, each having its own set
of subscribers, are the height of absurdity. The elimination of
competition is here not only inevitable, but unquestionably^ bene-
ficial. The only possible question is whether there shall be public
monopoly, or private monopoly regulated by public authority.

§ 2. In virtually all of these cases, public ownership, where it
has been adopted, has been preceded by private; and this for the
reason that the spur of profit is necessary for the initiation of
advances in the arts.

We are here on disputed ground : how far do the selfish motives
predominate, and how far must they be appealed to for the further-
ance of material progress? Men are extraordinarily unequal, and
not least unequal in the degree to which they respond to altruistic
impulses. Among men of genius — great painters, poets, musi-
cians, men of science — the coarser motives are often veiled or over-
borne. In them, the inborn instinct is strong; they work not
primarily for reward, but because the bent is irresistible. So it is to
a large extent with inventors. But these are highly exceptional per-
sons. For the vast majority of men, the argument from the bribe
holds. The prospect of gain is immensely powerful in bringing
men to exercise their faculties to the utmost pitch. This is the
case in no small degree even with those of highest genius. It is
more markedly the case as we descend from this very small set to
the much larger class of able, but not brilliant men. For all except
the very few of extraordinary gifts, the spur of gain is not only
powerful, it is indispensable. Almost all inventors and men of

which Rowland Hill argued for his great reform (penny postage). In a compara-
tively small and densely settled country, a uniform postage rate thus rests on an
economic as well as on a social basis. In a vast country like the United States, the
economic reasons are less strong. Distance and cost of transportation count for more
in the expenses, especially where not only letters are carried, but bulky printed and
miscellaneous matter. Uniformity of charge, like the extension of free delivery
into sparsely settled country districts, can be justified chiefly on larger social,
grounds.

424 PROBLEMS OF ECONOMIC ORGANIZATION [64-§2

science are subject to the self-regarding motives which affect so
profoundly the life about them. They work the more strenuously
and effectively in proportion to the expected reward. This is the
principle underlying the whole system of patents, copyrights, and
trade-marks, nay, the whole system of competitive industry and
private property.

Further, for the progress of industry, there must be not only in-
ventors and managers, but persons willing to venture their means
in new ways. The history of all the great advances in the arts,
especially the epoch-making changes of modern times, shows that
the business man and venturesome capitalist have played an es-
sential part. We are apt to think of successful inventions as made
once for all at a precise date by one individual. In fact, there has
been almost invariably a long period of experiment by many per-
sons — rival projects and false starts, disappointing trials, slow
emergence of the finally successful device. The steam engine, the
textile inventions of the Industrial Revolution, the railway, electric
traction, flying machines, all went thru this stage of uncertainty.
To select among the rival schemes, and to venture boldly on new
investments, the business man is as necessary as the inventor.
Sometimes, as in the cases of Stephenson and Siemens, the in-
ventor is also a business man. More often — as in the typical case
of Boulton and Watt — the two sorts of ability must be combined
in a partnership; the inventor needs the backing and guidance of
the managing capitalist.

The history of the past shows the spur of profit to have been at
work, and apparently indispensable, in all the industries of the sort
we are now considering. Private management has been a neces-
sary stage. Public management has come as a transition and a
growth, not by an independent start. \Miere indeed an industry
has been developed by private activit}^ in one country, it may be
transplanted to another without the preliminary stage. WTien the
railway, after a long period of experiment, had been brought into
effective working order in England, it was easy to introduce it on
the Continent as a state industry.^ A generation later, it was easy

iMost railways on the Continent, none the less, were built, and at the outset
managed by private companies. The first construction was usually undertaken by

64-§3] PUBLIC OWNERSHIP AND CONTROL 425

for the Australian colonies to undertake public management of rail-
ways, by importing from England men trained in the school of pri-
vate management. Electric traction for urban transportation was
easily started in England as a public business, after private enter-
prise in the United States had shown how the thing could be done.

The probabilities are that the same course will be followed in the
future. The present state of water-power transmission thru elec-
tricity supplies an instructive illustration. Here are great possi-
bilities, nay, great certainties. The simple matter of building
dams and impounding the water can indeed be done by the state.
But the hydraulic and electric plant, and the transmission and dis-
tribution of the power, involve risks and call for enterprise and
vigor (not to mention technical progress) such as public officials are
not likely to supply. The utilization of water power thru elec-
tricity thus waits on private initiative and management. Ob-
viously, a monopoly situation exists, or at all events impends; here
is just so much power, and he who controls it controls all the indus-
trial possibilities. The public should never give away in perpetu-
ity the ownership of this great resource. Yet it can probably
secure its effective development only by allowing scope for private
profit. It is at a later stage, when the best ways of utilizing the
power have come to be understood, that public management may
take the place of private.

§ 3. When the transition from private ownership and manage-
ment takes place, the question of vested rights will always arise.
The terms of purchase must not be such as to deter future invest-
ment in other enterprises. But, on the other hand, only so much
should be paid as is necessary to keep alive the spirit of private
management and investment. The bribe should not be larger than
suffices. Naturally, the recipient tries to get more — unlimited
franchise at the start, and at the later stage purchase at the top
price. The financial markets will capitalize his earnings, however
high, and he will expect purchase at the capitalized ^^alue.

It is the first and simplest canon of public policy in these matters

English contractors, among whom the Stephensons and Brassey were conspicuous.
In the United States, the railway grew independently, and thruout by private
enterprise.

426 PROBLEMS OF ECONOMIC ORGANIZATION l64-§3

that there should be no unUmited franchises. Whether the question
be of railways or street railways or gas works or telephones or water
power, the right to establish and conduct the industry in private
hands, and the needed authorization from the law, should be for a
limited term. There should be, too, a reserved privilege of pur-
chase at terms based on the cost of the plant, not on the capitalized
value of its earnings. Experience shows that a period of thirty
years, certainly one of fifty years, is long enough, and that a right
of purchase on reasonable terms does not deter private investment.

In this respect, our American communities have been reckless
of posterity. The}' have sold their birthright for a song, or have
simply given it away. The explanation is obvious enough. In
the pioneer days one of the main objects of the early settlers is to
possess themselves of the very things that will become valuable in
the future — land, urban sites, mines, forests, water power, " fran-
chises." No one then thinks of conserving the rights of posterity;
nearly every one wishes to appropriate at once those things for
which posterity may pay a large price. Only a stringent prohibi-
tion, by constitutional enactment or from an outside power (Con-
gress as to the Territories), will keep a pioneer community from
such appropriation of the possibilities of the future.

When the mistake has been made of allowing the monopoly in-
dustry to get into unrestricted private ownership, and where it has
been sold and bought by successive persons on the basis of such
ownership, there is nothing to do, if the transition to public owner-
ship is determined on, except to buy the owners out at the market
price. The purchase price must then be fixed, not on the basis of
cost of investment or reproduction, but on that of the capitalized
value of the earnings. The case is the same as with land and urban
sites. If the community has sanctioned investment and purchase
on the basis of a perpetual franchise, it must itself buy, as it has
authorized others to do, on the basis of present value. At the
most, it can conserve for itself only the future increase in the
earnings of the monopoly or privilege; just as it may appropriate
thru taxation the future increase in the value of urban sites. Un-
less all private property is wiped away once for all, the lawful own-

64- § 4] PUBLIC OWNERSHIP AND CONTROL 427

ers of this particular kind of property cannot be singled out for
special dispossession. Hence, for example, when Prussia in 1878
resolved on the epoch-making step of buying the railways for the
state, purchase proceeded frankly and even liberallj^ on the market
value of the roads. Great Britain will do the same when she buys
her railwaj^s, as she may before very long. The United States
will have to do the same, if the time should come for that far-
reaching change. France is in a comparatively favorable position
for the possibilities of the future; since, under the terms of the
original legislation, her railways are to pass into the state's hands
by the middle of the twentieth century (1959), without any com-
pensation at all for the permanent plant.

§ 4. The preceding discussion has proceeded as if the transition
from private ownership to public were certain to come in the case
of all the monopoly industries, and as if it were dependent solely
on the attainment of a settled stage of technical and industrial de-
velopment. But the matter is not so simple. Public ownership
may not come at all ; or it may be preceded by a long period of pri-
vate ownership under public regulation. The conditions on which
the choice of policy must depend are here not economic in the nar-
rower sense; they are mainly social and political.

There have been, it is true, attempts to formulate certain eco-
nomic characteristics by which the line between public and private
industry can be drawn. A well-known older attempt was that of
Jevons, who stated the earmarks of an industry adapted for pub-
lic management to be the following: (1) small capital account; (2)
routine operations; (3) the coordination of several services, as the
post, the telegraph and the telephone ; (4) the sufficiency of a single
all-embracing plant, as in the case of water and gas supply. This
enumeration, made at the time when the transfer of the telegraph
to the state was under discussion in England, has obviously failed
to fit later exigencies. The very first requirement, that of a small
capital account, is not met in the case of the railway ; yet here we
have public management on a great scale. None the less, the enu-
meration still deserves attention; for it points to some of the
political difficulties of the problem.

428 PROBLEMS OF ECONOMIC ORGANIZATION [64-§4

Underlying the requirements of Jevons is a suspicion of public
officials. This explains the very first requirement — small capi-
tal account. Where the capital account is large, the financial and
technical outcome of an enterprise is difficult to judge. The man-
agement may be good, yet expenditures for repairs or enlargements
may result in a deficit in the year's account. Conversely, a skimp-
ing on needed repairs and on improvements for the plant may
enable a good showing to be made by a poor manager. Every per-
son who has looked into the accounts of a railway or ironworks or
large manufacturing concern knows how necessary it is to analj^ze
the figures, and, above all, to probe the capital account, before
judging whether the management has been good. To supervise
public officials and to judge whether their administration has been
efficient, becomes the more difficult as plant is larger and more
complex. The more one is disposed to entertain general doubt as
to the probable success of public officials, the more is one averse to
intrusting such business to their hands.

Something of the same sort holds of a routine character of the
operations. This also makes supervision easier. Where adminis-
tration can be reduced to set rules, it is easily seen whether these
have been followed For the same reason it is sometimes said (as
it was by Jevons) that an industry is more likely to be well con-
ducted by the state if its operations are constantly under every
one's eye. The post office fulfills all such requirements; indeed,
this case doubtless suggested the criterion. If we start with the
premise that public officials are to be mistrusted and must be con-
stantly under w^atch, we end with limitations on state manage-
ment such as Jevons suggested.

Now the question whethe public officials need to be constantly
watched depends on their character and quality; and this, again,
in a democracy depends ultimately on the character and quality
of the electorate or other body that chooses them. If we are sure
of the probity and ability of the officials, we may turn over to them
for management a very wide range of industrial operations. We
need not hesitate because the capital account is large, or because
the operations are irregular and complex, or are concealed from the

64-§5] PUBLIC OWNERSHIP AND CONTROL 429

public eye. We may intrust to them the management of all the
monopoly industries which have passed the formative and experi-
mental stage, and in which the technical conditions have become
fairly settled.

To sum up: the strictly economic earmarks for state-managed
industries are maturity and monopoly. But the state means state
officials; and whether these are competent to take charge is a
troublesome political and social problem.

§ 5. Two things are necessary for the securement of an efficient
body of public servants: first, well-devised political institutions;
and second — above all in a democracy — a sufficiently high level
of intelligence in the great mass of the community.

Not a little depends on tradition and habit. The spoils system
is largely a bad habit. LTntil it is rooted out, good public man-
agement is hopeless. The bureaucracy of Germany has the sup-
port of ancient traditions, long bound up with devotion to the
monarchical ideal but likely to persist whatever the form of politi-
cal organization. It has proved an invaluable instrument for the
successful extension of state activity. The British Civil Service
as it developed during the second half of the nineteenth century,
proved an instrument not less efficient. Like the German, it had a
certain oligarchic flavor, utilizing a spirit of achievement and of
service which had been nurtured in a select highly-educated class.
In Great Britain also that spirit may be expected to persist under
altered political conditions. Our American principles of checks and
balances, of limited powers and divided responsibilities, work
against efficient public management. Our traditions have been
inherited from the days when the would-be absolutist was at the
head of the state, and when state officials were suspected of attacks
on liberty. We are slowly coming to recognize that the state may
be a great agent for social uplift, and that its officials need
more freedom of action, less fetters on action. In municipal
government, where the situation is worst, the goal of reformers is
the elimination of the wheels within wheels, concentration of
responsibility, diminution of the number of elective officers and
lengthening of their terms, permanent tenure for the routine staff

430 PROBLEMS OF ECONOMIC ORGANIZATION [64'-§5

and for the trained experts. In all these respects, habits of
thought are slowly changing, and the way is being prepared for at
least the possibilities of better things.

The employment of public laborers in a democracy is always a
thorny problem. They strive to become a favored class, w^ith ex-
tra pay and extra privileges. As has already been said,i other
laborers commonly support them in such endeavors, from a con-
fused notion that the process will raise wages and privileges gener-
ally. Elected officials, on the other hand, are apt to accede to
their demands; for this compact body of voters needs to be concili-
ated. At its worst, the employment of large bodies of laborers
means a political machine and political corruption. Even at its
best, it is likely to bring place-making and easy stints; hence, in-
efficiency and expense.

Private industry has a quasi-automatic check to this evil. The
manager looks to money-making, and will pay his labor no more
than he can get it for; that is, no more than other labor secures.
The public official, on the other hand, is not rigorously subject to
the test of profits ; he can dip into the apparently bottomless pub-
lic purse. The state should be a model employer, and should set
an example of good wages, moderate hours, steady emplo^Tnent,
humane surroundings. But the state should set also an example
of requiring for its full day's pay a full day's work. The ideal of
too many people is that it should be generous with the pay, but
easy-going with the work. There is a world of significance in the
Australian phrase — "the government stroke." A public official
in a democracy always finds it difficult to exercise the power of dis-
charge, above all to prevent conduct that is simply slack and dil-
atory.

The maintenance of progress in the arts is another difficult
matter under public management. Technical maturity is never
reached completely; fiu-ther advance is always possible. There is
indeed a wide difference between the early stage of uncertainty
and experiment, and the later stage of gradual improvement on
established lines. The railway, for example, is still being made

1 See Chapter 47, § 1.

64-§6] PUBLIC OWNERSHIP AND CONTROL 431

more efficient; but the great lines of technical and economic proce-
dure seem to have been definitively marked out. Tho the applica-
tion of electricity to traction may bring great changes in railway
transportation, there will be none so revolutionary as those in the
early period of invention and development. Nevertheless, in rail-
ways as in other industries, even when they have reached a compar-
atively settled stage, public management, to be fully satisfactory,
should not be content with doing passably w^ell what the world has
already learned to do. The continued progress which it should
maintain calls for keenness, vigor, enthusiasm, single-minded devo-
tion to professional tasks on the part of trained administrators and
experts. Only an intelligent and self-restrained democracy, or a
very capable autocracy, can enlist such men and get them to do
their work in the best spirit. The German Empire and the German
states, in their post office, telegraph and telephone, perhaps in their
railways, unmistakably in their military organization, long main-
tained a high spirit of ambition and emulation. But the Austra-
lian colonies seem to have secured simply humdrum management;
honest, to be sure (and for this we in the L^nited States, to our
shame, must pay our tribute of respect), but devoid of life and
vigor. No democratic community, with the possible exception of
Switzerland, has show^n in its public industry a spirit of progress
comparable to that of private industry.

§ 6. In the end, all these matters of organization and efficiency
go back in a democracy to the most fundamental of the requisites
for successful public management — the moral and intellectual
quality of the community. There must be in the community a
good average of character and conduct, in order to secure even
honesty and faithfulness; there must be, in addition, a good aver-
age of intelligence and self-restraint, in order to select and retain a
body of trained and progressive experts. It is hard enough to se-
cure the first of these things ; it is very hard to secure the second.

We in the United States have still to learn how to get common
honesty and faithful routine. Antiquated political institutions,
excess of elected officials, lack of concentrated responsibilitj^ — all
these explain a good deal, and improvement in these matters of

432 PROBLEMS OF ECONOMIC ORGANIZATION [64-§6

political machinery promises a good deal. But in the end we have
to rely on the stuff of the people. A good electorate will choose
honest and capable officials, a debased or indifferent one will toler-
ate demagogs and thieves. The traditional method of committee
administration and scattered responsibility has often been held
accountable for the evils of municipal government in the United
States. No doubt it has had its ill effects. But it is striking that
a very similar system in Great Britain has not stood in the way of
honest and efficient administration.' Reform in the machinery of
municipal government will avail little unless the right persons are
chosen to run the machiner3\ From this elemental requisite there
is no escape.

It is often said that corruption in our municipal and state affairs
is caused by private ownership of the great monopoly enterprises,
and that public ownership is the cure. To reason so is to mistake
the occasion for the cause. The occasion is the great fund of gain
which the monopoly enterprises can yield; the cause is political
demoralization. It matters little whether the initiative in cor-
rupt ways is taken by the heads of the monopoly corporations
or by the public officials — whether the first step be bribery or
blackmail. In either case it is the existence of venal legislators
and administrators that brings coarse and characterless persons
into the management of the "public service" industries. Honor-
able men withdraw from the unsavory affairs and are replaced by
those less squeamish. The root of the difficulty is that a bad po-
litical situation invites corruption, not that corruption makes the
political situation bad.

On the other hand, this much must be admitted: there is a
kindling power in public action. The sentiment of a community
can be aroused toward accomplishing well the tasks which it has
set for itself. It is absurd to go so far as to say that there is an
automatic effect on the quality of government from giving govern-
ment much to do — that the mere assumption of larger tasks will
make the body politic fit for accomplishing them. But pride can

^ See Lowell, Government of England, Vol. II, Chapters 39, 40, esp. p. 179; and
Munro, The Government of European Cities, 282 seq., esp. p. 307.

64-§7] PUBLIC OWNERSHIP AND CONTROL 433

be enlisted, especially local pride, and some stir may thereby be
given to smoldering forces for good.

§ 7. It is not too much to say that the future of democracy will
depend on its success in dealing with the problems of public owner-
ship and regulation. To allow the great monopoly industries to
remain without control in private hands is to allow an iviperium
in imperio — nothing less than a plutocracy. To manage them
as public enterprises, or to regulate them effectively while still in
private hands, calls for restraint, abdication of the town-meeting
method, intelligence in choosing good leaders, steadfastness in fol-
lowing them. These things are not learned in a day, nor is there
any certainty that the mere increase of public industrial manage-
ment will cause them to be learned. It may be that we in America
shall not reach for a long time the stage when we shall be able to
grapple with the tasks of public management. The ideal solution
is that the great monopoly industries should be under efficient
and progressive public management; but he is sanguine who be-
lieves that the attainment of this ideal will come easily or quickly.

To admit that a task is difficult, the outcome uncertain, is not to
say that it should be given up. The experiment of public owner-
ship and operation should be tried, and every effort made to bring it
to a successful issue. The most promising field would seem to be
the municipality of moderate size. To put vast industries now
into the charge of city governments like those *of New York or
Philadelphia would be reckless. But cities 'of smaller size may
have better possibilities. Even tho, in these also, the political con-
ditions too often have been wretched, the movement for "muni-
cipalization " has better prospects, and a trial is to be welcomed. If
it fails, it will show that those are mistaken who would make haste
in adding to the undertakings of democracy. If it succeeds, so
much the better.

Success or failure in such experiments cannot be gaged in a short
time, nor without reasonable discrimination. Mistakes and dis-
appointments will be inevitable in the early stages. A considerable
period must elapse before it can be known whether the needful
lessons will be learned. And as regards the final outcome, it must

434 PROBLEMS OF ECONOMIC ORGANIZATION [64-§7

be remembered that the question will always be one of the balance
of gain. The opponents of public ownership are constantly point-
ing to its weaknesses and its ugly aspects — slowness and inde-
cision in adopting improvements, placation of the public by con-
cessions that make a show on the surface (e.g. low passenger rates
and good passenger accommodations on railways, to the neglect of
the more important freight service), log-rolling, undue favors to em-
ployees. The real question is not whether these things are bad,
but whether they are worse than the evils of private ownership.
He who compares, for example, the railways of the United States
and Australia will undoubtedly find some serious defects in Aus-
tralia. But he will find crying evils in the United States. He
will find greater efficiency in our country, but also tortuous
management, and ominous consequences in the greater inequality
of wealth; and he will not render an unhesitating verdict against
the state railways of Australia.

The business and well-to-do classes of all countries, and especially
of English-speaking countries, rarely consider this subject with an
open mind. They listen readily to all the evidence that tells
against public ownership and are pessimistic about its prospects.
The persons now in control of the money-making monopolies sup-
ply them freely with all sorts of distorted information and super-
ficial arguments. In the United States more than anywhere else
their prejudices are rank. This attitude is due to various causes.
In part, it is an inlieritance from the older political philosophy of
laissez-faire and non-interference. In part, it is due to sad experi-
ence of misgovernment in this country. But to no small degree it
arises from a lurking fear of dispossession. Public management is
"socialistic"; it is feared as the entering wedge to complete expro-
priation.

The relation of the problems of public ownership to socialism
will be considered elsewhere.^ But this much may be said at once:
private property is more likely to maintain itself if it is coupled
with an extension of public regulation. It will be more secure if
its abuses are done away with, and if the avoidable causes of great

1 See Chapter 66, § 5.

64-§8] PUBLIC OWNERSHIP AND CONTROL 435

inequalities are removed. Public ownership of the monopoly
industries, or the alte native of public regulation, may be called
conservative in the sense of possibly obviating changes really
revolutionary.

§ 8. The clear alternative, then, and the only alternative, to
public management is public regulation. Ideally, regulation is less
good, but practically it may be much better. Reasonably suc-
cessful regulation is more easy to attain than reasonably successful
public management.

Some matters of political machinery need attention in this case,
as in that of direct management.. The success of regulation de-
pends on the quality of the individuals who are to regulate. They
should have stable tenure of office and adequate salaries. They
should be chosen not by popular election, but by executive appoint-
ment. These are simple requisites, too often neglected in our
American states. But the problem of finding and retaining good
men on regulating boards or commissions is vastly easier than that
of finding and retaining men capable of efficient management.

Two distinct types of board or commission have appeared in
American experience: the commission for investigation and rec-
ommendation, relying chiefly on publicity; and that with power
of command. The first type, of which the Massachusetts railroad
commission was the earliest and the best-known example, was
commended for a long time by the sober American observers.
None the less, the second t\'pe gradually came to prevail. Inves-
tigation and publicity can do a great deal, but not everything that
is needed. The milder form of regulation was a natural first step,
when people were still timorous about state interference. As they
have become used to it, and as the growth of monopoly has ap-
peared more clearlj^ to call for regulation, commissions of the sec-
ond, more drastic, type have been generally established. In Massa-
chusetts itself the authority of the railroad commission gradually
extended beyond investigation and recommendation; and the later
commission of this state, with jurisdiction extended to all the
"public service" industries, was also given large powers on the
crucial question of the prices to be charged.

436 PROBLEMS OF ECONOMIC ORGANIZATION [64-§8

All the modes of regulation, whether by supervision, publicity,
or unqualified prescription, look to the same end : control of prices
and of profits. Sooner or later such control is likely to be under-
taken directly as well as indirectly. People of conservative tem-
per smell confiscation in it; yet it is all involved in those first steps
of investigation and publicity which they commonly approve.
Reforms of this sort proceed by stages which follow the slow
growth of public opinion, the meaning and probable outcome being
concealed at the outset by ambiguous phrases and mild measures.

Direct control may be of prices or of profits, or of both. Like
the control of capitalization, it should have a reasonably liberal
regard to the returns of investors and managers, and must content
itself with results satisfactory on the whole. Prices seem on the
whole easier to regulate than profits. Restriction of profits, i.e. of
dividends, may be evaded by extravagant salaries and bonuses.
Even when not so evaded, it removes the stimulus to efficiency
and progress. Prices, it is true, are not so easily fixed at a "rea-
sonable" point as is a rate of dividend on capital. Some knowl-
edge of cost of production and of technical details is called for. Ill
such industries as that of railway transportation, there are peculiar
difficulties, already pointed out.i The need of a trained body of
permanent public officials is obvious. But the fact that their task
is difficult, and that only an approximation to an ideal solution is
attainable, is no reason w hy the task should not be undertaken at
all. All the truths of economics are approximations, and all its
ideals can be attained only in the rough.

Not the least of the things which public regulation should try to
accomplish is the elevation of the standards of private manage-
ment. The speculative promoter, the stockjobber, the unscru-
pulous corrupter, should be crowded out, and the business leader
of the better type brought in. To this end publicity will do much;
and pressure will do much, too. Let it be made a paying policy
to have honest and far-sighted management, content with moderate
but sustained profits, and considerate in its dealings with the com-
munity. There are able business men in plenty to whom manage-
» See Chapter 62, §§3, 5.

64-§ 9] PUBLIC OWNERSHIP AND CONTROL 437

ment of this sort appeals. There is no harm in mixed motives, and
some mixture of pubHc spirit and private interest is a remedy worth
trying. The now-pervading conviction that these are not strictly
private industries, and that the people in charge of them have
duties to the community as well as to the investors, leads to a very
different attitude from that of a generation ago. The public is no
longer damned. Pressure thru publicity and thru threat of legis-
lation or forfeiture of charters, plans for direct public ownership,
demagogs' attacks, if you please — all strengthen the better atti-
tude. Let it be made worth while to please the public.

§ 9. We return, in concluding this subject, to the railway situ-
ation in the United States. The policy adopted for the railways
is likely to be followed for all the industries that present the prob-
lem of public management.

The Interstate Commerce Act of 1887 was the first step toward
the effective control of railways and of railway rates. It is not
within the scope of this book to consider its details or those of the
series of measures that followed and supplemented it. We must
content ourselves with noting some salient features bearing on the
general problem.

Control over rates by the Interstate Commerce Commission,
established under the act of 1887, became effective, and indeed
became more rigorous than had been expected, because of an un-
expected circumstance — the upward movement of prices which
took place during the first decade of the twentieth century. Tho
the Commission had power both to reduce rates when deemed too
high and to keep them unchanged when deemed high enough, it
was the latter process which proved of substantial efficacy. Re-
duction could not be ordered without detailed investigation of the
specific cases, followed by semi-judicial procedure. Delays in
dealing with these intricate matters were inevitable; a great mass
of charges were necessarily left untouched which might have been
found too high if probed. Only sporadic reductions could be
effected. But it was comparatively easy to exercise over a great
range of rates the power of keeping them as they were — of vetoing
advances. Here the inevitable delays served as a brake on the

438 PROBLEMS OF ECONOMIC ORGANIZATION [64-§9

railways, not on the Commission. Precisely this proved to be the
characteristic feature of the period of rising prices. The railways
had to pay more and more for materials and labor; but their rates
could not be raised without the sanction of the Commission.

Not only was this an unexpected turn in prices and rates, but
the consequences, welcome in themselves to those who believed the
railways should be curbed, were allowed to drift further than ex-
pected or intended by anyone. The margin between the railways'
outlays and their receipts from operations, steadily grew less and
less. Gradually a situation developed in which the country had
the advantages neither of private nor of public management.
Private management was almost stifled. Enlargement of the
railway ceased; facilities and equipment were kept within the
minimum; the future was left to take care of itself. Yet the
general rate structure and the general principles of management
remained those of an industry primarily directed to getting profits.

Something like an impasse had been reached even before the
country entered on the Great War. When it did so, in 1917;
when the rise in prices and wages became suddenly accentuated,
and at the same time the transportation needs for war purposes
were suddenly intensified — there was nothing to do except for the
government to take over the operation of the railroads. Without
this emergency step, the railroads would have been bankrupted;
and without it they could not have met the military exigencies.
From the close of 1917 to the early part of 1920, a period of a httle
more than two years, the federal government managed the rail-
roads.

What might have been the consequences if the war had lasted
long, it is as difficult to say as it is for the other extraordinary events
of this period — the monetary expansion, the tax changes, the reg-
ulation of industry. When the war ended, in the autumn of 1918,
it was inevitable that there should be a revulsion from the various
emergency measures. By general consent the railroads were
returned by the government to their owners. But the return took
place under conditions very different from those of the preceding
period; and the outcome was a situation of quite a different char-

64-§9] PUBLIC OWNERSHIP AND CONTROL 439

acter from that of pre-war days. The government undertook on
the one hand to control the raihoad system to a greater extent than
before, on the other hand to safeguard the private owners more than
ever before.

The Transportation Act of 1920 gave the Interstate Commerce
Commission greatly increased power. Not only was its control
over rates maintained ; it was also given large control over organ-
ization and managsmjgnt. Most Important in this latter regard
was the authority to comp.eLthe.x?onso],idation.of the railways into
large^ competing systems, whose make-up was arranged by the
Commission itself. On the other hand, the Commission was di-
rected so to fix the general range of rates as to assure to the railroads
a "fair" return; a fair return being provisionally defined as 5§ per
cent on the ascertained " value" of the property. But on what prin-
ciples that "value " was to be ascertained, Congress did not specify.
An earlier act (of 1913) had directed the Commission to make a
v^luatiow of the railroads, the underlying intent then being to
ascertain how far there had been overcapitalization. But no tests
or principles of capitalization or of value had been set up; nothing
more than some question-begging phrases. The act of 1920, tho it
made a far-reaching use of the figure supposed to represent the
fair value, left the principle on which value was to be settled as
beclouded as before. This sort of question-begging is common in
our legislation to a degree that sadly tasks the patience of the dis-
cerning. The original regulating act (of 1886) prescribed, for
example, that rates should be "reasonable," without the remotest
intimation of any principle or rule of "reasonableness." The acts
of 1913 and 1920 provided that the "property value" of the several
railroads should be ascertained; not only without a definition of
value but with a prescription that several divergent and indeed
inconsistent principles should be observed in ascertaining it. Yet
the substantial intent was plain enough. The railways were to
remain in private hands ; competition between the newly-arranged
systems was to give the good results of rivalry in production; the
owners were to receive a moderate return on a capital-value ascer-
tained by a hit-or-miss process but designed to be somehow equit-

440 PROBLEMS OF ECONOMIC ORGANIZATION [64-§9

able. In effect, the new policy was one of delegated management:
complete and all-ramifying control, a fair return virtually guaran-
teed on the railways as a whole, and "reasonable" rates prescribed
in the sense that they should be such as to yield this fair return
and no more.

How long can such a system endure? On the answer to this
question depends the trend of public policy not only for the rail-
roads but for a great range of other industries. It was freely
recognized in 1920 that the plan then adopted constituted the last
trial of private ownership and operation in the United States.
Should it not prove successful, the next step must be public owner-
ship once for all. My own judgment is that ultimately this step
will be taken and should be taken. The march toward public
management may indeed be slow. A half-way plan like that es-
tablished in 1920 may endure for a considerable period. But the
radical change will come in the end. Just as supervision and
control by commissions began modestly, first with mere supervision
and publicity, then with growing control, finally with regulation of
minute details as well as of the general rate of return on capital;
so the plan of delegated management, of a sort of partnership,
will be followed by complete assumption of ownership and man-
agement. Democracy sooner or later must undertake this great
adventure. Of its dangers enough has been said in the preceding
pages; nor can any open-minded person, however ardent for the
betterment of mankind, however hopeful of ulti»mate benefit,
look forward to its course with a light heart. The difficulties to
be faced are bound up with all the problems of democratic govern-
ment, of political and social progress. But to this sort of task we
must gird our loins.

CHAPTER 65
Combinations and Trusts

Section 1. Combinations in restraint of trade and the common law rule mak-
ing them void. Surprising effectiveness of this rule, 441 — Sec. 2. Mod-
ern forms of combination in the United States: the "trust," the holding
company, the unified corporation. The Kartell in Germany. The fact of
monopoly, not the form of combination, the important thing, 443 — See.
3. The permanency of combination as affected (1) by the economies of
large-scale management; (2) the devices of "unfair" competition — railway
favors, discriminations in prices, factor's agreements, advertising devices.
The effective defense against "unfair" competition is not from legislation
so much as from large-scale competition, 447 — Sec. 4. Will large-scale
competition persist? The pressure from constant accumulation of fresh
capital. Potential competition, and the possible emergence of far-sighted
management tinctured by a sense of public responsibility, 452 — Sec. 5.
The possible public advantages of combination lie in the mitigation of in-
dustrial fluctuations. The supposed ruinous effect of competition to be
judged from this point of view, 4.55 — Sec. 6. The legislative problems.
Federal regulation called for on publicity, capitalization, eventually per-
haps on profits and prices, 458 — Sec. 7. The earmarks of monopoly: size,
profits, discriminating prices, 460 — Sec. 8. Legislation in the United
States. The act of 1890 and its enforcement. The acts of 1914. The
Federal Trade Commission, 461 — Sec. 9. Economic problems have
outrun political capacity for dealing with them, 463.

§ 1. Attempts at combination and monopoly are as old as in-
dustry. In European countries, during the earlier stages of their
economic development, such attempts were subject to prohibition
and penalty. During the modern period, the trend has been, until
very recent years, to let them take care of themselves, competition
being relied on to keep prices at a fair or normal level. In English-
speaking countries it was long supposed sufficient simply to prevent
the enforcement of agreements for combination. Under our com-
mon law, contracts in restraint of trade are void. They are not
punishable; but they cannot be enforced in the courts. Just what
constitutes a contract in restraint of trade, such as the courts will

441

442 PROBLEMS OF ECONOMIC ORGANIZATION [65- § 1

hold void, has been the occasion of nice legal discrimination. Some
agreements which restrict competition are adjudged to be "rea-
sonable," and the parties to them will be held to their contracts.
Others are adjudged to be "unreasonable," and will not be en-
forced. The line of distinction is in principle clear enough: those
agreements are bad which tend to bring a range of prices higher
than that ensuing under free competition.

It is astonishing how effective this simple policy of indifference
has been. Combinations, pools, and price agreements among man-
ufacturers and dealers have been among the most common phe-
nomena of modern industry. Almost invariably (unless bolstered
up by some independent cause conducive to monopoly control)
they have gone to pieces of themselves. The persons forming them
have been both shortsighted and covetous. It has often been the
case that all would have made larger gains if all had stuck to their
restrictive agreements. But each has been desirous of increas-
ing his own particular gains, and each has been suspicious of his
associates. The usual result has been that price combinations are
no sooner made than broken, with much lament that there is so
little honor among these gentry. Even where the would-be mo-
nopolists have held together for a while, competition from outside
has soon caused their compact to crumble away. The outside com-
petitors also have been covetous and shortsighted, failing to see that
their own entrance into the field tended to destroy the very gains
in which they were trying to share. The truth is that few men,
in business or in other doings, look beyond the present and imme-
diate future. Had they a more resolute and intelligent eye to
ultimate results, the policy of letting people try at monopoly, but
refusing legal sanction to their monopolistic agreements, would
have proved much less effective.

In our own day the situation is changing fast, at least in manj^
directions. Far-reaching plans and ultimate results play a greater
and greater part in industry. Still more important is the fact that,
as large-scale production spreads, the number of individual estab-
lishments diminishes, and the entrance of new competitors grows
increasingly difficult. The attempts at combination become

65-§2] COMBINATIONS AND TRUSTS 443

more persistent and ingenious, and the eflficacy of a policy of non-
interference becomes more uncertain.

§ 2. First among the modern endeavors in the United States to
prevent the disintegration of non-enforceable agreements and so
secure a tight combination, was the trust device, which gave to
the term "trust" the meaning now embodied in famihar usage.
Large-scale operations being commonly conducted under corporate
organization, it was arranged that the holders of stock in the
several companies to be combined should all transfer their shares
to a few selected persons as trustees; these trustees then holding the
shares, and having the rights of vote and control which belong to
titular shareholders, but being under obligation to manage the
property for the benefit of their cestuis (to use the legal phrase)
and to turn over to these all dividends and profits. Thus the
scattered owners and their enterprises would be tied irrevocably
to the combination, and the trustees, as nominal stockholders,
would control everything in their own hands; while at the same
time the summary control over trustees by courts of equity would
prevent over-reaching of the owners by these trustees. It was an
ingenious device, but, as it proved, one to which the courts refused
to give the expected legal solidity. In a test case it was held that
the ordinary machinery of the law would not be used to carry out
a scheme in effect monopolistic; and it was held further that a cor-
poration which practically divested itself in such fashion of its in-
dependence was subject to dissolution. This particular method
of securing tight combination was accordingly given up in the in-
dustries in which it was tried. The only permanent outcome was
that the word "trust" came to be attached in popular parlance to
any and every sort of combination, and, indeed, to any and every
bjrt of large-scale operation. ^

The holding company formed the next stage, and indeed is still
the prevalent stage in the United States. A corporation is formed

1 The " trust " device was first used by the Standard Oil combination. The Sugar
Refiners tried it later, and it was in their case that the courts refused to apply the
law as had been expected by the astute lawyers who had framed the scheme. These
enterprises, and the others that tried it, have all turned to other forms of combi-
nation.

444 PKOBLEMS OF ECONOMIC ORGANIZATION [65- § 2

which acquires the stocks of the several combining concerns —
either all of the shares, or enough to give control. Its directors
thus become the effective managers, just as the trustees under the
trust scheme were designed to be. The original corporations retain
their existence, and nominally continue to do business as before;
but all control is united in one board. This device, nowadays so
familiar, has the advantage, for the would-be monopolists, of
achieving the result and at the same time concealing it. It may
easily be made to appear that no combination at all has been
effected. It has other tactical advantages, too; there are wheels
within wheels, holding corporations for the original holding
corporation, and thus not only further concealment, but easy
possibility of manipulation by a small knot of insiders. These
same results are in the main disadvantageous from the public point
of view; they bring obsciu*ity, mendacity, stockjobbing, danger of
corruption. There is a strong disposition to put a check on the
holding company device, which can easily be done by prohibiting
a corporation from being the shareholder of another corporation.^
The last stage, and the one to which the others lead, is simply
that of the great or giant corporation, into which all the former com-
peting enterprises are formally and completeh' merged. The hold-
ing corporation tends to develop into this, its constituent (or sub-
ordinate) parts being deprived of their nominal independence, and
the shareholders becoming direct shareholders in the single com-
pany. For some time the indications w^ere that the attainment of
this final stage of combination would be accelerated by the very
endeavors of our law to suppress combination. Under the pro-
hibitory statute of 1890 (the so-called Sherman Act), a holding
company might be unlawful, and subject to dissolution, on the
simple ground that it obviously stifled competition between the
subordinate corporations held together by it. WTiether the com-

1 This power — to hold the stock of another corporation — never belongs to a
corporation under Enjclish and American law, unless given in express terms by the
grant of its charter from the sovereign power. In the absence of express grant,
such holding is ultra vires. Our American states have been so complaisantly liberal
in their laws as to incorporation, and have so frequently given the power, that most
people are unaware of its being dependent on specific authorization, and do not
know how easy it is — given only the will — to check this form of combination.

6o-§2] COMBINATIONS AND TRUSTS 445

pletely unified corporation, made up de novo from the others that
completely disappear as corporations, stifles competition, and hence
becomes subject to the prohibitions of the statute, is a question
much less easy to decide ; since it involves inquiry about the rela-
tions between the consolidated company and its "outside" rivals.
As will appear in the course of this chapter, it is often difficult to
make out whether such a company attains a monopoly, even
whether it strives to attain one; and still more difficult to decide
what is wise policy in dealing with such a real or would-be mo-
nopoly. Yet these problems will have to be faced before long
both by the judges and by the legislators; for the holding company
is likely to be succeeded by the form, less vulnerable before the law
as it now stands, of complete consolidation.

In Germany, and on the continent of Europe in general, a dif-
ferent state of the law has caused combinations to take a different
form. There contracts in restraint of trade are not void; they are
enforced as between the parties; but they may lead to penalization
if deemed by the courts reprehensible or inconsistent with the
public interest. The interpretation of these general principles
has been the subject of as much nicety in judicial construction as
has been the English common-law principle with regard to restraint
of trade. Broadly speaking, however, their outcome has been
plain. Ordinary agreements for pooling, fixing prices, and the like,
which are not enforceable in the countries of English law, are en-
forceable on the Continent. 1 The parties having once come to an
agreement must abide by it. Hence they are not prompted to
those devices for tighter combination which play so large a part
in our American development. The German Kartell is commonly
an elaborate organization, public and formal, which fixes prices
and prevents the members from competing with each other. In
its tjT>ical form, it includes a central sales agency, to which orders
go and by which sales and prices are effected ; and, not less impor-
tant, it provides for a limitation and apportionment of output, each

1 See the excellent article by Dr. F. Walker, "The Law Concerning Monopolistic
Combinations in Central Europe," Political Science Quarterly, Vol. XX, p. 13
(March, 1905).

446 PROBLEMS OF ECONOMIC ORGANIZATION [65- §2

member being assigned a specified amount (or proportion of a total)
within which he must confine his product. The Kartell leaves to
the individual members a greater degree of independence than any
of the American forms — the trust or the holding company or the
unified corporation ; since each member manages his establishment
in his own way. It is disputable whether the German method does
or does not lead to technical improvements more than does the
American — whether the spiu* which each German producer still
has in cheapened production outweighs the advantage from large-
scale consolidated management on the American plan. Nor is it
clear whether the German Kartell is a mere transitional stage, likely
to be followed in time by complete consolidation. There is no
such pressure from the German law toward forming an all-embrac-
ing giant monopoly ; and the course of economic development has
been slower and more tentative.

The form which combination may take is obviously less im-
portant than the fact of combination. The essential question is
whether the conditions of competition are in effect supplanted by
those of monopoly. Combination does not necessarily mean mo-
nopoly; it may mean only a regulation or modification of competi-
tion. But the object of those who plan it is to stifle comj)etition
in some degree, and to secure greater gains than competition will
permit. In the United States, a new goal of business ambition
appeared in the latter part of the nineteenth century (more specifi-
cally, in the decade 1880-1890) : business leaders began to scheme
for full monopoly, not only in the industries of unified plant, but in
ordinary manufacturing industries. The Standard Oil enterprise
was the first conspicuous instance; the Sugar Refining concern was
another. Both proved financially successful to a marvelous de-
gree. Toward the close of the century a veritable rush for similar
combination took place over a great range of industries. At the
same period in Germany the Kartell of the coal mines proved stable,
increased the profits of the mine owners, and served to raise in even
greater degree the quotations for shares in their companies. Here,
too, a conspicuously successful cage led to a rapid spread of combi-
nation. The trust problem suddenly appeared full-fledged.

65-§3] COMBINATIONS AND TRUSTS 447

§ 3. Two different questions present themselves. One relates
to the permanency of the combination or trust: whether it wull
have advantages in methods of production which will enable it to
hold its own and bring financial gain to its promoters. The other
is concerned with its effects on the public: whether it brings ad-
vantages for the organization of industry toward the general good.
These two sorts of possible advantage we may consider in order.

The permanency of a combination, or its success in the business
man's sense, depends partly on the real economies which it makes
possible, partly on some tactical advantages or so-called "unfair"
advantages.

The real economies of combinations are chiefly those of large-
scale production, and have been already considered. ^ They vary
from industry to industry, and, within a given industry, vary from
time to time vAth the progress of invention. No general rule can
be laid down regarding them. Only the test of competition and
experience can decide whether an establishment produces more
and more cheaply' as it grows larger and larger. The special ques-
tion presented in this regard by the trust movement seems to be
whether a combination of establishments, each one of which is large
enough to secure the utmost mechanical efficiency, can yet be so
managed as to produce more economically than the several estab-
lishments when independent; in other words, whether large-scale
management adds something to the gains from large-scale produc-
tion in the narrower sense. Here, too, it would appear at first sight
that the matter may be allowed to settle itself. Let them fight it
out, and let that form of organization survive which does the work
most cheaply.

The question arises, however, whether the "unfair" advantages
of a great combination may not enable it to overcome rivals, even
tho these can produce as cheaply and serve the public as well. May
not the great producer secure tactical advantage from mere size,
mere length of purse, mere pressure thru influence and threat and
manipulation, which will enable him to destroy his smaller yet
equally serviceable rival?

i See Chapter 4, § 4.

448 PROBLEMS OF ECONOMIC ORGANIZATION [65- §3

One tactical advantage, much referred to in the debates on this
topic, has arisen from preferential rates, in the way of rebates and
the like, on our American railways. The notorious special rates
secured by the Standard Oil Company were of great aid in enabling
that combination to crush or absorb its rivals, especially in its
earlier stages. Other great combinations enjoyed similar favors,
and, like the Standard concern, threatened to become masters of
the railways. Tho one great cause which led to this evil in former
days — the peculiar pressure to which a railway is subjected when
competing with rivals — has been weakened by growing consoli-
dation among the railways themselves, another source of similai
danger has come from the widespread dominance of the persons who
engineer the trusts. The concentration in the control of great
industrial, banking, and transportation enterprises has threatened
an interrelation of " interests ' ' and a moneyed oligarchy over great
stretches of the industrial field.

None the less, the influence of this factor in promoting and main-
taining trusts has probably been exaggerated. Special rates were
part of the general chaos of railway rates in the earlier period.
They resulted from large-scale operations, and in turn promoted
large-scale operations; and it was this general development, inher-
ent in modern conditions, which led to the general movement for
industrial combination. The evil of railw^ay preferences has been
immensely diminished, almost w^iped out, by the penalties imposed
in the interstate commerce act of 1887 and the later measures of the
same sort, by the consolidation of the railway net, and by the grow-
ing sense of public responsibility in railway management. Yet the
industria' combinations have remained, even tho, like the railways
themselves, they have turned to less intriguing and irregular
methods of operation. And it would seem certain that, notwith-
standing the slow and halting progress of public regulation, and
notwithstanding the many ways of concealing an advantage
under outward forms of equal railway rates, this cause of ad-
vantage for the browbeating combination will cease to be of
importance in the future.

Other devices of combinations for getting competitors out of the

65-§3] COMBINATIONS AND TRUSTS 449

way are more direct. Simplest of all is cutthroat competition —
sales at prices ruinously low, designed to force the rival into bank-
ruptcy or absorption. Mere length of purse, without possession of
any real advantage in efficiency, may bring victory in this sort of
warfare. A similar method of crushing a competitor, more insidi-
ous and effective, is thru a partial reduction of prices, designed to
oust him from his particular field. Thus a combination which
manufactures a variety of articles may cut the price of a single one,
in order to bankrupt a rival who produces that one ; the combina-
tion maintaining prices on its other articles, and thus offsetting in
part or entirely its loss on the contested one. This result is also
secured if the combination can discriminate in prices on one and
the same article, lowering the price where there is competition
but maintaining it elsewhere.

All su h maneuvers were again and again illustrated in the his-
tory of the Standard Oil Company, the archetype of the industrial
trust. In its sales of illuminating oil — which was the main
product — its method, carried out with remarkable skill, was to sell
to retail dealers only. In the phrase of the mercantile community,
it did its own jobbing In the regions where there was competition
from other refiners, it cut prices ruthlessly. But it kept prices
up in other regions where there was no competition, and so main-
tained its own profits. This policy would have been difficult to
carry out had it sold to jobbing wholesalers, since these not only
compete with each other over widely extended markets, but know
of each other's doings and buy and sell among themselves. Each
retailer, on the other hand, covers a limited region only; he does
not compete with distant retailers, or concern himself about the
prices at which they buy and sell. Obviously', some geographical
limitation on its competitors was also essential to the successful
working of this device; the competitors must have been kept from
reaching the retail market at all points, either by transportation
rates higher than those granted to the Standard, or by the isolated
location of their refineries.

Still another device is the factor's agreement, so called — a con-
tract with a dealer (wholesale or retail), by which he agrees to sell

450 PROBLEMS OF ECONOMIC ORGANIZATION [65-§3

only goods produced by the combination. If the combination has
a "line" of goods which are estabhshed in public favor, the dealer
feels that he must have them. If many dealers are coerced or
cajoled into buying these, and these only, a rival producer on a
smaller scale finds great difficulty in marketing his more limited set
of goods.

A possible influence of the same sort appears in advertising.
Mere effrontery in puffing your wares is an important factor in
modern trade. The advertising problem is a curious one. It is
not easy to say just how far advertising serves a good purpose, how
far it means waste. No doubt, it introduces new contrivances,
promotes variety in production and consumption; and it is often a
means of useful competition. But sometimes it is a weapon of de-
structive competition. Among articles equally good, that which
is systematically paraded is likely to be most readily sold. People
are led to buy Smith's wares rather than Jones's. One might sup-
pose that if Smith's wares were equally good, and were sold at a
lower price (made possible by eliminating the advertising expense),
he would hold his own in spite of Jones's preposterous puffing.
But, in fact, Jones's wares are preferred; some vague impression
of superiority is produced by the incessant boasting. Plentiful
cash is the sifie qua non of an effective advertising campaign. The
large producer, or would-be monopolist, has here again a tactical
advantage.

The same is true of other means for popularizing your goods —
prizes, premiums, gifts, pictures, what not. These delude the pur-
chaser into the belief that he is getting something for nothing.
Like mendacious advertising, they rest on the gullibility of man-
kind, and are effective in proportion as they are carried out on a
large scale. The Tobacco combination in the United States has
practised the arts of advertising and of premium-giving syste-
matically and successfully ; success being promoted by the fact that
for its commodity goodwill and the brand are of special importance.

It has been proposed to deal with some of these tactical devices
by legislation. Intentional cutthroat competition — the lowering
of prices for the express purpose of driving out a rival — is to be

65-§3] COMBINATIONS AND TRUSTS 451

made unlawful. It is to be made cause either for a civil action for
damages by the threatened competitor, or for criminal prosecution,
or both. Discrimination in prices is also to be made unlawful. A
producer is to be compelled, under penalty of civil or criminal law,
to sell at the same prices to all applicants and in all markets. He
is to be dealt with as the law now deals with common carriers, who
are under obligations to do business for everybody on the same
terms. Neither cutthroat competition nor discriminating prices
are now under the ban of the law in English-speaking countries.
They are not punishable, or cause for civil suit, under the common
law nor usually under statutes. Underlying this state of the law is
the belief in the efficacy and usefulness of unfettered competition.
The public good is supposed to be promoted by allowing every
competitor to press every other as bitterly as he chooses. The ques-
tion fairly arises whether we must not admit that here, as in other
directions, competition, on the plane and wuthin the bounds hith-
erto traditional, fails to work for the general good.

The case is plausible for such changes in the law. Unless one
is a convinced socialist, and believes that monopoly is simply a
welcome forward step toward the eventual assumption of all indus-
trial management by the state, every measure that aids in main-
taining "fair" or normal competition is good. It may be that the
situation is hopeless, and that over a wide and widening range of
industries nothing can stay the march of combination and mo-
nopoly. At least let all be done that can be done toward checking
the ominous tendency.

Not too much, however, should be expected from legislation of
this kind. There are those who believe that, unless there be other
causes leading to monopoly, changes in the law on competition will
suffice to prevent that control of industry and that eventual rise
of prices at which exterminating competition aims. But unless
"fair" competition is strengthened by economic forces — by in-
dustrial conditions enabling the independent producer to hold his
own — little is likely to be gained by this method of staving off
the growth of monopoly.

Such legislation is, in its nature, difficult to enforce. What is

452 PROBLEMS OF ECONOMIC ORGANIZATION [65-§4

cutthroat competition? Mere lowering of prices is the ordinary
salutary result of competition. Intention to wipe out a competi-
tor, the only thing which the law can make cause for action, is dif-
ficult to prove. Cost of production, fair price, deviations in market
prices — these cannot be settled with the precision essential in
legal procedure. They are necessarily notions of some vagueness.
A prohibition of a factor's agreement, again, is easily evaded. All
that needs be done is to abstain quietly from dealing with the
trader who on his part persists in dealing with the would-be
monopolists' competitors. A suit at law based on a remodeled
law of "fair" competition would be a very uncertain defense
against monopolistic aggression.

The effective defense is found only when Greek meets Greek —
when the big monopoly meets with a big competitor. All the de-
vices of "unfair" competition are devices of the large producer
and the long pm'se. One whose purse is equally long will endure
cutthroat competition equally well; will meet discrimination with
discrimination, will make his own factors' agreements. Large
producers will be able to compete, even tho the law of competition
remains unchanged. The real question is whether competition
among large producers will be permanently maintained.

§ 4. With regard to the permanency of competition between
large-scale producers, two conflicting forces or tendencies meet;
and it is not easily foreseen which will prevail. On the one hand, the
competitors are likely to cease fighting and to combine. Where the
growth of large-scale operations reduces the number of individual
establishments to a dozen or so, they are almost sure to get together
sooner or later. On the other hand, the rapid increase of savings
and of surplus for investment causes an incessant search for profit-
able openings. At the same time the supply of managing ability is
constantly enlarged and varied with the rise of fresh generations
of capable business men. New capital and new ability will be
turned to every industry that offers large profits; and so long as
this is the case, monopoly gains will not be all-pervading, but con-
fined to a comparatively limited range.

There can be no question of the possibility, nay the probability,

65-§4] COMBINATIONS AND TRUSTS 453

of some sort of agreement among the large-scale producers. These
things go very much by tradition and habit; and the former indi-
vidualistic traditions are broken among the capitalists themselves
as well as among the social philosophers. The notion of getting
together and ceasing from competition is becoming a familiar
one, and is thrusting aside the older feeling of pride in indepen-
dent management. It is extraordinary how far the experiments
in combination have been carried; not only to those industries
where but a few large establishments — a dozen or so — are left
in the field, but to those where the number is thirty, fifty, even a
hundred. It is true that the larger the number, the more dif-
ficult it is to form an effective trust, and the more probable it is
that competitors will remain or will reappear. It would be difficult
to say within what limits the movement is confined by the techni-
cal conditions themselves.

One special obstacle in the way of getting capital to embark on a
large scale in competition with the great combinations has arisen
from the consolidation of banking operations and the concatenation
of these with the trusts. New investments on a large scale are
hardly possible without being "financed." The financial leaders
are often in a tacit understanding not to get in each other's waj'.
In the Germany of pre-war days, where the consolidation of bank-
ing had proceeded farther than in the other countries, each one of
the great banking institutions had under its wing a set of industrial
ventures. A newcomer finds it difficult to get the opening wedge
of a banker's backing. Something of the same sort is true in the
United States also. It is not probable, however, that this obstacle
to newly competing enterprises will be permanent. The constantly
accumulating savings must find an outlet somewhere, and no com-
bination can prevent new banking firms from arising, with new
financial and industrial leaders, who will try to break into the
jealously guarded preserves.

Among the forces which are likely to give a new start to compe-
tition, we must reckon not only the unceasing accumulation of
capital and the ambition of new business men, but the possibility
of decay in the management of the combination itself. A success-

454 PROBLEMS OF ECONOMIC ORGANIZATION [65-§4

ful combination is commonly brought about by uniting in one or-
ganization the largest and best-managed enterprises in a given in-
dustry; the lesser establishments being bought up or "frozen out."
Initial success is due to the ability and prestige of the leaders. As
time goes on, new leaders must be found. But nepotism is likely
to appear in the established management. Competition, which had
brought the original managers to the fore, no longer acts to bring
about in the combination itself the sm-vival of the fittest. True,
goodwill and prestige go a long way, and it is easier to hold a posi-
tion of command than to attain it. But the economies of large-scale
management, as well as the tricks of "unfair" competition, can be
learned by others; the stimulus of ambition is most powerful among
those who have their fortunes to make; and any settled enterprise
— be it a trust, a bank, a newspaper — is in danger of dry-rot.

Whether or no, as the outcome of these contending forces, com-
binations and trusts will prove to hold their own permanently, it
seems certain that in the ordinary manufacturing industries, even
in those where large-scale operations prevail, nothing but a pre-
carious and limited monopoly can result. The trust must be al-
ways on its mettle, always on the watch against interlopers. These
may be browbeaten or bought up; nevertheless new ones will con-
stantly appear if the profits are very high. The trust may become
a dominant form of organization, and, by good management, may
maintain itself permanently without bringing about true monopoly
prices or extraordinary profits.

There is therefore the possibility — perhaps the most hopeful
for the immediate future — of a tempered sort of combination
under far-seeing management and with some sense of responsibility
to the public. The guiding spirits may wisely conclude that com-
petitors must be faced, and that it is good policy to keep profits
within limits that will not tempt newcomers. Such is the outcome
expected from "potential competition": unified control, a stable
course of industry, but prices and profits not greatly different from
what would result under competition. Very likely the profits of
the commanding corporation would be liberal, but dependent, after
all, chiefly on sustained good management.

65-§5] COMBINATIONS AND TRUSTS 455

Such a turn for the better in the combination movement may be
promoted by pubhc regulation — of this more presently. Much
will depend, also, on the state of mind of the business men and
the well-to-do property-owners. Tho these still worship the money-
maker, the pervasive movement for promoting the common interest
which has so profoundly affected social legislation and economic
thought is beginning to make its impression on their ambitions
and ideals also. More is heard of fair profits and fair prices,
legitimate methods, honest gains, a "reasonable" regard for the
public — phrases used in a vague and question-begging way, but
none the less significant of a tempered attitude. The monopolist
is not a popular person. Even tho he shelter himself in the
compan}^ of those to whom money is the sole test of distinction,
he feels the sting of general reprobation. This change in public
feeling works in favor of that sort of management which is both
moderate and farsighted, is perhaps a matter of shrewd ex-
pediency as well as of higher spirit, at all events promotes the
general interest.

§ 5. What now are the possible advantages of combinations for
the community — of combinations, that is, so large and so nearly
all-embracing as to portend monopoly?

The only one seriously worth considering is the avoidance or
mitigation of fluctuations in industry. The irregularities of pro-
duction and employment are among the black sides of the existing
re'gime. The removal of chaotic competition can perhaps do some-
thing to check them. It is argued that, as a great ship can hold
its course regardless of wind and wave, so a great combination can
disregard financial disturbances and carrj^ on its operations con-
tinuously.

The possibility exists; but much depends on the trend of devel-
opment in the combination movement. It is quite conceivable
that it may intensify rather than mitigate fluctuations. A gam-
bling promoter and a patched-up combination; an attempt to raise
prices and profits; plenty of watered stock, with speculation and
manipulation; the rise of competitors; a sudden puncturing of the
inflated enterprise and a collapse on the stock market, followed

456 PROBLEMS OF ECONOMIC ORGANIZATION [65-§5

by a period of uncertainty and reorganization — these are familiar
episodes of recent times. They do not make for economic steadi-
ness. Perhaps they are but transitory, and will cease as the limits
of combinations are better gaged by the investing and business
public. There may be a development of farsighted management
and stable combination, and therewith the lessening both of specu-
lative and of industrial irregularity. The United States Steel
Corporation has attempted to moderate the fluctuations in an
industry which has been peculiarly subject to them, and, it must
be admitted, with some promising results. It is true also that
among the railways the process of consolidation has checked the
former alternations from feverish new construction to complete
standstill. Real gains for the community would come if industrial
growth could be made to take place more systematically and con-
tinuously.

Another supposed gain from combinations, in some ways allied
to that just considered, is in the elimination of the supposed ruinous
effects of competition. Under modern conditions, it is said, com-
petition is maintained to the last ditch. "VMien a great plant is
once started, it will be kept going so long as anything at all over
operating expenses is earned. Railway competition best illus-
trates this sort of extremity (tho accentuated by the peculiar con-
ditions of railway transportation). Any industry having large
fixed capital is in a similar case. From all of which it is concluded
that unchecked competition will inevitably be carried to the point
of general disaster and that combination is the sole means of sal-
vation.

The argument has some foundation; but it cannot be carried far.
No doubt, there is an analogy between the capitalist producer who
has a going concern with large plant, and the unorganized laborer.
Both have to face a tendency to competitive undercutting of stand-
ard prices. Neither can wait without loss. Just as the laborer's
working power goes to waste if not used, so the capitalist's plant
and overhead organization bring a definitive loss when they are
idle. Hence, a wholesaler or "jobber" can play off one producer
against another, and nibble away at " f air " prices. Hence, too, the

65-§5] COMBINATIONS AND TRUSTS 457

disintegrating influence of competition on the minor conditions
of the bargains. There is disguised price cutting by manipulation
of discounts, by allowances for packing and freight charges, by easy
interpretation of what are damaged goods. Similar disguised cut-
ting of the standard rate takes place when laborers are overcharged
for tools and materials (in the case of miners, for example), or are
called on to work overtime without extra pay, or to submit to ma-
nipulation of piecework rates. The analogy must not be pressed too
far. The capitalists are not so likely to suffer seriously as the labor-
ers, nor is their bargaining so much weakened by the lack of stand-
ardized definitions. Yet some analogy there is. In both cases
there is a chance for the purchaser to play off one seller against the
other, and in both there are causes which justify permanent organ-
ization for combined action.

This is far from saying that a tight and exclusive combination is
necessary to protect the sellers, whether capitalists or laborers. An
organization for standardizing competition is a very different thing
from one for eliminating competition. Yet many persons of the
business class talk nowadays as if competition were necessarily
ruinous to producers, and as if there were no escape from disaster
except thru the trust or Kartell. Competition does not go on auto-
matically, or irrespective of the ultimate outcome. The troubles
of capitalists from "excessive" competition will bring in time their
own cure. People will not continue indefinitely to invest in in-
dustries whose profits are wiped out by cutthroat underbidding.
The real source of difficulty for the capitalists, not clearly perceived
by those who say that modern competition of necessity works dis-
aster, is the constant pressure of new accumulations for investment,
and the constant tendency to a decline of profits in known and es-
tablished industries. From this pressure the business and invest-
ing public is always trying to escape, partly by the wholesome pro-
cess of improvement, invention, and the opening of new fields,
partly by the noxious one of combination and monopoly.^

The real evils to the body politic from "ruinous" competition,

1 Compare with what was said on this topic in Chapter 41, on Overproduction
and Overinvestment.

458 PROBLEMS OF ECONOMIC ORGANIZATION [65-§6

and the real gains which combinations may bring, are of the sort
mentioned a moment ago: they bear on the steadiness of industry.
Competition does tend to alternations between feverish activ-
ity and dull depression. Combination may conceivably mitigate
fluctuations. If it does so, without bringing a tyrannous mo-
nopoly — if the peace and order be not those of despotism — a gain
of no mean social import will have been achieved. To repeat, it is
by no means certain that this desirable outcome will be reached;
and in any case it is a very different one in its public aspects from
that preservation of profits thru the elimination of competition
which the business and investing classes are disposed to welcome.

§ 6. In this state of uncertainty concerning some essential
elements in the problem — such as the gain in efficiency from
large-scale management, the potency of unfair competition, the
mitigation of cyclical fluctuations — there is inevitably a lack of
agreement concerning appropriate legislation. The underlying
question of all is disputed: shall there be acceptance and regula-
tion (or at least expectation of regulation), as in Germany, or stern
repression, as in the United States? Even if the latter policy be
considered settled, troublesome questions arise concerning the
method of applying it, and the incidental practices which may be
permitted or regulated. For the time being, something like a
Fabian policy is alone practicable.

None the less, in developing a legislative policy such as the
United States is committed to, resting on the suppression of mo-
nopoly and the enforced maintenance of competition, some things
are tolerably clear. Legislation may begin on certain lines, the
results of experience being awaited before proceeding further.

The most obvious thing to be secured is greater publicity, thru
regular reports, with supervision of books and records by public ac-
countants. Tho publicity is in great part a matter between in-
vestors on the one hand and promoters and managers on the other,
and so far not of the first concern to the general public, it is none
the less of much importance to the public ; for there is need of infor-
mation on which to base legislation. We know too little about the
extent to which combination has brought monopoly conditions,

65-§6] COMBINATIONS AND TRUSTS 459

and know even less about the likelihood of its bringing them
in the future.

Publicity will promote that better sort of management which has
just been referred to — management more honest toward invest-
ors more farsighted in competition, more moderate as regards
prices and profits. How far a turn for the better will come in these
matters, how far private industry will become tinctured with some
sense of public responsibility, remains to be seen. Effective pub-
licity will aid in turning the course of development in this better
direction.

Another object of control should be capitalization. Here, too,
the interest of the public is an indirect one; capitalization is pri-
marily a matter between investors and promoters. So far as the
public is concerned overcapitalization is not a source of monopoly
profits, but only a device for concealing them. Its regulation rests,
therefore, on essentially the same grounds as the general require-
ment of publicity. It can perhaps be supervised with effect only
by incorporation under federal law. So long as the matter is left
to fifty-odd legislatures, there will inevitably" be some complaisant
or indifferent states which will virtually nullify a watchful and re-
strictive procedure adopted by the majority. Federal incorpo-
ration will seem to many persons a drastic step. However unwel-
come centralized control of this kind may be, it must be admitted
among the possibilities of the future.

One immediate and important phase of the control of combina-
tions is the "holding company." It may be going too far to pro-
hibit at once any corporation from holding the shares of another.
At the least, full information should be had as to these interrelated
companies. The wheels within wheels are often merely devices
for concealing the real situation, or for easy rotation of control by
a few insiders. Genuine publicity will be secured, and effective
regulation made possible, only if the whole story is put on public
record.

The various forms of "unfair" competition call for attention:
perhaps mere definition, perhaps regulation, perhaps stern inhi-
bition. This is a thorny matter, as has already been indicated.

460 PROBLEMS OF ECONOMIC ORGANIZATION [65-§7

The common law on unfair competition may need to be revised;
yet this part of the legal situation seems to be itself in a state of
flux and uncertainty. It is not clear that amendatory legislation
is called for, still less clear what shape the new enactment, if needed,
should take.

Control of profits and prices is a more drastic step, and one not
often formally proposed. It is obvious enough that this is the
thing ultimately aimed at. As in the case of the public service
industries, the essential thing is the effect on the distribution of
wealth. Publicity, supervision of capitalization, regulation of
competition, all look to this main end. Perhaps comparatively
mild measures will suffice to prevent "undue" profits and "un-
reasonable" prices. But if the mere suppression of overt com-
binations fail to achieve the desired end, control of profits and
prices must be resorted to. It may be direct regulation of rates,
like that of the Interstate Commerce Commission on railroads.
It may take the form of regulation of profits thru taxation of exces-
sive gains. In either form it will be difficult enough, necessarily
entailing a stringent supervision of accounts. The open-eyed
observer of industrial changes must face it as a possible measure.

§ 7, One troublesome problem will present itself at the very
beginning of any attempt at systematic legislation: how define
the thing to be regulated? What, in the eye of the law, shall con-
stitute a combination or monopoly or trust? The law cannot use
rough and approximate conclusions or statements, such as often
suffice for the economist. It must define in precise terms. What
are the earmarks of a monopolistic combination?

Mere size is not conclusive. A concern may be of huge extent,
as to capital and output, and yet may not control the output in
such manner as to bring to itself monopoly returns. Nor is pos-
session of the field a conclusive indication. In current discussions
it is sometimes assumed that when a "trust" produces 50 or 60 or
70 per cent of the output in a given industry, it is virtually in
absolute control. This by no means follows. The trust maj'- have
vigorous competitors, or ma}^ be under farsighted ("conserva-
tive") management with a view to staving off such competitors.

65-§S] COMBINATIONS AND TRUSTS 461

A more certain test would seem to be found in large profits, on a
scale much beyond those expected under competitive conditions.
Yet here too caution is needed. Large profits, of 20 and 30 per
cent on capital and more, are constantly secured in industries sub-
ject to unfettered competition; sometimes under the influence of a
favorable turn in the market, more often because of high managing
ability. None the less, long-continued high profits, on a great
scale and spread over a large capital, are suspicious. Thirty per
cent on a capital of a hundred thousand dollars may not be an un-
usual return for a man of ability; but the same rate of return on a
capital of a million, still more on a capital of ten millions or a hun-
dred millions, cannot be steadily secured under competitive condi-
tions.

Again, discrimination in prices constitutes, as we have seen, a
symptom of monopoly; yet here also only if long continued and on
a considerable scale. ^ Some discriminations arise naturally from
competition and the higgling of the market, from the endeavor to
stave off the consequences of an oversupply, from the wish to in-
troduce goods in a new market without "spoiling" the accustomed
price in the old. It is only where one set of buyers are continu-
ously charged prices substantially higher than are charged to others
that we smell monopoly.

The strictly economic indications, however, are not easily ap-
plied in legislation. I suspect that, certainly as a first step, the
law must go by the mere fact of size. All large concerns — large in
terms of capital or of output — may be compelled to conform at
least to the requirement for report of the simplest facts, such as
capital, output, and profits. Such information, continuously se-
cured for a series of years, will serve as the basis for further inquiry
and very likely for further legislation.

§ 8. The American policy of repression was long a flat failure.
For some fifteen years after the passage of the Sherman Act of 1890
the efi^ect of all the prohibition and penalizing was nil. Not only
did the old combinations go undistm-bed, but in the closing years
of the nineteenth century there was that extraordinary outburst

iCp. Chapter 15, §§4-5.

462 PROBLEMS OF ECONOMIC ORGANIZATION [65-§ 8

of new combinations to which reference has already been made.
The great combinations were not driven into hiding. The busi-
ness world went on with its experiments and contests regardless
of the law of the land.

Within a surprisingly short period, however, the situation
changed. An unmistakable public opinion against trust "extor-
tions"— partly such in reality, often exaggerated — and still
more against the spectacular emergence of vast fortunes, not justi-
fied under any of the accepted economic canons, led the successive
administrations of Roosevelt, Taft, and Wilson to vie with each
other in more and more drastic applications of the law. A large
number of combinations, among them conspicuously the oil and
tobacco trusts, were haled into court and compelled to disband.
Others took the same course rather than meet prosecution. The
policy of trying to crush monopoly was resolutely put into effect.

None the less, few thoughtful persons believed that this alone
sufficed as a permanent policy. Not only those who held combi-
nation in some form and under some restriction to be the more ad-
vantageous organization of industry, but also those who were intent
on rigid suppression, looked to further legislation, less vague than
that of 1890, and with better administrative machinery for enforc-
ing its provisions. Accordingly two important acts were passed
in 1914. One, the so-called Anti-Trust Act, repeated the pro-
hibitions of the act of 1890, and added further provisions designed
to prevent holding companies, so-called interlocking directorates,
and other devices for concealed combination. The second, more
novel and more important, established a Federal Trade Commis-
sion, with large powers of investigation and supervision. Much
discretion was given the Commission. For example, it might call
for reports — i.e. seciu"e what may be termed a "round-up" of the
enterprises to be supervised — on any principle or to any extent it
saw fit. On the vexed question of unfair competition it was also
given wide discretion. No attempt was made to define what was
unfair; the Commission was simply given power of quasi-judicial
inquiry and of issuing orders, with appeal to the courts in case the
orders should be disputed. As in the analogous case of railways,

65-§9] COMBINATIONS AND TRUSTS 463

the establishment of the Commission marked the beginning of a
new era: a settled policy of control, but no hard and fast settle-
ment of the precise methods by which control was to be exercised.

§ 9. No problem of public policy or public regulation is solely
economic. Thruout, the political aspects as well as the economic
must be considered. The trust problem like the others raises not
merely the questions of supervision, regulation, of fixing prices or
paring profits, but also those of devising and working the needed
political and administrative machinery. The right men must be
found, must be given secure tenure and adequate remuneration,
must be able to carry out deliberate policies undisturbed by popu-
lar impatience and partisan recrimination. How slow has been
progress in the political organization of American commonwealths
need not be said again. Nor need it be said again that the average
of intelligence and character, the stuff of which the community is
made, constitute the foundation on which must rest all political
and social betterment.

In almost all directions, it must be confessed, economic problems
have outgrown government capacity for dealing with them. Not
least is this the case with the trust problem. Modern industry has
marched to huge agglomerations, whose chiefs acquire power and
wealth not consistent with the ideals of democracy and equality.
The political agencies have not proved adequate to deal with these
giants. Public control is imperative; in many directions public
ownership and management loom up as inevitable. But parlia-
mentary government, representative institutions, elective officials,
divided jurisdiction between central and local authority, demar-
cation and limitation of the powers of legislators and administrators,
are not adapted to cope with the pressing tasks. Our institutions
have been largely inherited from the days of simpler industry and
simpler society, from a stage when power in public personages was
feared and assumption of control by the state was deemed danger-
ous. Political traditions hark back to the days of despots; economic
preconceptions to those of wagons and sailing ships and small
factories. An overhauling of the methods and principles of govern-
ment is a necessary part of every program of reform for the future.

CHAPTER 66

Socialism

Section 1. Proposals for large-scale socialism have superseded those for
isolated communism. The essence of socialism is economic transforma-
tion; changes in religion, the family, political institutions, are not essen-
tial to its program. Nor is violent change essential, 464 — Sec. 2. Land
and capital to be in public hands; not necessarily pubhc property in every
instance. The peculiar problem as to agricultural land. Wages to be
the only form of income. Exchange and money in the socialist state, 467
— Sec. 3. Guild socialism; under larger-scale industry, it leaves the
problems essentially the same, 470 — Sec. 4. Three conceivable prin-
ciples of distribution: need, sacrifice, efficiency, 474 — Sec. 5. How far
public ownership, as adopted in present society, is socialistic; how far
labor legislation and the like are so, 478 — Sec. 6. Some current objec-
tions to socialism are of little weight; for example, that the huge organi-
zation is impracticable, that goods could not be valued, that capital could
not be accumulated. Would freedom disappear? 480.

§ 1. To the socialists, the conclusions of the preceding chapters
will seem not only uncertain, but childishly uncertain ; and legisla-
tion such as is there described will seem a feeble palliative for a
deep-rooted disease. The outstanding fact, they say, is the col-
lapse of competitive industry. Combination and monopoly are
the inevitable result of the machine processes and of large-scale
production. Legislation cannot prevent monopoly, nor can it pre-
vent its concomitant of ever growing inequality. The bourgeois
economist only palters with the situation when he weighs the pros
and cons of competition and combination. The bourgeois legis-
lator, whether he tries to repress or to regulate combination, is
trifling with a force that is irresistible. The evolution of indus-
try necessarily brings full-fledged monopoly. The ultimate out-
come is plain: the state will expropriate the monopolists and will
manage all large-scale industry for itself. Socialism is the one goal
and the one gospel ; it is the desirable and the inevitable end.

464

66-§ 1] SOCIALISM 465

Socialism proposes to do away with the system of private prop-
erty, and especially with that system so far as it leads to great
inequalities. It proposes, above all, to do away with the leism-e
class, and with incomes from interest or rent — to allow only
incomes secured by labor.

In the first half of the nineteenth century, schemes for small-
scale socialism were rife. They contemplated select communi-
ties, oases in the competitive desert. There men, having left the
selfish life, should share things in common, without strife or vic-
tories or privileges. Such communities have been established in
many countries, most frequently in the United States, where the
spirit of freedom and non-interference, if it has led to great lengths
of individualism, has at least permitted men to experiment freely
with communism. Usually the societies or associations which have
tried these experiments have been communistic in the narrower
sense; that is, all things have been shared in common, and all mem-
bers have been on one level in respect of income. But such com-
plete leveling is not an essential feature. It is quite conceivable,
and not inconsistent with the ideals of the societies, that leaders
should be distinguished not only by their position of leadership, but
in some degree by their income as well. Usually, too, the societies
have had a religious basis. This also is not an essential charac-
teristic; some have been frankly unreligious. It is true that those
infused with a religious spirit have lasted longest, and have been
most successful both in worldly and in spiritual waj's. As a rule,
the experiments have collapsed, after a comparatively short period
of trial; yet a few, under leaders of commanding personality and
fervid religious spirit, have had long and interesting careers.
Harmony, the Shakers, the Oneida community, the Amana
Society — these are some noted cases in the United States.

The history of the small communities, however, counts for little
in the modern socialist movement. Like most things of to-day,
socialism looks to large-scale operations, not to petty experiments.
It proposes a complete transformation of all society. Machinery
and huge industrial enterprises, the minute division of labor, the use
of great plant, transportation and exchange on a great scale — these

466 PROBLEMS OF ECONOMIC ORGANIZATION [66-§l

are to continue ; but all under public management. No corner of
society is to be left untouched by the process of transformation.

This transformation is to be economic only; or, at least, accom-
panied by other changes only so far as they may result inevitably
from those of an economic sort. It is true that many socialists
advocate changes in other great social institutions also — in
religion, in the family, in political organization; and to some among
them such changes seem as essential as changes strictly economic.
Yet there is diversity of opinion on these matters; and the socialist
ideal does not necessarily lead to any one policy regarding them.
It is conceivable that the socialist state should concern itself not
at all with religion, as little as does the state in our American
society. Equally possible and consistent would be support to dif-
ferent denominations, such as that given by German states. Prob-
ably the majority among the unqualified socialists are frankly
unreligious; but some deeply religious persons, devoutly attached
to existing churches, are frankly socialistic. At the least, complete
tolerance of all forms of worship and belief would seem to be beyond
question in the transformed society. Again, in the family and the
institution of marriage, no great outward change seems to be neces-
sarily implied. Some socialists believe in a looser connection be-
tween the sexes than that of marriage for life; but there is no reason
why their society should not maintain the present relation. The
responsibilities of parents to children, it is true, would inevitably
be different from what they now are — of this more will be said in
the next following chapter. Still, marriage, the family, the home,
might be expected to remain very much as they now are. Nor is
any particular form of political organization essential. Here, to
be sure, there is a greater approach to unanimity among the social-
ists than on some other points. To most of them their economic
program seems the legitimate and inevitable outcome of democ-
racy. Yet one of the keenest among the socialists, Rodbertus,
looked to the permanent maintenance of a monarchical form of
government; and one of the greatest of philosophers, Comte, who
sketched an ideal organization virtually socialistic, believed that
it must have an autocratic head.

66-§ 2] SOCIALISM 467

Lastly, socialism does not necessarily imply revolution or vio-
lence. Most well-to-do people of the half-educated sort associate
it with the red flag and a reign of terror; just as most of them find
no epithet of condemnation so conclusive as "socialistic." It is
true that the most influential socialist thinker of modern times,
Marx, was frankly a revolutionist. He believed that the existing
regime could not be abolished without violence, and his preaching,
was inflammatory. Other socialist thinkers, no less ardent, look to
a peaceful change; some to a rapid one, even tho peaceful; some
to a slow evolution that will lead to the transformed society by
gradual, orderly steps. Marx's own followers, tho loyal to his
general teaching, are now much less truculent than was Marx him-
self. The most thoughtful and kindly disposed among the social-
ists — and brotherly love, rather than hatred or envy, underlies
the movement — look not even to any hasty dispossession of the
present property-holding classes. These might be pensioned in
some way — assured of their present income, or at all events of a
comfortable income for themselves during life and even for their
children. The indefinite continuance of a set of persons w^ho are
(from the socialist point of view) mere drones is indeed incon-
sistent with socialist principles; but the process of getting rid of
them may be a gradual and peaceful one, entailing no serious
suffering for any individual.

§ 2. The essential end which socialism tries to attain is ajcLange
in distribution. By way of attaining this, and primarily in order
to attain it, the machinery of production is to be made over. More
accurately stated, the machinery of production is to be turned over
to other hands — transferred from its present owners into the
ownership and management of the state. All land, all factories,
workshops, railways, all the instruments of production, are to be
public property. All the advantage which such things bring, in the
way of increasing the productiveness of labor and the output of in-
dustry, are to go to the community as a whole. No part of the
advantage is to be got, as now, by private owners.

This does not mean that all ownership of property shall dis-
appear. It is sometimes said that socialism must fail because it

468 PROBLEMS OF ECONOMIC ORGANIZATION [66-§2

runs counter to a deep-rooted instinct of ownership and property,
showing itself from the child's grasping of its toy to the avarice of
the aged. The socialists reply that, whether or no there be such
an ineradicable instinct, ownership is not to disappear. One may
have one's own clothes, furniture, and books and household posses-
sions, may save one's own money, perhaps even possess a house.
Only such forms of consumer's wealth as may readily give rise to an
"unearned" income are to be kept out of private hands. The
ownership of dwellings, to be let at a rental by one person to
others, could not be permitted; for this spells inequality and a pos-
sible privileged class. But it would not be out of the question
that a person should possess a house of his own bought with sav-
ings; as one might own a piano or a horse. These things might
also be transmitted by inheritance to children. Only ownership
of investments of any kind, and dealings with things as investments
to yield an income, would seem necessarily tabooed — no con-
tracts of lease allowed, or payments of rent or interest. The details
of a Utopian community have an attraction for many people who
amuse themselves by specifying just how dwellings might be owned
and inherited, how turned back to the state at a valuation if the
possessor wished to make a change, how let by the state as universal
landlord. So one might speculate on the extent to which sale or hire
of other durable consumer's goods might be permitted — furniture
or pianos. The essentials in regard to the ownership of property in
the socialist state are that, so far as it is in private hands at all, it
shall be susceptible of wide diffusion, shall not give rise to anything
in the way of " funded " income, and shall not be cumulative.

A curious change has taken place recently in the attitude of many
socialists in regard to land. The unrelenting socialist, classing
land as obviously an instrument of production, would leave it all in
the community's hands and would have all gains from it guarded for
the community. Of late there are signs of some withdrawal from
this extreme position. The change is due, especially in Germany,
to the impossibility of rousing even an interest in socialism, not to
mention adherence to it, among the millions of small land proprie-
tors. Each owner clings to his few acres; and the socialists are

66-§ 2] SOCIALISM 469

beginning to consider whether there is any reason why he should
not be allowed to. Private ownership of agricultural land, where
it is in the hands of those who themselves till it, gives rise to no
great inequalities and to no considerable unearned gains. On the
other hand, concentration not only of ownership but of manage-
ment in the hands of the state suggests problems difficult in pro-
portion to the difficulty of great-scale farming. Why not let the
small and moderate farm owners ("peasant proprietors") stay as
they are? This would mean quantitatively a large breach in the
strict socialist doctrine, but qualitatively nothing to be much re-
gretted. The tenure of the farmers might be that of lease-holders
on long term, with fixed rentals; and the state would surely reserve
the right to take possession of the site if it should become unusually
valuable {e.g. thru the discovery of mines). Urban land, mines,
manufacturing sites, would in no case be let out of the community's
hands. Where large-scale agricultural operations proved neces-
sary, they might be undertaken on some sort of cooperative plan.
Here, too, there is a temptation to speculate on possible details, and
to work out a Utopia to one's own satisfaction. Agricultural land
presents problems of its own in existing society, and would do so in
any socialist organization. Yet it may be doubted whether it
would prove possible to retain the essentials of private property
and management here, after they had been swept away elsewhere.
Distribution in the socialist state would be in one way very
simple. Wages would be the only form of income. Rent and in-
terest would disappear. There would doubtless be pensioners and
paupers, but no leisure class — no set of able-bodied persons living
in prosperous idleness. Business profits would exist onlj^ in a
strictly limited form, as wages of management. A carping critic
might say that the rent of land could not really be done away with,
since it results necessarily from the inherent differences between
natural resources The socialists would have to admit that in this
sense a rent — a differential return to some sorts of labor and effort
— would remain. But the private appropriation of rent would
cease. The excess of return on the better sites would in some form
or other go to the community.

470 PROBLEMS OF ECONOMIC ORGANIZATION [66-§3

Exchange would proceed in the sociahst state very much as it
does now. Exchange is part of the machinery of production, and
that is not to be disturbed. There would be warehouses and shops,
constant passage of goods from factory to counter, daily purchase
of goods by consumers. All middlemen and all shopkeepers (virtu-
ally all — might there be exceptions for some hucksters?) would be
"business men" in the employ of the state and receiving its wages.
There would be money, too; presumably metallic money, because
this is clean and durable. The devisers of Utopias have some-
times pictured something else — labor tickets, quite different from
the traditional sort of money. Things for sale in the shops might
be labeled with the amounts of labor which their production had
involved — all the labor, remote and near, direct and indirect.
Each producer would receive tickets in proportion to the amount of
the labor he had performed, and would use these tickets as money.
Thus each person would buy the product of precisely as much labor
as he had himself performed. Such an arrangement assumes an
apportionment of wages on a strict labor or sacrifice basis. Of this
aspect of the case, more will be said presently; certainly the de-
termination of the prices of goods would necessarily involve a prin-
ciple of distribution among the wage receivers. But labor tickets
and the like fanciful devices signify nothing. The essential things
would be to have stable prices and stable money incomes — no
rise or fall in the value of money, no problems of appreciation or
depreciation, no crises, no dislocation of the machinery of exchange.
The quantity of the circulating medium would be adjusted to the
quantities of things bought and sold, and to a given scale of prices
for them; in a manner analogous to the present adjustment of the
quantity of subsidiary coin to the occasions for its use. The prices
of things would not adjust themselves, as now, to the quantity of the
circulating medium. This medium we may suppose to be bright,
clean gold and silver and copper — or any of them. But the
mining of these metals as well as the manufacture of the coins would
be government operations.

§ 3. A variant of the socialist proposals which came into vogue
in England during the early years of the twentieth century is that

66-§ 3] SOCIALISM 471

for guild socialism. It looks to some modification of the full com-
mand of industry by the state, to a division of powers and func-
tions, to some elasticity in a scheme accused of being too rigid. The
control and management of industry are to be in the hands not of
the public or its representatives, but of the organized workers.
The railway workers as a group are to operate the railways, the
coal miners the coal mines, the cotton operatives the cotton mills,
and so on. Each group is to include not only the manual workers,
but the clerks, superintendents, managers. The owners, as own-
ers, are of course to be dispossessed and property income is to dis-
appear. Ownership of property, so far as there is any such thing,
is to be vested in the guilds. The term "guild" is applied to this
sort of organization, because it is supposed to resemble that of the
medieval guilds.

The association with medieval traditions implied in the termi-
nology is less significant than is the relation to the militant element
in the contemporary labor movement. Within the workmen's
union there is half-concealed dissension between the more con-
servative and the more radical factions. The conservatives think
of the unions as means primarily of strengthening the men's position
in the existing system. They may admit socialist phrases in the pre-
ambles and in the declarations of principle, but their heart is not in
such matters. The radicals, often the younger among the leaders,
have set their hearts precisely on these. For them the bargaining
union is merely the preparatory phase, the first step, in the assault
on the whole capitalistic structure. In the labor organizations of
the Continent, and especially of France and Germany, this outlook
toward a fundamental reordering was conscious and deliberate
almost from the start. In Great Britain the reins of policy were
long held by the less imaginative, more restricted, more sober-
minded, as they were in the United States also; yet with a growing
tendency to reflect on what might be the ultimate goal. A possi-
ble goal, readily indicated by the organization of workers in the
existing unions, is the complete control and management of the
several industries by the unions. The romantic and aesthetic spec-
ulation, the moral idealism of the guild socialists, mean little to the

472 PROBLEMS OF ECONOMIC ORGANIZATION t66-§3

revolutionary unionists; but they are quite ready to join hands
in subjugating and dispossessing the capitahsts, and developing
the existing institutions of the workers into self-governing bodies,
each of which shall own and manage its own compartment in the
industrial system.

Something more must obviously be elaborated than this general
notion of an individualist collectivism. The several compart-
ments must be brought into relation with each other. No group
could possibly be allowed to go its own way quite without let or
hindrance. Some coordination must be arranged; some super-
vision must be exercised by a controlling general authority. The
proponents of the ideal do not fail to face this need. They
elaborate schemes for general councils and like representatives of
the public interest, which shall curb any selfish policies of the
particular guilds or unions, and see to it that all work together for
the common good. The details of such schemes need not concern
us; they have the same fascination and the same futility as those of
other Utopias. Within the limits of a book like the present it is
possible and profitable to consider only some outstanding aspects.

In the first place, it is to be remarked that all this is quite dif-
ferent from producers' cooperation. Sometimes indeed the guilds
have imagined a modest beginning, a preliminary peaceful assump-
tion of one corner of an industrial compartment. Steps of this
kind would be quite like the endeavors of laborers to organize work-
shops of their own on a cooperative bas's. Cooperative enter-
prises, however, must begin and must maintain themselves in com-
petition with the existing enterprises of the business world. They
must accumulate their own capital thru their own savings. They
mu t submit to a period of trial, and alas! must expect, in view of
the almost universal experience of their kind, to succumb after a
shorter or longer trial. No; if the displacement of the employing
capitalists is to be achieved, something much larger must be set up,
more ambitious, more proof against an unequal competition. Not
an occasional single business within an industry, but each industry
as a whole is to form the unit of organization. And all the existing
businesses are to be taken over at one swoop, their outfit of plant

66- § 3] SOCIALISM 473

and supplies utilized as it stands; no puttering self-help by
struggling cooperators. Each single great "guild" will have a
monopoly of its field. No competition of any kind is to remain.
Tho this may be in a sense producers' cooperation, it is exempt
from the trials and the tests which in previous experience have
proved insuperable for that form of organization.

In other words, large-scale conduct of industry is no less an in-
herent part of this socialist program than of any other. The guild
is a huge trust, more completely in control of its industry' than any
capitalist trust ever has been. The size of the unit renders futile
one endeavor which has played a part in the movement — the
endeavor to escape the centralization of control under full socialism,
the intricate administrative machinery, the bureaucratic stiffness.
No escape from these difficulties is offered by guild socialism.
Under the stress of modern technique and of large-scale operations
its problems can no more be made simple than those of any plan
of public management.

With large-scale operations come two fundamental tasks: the
establishment of a^ wa:gea system and the selection of leadersT" A
wages system there must be, in the sense of a settled scale of re-
muneration for men who are working at things which they do not
themselves consume. In that sense, they must be hired. Hire
by profit-seeking capitalists is not essential; "wages" on the basis
of short-period and terminable engagements are not essential. A
sort of "salary" arrangement is quite conceivable. Somehow,
nevertheless, men must receive at once the wherewithal for their
living while they are at work in the manifold stages of an intricate
division of labor. The question of the scale on which they shall be
paid cannot possibly settle itself. Some authority, even tho it be
of the town-meeting type, must arrange the terms on which each
is to receive his share of the consumable goods and services. There
will be no remuneration except wages; yet the problem persists, on
what principle the assignment of wages shall be made to the several
individuals and the several t^-pes of workers.

And leadership there must be. The huge machine will not run
itself. Some one, some group, must be in command. Discipline

474 PROBLEMS OF ECONOMIC ORGANIZATION [66-§4

there must be, a tautness of organization, obedience to the orders
of superiors. Who shall select the leaders, and what promise is
there that those qualified for leadership shall be chosen?

These requirements cannot be escaped. No spontaneous or self-
regulating organization is to be conceived as possible. The
notions of the eighteenth-century optimists, that the inherent
goodness of men, once released from the trammels of an artificial
society, will lead each to fly to his proper station and do his proper
task — all this is no longer worth discussing. Leadership and di-
rection and organization, that is, bureaucracy of some sort, there
must be, under private ownership and management or under pub-
lic, under communism or state socialism or guild socialism. And,
to repeat, some principle of remuneration must be set up. The
apportionment of income must be settled. How are we to con-
ceive that these requirements shall be met?

§ 4. The crucial question of distribution, then — in fact, the
only question of distribution in a socialist state — would be that
of wages. On what basis is the pay of different sorts of workers to
be fixed? There are three conceivable principles of apportion-
ment: need, sacrifice, efiiciency.

Distribution according to need would be the simplest of all; for
it would mean that all shared alike. It is true that men's capaci-
ties for enjoyment are different, and their needs correspondingly
different. Some are sensitive by nature; to such, plain fare and
cheerless surroundings will always be more distressing than to the
average man, and ampler means will be a greater source of pleas-
ure. And apart from differences in sensitiveness, he who works
with his brains doubtless needs, for full efiiciency, better surround-
ings and greater variety in occupation than the manual worker.
But considerations like these could not seriously affect the general
consequence that distribution according to needs would lead to vir-
tual equality. The seeming diversities in the keenness of desire
and enjoyment are due chiefly to habituation. Those bred to com-
fort and refinement are sensitive because they have been made so.
The socialist state could pay no attention to such differences.
And tho it might logically pay attention to other differences not

66-§ 4] SOCIALISM 475

due to the established habits of far-separated social classes — to
differences between weak and strong, between sensitive and coarse
persons — the divergences from the rule of equality could hardly
be considerable. Still less could they be made acceptable to the
rank and file. There is no way of measuring how far differences
in capacity for pleasure are real, how far fanciful. Virtually, dis-
tribution on the basis of need would mean that all should share
alike.

This is perhaps the highest ideal; it conforms to the highest
pitch of altruism. It has usually been accepted in the communis-
tic societies which have been under strong religious influence. It
is more or less consciously the ideal of those who find "socialism"
in the teachings of Christ. But it is not proposed, at least not
overtly, by most socialists. Many persons think that leveling is
an essential part of socialism. Great mitigation of existing in-
equalities does seem to be universally demanded by socialists; and
a lurking predilection for complete equality is found in the usual
propaganda. Nevertheless, almost all socialists have in mind,
even tho vaguely, some differentiation in the individual incomes.

The second principle, of sacrifice, means that men should be
paid in proportion to the irksomeness of their labor. If all labor
were equally severe and equally distasteful, this would mean that
men should be paid in proportion to the time (hours and days) of
their labor; for, on the whole, a day's labor or an hour's labor
means as much to one man as to another. The principle of sacri-
fice as measured by labor-time underlies the notion of an intrinsic
or necessary value in commodities, resulting from the incorporation
of labor in them. Marx had a doctrine of this sort. Value was
said to be so much embodied labor, a kind of labor-jelly; value being
regarded not as a mere matter-of-fact phenomenon in exchange, but
as a something inherent in economic goods. Quantity of labor —
such quantity as is ordinarily and reasonably necessary — was sup-
posed to settle this inherent value. The doctrine really has in
mind the principle that goods ought to be exchanged in proportion
to the labor needed for producing them ; and this, again, means that
all labor ought to be remunerated on the same basis; hence that

476 PROBLEMS OF ECONOMIC ORGANIZATION [66-§4

differences in duration and disagreeableness of labor should alone
be the occasion for differences in its remuneration. In such a
mechanism of exchange as was referred to in the preceding sec-
tion (the use of labor tickets), goods would be valued according to
the quantity of "socially-necessary" labor involved in their pro-
duction, and sold on that basis.

In a scheme for an ideal society, which was much discussed some
years ago,i it was proposed that all laborers should be paid at the
same rate, but that the hours of work in different occupations
should be adjusted in such way as to make sacrifice or irksomeness
the same for all. Let the pleasant sorts of labor have long hours
— those of superintendence and government, for example, since
"bossing" seems always to be agreeable. Let the dirty and heavy
labor, such as mining and ditch digging, have short hours. Read-
just the hours if it should appear, from the deficiency or excess of
applications for the several employments, that this handicapping
by the length of working time was not accurate. The proposal is
no more to be taken as an essential part of socialism than any other
detail in the sketches of Utopia. But it brings out clearly the prin-
ciple of equality of sacrifice : not pay at the same rate for all, but
pay at such rates as to bring the same sacrifice for all.

Equality of sacrifice rests on an ideal of liberty. Sacrifice,
hardship, irksomeness, are subjective feelings. They can be meas-
ured only by giving men choice of what they shall do, and judg-
ing of their feelings according to that choice. Tacitly the assump-
tion is that equality exists in the capacities of men, and that all can
turn at will to the several sorts of labor; or, at least, enough per-
sons can turn freely to make it perfectly feasible to get a full quota
for each sort. If we assume that all men have the same inborn
abilities, and that there are no obstacles to free choice of occupation
from custom, expense of preparation, or social environment —
then precisely this kind of adjustment of wages would ensue in an
individualistic society. The only differences would be those that
served to offset the varying disagreeableness of different sorts of
labor.2

1 Bellamy's Looking Backward (1888).

2 Compare what is said of differences of wages, above, Chapter 47.

66-§ 4] SOCIALISM 477

Very dissimilar is the third principle, that of remuneration ac-
cording to efficiency. This says that each man shall be rewarded
in accord with his contribution to the social income. The able,
strong, and alert shall get more, the dull and weak less. The out-
come would be in many cases quite the opposite of that from the
principle of needs, under which the strong are likely to get less,
the weak to get more.

Remuneration according to efficiency seems to most persons
just. We think it right that he whose work accomplishes more
shall get more pay, that an efficient man shall be paid at a higher
rate than an inefficient one. The principle assumes, too — tho
this assumption often is not consciously made by those who reason
on it — that efficiency is not the same for all, some having greater
capacity than others. Remuneration according to sacrifice tacitly
assumes perfect liberty of choice; remuneration according to effi-
ciency tacitly assumes that not all men can do all things, and that
not all are equally sedulous.

The ready acceptance of efficiency as a just basis of reward is
the result of its being the basis on which reward in now in fact ad-
justed. In existing society men are paid for labor, on the whole,
according to what they contribute to society; or, to be accurate,
according to the marginal contribution of their sort of labor On
this matter, as on others, most persons accept as just that to
which they are habituated. The real ground on which remunera-
tion according to efficiency is to be justified is the utilitarian one.
It spurs every man to contribute his utmost. The argument for
it is the argument from the bribe. On the most altruistic ethical
standard, there is no reason why the strong man should get more
than the weak; nay, rather, there is ground for his sharing freely
with the weak. The reason why he should get more is simply that,
unless he is so rewarded, he is not likely to exert his strength. In
the end — this is the essence of the argument — all men are better
off when each is induced to contribute his utmost. If indeed all
men are born with equal gifts and have equal opportunities, the
final result will be the same as under the second principle — all
will be paid in proportion to sacrifice. Every one will be spurred

478 PROBLEMS OF ECONOMIC ORGANIZATION [6&-§5

to turn his labor to the occupations which are highly rewarded ; in
these, numbers will increase and reward then will diminish; ulti-
mately, only those differences will remain which correspond to
differences in irksomeness. But if there are inborn differences in
capacity, some men will always get more than others, even tho
opportunities be the same for all. The resulting inequalities must
be accepted as necessary in order to induce every man to exercise
his own faculties, and to exert himself in acquiring by training and
assiduity those faculties which bring about high efficiency and high
reward.

Not many advocates of socialism have expressed themselves
clearly on this fundamental question: what is the just or ideal
apportionment of reward for labor? Often they think loosely and
fail to discriminate among the possibilities. The trend among
them, on the whole, is toward the second principle ■ — that of remu-
neration according to sacrifice. Strong as is the underlying "pro-
test against inequality, few would accept squarely and without
qualification the first principle — that of equality. Few, again,
would be willing to accept all the consequences of the third prin-
ciple. Often they ignore inborn differences, believing in the per-
fectibility of men; and in any case the great differences which flow
from eward according to efficiency would not be in accord with
their general striving for equality. Tho only half conscious of
doing so, the socialists are apt to propose or imply some sort of com-
promise: some inequality, but not very much; some adjustment
to efficiency, but not so much as to lead to marked inequality. Df
the diflSculties and problems which must emerge, more will be said
in the next chapter.

§ 5. Before further consideration of the meaning and possibili-
ties of socialism, it may be pointed out wherein socialism differs
from public ownership, and from the humanitarian legislation
which is often described as "socialistic."

Public ownership does not mean socialism as to distribution,
that is, as to the thing essential. The state, in owning and operat-
ing railways, proceeds in much the same way as a private com-
pany does. It pays high salaries to the managers at the head, less

66-§ 5] SOCIALISM 479

salaries to subordinate officials, ordinary wages to mechanics and
unskilled laborers — thruout on a scale like that prevailing in the
world outside. No doubt, there is a tendency to mitigate existing
inequalities. The higher officials often get less than persons of
the same capacity would get in private employment; tho this,
again, has not infrequently the result that the officials are not in
fact, as they are supposed to be and ought to be, of the same
capacity as those in private employ. In democratic countries the
mechanics and unskilled laborers are often paid more than they
would be paid by private employers. These are no more than
differences in degree, however, and rest on no clearly conceived
principle. As a general rule, the existing differences of wages are
accepted in public business management.

Again, public ownership does not do away with the leisure class.
When the state turns to railway ownership and operation, it buys
out the private owners, who thereafter receive their income from
other investments. Such purchase often results simply in an ex-
change of public securities for corporate securities. The same
consequence ensues when the state sets out to own great works
from the beginning (as the Australian colonies did in building
their railways). It then borrows the funds, and pays interest to
the creditors. The leisure class still gets its income.

No doubt it is true that public ownership means an endeavor to
mitigate inequalities in distribution. Monopoly returns are to be
done away with, or (what comes to the same thing) are to be appro-
priated by the community. This is by no means inconsistent with
the conduct of the great mass of industrial operations by private
hands, with all the resulting phenomena of private property —
inequalities in earnings, savings and accumulation, investment,
a leisure class, a stratified society. There is a vast difference be-
tween the mitigation of present inequalities and the complete re-
moval of the causes which lead to the inequality characteristic
of the existing regime.

Similarly, the whole series of social reforms, from the regulation
of the large-scale industries to factory legislation and old-age pen-
sions, has a limited range. It looks also to the mitigation of ine-

480 PROBLEMS OF ECONOMIC ORGANIZATION [G6-§5

qualities and of the results of inequalities. All these measures
serve to determine the plane on which competition shall proceed
without putting an end to competitive bargaining or competitive
returns. Factory legislation, for example, workmen's insurance,
even minimum wages, fix the limits within which the bargains
shall be adjusted, but do not attempt to settle the bargainings.
The case would be different if the state were to go to the point of
actually fixing wages, say by a method of compulsory arbitration.
This, as has been said already, involves a principle more far-
reaching than the other forms of labor legislation ; since, carried to
its logical conclusion, it calls on the state, by fixing wages once
for all, to settle the other elements of distribution as well as
wages.i

It may be said, of ( ourse, that all these things — public owner-
ship, regulation of industry, labor legislation — rest on the same
principles and ideals as socialism, that they look in the same direc-
tion, and that they will lead ultimately to a socialistic state. They
do rest on the same or similar impulses — a wider altruism, a grow-
ing impatience with great inequalities. So far they look in the
§ame direction. Their ultimate outcome is by no means neces-
sarily the same. That outcome may be a purified and better
society, still organized on a basis of property and of free bargaining.
Oddly enough, the advocates of socialism and its extreme oppo-
nents alike have a vague and all-embracing conception of the
movement, the former by welcoming every step for reform as " so-
cialistic," and the latter by stigmatizing with the same name every
measure to which they object. Little is gained by such discussion
toward understanding the problems really involved in the scheme
of a radical reorganization of society.

§ 6. Some current objections to socialism are easily met.

It is said that the scheme is too huge, the difficu'ty of organiza-
tion insuperable, the actual operation sure to break down because
of the extent and complexity of the industrial problems. The
large-scale enterprises of modern times go far to dispose of this
objection. The possibilities of organization have been proved to
J See above, Chapter 59, § 6.

66-§6] SOCIALISM 481

be immense. When we see how railways and industrial enter-
prises are successfully conducted on a vast scale under unified
management, we cannot say that the mere difficulties of manage-
ment and operation would be insuperable under socialism. In
fact, many of the problems of production, exchange, transpor-
tation would be simplified. Fluctuations and uncertainties would
largely disappear. Only the nevitable irregularities of the seasons
would have to be reckoned with. Overproduction of any one
commodity could easily be set right, by simply waiting until the ex-
isting supply was disposed of. There could be no ruinous under-
bidding by frantic competitors, each rushing to market in the fear
that the other would undersell. It is true that the system, order,
regularity, which the socialists may fairly claim as belonging to
their society-, may mean also stagnation — the cessation not
only of change, but of progress. This, however, amounts to saying
not that administration and management are impracticable, but
that they would not be as progressive as they might be.

Again, there would seem to be no insuperable difficulties in the
way of valuing commodities in the socialist state. The pricing of the
goods on sale would involve, to be sure, not only accurate book-
keeping (of the cost-account sort), but the determination of the
wages of the laborers engaged in the several branches of production.
In other words, it would presuppose a scheme of distribution
among the laborers. This as already intimated, and as will
presently be further shown, is a crucial matter. But supposing
the principle or standard to be settled, the next step, that of fixing
a price for the goods produced by different kinds of labor or dif-
ferent combinations of labor, is not more troublesome than it is
now for a great manufacturing establishment. Often enough, in
existing industrial organization, figures of cost and price can be
reached only with approximation to accuracy; and this reasonable
approximation suffices.

Nor would "the accumulation of capital" be a matter of crucial
difficulty. It would simply proceed by a different process from
that of present society; not by savings and investments of
individuals, but by the deliberate setting aside of part of the com-

482 PROBLEMS OF ECONOMIC ORGANIZATION [66-§ 6

munity's resources for new construction. As at present, it would
depend on the existence of a surplus, an excess over what may be
used for satisfying current wants. In this sense, there would be
"abstinence" and saving in the socialistic state. It would be
"abstinence," however, not by a comparatively few, but by all.
Each and every individual would have his present income cur-
tailed somewhat, in order that provision might be made for adding
to the outfit of the community Success in making such a pro-
vision would depend, of course, on the possession of a fairly high
level of income; that is, on an existing high productivity of labor.
Given a sufficient present income, there would be no difficulty in
setting aside something for addition to the community's capital.
The serious problem would be whether there would be continued
progress and invention, not whether there would be the means for
carrying out inventors' projects.

It is often said that socialism would be destructive of liberty.
Yet for the great majority of mankind, freedom might be no less
than it now is. Most men now find the nature of their occupations
fixed for them. Their daily round is settled virtually without choice
of their own. Change from one occupation to another of a similar
grade would seem to be no more difficult of arrangement in the
socialist state than in our own. If the dreams of the socialists
come true, there would be shorter hours for ail, and more leisure.
But greater freedom in this sense is not unattainable in existing
society. If the dreams of the non-socialists come true, toil will be
less all-absorbing, free time more plentiful. For the mass of men,
it is not clear that on the score of liberty there is a preponderance
of gain under either system.

Whether persons of unusual gifts would have greater freedom,
is again not easy to say. Unless real freedom could be secured
for them, real opportunity for development, no dreams of the
socialists could come true. A stiff and bureaucratic socialism —
and danger there is of crass bureaucracy — would stifle individu-
ality. This is a matter of the kindling of ambition and emulation,
the selection of leaders, the maintenance of progress — difficulties
which, as will presently appear, are the crucial ones.

6(>-§ 6] SOCIALISM 483

Obviously, there wouid be loss of freedom for many who now are
privileged. The commonplace persons of the well-to-do class,
with an "independence" of their own to fall back on, would have
less choice of occupation, less chance for experiment, less freedom
as to their mode of life. The abolition of the regime of privilege
would necessarily destroy some advantages of the privileged.
That elegant freedom now enjoyed by the possessors of large
funded incomes would disappear completely.

We are so habituated to the ways and traditions of present soci-
ety that we cannot easily imagine what those of a society essentially
different would be. There is no such thing as unrestrained free-
dom. Men live now within limits set not only by the need of earn-
ing their living, but by law, by custom, by the environment. In
the socialist state there would be necessarily restrictions, also, in
some respects similar, in some respects different. A bureaucratic
and semi-military socialism is conceivable which would crush in-
dividuality. A regulated and refined system of private property is
conceivable, with unfettered freedom of opportunity, in which
there would be a completeness of liberty hardly to be attained in
any socialist state. If we conceive the summum honum to be the
full development of personality, we must hesitate before saying
which sort of social organization gives the promise of the best
happiness.

CHAPTER 67
Socialism, continued

Section 1. The family and the problem of population under socialism. The
Malthusian difficulty a real one, 484 — Sec. 2. Vigor and efficiency
among the rank and file. The absence of the power of discharge. The
irksomeness of labor, 486 — Sec. 3. Leadership and the ways of securing
it. The love of distinction; can it be satisfied by the laurel wreath?
Mixture of higher and lower aspects in the love of distinction. The
possible growth of altruism, 488 — Sec. 4. The selection of leaders in a
socialist state. Genius and originality likely to be deadened, 490 — Sec. 5.
Material progress thru the improvement of capital likely to be checked.
Is a change in distribution alone now needed; can advance in production
be neglected? 492 — Sec. 6. The problem is essentially one of motive and
character. Human nature and ideals of emulation and distinction are
subject to change. Tho socialism and current movements of reform rest
on the same force, the difference in degree is vast, 493 — Sec. 7. Is
socialism to be the ultimate outcome of social evolution? The material-
istic interpretation of history and its prophecies. The certainty that
change will be gradual and the impossibility of foreseeing how far it will
finally go, 497.

§ 1. Let us now consider some difficulties in the way of socialis-
tic organization which are more serious.

Tho socialism would not destroy the home or the family, it would
bring domestic relations very different from those with which we
are familiar. The socialists are justified in scoffing at the bugbear
of phalansteries and barracks, with supposed gigantic nurseries
— quasi-incubators, in which children would be reared without
parental love or guidance. Yet inevitably the family would be in
an environment very different from that of the present, its influ-
ence much diminished, the relations of parents to children greatly
modified, the problem of population more ominous.

Education and training, it would seem must be completely
under state control. The training of the young and their prepara-
tion for a career in life could not be left to the discretion of parents.

484

67-§l] SOCIALISM (Continued) 485

At the least, it would be subject to minute public control. And,
on the other hand, the responsibility of parents for the future of
their children would virtually cease. Every child would not onlj^
be taught the fundamental things, but properly fed and cared for.
Its education would be pushed as far as the constituted authori-
ties might deem worth while. And a necessary corollary would
seem to be that every child should be assured employment, and
as good an opportunity for earning an income as any other child of
like promise.

Malthusianism was held up by the economists of a generation
ago as an insuperable obstacle to any collectivist scheme. The
socialists have commonly pooh-poohed it. It is none the less real.
The decline in the birth rate and the lessening pressure of popula-
tion which appear in the highly civilized countries, are the conse-
quences of individualism and the regime of property.^ These ten-
dencies, salutary on the whole, rest on stirred social ambition more
than on any other force. They are due to the present position of
the family, to hope for the future of one's children, to the desire
to rise in the social scale. It has been shrewdly said ^ that the
natural man has only two primal passions — to get and to beget.
The desire to beget is now held in check by the desire to get. That
removed, what would check multiplication?

This is a thorny subject, not often entered on C00II3' and openlj-
either by the socialists or their opponents. Man the animal tends
to multiply like other animals, and when he does so encounters
essentially the same obstacles as other animals. Regulation and
relaxation of the tendenc}^ to increase are imperative, yet are
fraught with dangers — physiological and moral as well as social.
These dangers and evils are ominous in existing society. So fun-
damentally different would be a collectivist organization that it
would be rash to predict just what dangers could be avoided
in it, just what would be inevitable. I cannot but fear that some
coarse and mechanical regulation of the sexual relations would
have to be resorted to; a formal retention, no doubt, of monogamy

1 See Chapter 64.

2 Bj' Dr. Osier, Science and Immortality, p. 10.

486 PROBLEMS OF ECONOMIC ORGANIZATION [67-§2

and of family obligations, yet without those concomitants which
now make the family a safeguard for public and private well-being.
The sexual relations are made pure and sweet, and safe for society,
not only by the marriage tie and the lawfulness of monogamy, but
by care and responsibility for the offspring. Without that respon-
sibility and all the ambition and affection that go with it, the ani-
mal instinct bodes vast dangers. The domestic relations which
now enshrine it are highly unselfish within the narrow range of the
family, but highly selfish as regards the rest of the world. In
their essence, they are individualistic ; and it is their very individ-
ualism and selfishness which cause them to work to social ad-
vantage. It is hardly conceivable that any new development of
public opinion, any new regulation by public authority, any
decreeing of childless monogamic unions, should replace the re-
straints, the sanctions, the motives for both industry and economy
which the individualistic family gathers about it under conditions
of free opportunity and of hope for the future.

§ 2. The maintenance of vigor, efficiency, and progress presents
problems no less troublesome, both as to the rank and file and as
to the leaders.

For the rank and file, some among the difficulties in the exist-
ing order of things would indeed disappear. There would be no in-
ducement to "make work" or oppose improvements. The fear
of unemployment, which is the main cause of the disposition to
adopt such policies of restriction,^ could not have influence in the
socialist state. The laborers who were no longer needed in one oc-
cupation or in one locality would be transferred elsewhere; if im-
mediate utilization proved not feasible, with no oss or suffering
during the transition. There would be no inducement for making
any job last.

On the other hand, there would also be no right of discharge;
none, certainly, that could be exercised with effect, least of all in a
democratic community. Criminals, tramps, ne'er-do-wells, would
indeed be comparatively easy to deal with. They could be im-
mured, kept from breeding, and, if beyond redemption, got out

1 See above, Chapter 52, § 3.

67- §2] SOCIALISM {Continued) 487

of the way painlessly. The serious problems would be presented
by the rank and file of men, not hopelessly bad, not spontaneously
good. How deal with mere slackness, indifference, the lazy
stroke? No threat of discharge could avail; for non-employment
and work-seeking are quite to be done away with. The men must
be dealt with once for all either as workers or as delinquents.

If, indeed, labor were not ordinarily irksome, and if work were
always done cheerfully and spontaneously, no difficulties would
arise. We return here to some of the very problems with which
we began. 1 It may be true that a life without labor is demoraliz-
ing and unhappy; and it is certainly true that a life of inactivitj^
is miserable. Steady abor at monotonous tasks, however, such as
is essential for the productiveness of industrj^ is evaded by almost
all men. In an ideal state, we should wish to have good work, good
pay, good leisure; but will men do good work if assured in any case
of good pay and good leisu e? Spontaneity in labor seems inconsist-
ent with large-scale operations. It is found only when men work
for themselves, or in groups where each works for all under the eyes
of all. The larger the group, and the more remote the connection
between each individual's labor and the final output, the less likely
is it that men will work faithfully without some machinery of en-
forcement and penalty. The problem is similar to that universally
encountered when taxation is resorted to for defraying public ex-
penses.2 The services being reely supplied to all thru taxation
— there being no precise quid pro quo — all grudge the taxes that
must be paid in order that government shall be able to supply the
services. Hence the mien of the tax-gatherer is inevitably harsh.
In a socialist state all ostensible workers would be assured once for
all of getting their share — on whatever principle adjusted — of the
results of collective activity; and hence some sort of pressure would
have to be exercised in order to induce vigorous and effective work.
Must not the socialist taskmaster be harsh, like our present tax-
gatherer? And what penalties shall he apply?

We may conceive, indeed, that a socialist state shall undertake

1 See Chapter 1, §§4-6.

2 Compare Chapter 68, § 1.

488 PROBLEMS OF ECONOMIC ORGANIZATION [67- §3

to adjust distribution on a basis of efficiency, and thus shall at-
tempt to apply a spur to vigor by differences in pay proportioned
to zeal and to capacity as well; frankly accepting the wide range of
differences which must result from that principle. The greatest
variations from the average or ordinary rate would then appear,
of course, for the case of the comparatively few having great gifts,
for the great leaders and administrators, the men of science and the
inventors — and surely, the poets and artists likewise. But differ-
ences of the same sort, tho less in degree, would appear in the rank
and file also. The interest of every private employer now leads him
to make distinctions on this basis. He selects for well-paid posi-
tions the steady, zealous, and intelligent, and relegates the dull and
indifferent to tasks that can be mechanically measured — or he
discharges them once for all. Is it to be supposed that public
officials, having no stimulus from any interest of their own, will
discriminate in such way as to stir zeal and intelligence, penalize
laziness and incompetency? Above all, will the public officials of
a democratic community do so?

Whether a man shall contribute more or less to the general out-
put of the community depends in most cases on his own spirit —
on his choice and will. Conspicuous ability and the temperament
that leads to its exercise present a special problem : how to discover
the ability, how to stimulate it. For the vast majority of men,
efficiency in work depends on striving, on self-imposed habits.
People do not know how^ much they can do until they are com-
pelled to try. The virtue of the system of competition, of pri-
vate interest, of self-dependence, is that it leads men to try hard.
No doubt it often fails. Among the very poor it stunts endeavor;
and there is lack of opportunity for developing latent faculties.
At the opposite extreme, many of those born to riches waste valu-
able powers. Most men, being dependent on themselves and pros-
perous in proportion as they exert themselves productively, are led
automatically to do their best. This great and seemingly indispen-
sable motive force no socialistic scheme can bring to bear with
effect.

§ 3. Similar questions arise as to leadership. All progress,

67- §3] SOCIALISM {Continued) 489

material as well as spiritual, depends on the selection of the right
leaders and on spurring them to the best exercise of their faculties.
What is the outlook for effective leadership under socialism?

The possibilities seem to me greater than some critics admit.
The essential thing, say the socialists, is to find new and better ways
of inciting emulation and satisfying the love of distinction. What
men chiefly strive for, and above all what men of leadership strive
for, is fame, place, and power. In some degree, too, they are
prompted by the mere instinct for the exercise of their gifts.
Not the poet and painter and musician only, but the man of
science and the administrator also are impelled by an instinct for
achievement. Add to this the stimulus of emulation, of wide-
spread appreciation, of conspicuous distinction, and the sordid re-
wards of present society can be dispensed with. Give free play for
the exercise of genius and power — then the ribbon and the laurel
wreath will suffice as rewards.

The psychology which underlies this train of argument is surely
better than that older one which supposed that all men have a
simple desire for wealth. Other things than riches and worldly
success appeal to the artist and the man of science. The leader
in business also responds to other and higher ideals. Government
posts even now have an attraction which goes far to outweigh the
higher pecuniary rewards of private business. The captains of in-
dustry and fortune builders are actuated by very mixed motives.
They follow the traditional paths of emulation, themselves but
dimly conscious that the wealth they pursue is, after all, but a sym-
bol of achievement and success. What stirs them more than any-
thing else is social ambition. Therefore, say the socialists, the
essential thing is some symbol of eminence that shall put its pos-
sessor above the common herd as conspicuously as riches now do.

It must be admitted that emulation and imitation underlie the
doings of industrial leaders, as of others; but it does not follow that
the particular kinds of appreciation and recognition familiar in our
system of property and inequality can be dispensed with. Coarse
men need coarse stimuli. How far will the typical person of busi-
ness ability respond to other incentives? Even among persons of

490 PROBLEMS OF ECONOMIC ORGANIZATION [67- §4

intellectual and spiritual bent, there is a mixture of motives.
Creature comforts, pride of place and power, command of the
services of others, are not entirely despised even by poets and
philosophers. As few men are wholly selfish and few wholly
altruistic, so few are wholly moved by the higher or by the lower
forms of the love of distinction. It is not often that the laurel
wreath alone is enough to satisfy ambition.

Much depends on the growth of altruism; and this again depends
on the spirit that pervades the community. The nobler and wider
feelings may be fostered or smothered in the individual by the at-
mosphere which siu^rounds him. We may expect, with the better
development of democracy, with the spread of education, the ele-
vation of character, the clearer understanding of social and eco-
nomic problems, that the environment will become more favorable
to emulation in service. A simpler way of giving rewards and dis-
tinctions will prove effective in proportion as the sense of common
interest is stronger in its hold on all. But this is a matter of slow
evolution. It is not to be supposed that a mere change in insti-
tutions will at once overturn the deep-rooted self-regarding im-
pulses or modify their paths of action.

§ 4. Another problem is that of selection. Granted that ways
can be found in the socialist state to stimulate and reward the per-
sons fit for leadership, how pick them out?

The gradations of ability, talent, and genius are not recognized
early or measured with ease. Those who show promise must go
thru a stage of trial. High intellectual capacity, unlike bodily
dexterity, does not appear at its full until long after adolescence.
Poets, musicians, painters, scholars, look back with mingled curi-
osity and amusement on the work of their early years. Often those
whose achievements in later life prove greatest could not be
singled out in youth from their competitors. Men of affairs,
especially, are bred in the hard school of experience. The more
promising are indeed readily picked out from the rank and file.
To what degree they are promising, and how far they will ulti-
mately advance, is not evident in the early stages.

No community has produced great poets, sculptors, musicians,

67- §4] SOCIALISM {Continued) 491

except by the emulation and competition of a large body of aspi-
rants. Many try, few succeed. The case is the same with men
of science, inventors, business leaders. Often it is the most
brilliant of all, in every field of achievement, who find it hardest
to make their way; because they are ahead of their time. Those
most readily gain place and appreciation who have high ability
but not the originality of genius — the poets and painters who
do that to which the general taste has already been educated, the
leaders in science and industry who apply principles already es-
tablished. On the other hand, there are always hosts of men who
undertake to break new paths, but prove not to have it in them.
The world is full of would-be geniuses and crack-brained schemers.
Persons who are now called on to take the initiative in the processes
of investment, such as bankers, hardly pass a day without having
new projects lu-ged on them — some obviously absurd, some doubt-
ful, a few promising. An exercise of good judgment is necessary
before novel enterprises can be launched with promise of success;
and then must follow a period cf experiment to test the outcome.
The same holds good as regards the selection of administrative
officers, managers, heads of large enterprises. It does not appear
in advance who has the particular qualities that make an effective
leader; least of all, who has those that make a great path-breaking
leader. .

By whom is the process of selection to be carried on when there
is nothing analogous to the "natural" selection of present society?
The discouraged and rejected will then be no longer free to seek
some one else to back their projects. They must accept once for
all the decis on of the officials in charge. Governments now find
it hard enough to do things in the ways already approved by ex-
perience, and to select for their work men whose qualities for lead-
ership have already been tested in private industry. How would
it be if the responsibility for selection and promotion were entirely
in the hands of officials? Even those public business enterprises in
which management is now most efficient are apt to be a refuge for
mediocrity, or at best for safe clinging to established methods.
Men of new ideas and far-reaching projects find no hearing. The

492 PROBLEMS OF ECONOMIC ORGANIZATION [67- §5

same reasons which lead to the conclusion that in existing society
government can advantageously take charge only of industries that
have reached the stage of maturity/ tell even more strongly against
the control by government of all industry. It is conceivable that
democracy will choose honest and efficient leaders; even this awaits
the proof of experience. It is well-nigh impossible to conceive that
any governmental organization, democratic or autocratic, will be
able to pick out the men of originating ability. A vast collectivist
organization would hardly fail to be deadening to genius of all
kind. Would not its selection of leaders be at best a recognition
of ability to do well what is already well done?

§ 5. Considerations of a similar sort apply to the development
of capital. The mere accumulation of capital in a socialist state is
perfectly feasible, as was noted in the last chapter; that is, the set-
ting aside and "saving" of a surplus. This, however, is only the
jBrst step in the process by which real capital is added to. Tools,
implements, "capital goods," are not saved; they are made. More
of them and better k nds can be made only if there is progress in the
arts. The effective increase in the community's capital can take
place only by improvement and invention.

In the sketches of Utopias, there is commonly reference to the
great mechanical improvements which will be seen in the ideal
society — vast systematic plant, automatic devices, supersession
of dull manual labor by ingenious machines. The schemers speak
as if these things came of themselves. In fact the great mechanical
advances have come in the past by slow steps, with experiments
and failures; dependent on the accumulation of surplus means,
but not caused by it. Tho the future is likely to see tools perfected
far beyond what we now possess, all such devices will come, as they
have come in the past, by trial, by selection, by evolution. There
must be not only the means for getting new capital made, but or-
ganizers and inventors. The process of merely adding to the num-
ber of existing tools and machines is easy. When once the turbine
engine and the automatic power loom have been perfected, almost
any one can make more of the same kind. To improve the loom

1 See Chapter 64, § 2.

67- §6] SOCIALISM (Continued) 493

or the turbine still further calls for a very different procedure and
a very different kind of man.

The betterment of capital is thus closely interwoven with the
selection of capable leaders. Both are essential for continued
progress. For both, existing society offers the bait of riches. With
an ideally-perfected community and with ideal leaders spontane-
ously chosen, all things are indeed possible. But under a non-
competitive organization, even in a community far advanced in
intelligence and character, there would seem to be but a slender
prospect for sustained material advance.

It may be said, of course, that advance in production is no
longer a matter of the first consequence. Better distribution may
be thought the prime requisite. If the whole income in civilized
communities were equally divided now, would not all have enough?
Possibly; the question is simply how much suffices. It would prob-
ably be a liberal estimate of the average income of a family in the
United States, the most prosperous country on the globe, if it were
stated at one thousand dollars a year.^ When we consider what
this means in food, shelter, clothing, education, recreation, we can
hardly be content to let it stand as the last stage in material prog-
ress. Surely it is but the beginning of what we may hope to see
in the centuries to come. Those who dream of the great perfections
to be seen in the socialist state, of the perfected automatic machines
and the superabundant products, thereby confess that much
beyond the present stage of productiveness is desirable. And the
more "scientific" socialists, also, when they speak of the inevit-
able victory of large-scale production, of the disappearance of the
small producer and the middle class, imply that there is still occa-
sion for those advances in the arts on which the spread of large-
scale production depends. Such advances, to repeat, do not come
by any automatic process.

§ 6. The questions between private property and socialism thus
reduce themselves to questions as to men's character, motives,

1 This on the basis of prices and money incomes as they stood before the war of
1914-18. The reader need hardly be reminded that in the use of illustrative figures
of this kind, allowance must be made for subsequent changes in monetary conditions.

494 PROBLEMS OF ECONOMIC ORGANIZATION [67- §6

ideals. They are questions, in so far, of psychology; in more
familiar language, of human nature. They are not simple, but
highly complex; because human nature is highly complex.

What is sometimes called "strictly economic" reasoning rests
on the assumption of deliberate intelligent choice of the procedure
that brings the most gain to the individual. It assumes hedonism
in its simplest form. Motives other than the self-regarding ones
are supposed to show themselves only in matters that belong out-
side the "economic" sphere — in the family relations, in religion,
in charity, perhaps in political action. Human nature is not so
simple as this, nor so neatly divided into separate parts. Men are
not wholly selfish or wholly unselfish. True, in most of their deal-
ings with strangers to the blood, they pursue their own advantage;
and it is this fact which gives validity to "strictly economic" doc-
trines. But they do not follow their advantage ruthlessly. In
the future they may follow it even less ruthlessly than they do now.
They may be restrained not only by the law, but by a higher moral
sense. Human nature varies in this regard from age to age, and
often varies for the same individual with his own changing years.
It may improve so much in the future as to make feasible plans of
social reorganization which now seem quite Utopian.

So it is with the impulses of emulation and distinction. In the
past they have turned usually to some form of domination, in ac-
cord with that instinct of struggle and conquest which we have in-
herited from savage ancestors. Power over others has been the
keynote of political and economic history. It was at the base of
the feudal system. It affects enormously, tho half unconsciously,
the struggle for wealth in modern society, whose ways of emu-
lation are still much under the influence of the feudal traditions.
The love of distinction is so universal and so rooted that it cannot
be eradicated. But it can conceivably be turned into directions
which, while still satisfying the ineradicable impulse, will lead to
a wider spread of the elements of happiness. A spirit of service
may replace the spirit of domination, and emulation may be for the
greatest promotion of the common good, not of individual interest.

We are much better men than our savage ancestors; more altru-

67- §6] SOCIALISM (Continued) 495

istic, on the whole, as well as more intelligent. Of this general
betterment the last hundred years have supplied many illustrations.
Suffering will not be endured as it was in former times; the mere
description and exposure of it means that something will be done to
stop it. The abolition of cruel punishments is a phenomenon of large
significance. The steady development of social legislation, and the
increase of charitable and educational endowments, are other results
of the sense of common interest, of the growing altruistic impulse.

From this point of view, it may be said that all the great social
movements of modern times rest on the same basis, and that all
tend away from individualism and in the direction of socialism.
Tho important distinctions exist, as has just been noted,^ between
full-fledged socialism and public management of selected indus-
tries, it may none the less be maintained that the movement for
public management and control rests on the spread of a more al-
truistic spirit. And the substitution of public for private manage-
ment is not only impelled by this higher social spirit, but depends
for its eventual success on a high level of character and intelligence.
Of labor legislation, also, it is to be said that it is both impelled by
the spread of better ideals in the community at large, and depend-
ent for its ultimate good results on betterment of character among
the laborers themselves. Thus the differences in spirit, in method,
in limiting conditions, between socialism and other movements
for reform, may be said to be only in degree.

But the differences in degree remain vast; and such radical trans-
formations in human nature and in human institutions as the so-
cialists expect are not to be looked for within any stretch of time
that concerns present generations. How far changes in men's
motives and ideals, and so in their public and private relations,
will ultimately go, it would be rash to predict. But it is certain
that they will proceed very slowly. For long ages men will remain
very much as thej' now are, responsive in some degree to the higher
and larger impulses, yet in most of their dealings with each other
acting mainly under the sway of those lower and narrower. They
will need to be spurred to vigor, to the full exercise of their powers,

J See Chapter 66, § 5.

496 PROBLEMS OF ECONOMIC ORGANIZATION [67- §6

to self-restraint, by their own needs and interests and by the selfish
altruism of the family affections. So long as this is the case, the
system of dependence on one's own exertions, of bargaining between
individuals, of private accumulation and private ownership, will
persist.

It may be suspected that the divergence of opinion on the pos-
sibilities and ideals of socialism often hinges on differences between
the disputants in character and temperament. Persons of highly
altruistic character easily believe that others will respond to the
motives that actuate themselves. Those, again, who are most
happy when engaged in useful labor, even tho it be sustained and
monotonous, believe that others will cheerfully work, as they do,
with little regard to the rate of remuneration. So it is with the
ideals of life and the ultimate sources of happiness. To some op-
ponents of socialism, its program is unattractive because it offers
a world without strife — as tame as a sport without danger. To
them, peaceful emulation, and competition solely to serve the com-
mon good, are things flat and stale. They see no zest in life with-
out the prospect of victory and therefore the possibility of defeat.
And so it is as regards that stereotyping of life which would seem to
be, in some degree at least, inevitable in a socialist state. The
advocates of individualism say: let men ruin themselves, if they
will, and bring ruin on those nearest and dearest to them ; can they
rise to heights of happiness and perfection, of full development of
personality, unless they have a choice of shaping their careers to
the sweet or bitter end? Persons of a placid temperament, on the
other hand, are attracted by peace, security, mutual help, assured
comfort; a world with no glittering prizes and no abject failures.
Freedom means different things to different people. To some,
it promises nothing unless it be the chance to compete, and to win
and to reap the fruits of winning. To others it means escape from
pain, from the need of holding one's own against superior competi-
tors, from the subjecton of defeat. Such differences in tempera-
ment can be brought into accord by no reasoning. Hence the de-
bate on the merits and attractions of private property and socialism
may be expected to go on indefinitely.

67- §7] SOCIALISM (Continued) 497

§ 7. In the preceding pages, no far look into the future has been
essayed. Only for the next few generations can we venture on
some predictions. Public ownership will spread, tho how far we
cannot be sure. The plane of competition will be raised; the in-
stitutions of property and inheritance will be narrowed in scope.
For the immediate future we see some reforms clearly called for,
others awaiting inquiry and trial. But what of the final outcome?
Will the evolution of society eventually proceed to the socialist
state?

The so-called materialistic interpretation of history, as worked
out by Marx and adopted by others of more or less socialist drift,
tries to give an explicit answer. The future will inevitably bring
the disappearance of private ownership in instruments of produc-
tion and the elimination of the property-owning and income-
receiving class. Stripped of its inessentials, the prediction is
simple enough. Large-scale production will spread further and
further; the small producer and the middle-sized will disappear;
there will remain only a few great capitalists and a propertyless pro-
letariat; the masses will become more intelligent and conscious of
their power; the capitalists will then be dispossessed (possibly but
not necessarily by bloody revolution) and the fully organized so-
cialist state will emerge.

One thing is tolerably certain: the overturn is not imminent.
At the time of the revolution of 1848, Marx thought that the final
stage in this industrial evolution was setting in. The first stage,
long extended, had been that of the direct exploitation of the la-
borer thru slavery and serfdom. During the second stage, last-
ing from the beginning of the industrial revolution in the eighteenth
century to the middle of the nineteenth century, the property-
owning class had exploited the free laborer. The third and last
stage, that o' the emancipation of the laborer thru dispossession
of the capitalist, was supposed to be ushered in by the revolution
of 1848. But of this prediction as little has been fulfilled as of the
confident expectation then cherished by others that an era of uni-
versal democratic government was setting in. The uprising of
1848 subsided, with few immediate changes in political or social

498 PROBLEMS OF ECONOMIC ORGANIZATION [67- §7

structure. Its lasting effects, fused with those of other move-
ments, came about by s ow and gradual changes. Society has been
much altered in the last fifty years, but it has not been revolution-
ized.

The socialists themselves are coming to recognize the inevitable-
ness of gradual change. A curious controversy is going on in Ger-
many within the socialist ranks, between those who hold to the
strict Marxian doctrine of impending revolution and early dispos-
session, and those who, maintaining that changes will be slow,
advocate a policy of opportunism. Marx's Caintal has been a sort
of bible in the German socialist camp. Tho the book contains,
with evidence of extraordinary intellectual ability, much obviously
untenable matter, the loyal socialists are unwilling to give up any
of its teachings. Yet the proof is brought, by socialists no less
convinced than was the leader, that his predictions as to economic
evolution are wrong. The middle class is not disappearing. The
number of the rich grows, but the number of the moderately well-
to-do grows also. Great establishments increase, but vast-scale
production does not cover the whole industrial field, and there is as
yet no indication that it will.^ Democracy extends, and the trade-
union movement grows. But there is little sign of an impending
class war, or of a resolute and conscious adoption of the socialist
principles by organized workingmen.

It is true that changes are likely to proceed more quickly in the
future than they have done in the past. The spread of education,
the ease of communication, the enormous facilities for propaganda
thru cheap printing, make public opinion more mobile. The
inertia of settled habits is less. Moreover, the last fifty years have
seen wonderful changes in industrial organization as well as in the
mechanic arts; the next fifty years may see changes as great The
consolidation of industry will probably become accentuated, and
public ownership will almost surely spread. The twentieth cen-
tury before its close is likely to see developments that would seem

1 Compare the figures already given in Chapter 55, §§ 1-3, and in Chapter 4,
§ 1. See also Bernstein's Evolutionary Socialism, English translation, p. 57. Bern-
stein is one of the best known among the non-orthodox German socialists, an able
and high-minded writer.

67- §7] SOCIALISM {Continued) 499

unthinkable to the staid American business man of our own
time.

Nevertheless, the fundamental social institutions will not be
quickly revolutionized. As compared with such an overturn as
the uncompromising socialist would bring about, the most radical
changes now in prospect will leave the face of society very much
the same. The Australian colonies now have public ownership of
railways and other great enterprises; they have compulsory arbi-
tration and minimum wages; they have progressive taxation and
the like. But they have competition and money-making, social
classes and pecuniary ambition, marked inequalities in property
and income, idle rich and overworked poor. The traveler who
journeys there finds a state of things not essentially different from
that in the United States, where the individualistic traditions
retain their hold so much more tenaciously. Society can go a long
way in overhauling present institutions without approaching the
socialist goal.

The reason why the process of social evolution is slow is that
men themselves change slowly. Not only human nature and
human motives, but the current standards of right and wrong,
the beliefs as to what constitutes right government, right owner-
ship of goods, right relations between men and between men and
women — these foundations of society are extraordinarily stable.
Even when shaken by a great upheaval like the French Revolution,
they prove in a short time to have been little disturbed. They are
maintained from generation to generation by the unseen but per-
vasive influence of example and imitation. The slowness with
which education works out results on any large scale illustrates the
difficulty of changing habits of thought and conduct among masses
of men. Better education is rightly deemed the greatest of social
solvents; but it is hard to bring a real influence to bear on the mil-
lions who are to be affected. The educational leaders tell us that
the things to be aimed at are clear thinking, accurate observation,
training in the Independent use of the faculties — above all, con-
science and character. Yet even the greatest educational advances
go but a little way toward attaining these elusive ends. How slow

500 PROBLEMS OF ECONOMIC ORGANIZATION [67- § 7

is the improvement in methods of education, how much slower the
influence on the character and the daily life of the individual!

The question none the less persists, whether there is not a goal
for the development of society. Tho one may be convinced that
the full-grown socialist state is not to come in any visible future,
may it not come in the end? I cannot believe, for myself, that it
is possible to foresee what the distant future will bring. Consider
what was the state of civilized society some four hundred years
ago, at the culmination of the Renaissance and the first stages of
the Protestant Reformation : who could then imagine what devel-
opment would take place in the coming centuries, what political,
social, intellectual, industrial changes would occur? No less im-
possible is it for us to conceive what will be the changes in the cen-
turies that lie before us. The system of private property, if it
maintains itself, is indeed likely to be very different from what it
is now; but whether it will remain unchanged in essentials, or will
be gradually stripped of many features now deemed essential, or
transformed at last into something like the socialist state — all
this we cannot foretell.

The impossibility of seeing far into the future is admitted by
the less fanatical among the socialists themselves. The abolition
of great extremes in income, a wide guarantee of decent comfort,
the disappearance of a leisure class, the assumption by the state
of the overshadowing great-scale industries, the control of all nat-
ural resources — these, indeed, seem to be essential points in their
program. Just how far gradations of income may be allowed to
remain, how far individual ownership of property may persist, what
play may be allowed for some sorts of competitive industry, are
matters on which their program is unsettled. Each is entitled to
construct his own utopia. With this haziness about the ultimate
goal, many socialists accept a tentative and sometimes wavering
procedure. The revolutionary wing is less dominant, opportunism
more widely accepted. All sorts of changes in present society are
welcomed, so long as their general drift is in accord with the col-
lect! vist ideal; such as workmen's insurance and labor legislation,
state ownership and control even within a narrow range. Cooper-

67- §7] SOCIALISM {Continued) 501

ation and trade unions among workmen are no less welcome, even
tho the scope of these movements be strictly within the system of
private property; since they are the means of educating the mem-
bers and training them in habits of common action.

It is fortunate that men of all shades of opinion can work to-
gether in the reforms that are called for in the visible future. The
ultimate outcome may be allowed to ake its own course. Little
that we now do can have much effect in shaping it. The discus-
sion of socialism is by no means barren. It centers attention on
the fundamental problems of society, on the basis of existing insti-
tutions, on the sources from which coming growths must proceed.
It points to a goal that has had charm for some of the noblest of
men. It deserves the respect even of those to whom the goal is
not attractive or to whom it seems quite unattainable. But it
affects in no serious degree present endeavors and aspirations. As
to these, there is a noteworthy accord of opinion. The course
which society should take for the next generation or two is not ob-
scure, and all men, socialists as well as social agnostics, can join
in efforts to turn it to the direction admitted by almost all to be
that of progress.

References on Book VII

W. Z. Ripley, Railroads: Rates and Regulation (1912) and Railroads:
Finance and Organization (1915), gives a wealth of information on Ameri-
can conditions. W. M. Acworth, The Elements of Railway Economics
(1905), and E. R. Johnson, American Railway Transportation (new ed.,
1910) ; the latter chiefly descriptive and written primarily as a textbook
for American colleges. On the American situation as it stands in 1921,
l.'L.t^h.arf man, The American Railroad Problem (1921). Among foreign
books, C. Colson, Transports et Tarijs (1908), technical and detailed, is of
high value.

On combinations and trusts, A. Marshall, Industry and Trade, Book III
(1919), analyzes admirably the course of development in England, the
United States and Germany. R. Liefmann, Kartelle und Trusts (1909),
gives a compact account of the German situation as it then was; and H.
W. Macrosty, The Trust Movement in British Industry (1907), a detailed
survey of that in Great Britain. Books dealing especially ^\'ith American
conditions are R. T. Ely, Monopolies and Trusts (1900); J. W. Jenks, The

502 PROBLEMS OF ECONOMIC ORGANIZATION [67- §7

Trust Problem (1900) ; E. S. Meade, Trust Finance (1903) ; L. H. Haney,
Business Organization and Combination (1914); E. D. Durand, The Trust
Problem (1915).

On public ownership, L. Darwin, Municipal Trade (1903), is an acute
critical book, by an opponent; a briefer statement of the same reasoning
is in this author's Municipal Ownership (1907). S. 0. Dunn, Government
Ownership of Railways (1913), gives effectively the arguments against.
A convenient summary is in a series of papers, The State in Relation to
Railways, pubhshed by the Royal Economic Society (1912). A mass of
information and discussion on both sides is in the Report on the Municipal
and Private Operation of Public Utilities, Published by the National Civic
Federation (3 vols., 1907). A detailed treatment of the relation of muni-
cipalities to "pubUc utilities" is in D. F. Wilcox, Municipal Franchises
(2 vols., 1910-1911).

The books on socialism deal largely with controversies which do not pro-
ceed to the heart of the matter. This seems to me to hold of K. Marx, Das
Kapital (English translation, 1891), the most famous and influential of
socialist books. Among the innumerable discussions and refutations of
the Marxian doctrines may be mentioned E. Bohm-Bawerk, Marx and the
Close of his System (English translation, 1891), J. E. Le Rossignol, Ortho-
dox Socialism: a Criticism (1907). A concise and vigorous statement,
based mainly on Marx, is in K. Kautsky, The Class Struggle and The Social
Revolution (Enghsh translations, 1910). J. Spargo, Socialism (1906), is
another popular statement of Marxian tenets and proposals. G. D. H.
Cole, Guild Socialism Re-stated (1920), summarizes the arguments for that
proposal. S. and B. Webb, A Constitution for the Socialist Commonwealth
of Great Britain (1920), grapples with the problems of poHtical organiza-
tion which a socialist program involves.

Among expository and critical books, A. Schaeffle, The Impossibility of
Social Democracy, and The Quintessence of Socialism (English translations,
1892 and 1902), are good, especially the last named. Cp. 0. D. Skelton,
Socialism, a critical Analysis (1911). An admirable historical and critical
sketch (on the wider relations of socialism, as indicated by the title) is W.
Sombart, Sozialismus und Soziale Bewegung im 19 Jahrhundert (English
translation, 1909). A compact discussion of the Hterature on sociahsm
thru the nineteenth century, and of the Social Democratic party in Ger-
many, is in H. Herkner, Die Arbeiterfrage (7th ed., 1921). The most
stimulating and discriminating advocacy and discussion of sociahsm is
often by writers who do not pretend to be "scientific." Such are H. G.
Wells, A Modern Utopia (1905), and New Worlds for Old (1908), and G.
Lowes Dickinson, Justice and Liberty,

BOOK VIII

TAXATION

, CHAPTER 68

Principles Underlying Taxation

Section 1. The essential nature of taxation: no quid pro quo. Taxes a sign
of wider consciousness of common interest, 505 — Sec. 2. Proportional
or progressive taxation? This question of justice inextricably connected
with the general question of social justice and the righteousness of inequal-
ities in wealth. "Ability" and "equality of sacrifice" are inconclusive
principles, 507 — Sec. 3. Should property incomes be taxed at higher
rates than those from labor? 512 — Sec. 4. Can taxes be made higher
according to the source or nature of the income? 513 — Sec. 5. Pro-
gressive taxation of interest from capital, on the principle of taxing saver's
rent, 516.

§ 1. The essence of a tax, as distinguished from other charges
by government, is the absence of a direct quid pro quo between
the taxpayer and the pubHc authority. It follows that a tax
is necessarily a compulsory levy. The post office illustrates the
payments which are different from taxes. A charge is made by
it for each letter; no one is compelled to contribute toward its
revenue unless he makes use of its service. The revenue from
postage stamps in almost all countries roughly equals the expenses
of conducting the business, and each individual user pays (again
with a rough approximation) in proportion to the service which he
gets. The same situation exists when a government manages the
telegraph or the rai'way But when it maintains streets, afire
department, a police force, it supplies the several services free to
every one. On the other hand every one is called on to contribute.
It is immaterial whether the individual citizen happens to be
benefited directly or indirectly; a great deal, a little, or not at all.
f What he pays to the government for a postage stamp, for a rail-
I way ticket, for a supply of water, is in the nature of a price for a
'^ specific service. It is very different from a tax, which is exacted
from all alike and without any regard to the individual's use of
the services supplied.

505

506 TAXATION [C.8-§1

This severance of payment from service is sometimes inevi-
table. To tell how much any individual is benefited bj^ the
maintenance of order thru a police force is impossible. The only
way to support the force is to cal upon every one to contribute,
in some proportion deemed equitable. The same is true of a
military force, whether r garded as a sort of enlarged police or as
an instrument for national advancement in other ways. The
benefits from the maintenance of sanitary service are also un-
apportionable. As regards fire-fighting apparatus, it is conceiv-
able that division of the expense should be made among different
owners of inflammable property on some well-defined principle of
insurance premium But it is obvious that the whole community
is vitally interested in preventing conflagrations, and the support
of this public service also takes place by the levy of taxes which
disregard any question of special benefit.

In other cases, increasing in number as civilization progresses,
the use of taxes instead of prices is not inevitable^ being the result
simply of a growing conviction of the wide usefulness of the service.
Highways, beyond the confines of cities or thickly settled spots,
were in former times often managed on the toll principle; so were
bridges. Those alone paid for them who u;.ed them, and paid
according to the extent of the use. Their construction and main-
tenance were likely to be left in the hands of private persons, to
be managed like any other business x\s the conviction spread
that freedom of movement was of general advantage, tolls were
abolished on roads and bridges and these means of communication
were supported by taxes The most striking illustration of the
movement of opinion in this direction is found in the modern atti-
tude toward education. It is entirely feasible to conduct education
as a private industry, or to manage it, if public, on a principle of
payment in proportion to the expense incurred. All civilized
peoples, however, believe it to be of vital importance that educa-
tion should be supplied to all, and should be supplied in such way
as to uplift and advance the community at large, not on any basis of"
proportional payment. No doubt, a motive even more distinctly
altruistic enters — a desire to equalize opportunities, to make the

68- §2] PRINCIPLES UNDERLYING TAXATION 507

way easier for the great masses of the poor, to mitigate inequahties
in possessions and income. Under the influence of these converg-
ing motives, education is made free; not only elementary educa-
tion, but in more or less degree higher education as well A great
range of government activity illustrates the growing conscious-
ness of common interest and the growing influence of sympathy
and altruism — libraries, museums, parks, hospitals. It has
been aptly said that the growth of those services which are sup-
ported by taxation measures a people's consciousness of common]
interest — nay, its very progress toward higher civilization.

Taxation necessaril}' involves compulsory levy. Tho people
may be unanimous in the belief that it is in the common interest
for a given set of services to be undertaken gratuitously for all,
the support of the services by voluntary contributions is quite
out of the question. There have been occasions, in times of
great national peril and of fervently aroused public spirit, when
voluntary contributions have been an appreciable financial re-
source; but they hstve been rare and short-lived. Even in the
most imminent danger, a steady and considerable revenue can
be got only by compulsion. Hence the mien of the tax-gatherer is,
as stern under a self-governing democracy as under the most abso-
lute despotism. Men's willingness to support public service does
not grow apace with their conviction of the need of public service.
§ 2. The fh'st question of principle in taxation has to do, there-
fore, with the mode of apportionment. In what manner deter-
mine how much the individual shall contribute toward defraying
the various public services rendered gratuitously? Shall he pay
simply in proportion to his income, or more than in proportion?
On this question there are two fundamentally different answers,
the one more conservative, the other more radical; the one main-
staining the principle of proportion, the other that of progression.
'- The_conserya.tive opinion, maintaining the principle of pro-
portion, is very simple. It proposes to call upon each person
to pay in proportion to his income,~and so to lieave the relations
between different incomes undisturbed. Let the rich pay more
in the degree to which their incomes are larger, but in that degree

508 yy>^ TAXATION [68- §2

only. The essential basis for this view Is that the existing distri-
bution of wealth should not be disturbed. True, some people are
more prosperous than others; some are rich, others are poor. But
these differences are regarded as defensible — nay, in the un-
qualified support of the existing social order are thought to be in
accord with the maxims of ideal justice. Since taxes must be
levied, and since it is hopeless to measure either the cost of the
public services rendered to any individual, or the benefits to him
of the services, let all be treated alike, and let all be called on to
contribute the same proportion of income. The social system
thus remains undisturbed by the tax levy; it was equitable before,
and it remains so.

A somewhat different view, but one leading to the same result,
is that the existing distribution of property and income should
not be disturbed hy taxation. If it is to be disturbed, let other
machinery for doing so be adopted. This view implies neither
approval nor disapproval of the gulf between rich and poor, merely
Indifference or aloofness. The taxg^herer, it is said, should not
be distracted by having to consider such large and difficult social
questions. His task, even in its simplest form, is troublesome
enough: to devise ways of securing the needed revenue without
arousing discontent beyond endurance. This may be described
as the simply fiscal principle of taxation: according to which
taxation should concern itself solely with the problem of raising
the money for public expenses. It leads, like the view first de-
scribed, to proportional levy and to the rejection of progression. .

Still another '' fiscal )' principle of taxation may be noted ; one
that perhaps should be called the cynical principle. According
to this, the essential task for the legislator is to get the revenue
in such way as to cause the minimum of vexation and opposition.^
Any tax is good which brings in a large net revenue without pausing
much protest from the payers, or at least from those payers who
have political influence. If in a democratic community high
progressive taxes on the rich bring in substantial returns, without
trouble in administration and without causing many voters to
revolt, let them be imposed. And on the other hand, if taxes on an

68- §2] PRINCIPLES UNDERLYING TAXATION 509

article consumed in great quantities, such as sugar or coffee,
promise a large re\enue, and can be levied by a hoodwinking
process which prevents the masses from realizing the burden, let
them too be imposed. " Pluck the goose with as little squawking as
possible." This cynical view is hardly e.ver advocated in so many
words; but a great deal of legislation rests upon it. Every finance
minister has constantly to face demands for additional revenue,
and also opposition from those whom he proposes to tax. The
temptation is well-nigh irresistible to follow the path of least re-

^^ sistance. The very great part which indirect taxes on commodities

play in the finances of all modern countries is explicable chiefly
on this ground.

The question of justice in taxation is at least ostensibly kept
in mind in most discussions. A consciousness of it underlies the
trains of reasoning, favoring strict proportion, w^hich have just
been stated — both that which affirms the distribution of wealth
to be now just, and therefore rightly to be left undisturbed by
taxation, and that which simply would keep taxation disentangled
from questions of social reform. Both of these opinions have the
merit of facing squarely a truth which many writers on this much-
debated topic have failed to face; namely, that the question of
equity in taxation cannot be discussed independently of the equity

p^of the whole existing social order.

^y- Tlie -Cojurageous advocates of progression base their views pre-

^.''cisely on the ground that the existing social order is not perfect,
and that taxation should be one of the instruments for amending
it. Even tho it be an open question whether all inequality in
wealth and income be unjust, such great degrees of inequality as
the modern world shows are regarded as not consonant with
canons of justice. Very rich persons should be called to pay
taxes not only in proportion to their incomes, but more than in
proportion. This proposal has been called socialistic; and it is, if
all measures looking to mitigation of inequality be so called. Those
who hold it place progressive taxation in the same class with
free education, factory legislation, regulation of monopolies, exten-
sion of government management — measures all of which are

510 TAXATION [68- § 2

^'' based on a desire to improve the social order in the direction of
less inequality. The extent to which they are willing to go with
progression no doubt depends on the degree of their fervor for
social reform in general; nor are they themselves able to give a
precise answer to the question often asked, how far is progression
to go? Their opponents have urged, to use a much-quoted phrase
of McCulloch's, that w^hen once you diverge from the rule of
proportion, you are at sea without rudder or compass. The
same difficulty might be urged against all sorts of movements for
reform. Few except the rigid and extreme socialists have clear
notions about their ultimate goal. It suffices for the average
man to know in what direction he is moving. Most unsophisti-
cated persons in the advanced countries of modern times, tho they
have very hazy ideas about taxation and socialism and economics
in general, will instinctively declare it "right" that the rich should
contribute to the public burdens, as compared with the poor, not
only in proportion to their incomes, but more than in proportion.
In so saying, they show that influence of the spirit of the time
from which none of us can escape.

Sundry phrases have been used, embodying supposed prin-
ciples of taxation, which fail to face this fundamental problem.
u- It is often said that taxation should be based on "ability" (the
Germans use the word Leistungsfdhigkcit) or on "faculty." Yet
it is by no means clear either that this principle conforms to
economic justice or that it leads to any certain conclusion on the
crucial point — proportion or progression. No doubt, the rich
man's ability to pay is greater than the poor man's. Does it
follow that he should pay more heavily toward public charges?
His ability to pay for bread and coal is also greater; yet we accept
it as a matter of course, and as reasonable and just, that he should
pay for them at the same prices as persons of small income. It
may be questioned whether this be really just — whether the
strong and efficient, the fortunate and favored, should be in a
position of economic advantage. ^ Such is the way of the modern
world, under the regime of private property. Why, under that

1 Compare Chapter 66, § 3.

68- §2] PRINCIPLES UNDERLYING TAXATION 511

regime, should an entirely different principle be applied in regard
to taxation? Can the principle of " ability" be declared abstractly
just without maintaining also that our economic system is in
general unjust?

In any case, the principle of ability leads to no clear conclusion
on the question of progression. Granted that the rich should
pay on the basis of ability, the question remains, how is that
"ability" to be measured? Does their ability increase in exact
proportion to their incomes, or more than in proportion? Those
who advocate ability or faculty as the just principle for apportion-
ing taxes usually come to a conclusion in favor of progression.
Yet their principle does not necessarily lead to that conclusion.
They are influenced, tho not always consciously, by an underlying
belief that the rich in general are in an unduly favored position
and that it is therefore equitable to apply to public charges a
different rule from that which holds in other affairs.

The same sort of difficulty, and the same inevitable harking
back to the fundamental questions of social justice, arises from
another phrase much used in these discussions; namely, that
taxes should be so levied as to bring "equality of sacrifice." L^n-
flinchingly applied, this principle would lead to high progression
in taxation. Take away half the income of a poor man, and the
sacrifice imposed on him is vastly greater than when you take
away half the income of a millionahe. In the case of the poor
man, taxation would exact what is essential for life or for meager
comfort; in that of the rich man, only the means for luxury and
ostentation. To bring about equality of sacrifice, you must take
away a much larger proportion from the millionaire. The funda-
mental question recurs: why equality of sacrifice here, when in
other matters no such rule is followed? Efficiency, not sacrifice,
is the dominant principle in existing distribution. Problems of
taxation can arise only in communities founded on individualism
and private property; and to apply in these a principle of equality
of sacrifice is to admit that the working of individualism is not to
one's liking — that is, to undertake, in this regard at least, a
change and a reformation.

512 TAXATION [68-§3

§ 3. This same insistent question presents itself with regard
to another much-debated point: whether property incomes shall
be taxed at the same rate as labor incomes. In the literatiu'e
on taxation, the terms "funded" and "unfunded" incomes are
much used.^ Funded incomes are those derived from income-
yielding property, and standing for interest or rent or established
monopoly gains. Unfunded incomes are salaries, wages, business
profits, professional gains. We shall speak of them as property
incomes and labor incomes respectively. The former last in-
definitely; the latter cease at latest with the lives of their holders.
Should they be taxed at the same rate or at different rates?

The difference in duration between the two gives no solid reason
for discrimination. If it be said that the property incomes, because
lasting longer, are really larger, the answer is that the tax too lasts
longer. If the income lasts forever, the tax will go on forever. There
is indeed, in one respect, a substantial difference in the weight of
taxation; the holder of the labor income is in many instances under
a moral obligation not to use the whole of his income, but to save
some considerable portion. What he puts aside for the future
use of wife or children is virtually no part of his present income.
It will become later a part of the income of the dependents. If
it is taxed now, and is taxed again when it reaches the beneficiaries;
or if, after it has been invested, an income from it inuring later to
the beneficiaries is taxed in their hands — then there is double
taxation of the same income. The holder of a property income
may indeed do the same thing, and his savings also may become
the occasion of double taxes; but he is not so likely to put aside
part of his present income, since this passes on, presumably un-
diminished, to his heirs. On such grounds countries which levy
an income tax often permit the deduction, from the amount prima
facie taxable, of certain sums paid out for life insurance premium.
The sums so allowed to be deducted are limited, and only unmistak-
able savings out of income (evidenced by insurance premiums) are

1 In Great Britain, the terms "unearned" and "earned" are used; they are ob-
jectionable because, even tho usually applied in a purely technical sense, they im-
ply a judgment on the justification of the two classes of income.

68- §4] PRINCIPLES UNDERLYING TAXATION 513

considered ; precautions of this sort being necessary to prevent the
mitigation from becoming a means of evasion. But the principle
of lesser taxes on labor incomes is thus recognized, and recognized
on'the precise ground of not taxing such sums as are no effective
constituents of present income.

The common practise, however, of taxing property incomes at
a higher rate hardly rests on this ground. It rests probably on
the same attitude toward social problems as the common acquies-
cence in progressive taxes — on a half-unconscious admission
that justice does not call for identical treatment. Property in-
cornes stand for the leisure class — for those who contribute
nothing directly to the community's resources, but live on secure
income-yielding possessions. The thick-and-thin defender of the
existing order will indeed say that these incomes are as just as the
incomes of those who now work. Interest and rent are as worthy
and as defensible as any other sorts of income, and discrimination
against them by higher rates of taxation is an unwarranted admis-
sion of lack of justification. The contention is as unanswerable
as is the similar argument against progressive taxes on the rich.
Nevertheless most persons, tho they do not formulate their con-
clusions with care or accuracy, feel that somehow incomes derived
from labor do have a more solid justification and that the leisure
class incomes do stand on less defensible ground. It may be right
that some fortunate individuals, and their descendants forever,
should live in leisure, without doing a stroke of work. But this
does not seem right in the same degree as "earning" your living.
Hence, tho complete confiscation of property incomes, thru taxa-
tion or any other machinery, would be condemned by the average
man as "dishonest" or " socialistic, " some concession to the critical
and reforming spirit is made by approving higher taxes on such
incomes. Unle s there be concession of this sort and on this
ground there is no logical basis for the general application of a
Jower rate of taxation on labor incomes.

§ 4. Any conclusion, then, in favor of progressive taxation and
of higher taxation of property incomes must rest, to be consistent,
on a frank admission of unwelcome features in existing society

514 TAXATION [68- § 4

and on a program of social reform. The only question will be
whether this particular mode of reform, thru taxation, is likely to
work well, whether it may not bring evils in its train, whether
other ways toward the same end are not better. And here there
are serious reasons for proceeding with great caution.

Some difficulties of administration which stand in the way of
applying progressive scales will receive attention presently. They
vary with different sorts of taxes, as will appear on a consideration
of particular 'evies. Let attention be given here to some questions
of principle.

Progressive taxation, so far as it aims to correct unjustified
inequalities, evidently deals with results, not causes. . It is obvi-
ously better to go to the root of the matter, and to deal with the
causes. Much the more effective and promising way of reform is
to promote the mitigation of inequality in other ways — by
equalization of opportunity thru widespread facilities for rational
education, by the control of monopoly industries, by the removal
of the conditions which make possible illegitimate profits. Pro-
gressive taxation, which deals with income (or property) solely
according to size, and not according to social desert, is less dis-
criminating and also less effective in reaching the ultimate goal
than the various ways of diffusing material welfare which have been
considered in the preceding pages.

It may seem a simple matter to apply the principle of progres-
sive taxation on the basis of the character of the income ; to make
the rates progressively high, not in all cases where the income is
large, but in those cases where income is made large in objection-
able ways. vThe principle seems clear enough: are the inequalities
such as induce activity that is advantageous to the community as a
whole? Given the institution of private property, with all the
motives and ambitions which are part of it, and a great range of
inequalities is in this sense advantageous. Interest is not to be
dispensed with, nor that return for natural agents which is indis-
tinguishably commingled with interest. Salaries, professional
earnings, business profits in the strict sense, are inseparably associ-
ated with the exercise of their faculties by those who earn the

68- §4] PRINCIPLES UNDERLYING TAXATION 515

incomes. The fullest activities are promoted by letting them
earn all they can; and the greater the competition thus promoted
between them the more likely is it that the community will be
amply supplied with useful services. Tax no such incomes on
the ground of their size.

But to earmark the incomes thus "legitimately" large, and to
distinguish them from the "illegitimate" incomes, is an extremely
difficult matter. The law must deal with unmistakable facts; it
cannot be based on general principles and rough approximations.
On the other hand the conclusions of economic science, above all
on the great social questions, are essentially in the nature of rough
approximations. . What, for example, are " illegithnate " profits?
How define them in such manner as to make them subject to
special taxation? We may be certain that there are such gains,
due to chicanery, swindhng, browbeating of the weak and in-
experienced. How separate them sharply from the profits secured
in ways advantageous to the community and in accord with its
accepted standards of right conduct? To apply any sort of
discriminating taxation, without bearing also on the springs of
energy and enterprise, is impracticable. The best course is to deal
with the causes : to protect the weak, to elevate the plane of com-
petition, to improve the law, to prosecute remorselessly the guilty.

Certain kinds o property income are marked off more sharply
as not essential for the working of the individualistic system,
and therefore peculiarly fit for taxation. Such are urban site
rents, or rather those accretions of future site rents which are not
within the principle of vested interests. ^^ Monopoly profits are
in the same class. Often, it is true, they are as difficult to define
with the necessary precision as are "illegitimate" profits. How
separate high gains due to enterprise and good management from
those arising purely from monopoly? Yet there are cases when
this can be done; as where a bank is given the monopoly of note
issue, or a street railway or gas company the monopoly of serving
a city. Then it is clearly proper to provide that profits above a
given rate of return on the investment shall be divided with the

1 Compare Chapter 44, §§ 5, 6.

516 TAXATION [68- § 5

state. The amount going to the state in such case may be en-
titled a "tax" or a "share." The name is immaterial; it is in
essence a levy on a certain kind of income, justified by the principle
of removing inequality which brings no offsetting social gain.

In general, however, progress ve taxation is not practicable on
the basis of the kind of income. It is susceptible of application,
on a wide scale, only with reference to the amount of income. To
many persons, th's will seem no significant distinction. To tax
an income large in amount will seem to them the same thing as
taxing an income objectionable in kind. Tho few would carry
this sort of belief to its logical outcome and condemn all inequality
once for all, there is an instinctive feeling that great inequalities
are bad and very large incomes peculiarly fit objects of taxation.
The growth of social sympathy and all the prepossessions of
democracy strengthen the hold of the principle of progression in
its undiscriminating form. This state of mind, and the inevitable
formulation of the law on sharp lines, make it well-nigh certain
that progressive taxation will have wider and wider application.
The only question will be how far it shall go and what difficulties
of administration it must encounter.

§ 5. Still another question arises with regard to differential or
progressive taxes on property incomes. It is concerned with the
application of progression, not according to the source or kind of
the property income, but purely according to its amount.

The essential ground on which interest can be defended is that
the return is necessary in order to induce accumulation. Savin|;
is onerous and will not be carried on unless there is a return on
investments. But we have seen that this is by no means the exact
situation with regard to all savings. There are many intra-marginal
savers.^ As to these, the appropriation of part of their income by
the state would not lessen accumulation. The same principle. is
applicable as in the case of rent proper. A tax on rent falls defini-
tively on the owner, and has no further effects on the supply or the
utilization of the source of rent. From this point o£ view there
may be ground for progressive taxation of large property incomes.

1 Compare Chapter 39, §§ 2-4.

68- §5] PRINCIPLES UNDERLYING TAX.\TION 517

Those whose means are large almost always enjoy some " saver's
rent." They may secm^e say four per cent on their investments;
but the}^ would maintain the investments intact in almost all
cases, even tho they got only two per cent. The capital sum
being large, a comfortable income, perhaps a large income, would
still be secured at the lower rate. Rather than forego this income
accumulation would be maintained and capital would remain
undiminished.

The same reasoning would apply, of course, in all cases where
there is saver's rent. Those who save primarily in order to make
provision for the uncertainties of the future, for old age, for wife
and children, would continue to do so in large measure, even tho
mterest rates were much reduced, nay, wiped out. The appropria-
tion thru taxation of a part of their income from accumulations
would not cause a decline in social capital. But in these cases
there is not commonly the degree of inequality which gives rise
to the demand for differential or progressive taxation. Great
inequalities, such as seem inconsistent with the democratic and
equalizing spirit of our time, arise from the very large properties,
which are hardly ever accumulated merely because of a desire to
provide for the future. Social ambition, the love of domination,
the pride of achievement, are the motives of the creators of for-
tunes; social ambition, again, and the love of ease are the motives
which lead their descendants to maintain the fortunes. A lower
rate of return would not cause impairment of their principal or a
diminution of the sources on which the community's apparatus of
production depends.

On grounds like these, progressive taxation of large property
incomes can be advocated; advocated, that is, if one frankly
accepts the view that great inequalities in wealth are undesirable,
and should be lessened, by taxation or other means, so far as other
consequences equally undesirable for the community can be
avoided. In this case, one possible undesirable consequence is a --' ="
check to accumulation; but on the strict theory of saver's rent
no check in fact is to be expected.

Still other possible undesirable consequences, however, arise

518 TAXATION [68- §5

in connection with the administration of taxes. Some sorts of
taxes can be collected with facility and certainty. Others cause
endless difficulties in attempts at evasion and in demoralization
of the taxpayers. Income taxes more particularly cause such
difficulties, and cause them in greater degree according as they
are levied on a progressive scale. This aspect of the problem of
progression will be considered in the next chapter.

CHAPTER 69
Income and Inheritance Taxes

Section 1. Income taxes present the problem of progression sharply, yet
should be considered in connection with other taxes, 519 — Sec. 2. In-
come taxes limited as a rule to the well-to-do classes. The exemption of
small incomes rests partly on social grounds, partly on administrative
expediency, 520 — Sec. 3. The British income tax and the device of
stoppage at the source. The system not consistent with progression; it
has undergone steady modification, 522 — Sec. 4. Progressive taxation
on the entire income. Declaration necessary. Conditions for the
effective administration of such a tax. Income taxes pecuharly
adapted for readjustment from year to year to fit fiscal needs, 527 — Sec. 5.
The income tax question in the United States. The system developed
since the Constitutional amendment of 1913, 529 — Sec. 6. Inheritance
taxes are comparatively easy of enforcement and lend themselves
easily to progression. The trend toward progression, 532 — Sec. 7. A
high rate of progression in inheritance taxation would check accumula-
tion. If apphed new ways of ensuring the supply of capital must be
found, 535.

§ 1. In the preceding chapter the problem of justice was treated
as if all taxes were paid out of income. And this in the end is
the case: ultimately all taxes are derived from income. Tho
many taxes, in the first instance, are levied not with respect to
income but with respect to lands or houses or commodities, these
taxes fall eventually on some ones income, even if not on that
of the person first charged with their payment. True, there
are some taxes which may conceivably cause a diminution not
of an individual's income, but of his capital or his accumulated
possessions. Such may be the working of taxes on inheritances.
These, however, are effects not common in modern communities.
There is no serious deviation from the truth in sajang that taxes
are derived from income.

But tho taxes are paid out of income, a comparatively small
part of the public revenue is secured by direct levy on income.

519

520 TAXATION [69- §2

Some countries have no income taxes at all. Even those which
have fully developed income taxes secure only a part of their
revenue from this source. Moreover, no country endeavors to
reach in this way all incomes. Direct taxes on income are con-
fined virtually to the prosperous members of society. Most of
those who earn wages by manual labor are not so reached. Their
incomes are affected by other taxes only, and in ways of which as
a rule they are but dimly conscious.

It follows that the problems of justice in taxation, dealt with
in the last chapter, are to be considered with reference not simply
to those public levies which go by the name of income taxes, but
with reference to all levies of whatever kind. The questions
whether taxes should be progressive or are in fact progressive,
must be answered with reference to all the charges. It is entirely
possible, for example, that income taxes should be progressive,
yet the tax system as a whole not so. As will presently appear, a
great many sorts of taxes in wide use are really regressive in their
ultimate effects; that is, they bear more heavily, in proportion to
income, on the poor than on the rich and the well-to-do. Under
such conditions, it maj^ be maintained without hesitation that
taxes levied directly on the incomes of the latter should be pro-
gressive in order to secure simple proportionality for the tax system
as a whole. Whether this is in fact the case for the tax system
of a given country is extremely difficult to make out; so uncertain
is the ultimate effect of many of the taxes commonly resorted to.
But the verj' existence of the question, and the uncertainty of the
answer, show that progression as to taxes levied directly on income
is only part of a much larger problem.

None the less, the dispute concerning progression is specially
active and often acrid concerning direct income taxes alone. It
is so because here the question must be faced; whereas in the case
of other taxes it is concealed and evaded.

§ 2. The limitation of income taxes to the comparatively well-
to-do arises in practise from the fact that the trouble and cost of
direct levy make it impracticable to reach small incomes. It
costs at least as much to collect an income tax of, say, 2 or 5 per

69- §2] INCOME AND INHERITANCE TAXES 521

cent from a man having an income of S500 as from one having an
income of $5000; it may very possibly cost more. The revenue
in the one case is ten times as great as in the other. To collect
from millions of workingmen a few dollars or a few shillings each
would be perhaps not impossible, but almost ruinously expensive.
If they are to be reached at all by taxation, some other way must
be found. Hence there is exempted from income taxation in most
countries a minimum which is above ordinary working-class income
and above the average income of the whole people. Such was
the effect in Great Britain, with the level of wages and prices that
obtained before the Mar of 1914-18, of the exemption of incomes
under £160. In the United States, when incomes were taxed
during the Civil War period, only those over $600 were chargeable.
In 1917 the exempt amount for the head of a family was $2000.

This limitation has often been explained and defended on social
grounds. The poor, it is said, and those who have barely enough
to live on, should not be taxed. Obviously, the minimum of
subsistence should not be taxed ; or, to speak more accurately, the
attempt to tax it should not be made, since the very term implies
that it cannot be reduced by taxation. When people talk of not
taxing the minimum of subsistence, they commonly have in mind
something as variable as the living wage. The demand for the
exemption of the lowest tier of incomes results from the same state
of mind as the advocacy of progressive taxation — dissatisfaction
with existing inequalities and desire to lessen them. Unfortu-
nately, this feeling does not lead, so far as taxation is concerned,
to any consistent results. Those who possess only the "mini-
mum" or the "living wage," tho exempted from direct levies on
their income are in fact taxed, and often taxed heavily, in other
ways. It is onlj^ when a proposal is made to reach them overtl}^
that people balk, and insist on exemption. In the actual arrange-
ment of the tax system, benevolent phrases of the kind cited are
used to explain and justify exemptions which in fact are due
mainly to the practical difficulties of reaching small incomes, and
(in democratic countries) the fear of irritating millions of voters;
whereas, notwithstanding the phrases, taxes which reach the

522 TAXATION [69- §3

masses in unobtrusive ways are levied on a large scale with little
apolog}^

Considered as a matter of principle, it is by no means desirable
that the workingmen as a mass should not be subjected to taxes.
Let the taxes be moderate, and even, if you please, degressive;
that is, lower and lower in proportion as incomes become smaller.
There is no ground for the assumption that the mass of working-
men in advanced countries have barely the "living wage" and
should therefore be exempted. It is fit that they too should
contribute toward the public charges. It is desirable, moreover,
that they should not only pay but should be conscious of paying.
Much would be gained if they were not charged solely by veiled
indirect taxes. Even tho they paid sums but small in proportion
to incomes, their point of view on public affairs would be altered.
Too commonly, in democratic states, they are not conscious of
contributing anything at all. Their attitude toward public busi-
ness is simply that there is a great fund of money from which
employment or largess can be got. They rarely regard taxation
as an instrument for promoting the general welfare. And yet
this unfortunate situation is extremely difficult to mend. Taxes
levied in small sums are not only expensive to collect, but are
irritating to the payers. The legislator who gets rid of them not
only promotes administrative economy; he also gains popularity.
Even so slight a levy as the poll tax (a fixed small sum, say $1
or $2 a year, on each male adult) is almost impossible to maintain.

§ 3. Bearing in mind that in practise income taxes are levied
only on the comparatively small number of the well-to-do and
rich, let us consider the two great types — one of direct levy on
each individual's total income, the other of levy on the several
sources from which the income is derived. The direct method
is best exemplified by the practi e of the German states, among
which Prussia is for this purpose the most instructive, as well
as the largest. The other method, of which the salient char-
acteristic is stoppage at the source, is exemplified by the practise of
England. It will be convenient to examine first the British system.

The British income tax has sometimes been described as a

69- §3] INCOME AND INHERITANCE TAXES 523

series of taxes, in each of which a special method is adopted to
attain the same end. Wherever feasible, the method is to reach
the taxpayer's income, not after he has received it, but before.
Thus, to take the simplest case, the government deducts from the
interest which it pays on its own debt the amount chargeable as
income tax. The holder of consols hence receives his income
diminished by so much; thereby the tax has been collected. Every
debtor, whether private person or corporation, is required to act,
in substantially the same waj^, as a sort of agent for the govern-
ment in collecting the income tax from creditors. Every debtor
pays tax on his full income, irrespective of his being burdened
by debt and by an interest charge. But when he pays the stipu-
lated interest to his creditor, he is entitled to deduct the amount
(say 10 per cent — whatever the income tax rate may be) charge-
able as tax. The creditor receives 90 per cent of what would
otherwise have been his due, and thus his income has been reached.
And, to prevent possible failure of the system to work out this
result, "contracting out" is made void; it is provided that no
agreement between debtor and creditor by which the latter is
to receive his interest without income tax deduction, shall be
valid. The unrestricted self-interest of the debtor is thus brought
to bear toward the collection of the tax from the creditor. In this
manner the income tax is secured in regard to all bonds or deben-
tures issued by British corporations; the corporations pay the full
tax on their net receipts, but deduct the proper quota from each
bondholder's income.

As regards another kind of income often difficult to reach —
dividends on stocks — the same principle is follow'ed, and, as
regards British corporations, is followed with ease. The cor-
porations are simply taxed on the whole of their income, and the
way in which the stockholder bears the tax is that the net earnings
from which his dividends arise are diminished by so much. The
comparative publicity with which the affairs of corporations are
conducted, especially of large corporations, is a strong preventive
of fraud in their statements of earnings, and facilitates the eflBcient
collection of the tax.

524 TAXATION [69- §3

Again, as regards income derived not from British debtors or
British corporations, but from foreigners, the principle is also
followed so far as practicable. Such income is a large item in
Great Britain, whose people have great investments in foreign
regions. But these investments are commonly arranged and
managed by bankers or other financial agents, who often act as
agents for the remittance of interest or dividends to the individual
investors. When the}" so act, they are required to pay the income
tax on what passes thru their hands, deducting the amount from
what is payable to their clients. In this way a surprising amount
is reached. Evasion or concealment is virtually impossible, since
it would require collusion between the agent and the scattered
clients. Obviously, the method is inapplicable where remittances
are made, not thru a British banker or agent, but from foreign
parts direct to the individual investors. In such case the only
way to reach the income is to levy on the investor himself, calling
upon him to make a declaration of this income.

Income from land and real property is always reached with
comparative ease in any tax system; for land and houses cannot
be concealed, and the income they yield is not difficult to ascertain.
In the English system the occupier of real property is liable for
income tax once for all on the rental value of the premises occupied
by him. If he is owner, this ends the matter; he has paid income
tax on what as owner and occupier he enjoys. If he is tenant, he
is entitled to deduct from the rental payable to the landlord the
income tax on that sum, and the landlord thus finds his tax de-
ducted and paid. Here, as in the similar relations between debtor
and creditor, "contracting out" is made void.

Enough has been said to show how far-reaching is the method
of stoppage at the source. There are, indeed, some incomes
which cannot be so reached. The professional earnings of lawyers,
physicians, and the like; the incomes of business men, whether
shopkeepers or great manufacturers (so far as the incomes are not
secured in the form of dividends from corporations of a semi-public
kind); returns from foreign investment which do not go thru a
British banker's hands — these cannot be tapped at the source.

69- §3] INCOME AND INHERITANCE TAXES 525

Here some other method must be resorted to. Declaration of
income is required from the taxpayer or inquiry instituted by the
tax collector. But much the greater part of the income chargeable
with tax is reached without personal declaration or obtrusive
inquiry. The greater part of the British tax is collected without
a word of inquiry or a possibility of evasion.

It is obvious, however, that this system does not lend itself
easily to progression in the taxation of incomes. There is indeed
a device for making the tax degressive; that is, for lowering it on
modest incomes, and for exempting small incomes entirely. It
may easily happen that a person whose total income is below the
exempt amount (£160 until 1918) may find that his income has
been taxed thru stoppage at the source. He then applies to the
tax authorities, declares his income to be below the taxable limit,
and receives back in cash what has been reached by stoppage at
the source. The same method is applied in alleviating the tax
on modest incomes, ap to £700. These are entitled to an "abate-
ment, " varying by gradations according to the size of the income.
The possessor of an income in this range, if he has been reached by
the machinery of stoppage at the source, also makes a declaration
to the tax authorities, and is entitled to reimbursement to such
extent as will abate his income tax to the extent contemplated by
the law.

But, to repeat, the principle of stoppage at the source is not
consistent with progression. A person of large means pays income
tax, or rather finds that income tax has been paid for him, in a
number of ways — by various deductions from his rent, interest,
or dividends. He is never called on to declare his total income.
Only that income which has not been taxed before it reaches him,
must be directly ascertained by the tax authorities. Doubtless,
there are persons whose entire income must be directly ascertained,
such as small tradesmen, some lawyers or physicians, possibly
investors in foreign property. But almost every person having a
considerable income need make declaration of only part of it —
very likely of no part at all. The smoothness, ease, and certainty
of the method of tapping the source are inconsistent with the

526 TAXATION [69- §3

endeavor to ascertain in one lump the income of each taxpayer;
and without this there can be no appHcation of progression.

Notwithstanding the administrative advantages thus secured
by refraining from the attempt at progression, the British income
tax has been remodeled precisely in the direction of progression.
There can be no stronger evidence of the strength of the general
drift toward legislation that is hostile to inequality. In 1910, the
same budget which made the unsuccessful attempt to tax the
rising value of urban land, established also a "super-tax"; that is,
an addi ional tax on very large incomes, exceeding £5000 a
year. During the war of 1914-18 the super-tax was applied to
incomes over £2000, and was made progressively higher as incomes
exceeded that amount; so that on the very largest incomes the
total tax became something like fifty per cent. Such an addi-
tional tax, of course, cannot be collected without ascertaining the
total incomes of all who have incomes of this amount, or are
supposed to have. Thereby the income tax oflBcials are compelled
to face a new and difficult problem. They must secure declara-
tions of income with all the difiiculties of evasion, concealment,
fraud, which this endeavor necessarily brings.

Not only in this direction was there departure from the strict
principle of stoppage at the source and of proportionate levy; it
was modified also by the introduction of a differentiation between
labor and property incomes ("earned" and "unearned" incomes,
in the British terminology) . Beginning in 1907 labor incomes were
taxed at a lower rate, the lelief being limited, however, to those
whose total income from all sources was moderate (£3000 or less)
and not extended to those having high incomes. The method of
abatement was again followed in carrying out the new policy;
it necessarily entailed a further enforcement of declaration by the
taxpayer of his entire income and therein a further departure from
the semi-automatic mechanism of stoppage at the source. The
whole British income tax, thus modified in various ways, became a
patched and complicated structure, not conforming to any con-
sistent plan and troublesome in administration. Yet in fact it
was administered without serious friction; and it remained ex-

69- §4] INCOME AND INHERITANCE TAXES 527

traordinarily effective as a revenue-getter. The cumbrous differ-
entiation in favor of the moderate labor incomes, like the applica-
tion of progression to all incomes of large size, was testimony to
the growth of the feeling that in taxation, as in other fields of
government activity, regard should be had to the underlying
currents of social readjustment.

§ 4. Quite different is an income tax which has regard solely
to the individual's entire income. Such was the Prussian income
tax before the Great War; the model which the countries of the
Continent then tended to follow. It has been followed too by the
German Commonwealth since the war, tho with rates greatly
advanced and progression sharply accentuated. Necessarily the
whole of each taxpayer's income must be ascertained; and the
principle of progression can be applied with ease thruout the
entire range of incomes. The ascertainment of income can be
secured in two ways — by assessment on the part of the authori-
ties, or by declaration required from the taxpayer. Assessment
without declaration means more or less of guesswork, and, espe-
cially in the case of larger incomes, great inequalities, often glaring
discrepancies. Experience has proved that without the require-
ment no tax of this kind works as it is designed to work. Declara-
tions must be required — required not only nominally, but in the
actual administration of the tax.

Declaration, however, brings difficulties of its own. The
amount of the levy is made to depend on the taxpayer's own
statement. The temptation to evasion and deceit is patent.
Penalties for failure to make a statement, or for false statement,
are not easy to enforce. There is constant danger of demorali-
zation among the taxpayers, of easy-going connivance among
the officials, and so of failure to attain the essential object — the
precise adjustment of the progressive scale to actual incomes.
In their working, income taxes have too often been a byword and
a reproach.

The difficulties do not arise merely from evasion and dishonesty.
They rest in large part on a resentment against intrusion on what
are supposed to be private affairs. Many a man who will cheer-

528 TAXATION [69- §4

fully pay a substantial tax on his income is unwilling to submit
to prying eyes a detailed statement of that income. The social
philosopher may indeed say that this is an irrational frame of
mind, nay, is something like a confession of doubt as to the justi-
fication of the income. If it is right that one should have a large
income, why conceal at all its amount or its source? But men's
ways, as they have developed in the centuries during which the
acquisition of property has been a goal of ambition, are not so
simple as this question implies, A strong instinct of privacy has
extended to the possession of property and income; it is present,
whether rational or not; and it is violated by a requirement of full
statement, most of all by the chance of wide publicity.

These various difficulties are not insuperable. An honest,
well-trained, experienced staff of officials, and a well-framed tax
system, can meet them with sufficient success. Declarations
need not be required in minute detail, nor need they be opened
to public inspection. Some sort of publicity is probably necessary
as a safeguard against false statements; but it need not be publica-
tion to the world at large. It suffices if a select body of local
persons of experience, judgment, and established position are
enlisted to advise and cooperate with the permanent administra-
tors. These advisers must be persons who are likely to know
something of the probable incomes of the several taxpayers, and
before whom they would not wish nor dare to make statements
grossly false. A device of this sort was used in the Prussian sys-
tem, and is used also in that part of the English system for which
declaration must be resorted to. To go into the details of the
several methods would pass the bounds of a book like the present.
Suffice it to say that with a proper permanent staff of capable
and tactful officials, with a steady requirement of declarations,
with supervision and inspection not carried to the stage of wide
publicity, income taxes, even progressive, can be administered
successfully. Not a little depends, to be sure, on the amount of
the tax. The higher it becomes, the greater is the danger of
evasion, the greater the difficulty of preventing demoralization.

Income taxes are peculiarly fit for readjustment from year to

69- §5] INCOME AND INHERITANCE TAXES 529

year. Therein they are superior to taxes on inheritance; for these,
as will presently be explained, have not the same fiscal flexibility.
If income taxes are raised in one year, all bear the extra burden;
if lowered another year, all get the benefit of the reduction. In
Great Britain the income tax was long used as a means of keeping
the public receipts adjusted to the expenditures — raised in times
of financial stress and lowered in ordinary times. Obviously, it
is a necessary part of this policy that in ordinary times the tax
should not be pushed to the maximum which can be safely exacted.
A margin must be left for emergencies. The British rate in peace
had been not far from eight pence (3^ per cent) during the nine-
teenth century; it went to something like one shilling on the pound
(5 per cent) during the first decade of the twentieth century.
After the outbreak of the Great War in 1914, every resource was
strained to the utmost, and the tax was made to yield all that
could be squeezed out of it. The ordinary or normal rate was
raised to six shillings in the pound or 30 per cent; while the surtax
on large incomes was put as high as four shillings six pence in the
pound or 22^ per cent.

Like all taxes, this one proved difficult to lower when once
forced to the top notch; and the use of the tax as a flexible instru-
ment was endangered. Something of the same sort — to antici-
pate for a moment — happened in the United States. The in-
come tax was sharply raised on the entrance of this country in the
European conflict and thereafter was retained at higher rates than
would have been considered at all had it not been for the accept-
ance during the war of measures ordinarily deemed quite imprac-
ticable.

§ 5. In the United States constitutional obstacles stood for a
time in the way of a federal income tax. Such a tax had been
levied and collected, it is true, during the Civil War; but when
levied again at a later date (1894), was held not to be valid. This
question was set at rest by the income tax amendment to the
Constitution (1913), which gave Congress a free hand. In the
revenue act of 1913 advantage was at once taken of the authori-
zation by levying a general tax on incomes. In this regard, as

530 TAXATION [69- §5

well as in the simultaneous establishment of the Federal Reserve
banking system, the country had rare good fortune. As we have
seen/ the Federal Reserve system, set going in the nick of time,
became extraordinarily serviceable during the ensuing years of the
European war. In the same way, the income tax, enacted at a
time of profound peace, was brought into reasonably effective
operation during the next two years; when the war needs came,
it was available for an immediate great yield of revenue tliru the
simple device of sharply raising the rate of a tax already established
and in working order.2

In the act of 1913, some attempt was made to apply the principle
of stoppage at the source. But the method was not fully nor
consistently applied; and as amendatory provisions were added
by subsequent legislation, this method was thrust more and more
into the background, and finally was left in operation at only one
point of large consequence — the taxation of corporations and
of the incomes of shareholders in corporations. Conditions in the
United States are in many respects favorable to collection at the
source. It is true that some intricate problems of administration
are involved. As regards the taxation of incomes from real
property, there is a real or apparent conflict with the states and
local bodies. Most important of all among the obstacles to its
full application, however, is the inherent and inevitable conflict
with the principle of progression. And so strong is the drift
toward progression that any tax system which runs counter to it
must sooner or later give way.

The American income tax, as developed in 1913-1919, was levied

1 Compare Chapter 27, § 6.

2 In the edition of this book which was published in 1914, shortly after the pas-
sage of the revenue act of 1913, I wrote of the income tax then established: "Taxa-
tion of incomes by the federal government has come to stay. It is probable not
only that such a levy will be a permanent part of the revenue system of the United
States, but that the rate will become higher and that the progression will be
accentuated. Fiscal exigencies will not fail sooner or later to lead to a rise in the
rate; and the growing spirit of social readjustment will cause the progression to be
more marked. That same spirit, as well as eventual fiscal need, may bring about
— what is much to be desired — - a reduction of the exempt minimum and a reach-
ing down of the tax to a somewhat deeper social stratum." This forecast was veri-
fied in a surprisingly brief space of time.

69- §5] INCOME AND INHERITANCE TAXES 531

in two parts: a "normal" tax, uniform for all incomes (tho subject
to some degression on those of small size), and an "additional"
tax, or "surtax," analogous to the super-tax of the British system,
but applying progression more systematically and sharply. The
normal tax had been but one per cent in 1913; it was as high as
twelve per cent at the time of greatest fiscal need, and was reduced
to eight per cent at the close of the war. As has just been inti-
mated, it was applied once for all to the net incomes of corpora-
tions, and, being collected from them was deemed (as in effect it
was) a tax on the source of shareholders' incomes. Incomes
received by individuals on corporate shares accordingly were
treated as if already taxed, and dividends were not again subject
to levy; to this extent the tax was collected at the source. In
other respects, however, the start made in 1913 toward a wide
application of that method was not maintained. Barring the
treatment of corporate incomes and of dividends, and some other
provisions of minor consequence, reliance was placed on the
taxpayer's declaration.

As in all income tax legislation, a minimum was set which was
exempt from taxation; with the further provision that this mini-
mum was in no event to be reckoned as part of any one's taxable
income. Even in the case of the very largest incomes, not the
whole was to be taxed, but only the excess above the stated exemp-
tion. The exempt amount at the outset (in 1913) was S^,000
for the head of a family (the ordinary case), and $3,000 for not
the head of a family.

These exemptions were unduly liberal. On the monetary
scale of pre-war days an income of $4,000 meant a considerable
degree of prosperity and gave no valid claim to complete exemp-
tion from income tax. When the exigencies of war compelled
a less timorous policy, the exempt amounts were lowered to $2,000
and $1,000 respectively. As it happened these lowered figures
almost at once became too low. The inflation of prices and wages
brought it about that $2,000 in 1918 and 1919 had a purchasing
power less than half that of 1913. The exempt amount, unduly
great at the outset, became unduly small almost immediately

532 TAXATION [69- § 6

after amendatory steps were taken. There is no better illustration
of the unexpected and complete disruption which the war brought
in all pecuniary standards.

The other part of the system, the additional tax or surtax,
necessarily led to a requirement of declaration by each and every
person liable to any tax at all; since by this process only could it
be ascertained what was the sum total of his income and whether
he was liable to surtax. In 1913 the rates of the surtax, like those
of the normal tax, were low. But during the war they were
raised to figures that would not have been dreamed of during the
first stage. The highest surtax in 1913 had been 7 per cent on that
part of any person's income which was in excess of $500,000. In
1919 the highest rate was 65 per cent on that part of income ex-
ceeding $1,000,000. Ten years before, such an application of
progression would have been thought beyond the bounds of possi-
bility or of reason. Yet under the stress of military and patriotic
excitement it encountered no serious opposition; and, tho not
unlikely to be mitigated with the eventual return to conditions
deemed normal, it left as an aftermath of the war the permanent
embodiment in the federal tax system of radically progressive
taxes on large incomes.

No attempt was made to differentiate between property incomes
and labor incomes. This defect — such it must be deemed, in
view of the general acceptance of the equity of some differentia-
tion — was doubtless due to the initial endeavor to apply on a
wide scale the method of stoppage at the source. As regards
progression, the logic of that method, leading as it does to a flat
rate, was disregarded from the start. It left its traces in the
equal treatment of the two kinds of incomes between which there
is the greatest social cleavage.

§ 6. Inheritance taxes present administrative problems some-
what different from those of income taxes. Progression is easier
of application. At the same time, the question of principle — is
progression right? — presents itself more sharply.

The transfer of property at death must be subject to supervision
by a court or by an administrative bureau resembling a court, to

69- §6] INCOME AND INHERITANCE TAXES 533

prevent contention or fraud among those who may lay claim to
the property. Hence in all civilized countries the making of wills
is carefully regulated, and probate officials or judges have super-
vision over the winding up of decedents' estates. Their powers
are exercised directly on the persons charged by law with the
distribution of the estates — the executors or administrators.
This gives a convenient opportunity for collecting a tax. The
executors and administrators are called on to pay the taxes, and
not released from their obligations until they have given proof of
the payment.

Evasion of such taxes, if they are carefully arranged, is not easy.
The tax statute can be drafted in such a way that the net is tight.
Change of residence may indeed be tried, to another jurisdiction
where no such taxes are in force. This mode of evasion is obvi-
ously possible as regards the several states of our Union, since it is
probable that some among them will not levy inheritance taxes,
or will levy them only at low rates. But the more widespread
are inheritance taxes, the less is there opportunity for a successful
and convenient change of residence. Inheritance taxes levied by
the federal government obviously can be evaded only by transfer
of residence to a foreign country levying no such taxes or much
lower ones.

Gifts made during life, especially to children, constitute another
mode of evasion. They are commonly made subject to tax on the
same scale as inheritances; but a more effective obstacle than
such legal equivalence is the reluctance of property owners to
part with their own, even to their nearest and dearest. The
various possible means of evasion are of course likely to be resorted
to in proportion as the rate of tax is high, most of all that of gifts
inter vivos. Here, as with many other kinds of tax, a moderate
rate is apt to be more effective in practise, more really equable,
more productive of revenue, than a higher one.

Inheritance taxes are not equal in their effects — that is, do
not bear equally on all the taxpayers — unless they are main-
tained at the same rates for a long period. Given time enough,
all estates must run the gauntlet. But if the rates are changed at

534 TAXATION [69- §6

short intervals, some successions will pay at one rate, while others
of precisely the same amount and kind will pay at a dilTerent rate.
Hence this form of taxation, unlike the taxation of incomes,
shou'd not be resorted to in order to meet varying financial needs.
In 1898, during the war with Spain, the United States levied
inheritance taxes ranging (according to the size of the estate and
the degree of relationship) from f of 1 per cent to 15 per cent.
Shortly after the war, the revenue being redundant, these taxes
were repealed (1901). The estates of those who happened to die
within these three years were subjected to the tax; but a vastly
greater number never were. Such legislation violates the first and
simplest canon of taxation — that of equality in levy on all persons
in like circumstances. Great Britain followed a wiser course in
maintaining her inheritance taxes unchanged even under the
extraordinary exigencies of the war years 1914-18. Tho such taxes
cannot be expected to remain indefinitely at the same rates — with
changes in the public attitude toward the underlying social prob-
lems, new policies must come into effect — the rate should be
relatively permanent, not shifted under the influences of political
overturns or of current fiscal needs.

In the fully developed system of inheritance taxes of Great
Britain (as consolidated under the legislation of 1894), the highest
rate on estates going to direct descendants was 8 per cent, levied
on estates exceeding £1,000,000; on large properties going to noji-
relatives, the highest rate was 18 per cent. These figures were
still further raised after the close of the Great War, when a deliberate
revision was undertaken (1920). On moderate estates no changes
of importance were made; but on larger ones the advances were
sharp, the maximum (on properties over £2,000,000) being fifty
per cent on transmissions to other than direct descendants. In
the United States the pressure for revenue during the war of 1917-
18 led once more to the enactment of a federal inheritance tax.
The rates, like those of the income taxes of the same period, were
made sharply progressive on the larger properties. Moderate
inheritances, up to $50,000, were left entirely exempt. Above
this exempt limit, each successive increment was taxed at a higher

69- §7] INCOME AND INHERITANCE TAXES 535

rate; the first taxable increment being the amount between $50,-
000 and $100,000, subject to a rate of 1%, while the maximum
was reached with 25% on the amount in excess of $10,000,000.
No differentiation was attempted between direct descendants and
collaterals, or between relatives and non-relatives.

In the early years of the twentieth century the states of the
Union had also established inheritance taxes. Sometimes these
were on collateral successions only; but the tendency was to reach
direct successions also, tho at lower rates. Between the several
states (such of them as enacted the taxes — not all, but a steadily
growing majority) the rates were unequal, and the scope and the
effective burdens were different. The ubiquity of corporate
organization, and the endeavor of each state to secure an inheri-
tance tax with respect to every corporation and every share of
corporate property on which it could lay hands, led to irregularities
and duplications. With the federal tax superadded after 1916
(when the first step toward taxing inheritances was taken by
Congress) there developed an unseemly situation: a tendency in
each jurisdiction to grasp everything in reach and to stretch to its
advantage every doubtful question of constitutional and statute
law. Among the many problems in the apportionment of revenues
between the federal government and the states, and among the
states themselves, this proved perhaps the most troublesome.

The most promising solution would seem to be in a system by
which all inheritance taxes should be levied and collected by the
federal government, but a distribution of the revenue arranged
between the federal government and the several states. Such a
system would have to be deliberately planned as regards the range
of rates, the scale of progression, and the differentiation between
near relatives, distant relatives and strangers. Unfortunately
the local jealousies of the several states, and the obstacles which
our constitutional system and our political habits place in the
way of consistent and well-planned legislation by Congress, make
it quite uncertain whether any rational plan of this kind will ever
be put into effect.

§ 7. The general question of inheritance in its relation to in-

536 TAXATION [69- §7

equality and to the working of the whole system of private prop-
erty has already been considered.^ It will suffice to refer sum-
marily to the principles involved and their bearing on the fiscal
and administrative problems.

The argument and the sentiment in favor of progression are
stronger than in the case of income taxes. The inheritance of
fortunes, the perpetuation thru all time of conspicuous inequality
by the accident of birth, the grave doubt whether effortless acquisi-
tion and enjoyment of fortunes promote the best happiness of the
beneficiaries themselves, the moral scandal of the mode of living
among many of those born rich — all strengthen the objections
to great inequalities in wealth. So far as inheritance taxes can
be levied without serious administrative difficulties, there can
be no consistent argument against progression in communities
which try in many other ways to lessen inequality and mitigate
its consequences. Simple proportion — the same flat rate on all
inheritances — can be defended only on the ground that any and
every interference by the state with the existing distribution of
wealth is to be opposed and condemned.

On the other hand there stands the essential ground on which
the institution of inheritance rests. It is the great engine for the
maintenance of capital. So long as the maintenance and increase
of the community's capital depend on the way in which individuals
deal with their property, inheritance cannot be struck at its roots
without checking accumulation and investment.

But this ultimate limit does not mean that there is no room for
the application of progression. Considerable amounts can be
lopped from all properties without affecting the maintenance of
capital at all; up to a certain point the taxes will be paid out of
accrued income. Still larger amounts can be taken without
leading to harmful loss. So vast is the savable fund in modern
communities, so increasingly strong are the motives which lead to
saving, that something can be diverted from the swelling stream
without lessening Its volume. Evidently the question here Is one
of degree. The inflowing accumulations will no doubt remain

1 See Chapter 55, § 6.

69- §7] INCOME AND INHERITANCE TAXES 537

great even tho moderate deductions be made from ordinary estates
and large amounts withdrawn from the small number of great
estates. Changes of this character, however, leave the situation
essentiall}' unchanged. Inheritance still retains its efficacy as the
essential force for maintaining capital intact.

Pass beyond this limit — apply progression so sharply or limit
inheritance so narrowly that accumulation is seriously affected —
and you must supply ways of filling the gap. The public must see
to it that the needed material outfit is supplied by some other
process. It is not at all impossible that this should be done. The
notion that capital cannot be got together except by the process of
saving on the part of individuals in the familiar way is untenable.
It is part of the general narrowness of thought under which no
industrial structure is believed possible except that to which we
are habituated. What is true, and is not usually faced by the
advocates of drastic restriction of inheritance, is that something
more than mere restriction is involved in their program. New
institutions and new organs must be found. The state might
conceivably set up its own bureau for handling estates subject to
devolution, keeping the principal intact and separating the funds
strictly from current budget operations. In another direction too
the state might deliberately provide for the increase of capital.
It might own and manage great industries, operate them at a
profit, and build up new or larger plants out of the profits. Pre-
cisely in this way, by the process of putting the profits back into
the enterprise, great accumulations and great fortunes have been
built up under private ownership, and great additions made to the
community's capital. ^

No such course of action has yet been deliberately followed by
governments and no such results have yet been achieved on any
considerable scale. True, public trustees under jurisdiction of
courts have handled with success property in process of settlement.
True, also, occasional instances can be found of industries run by
governments which have enlarged their plant out of profits But
in both directions the quantitative significance is slight. It is no

1 Compare Chapter 51, on Great Fortunes.

538 TAXATION [69- §7

sensible deviation from the truth to say that governments, when
they enter on industrial enterprises or enlarge them, borrow the
capital ; they rely on private savings. It is also no sensible devia-
tion from the truth to say that when governments lay hands on
private property thru heavy inheritance taxes they not only
trench on the accumulated savings of private persons but use
the proceeds for ciu-rent fiscal needs and without provision for the
maintenance of the capital that comes under their control. We
are confronted here once more by the fundamental questions that
underlie the debate between public and private management of
industry, and between socialism and private property. They are
questions of the character and intelligence of the individuals
whom we vaguely call the public. Whether conservation of
capital shall be deliberately and successfully managed by govern-
ment depends on the quality of the persons to whom the govern-
mental functions are intrusted, and thus on the quality of the elec-
torate by whom those are chosen. We have to hark back once more
to the underlying problems of human character, human motives,
the nature of our inborn traits, the possibilities of modifying them
thru environment and education, the perfectibility of man and of
man's institutions. On many of these matters we are much in
the dark. And therefore we can see our way but dimly into the
future, must proceed tentatively, must remain uncertain of the
kind of social structure which the coming generations will establish.

CHAPTER 70
Taxes on Land and Buildings

Section 1. Taxes on land {e.g. an urban site) rest definitively on the owner, and
operate to lessen economic rent by so much, 539 — Sec. 2. Taxes on
buildings tend to be shifted to the occupier. Qualifications and limita-
tions of this proposition, 542 — Sec. 3. Effects of taxes on real property
— land and buildings combined, 544 — Sec. 4. In the long run, it makes
no difference in the incidence of such taxes whether they are first
imposed on owner or tenant; but for short periods it does. Similarly, it
is in the main of no concern whether the assessment be on rental or on
capital value; tho in some respects the two methods bring different results,
546 — Sec. 5. Concealed taxation of workingmen thru taxes on their
dweUings, 548 — Sec. 6. Taxes on real property should be primarily local
taxes, 549.

§1. Taxes on real property — land and buildings — play a
large part in all modern tax systems. For long periods in the his-
tory of European countries they were almost the only taxes; since
real propertj^ was the only sort of wealth which could be effectively
reached. The taxes which now exist in the older countries of
Western civilization are largely survivals or descendants from such
taxes of older days. They even descend, in a sense, from the dues
of the feudal system. But they have been transformed and re-
shaped, and they now retain their important place in financial
legislation for the simple reason that land and buildings are on
the spot, cannot be moved, and their owners must submit to what-
ever tax is imposed on them.

Let us consider first the effects of the taxation of land by itself
— of land irrespective of any changes or improvements made by
man. For the purpose of considering this case let us suppose
an urban site of great value, not improved by man, or improved
so slightly that the important and effective element in its value
is the land per sr. Not infrequently, in our American cities, a
lucrative central site is occupied by a one-story flimsy shop, used

539

540 TAXATION [70- § 1

for retail trade and commanding a considerable rental ^ — one very
high compared with the cost of erecting the building. This sort
of utilization of the site is but temporary, due to hesitation on the
owner's part as to when and how the full economic rent of the site
can be secured ; or due possibly to uncertainty in the legal title and
consequent unwillingness on the part of any one to make improve-
ments. Not uncommonly under these circumstances a cheap
dramshop is erected, because such an establishment is most sure
to yield a good rental, irrespective of the neatness or attractive-
ness of the building itself. Assume now that, for whatever reason,
a valuable site is in this state. According to oiu" American prac-
tise, it will be taxed on its full selling value as it stands — for a
large sum as regards the land, a small one as regards the building.
The total tax, at such a rate as is common in our cities (say 2 per
cent on the capital value), will very possibly be greater than the
whole rental secured from the shop. Who would bear such a tax?

The owner would gladly shift it to the tenant, by charging him
a higher rental. Clearly the owner cannot do so. Presumably
the tenant is already charged with a rental commensurate with the
profit-yielding possibilities of the site as it stands. The owner
from the outset will exact all that can be got. The tax will enable
him to get no more. Nor would a reduction in the tax cause him
to be content with less ; he would still demand and secure all that
the site was worth. The tax falls definitively on the owner.

Such is the general proposition to be laid down with regard to
taxes on land. They fall on the owner once for all. They operate
as so much diminution of rent. In the extreme case a tax equiva-
lent to the full rent of land can be exacted, without any other effect
than that of depriving the owner of his income. If a greater
amount is assessed, the land, of course, will cease to be used; the
owner and occupier alike will abandon it.

This proposition rests on the assumption that land is "rack-
rented " — that the owner exacts in rental as much as he can pos-
sibly obtain. Such is not necessarily the case. Thru ignorance

1 I use in this Chapter "rental" to signify what is paid by tenant to owner for
a parcel of realty; "rent" in the sense of economic rent.

70- §1] TAXES ON LAND AND BUILDINGS 541

or carelessness he may let a tenant have it for less than might be
got by the sharpest bargaining. In a country like England, agri-
cultm-al land was long owned and managed for the satisfaction of
social ambition as well as for immediate pecuniary return and was
not infrequently let to farmers on indulgent terms. Under such cir-
cumstances an additional tax levied on the landholder will prob-
ably lead him to look sharply at his rentals, and to take in all the
slack. There is much discussion in England as well as in other
countries on the expediency of taxing ground rents; that is, of
making a direct levy on the owners of sites. Those who advocate
the measure lay it down with confidence that such a tax will affect
the owners only, and will neither affect tenants nor raise the price
of the articles produced (or sold) on the premises. They are right
— provided that the land is already rack-rented.

Consider now the operation of such a tax if it has been long
imposed at the same rate and seems certain to continue indefinitely.
Any one who therea"ter purchases the land will allow for the tax,
and will pay a price based on its net return after the tax has been
paid. This later purchaser will feel no burden from the tax; hence
some persons are led to speak of this as "burdenless" taxation.
It is burdenless, at the later stage, simply because the first owner
has borne the burden once for all. In effect, a special permanent
tax on the site amounts to the appropriation by the state of so
much of the value of the site. Such appropriation may or may
not be wise — this raises the whole question of the ground for pri-
vate property in land and for the private title to economic rent.
The tax is burdenless only if it has prevented some part of the
economic rent from ever getting into any individual's hands.

These principles hold good of agricultural land as well as of lu-ban
sites. A tax on strictly economic rent in either case falls on the
owner. We have seen that in the case of agricultural land it is
peculiarly difficult to draw the line between the rent of land
proper and the return on capital invested in the land;i and for that
reason the effect of a tax on agricultural land is in practise not so
easy to follow. Yet there can be no doubt that there is a vast

1 See Chapter 42, § 5.

542 TAXATION [70- §2

amount of land in old countries, and in the older parts of new
countries, which is above the margin of cultivation and yields some
rent; and to all such land the propositions regarding the effects
of a tax hold good.

§ 2. Taxes on buildings present a different case. Buildings
may be taken as typical of improvements on land, or capital em-
bodied in the land. The case of buildings is instructive, because
it is comparatively easy to draw the line between the land itself
and the capital invested in it.

Suppose a situation removed as far as possible from that con-
sidered in the previous section. Suppose a building erected on
land whose value is negligible. Such, for example, are dwellings on
the extreme edge of cities or suburbs, or factory buildings in small
villages or in the open country. The familiar "three-decker" of
New England is often of this sort — the three-story wooden apart-
ment house, occupied by mechanics and other prosperous working'
men, in suburbs and outlying districts.

A tax imposed on such a dwelling tends to be borne by the oc-
cupier. If the owner is also the occupier the situation is simple
enough; the burden clearly must be borne by him. If, as is com-
monly the case, the dwelling is let and is built with the expectation
of letting, the burden is likely to be shifted to the occupier (ten-
ant) in the shape of higher rental. The building will not be put
up unless the owner has reason to believe that the rental will yield
him the current return on investment, and will yield that return
net; that is, after payment of all expenses. Taxes are reckoned
by him among the expenses. If a net return of five or six per cent
is looked for, the rental will be expected to yield a gross return of
eight, nine, or ten per cent. The difference covers depreciation,
expenses of management, repairs, insurance, and — not least —
taxes. If all taxes were remitted — if the public revenue were
secured in entirely different ways — competition between house
owners and house builders would bring rentals down. And, con-
versely, if taxes were to be greatly increased, house owners and
house builders would sooner or later recoup themselves for this
higher expense by charging higher rentals.

70- §2] TAXES ON LAND AND BUILDINGS 543

This would be the result in the long run. It would not neces-
sarily or even probably appear over short periods. The proximate
cause determining rentals is the supply of house accommodations
in its relation to the demand. A remission of taxes would not neces-
sarily lower them at once; this consequence would ensue only after
the greater return to the owners had stimulated an increase in the
supply of houses. Minor changes in the tax rate — a bit of an in-
crease one year, a decline in another — would not change them at
all. The owners alone would be affected, grumbling loudly in the
one case, in the other enjoying the remission in quiet.

There are circumstances under which the shifting of such taxes
would not take place at all. In a city whose population is declin-
ing, house rentals are governed solely by the principle of quasi-
rent. The houses are there, and cannot be removed. The cost
of erecting them and the ordinary rate of interest on investments
have no influence on their return. The question is simply one of
an existing supply in relation to a declining demand. An increase
of taxes in such a place would not cause rentals to go up; the owners
would have to pay the taxes out of their owm pockets once for all.
After a very long time, a readjustment would doubtless take place.
Houses do not last forever. As some wear out and disappear, new
ones will not be built in a decaying town to replace them. Given
time enough, the process of shifting taxes will indeed work itself
out. But the time required may be long — decades, even gener-
ations. The same situation may develop in a particular part even
of a growing city. Some sections may come to be out of favor;
fashion or convenience may cause people to move elsewhere; and
then the houses in the half-abandoned sections will be in the same
position as are all the houses in a declining town.

In a rapidly growing city the process of shifting takes place, not
indeed with mathematical exactness, but with considerable cer-
tainty. Houses will not be built for letting unless this is worth
while; and it will not be worth while unless the owners get the cur-
rent rate of return over and above taxes. The increasing demand
for house room due to growing population will not be met unless
rentals are high enough to make good the owner's outlay for taxes.

544 TAXATION [70- §3

Such is the common case in our American cities. Indeed, it is the
case in most cities of the Western world; for the phenomenon of
urban growth has shown itself in almost all countries. Taxes on
buildings tend to be borne by the occupiers.

What holds good of dwellings, holds good also of buildings let
for business purposes. Here also, if we fasten attention on a case
where buildings alone figure in the capital account, it is obvious
that taxes add so much to running expenses, and must be re-
couped to the investing owner in order to induce him to erect the
building. Here, also, the principle of quasi-rent must be borne
in mind. A business structure once put up is there for good, and
its rental depends not on the expectations and calculations of the
owner but on the supply of this particular sort of accommodation
in relation to the demand — on the adaptability of the premises
and on the growth and prosperity of the city. In a decaying town,
or for obsolescent kinds of buildings, rentals will tend to decline
in any case and the owner will find no possibility of shifting his
taxes to a tenant.

In the case of business structures a still further process of shift-
ing is probable. Just as the investing owner regards taxes as ex-
penses, and expects to be recouped for them in his charges, so the
business occupier regards his rental as an expense, and expects
to be recouped for it in his profits. This is most obviously
the case in retail dealings, where rental of the premises may be a
large part of the total expenses of the tradesman. High charges
for premises (that is, for buildings — not high ground rent) will
mean higher prices for the goods sold, and the effect of higher
taxes will tend to be somewhat higher charges on the community
at large. Taxes will be very widely shifted and diffused; that is,
they will tend to be so diffused, if competition is active in the par-
ticular business and if business profits conform to their normal
range.

§ 3. The common case, as to iu*ban realty, is not that land alone
or buildings alone stand for the greater part of the capital value,
but that each enters as a substantial part of the total. In the heart
of a great city, the site will stand for more than the buildings, even

70- §3] TAXES ON LAND AND BUILDINGS 545

tho these be substantial and expensive. In outlying districts, the
buildings will represent the larger part of the selling value; yet the
land still counts. Now, according to the distribution between
these two constituents, the incidence of taxes will be different.
That portion of the tax which is levied on the selling value (the
capitalized rent) of the site, remains definitivel}^ as a tax on the
owner That portion which is levied with respect to the building
tends to be shifted to the tenant. Here, as in the previous sec-
tion, we must have in mind the long-run operation of the taxes.
The immediate effect is commonly that the owner bears the burden.
Every parcel of real property yields proximately a rental fixed by
its serviceableness, and not directly affected by taxes. It is only
by affecting the supply of buildings that taxes on them tend to be
shifted to tenants.

The long-continued levy of taxes on a site, at the same rate,
brings about, as we have seen, a decline in the selling value of the
site. So much of the economic rent has been appropriated by the
state. The effect of taxes has not been to raise ground rents, but
to lessen the net return to the o^Tier. "\^^lere the site is highly valu-
able, a tax at the rates common in American cities — say 2 per
cent on the selling price — means the appropriation by the com-
munity of a very substantial part of the economic rent. And where
the value of land is rising, taxes rise in proportion, and some slice
of the unearned increment is steadily going into the public treasury.
If it were not for the taxes, the net yield of the sites would be so
much greater, and their selling price correspondingly higher. The
high value of land in our large cities is thus a source of much revenue
to the taxing body (that is, usually the city), and at the same time
of a revenue hardly felt as a tax by any one. It simply prevents the
rent of land and its value from rising even higher; and since this is
foreseen and expected by every one, no purchaser suffers. Evi-
dently the same result would ensue if the whole of the future rise
in value were absorbed in taxation.

The large and constantly growing revenue from this source, even
at the present rates, accounts in no small degree for the extrava-
gance of American municipal government. The business districts

546 TAXATION [70- §4

of New York City, for example, are a vast treasure house for the tax
collector, as they are also in even greater degree for their owners.
The enormous revenue collected from them in taxes makes possible
a measure of waste and corruption which would be intolerable
under taxes not levied in this burdenless way. The same is true,
only to a less degree, of our other great cities, in which urban rents
are also large and rising, and in which also taxes on sites are steadily
productive of increasing revenue.

§ 4. Whether a tax on real property be collected in the first in-
stance from owner or occupier is, in the long run, not material.
The practise in the United States is to levy on the owners; and in the
preceding section the incidence of taxes has been discussed as if
this were always done. In England, and in European countries
generally, however, the practise is to levy on the occupier.

If the occupier is called on to pay the tax or taxes on real prop-
erty, both he and the owner will consider the payment in calcu-
lations about rentals. So far as the tax is levied with respect to
site value, the pecuniary advantage of the site to the tenant is
diminished by the amount of the tax, and the rent he will pay in
order to secure the site will be so much less. If, on the other hand,
the tax levied with respect to buildings and improvements is col-
lected not from the owner but from the occupier, the owner obvi-
ously will be able to offer the facilities at a lower rate, and will be
impelled by competition so to offer them. The nominal rental
in either case will be less if the occupier is called on for the taxes.
The difference is in the mode of collection, not in the incidence of
the tax.

All this, however, holds good only if taxes are certain in amount
and thus calculable. Unexpected taxes are likely in all cases to
remain once for all a burden on the persons from whom payment
is directly demanded. If owner and tenant come to an agreement
on rentals, a new tax or an increase of tax falls, during the term
of the agreement, on that one of them who is directly chargeable.
In the United States, where the practise is to levy on the owner, it is
he who feels the brunt of all new taxes or increased taxes. He can
shift them to his tenant (if at all) only when the time comes for a

70- §4] TAXES ON LAND AND BUILDINGS 547

new lease. In England, where the practise is to levy on the occu-
pier, he in turn must pay during the term of his lease, and can ef-
fect a readjustment in such manner as to leave the tax burden on
the owner (in the case of site rental), only when the time for renewal
comes. In the United States, it is not infrequently stipulated in
leases that the tenant shall assume all taxes, even tho the landlord
be chargeable with them by the law. Clearly, both the owner and
tenant will consider this assumption of liability in their bargain
on the stipulated rental. Such agreements concerning tax pay-
ment are often simply a way of chaffering about the rental, es-
pecially where site rent plays a large part. If the site be valuable
and in demand, the tenant will assume the payment of taxes virtu-
ally as a mode of bidding higher for the site, and will take his
chances as to unexpected changes in tax rates.

Another difference between American and European practise is
in the basis of assessment. In the United States taxes on real prop-
erty are commonly assessed on capital value, that is, on selling
value. In Europe they are usually assessed on annual rental value.
Thus in the United States the usual tax on real property is some
such rate as $1.50 per $100 of selling pr ce, or 1^ per cent on the
capital, charged on the owner. In England a common tax is 5
shillings in the pound of rental value, or 25 per cent of the rental,
charged on the occupier.i These rates are roughly the same in
their proportion to rentals. And in either case their incidence is
in the end the same, differing (in the manner described above)
according as the realty owes its value predominantly to site or
to improvements. There is, indeed, one case in which the
two methods reach different results; namely, where rental value
does not correspond with capital value. This is most striking
where urban land is vacant, and yet has a selling value because of
the rent which it would yield if occupied, or which it is expected
soon to yield from the growth of population. Such land has, as it
stands, no rental value, or an insignificant rental value; and m

1 These at least were representative tax rates before 1914. The monetary up-
heavals of the European war led to chaos in tax rates, as in other matters; higher
figures became common, and once established were likely to persist for an indefinite
period.

548 TAXATION [70- §5

England it is taxed lightly or not at all. Because it has a consider-
able selling value, it may be taxed heavily in the United States.
The case is similar where the land, tho built on and used, is not
used to the best advantage, having obsolete or temporarj^ build-
ings. It would then be taxed lightly in England, on the basis
of its actual rental. It would be taxed heavily in the United
States, on a selling value representing the capitalization of its
potential rent.

The American practise has advantages and disadvantages. It
has the advantage of forcing land into use. Every owner, being
taxed on the capital value of his land, is under pressure to make its
contract rental correspond to its potential rent, and hence to im-
prove it rapidly. The English practise permits the owner to
wait. He will often wait, partly from inertia, partly from a
wish to bide his time until the most profitable use of the site
becomes quite clear. The American practise has the disadvantage
of stimulating a feverish haste in getting sites into use. The gen-
eral speculative and profit-gathering trend of American life would
doubtless lead in any event to some such haste; but it is made
greater by our method of taxation. Hence the sprawling aspect
of those American cities which are rapidly growing. Lots in the
outlying districts are built on, perhaps prematurely, with the design
of getting a return from rentals ; intermediate lots are vacant, their
owners holding on for a while. In England, where rental value
alone is the basis of taxation, land comes into the market in a more
slow and orderly fashion. The American practise has the further
advantage of appropriating for the community, thru the machinery
of taxation, a larger slice of the unearned increment.

§ 5. Workingmen, like all occupiers of dwellings, are reached by
the taxes on dwellings. They are indeed reached also by the taxes
on shops and factories, which enter into the expenses of merchants
and manufacturers and tend with more or less irregularity to be
shifted to consumers. But this second sort of shifting is so con-
cealed as to be difficult to follow in any concrete way. Taxes on
dwellings, however, in so far as they are levied with respect to the
structures, increase house rentals beyond question, and so cause

70-§6l TAXES ON LAND AND BUILDINGS 549

their occupiers, and the workmen among them, to bear a share of
the public burdens.

This indirect effect of taxation on workingmen appears not only
in the United States, where all such taxes are first collected from the
owners, but in England, where they are usually collected from
the occupiers. The English mode of levy is subject to exception
in the case of workingmen 's tenements. Here the taxes are col-
lected not from the occupier, but from the owner; or, if not from
the owner of the site, from a lessee who has taken the whole of the
premises and sublets them to the actual occupiers. The same
obstacles which stand in the way of the collection of income taxes
from persons of small means appear where taxes on real property
are sought to be collected from the occupiers of small tenements.
The expense of administration is larger, and there is irritation to the
taxpayer. It is much simpler to charge the landlord a lump-sum
tax on the whole, and let him recoup himself by larger rentals from
the several tenants or subtenants. This is commonly done in Lon-
don and other large English cities, the landlord being allowed to
"compound" as the phrase goes, and getting a slight reduction
from the usual tax rate by way of commission for thus acting as
taxgatherer.

The final result is that the workingman is taxed, but rarely knows
that he is taxed. He pays the going rentals for his house room,
and does not know that in this rental is included a tax charge.
The situation is doubtless inevitable; but it is unfortunate. It
much affects the attitude of the average laborer toward public
affairs. All that he is conscious of is the public outgo, of which he
is aware because the city or state is an employer of labor. The
public income from taxes does not seem to concern him. He is
commonly in favor' of expenditure, with little regard to the wisdom
of the expenditure; for increased taxes seem to be none of his con-
cern. Some sort of direct levy on every voter would much pro-
mote watchfulness and discrimination in public affairs; yet it seems
hopeless to retain any taxes of the sort.

§ 6. Taxes on real property are in the United States and in Great
Britain chiefly local taxes. That is, they are levied and collected

550 TAXATION [70- §6

chiefly by the local bodies — by the towns, cities, and counties in
the United States, by the boroughs and counties in England. The
revenue from them then goes to defraying the expenses of the local
be dies. Yet this limitation to local use is by no means univer-
sally or completely the case. A land tax levied by Parliament
still exists in England, tho it has come to be small in amount and is
in process of extinction. The English income tax reaches income
from real property, and the revenue so obtained goes to the central
government. In the United States the revenue of the several
states was originally derived, and is still largely derived, from the
general property tax in which the taxes on real property have been
by far the most important constituent. Nevertheless, it may be
said that in English-speaking communities the tendency is toward
using taxes on real property as strictly local taxes, leaving the
central government to get its revenue in other ways — by income
taxes, inheritance taxes, taxes on trade and communication, not
least, taxes on commodities.

The same tendency is beginning to show itself on the Continent.
There taxes on land and buildings, thru long use and contnued
tradition, have been assessed and levied by the central government.
The local bodies, the communes, have simply followed in the track
of the central government, using its machinery and assessments
and imposing for their own purposes supplements or percentual
additions to the state taxes. Such is still the situation in most
countries of the Continent. A break in the system has been made
in Prussia, where taxes on land and buildings, and some other so-
called "direct" taxes of a similar sort, have been turned over once
for all to the local bodies, the state retaining for itself the income
tax. Other German states have followed the Prussian example,
and it is probable that in the course of time other countries of the
Continent will do likewise.

This relegation of taxes on real property to local bodies is wise.
Local bodies are most likely to administer such taxes equably, and
in administering them are free from difficulties which commonly
arise in local administration of other levies. Income taxes, for ex-
ample, tend to drive people away from the places where they are

70-§6] TAXES ON LAND AND BUILDINGS 551

imposed; if local they would induce a competition between cities
and towns to attract residents by low rates or lax assessment.
Taxes on securities are open to the same objection, as will appear
more clearly in the next chapter. Most taxes on the production
or sale of commodities are subject to similar competitive evasion.
The list of taxes really available for local bodies is limited, while
at the same time their financial needs are great and growing.
Hence it is desirable that taxes on land and buildings, which are
peculiarly available for local bodies, should be left to them solely.

CHAPTER 71
Taxes on Commodities

Section 1. Direct and indirect taxes. Various ways in which "indirect"
taxes are levied on commodities, 552 — Sec. 2. In the simplest case,
of a competitive commodity produced under constant returns, a tax tends
to be shifted to consumers. Explanation and qualification of this prin-
ciple, 553 — Sec. 3. Complexities where the commodity is produced
under increasing or diminishing returns; where there is monopoly. Cau-
tions to be observed in the apphcation of theoretic reasoning on these
topics, 555 — Sec. 4. Taxes on imports present no peculiarities, except
as they bring a rival untaxed supply and thus raise the questions concern-
ing protection, 558 — Sec. 5. Taxes on commodities are little noticed by
consumers. They are commonly on articles of large consumption, and
regressive in their effects. A large and varied list of articles is most
easily reached by customs duties, 559.

§ 1. Taxes such as have been described in the preceding chapters
on income, property, inheritance, are commonly spoken of as direct
taxes. By this phrase is meant that the legis'ator, in levying them,
has no expectation or intention that they shall be shifted to any
other persons than those first called on to pay them. Taxes which,
on the other hand, are expected to be shifted to others are called
indirect taxes. As we have seen, the so-called direct taxes are
shifted not infrequently ; but they are not levied with this in view,
and the process of shifting is often uncertain. "Indirect" taxes,
on the other hand, are levied on the supposition that the persons
first called on will transfer the burden to others and will transfer
it with tolerable ease and certainty.

The simplest and most familiar of indirect taxes are taxes on
commodities. The phraseology, it must be borne in mind, is loose.
Just as there are not, in strictness, any taxes on property, but only
taxes which persons owning property are compelled to pay, so there
are no taxes on commodities, but only taxes levied on persons
when they deal with commodities in a particular way. A tax " on

652

71- §2] TAXES ON COMMODITIES 553

tobacco' may be, for example, a tax on the manufacturer of to-
bacco levied on the basis of the number of pounds of that article
as they pass out of his factory. A tax "on sugar" may be as it
formerly was in Germany, a tax of so much per hundredweight of
the beets used in making the sugar, collected from the manufac-
turer when the beets are delivered at his establishment. A tax " on
imports " is one collected from merchants and others on the occasion
of their bringing articles across the frontier from other countries.

The precise stage and the precise way in which these various
persons are called on to pay such taxes is much affected by the
possibility of evasion. Thus, under the method of taxing sugar
beets formerly followed in Germany (now given up, for reasons
that need not be here discussed), evasion was difficult, because
beets were bulky, and the operation of bringing them to the fac-
tory could easily be supervised. The method used in our Amer-
ican taxes on tobacco and cigars, of compelling the taxed person
to buy stamps and affix these on the articles at a given stage in his
operations, has the administrative advantage that the articles can-
not be marketed, in case of evasion, on any except the smallest
scale; since the absence of the stamps would inform all the world
of the violation of law. Taxes levied on importation are collected
with great ease in modern times, because the regular channels of
transportation, by railway or steamer, are extremely cheap, and
smuggling by out-of-the-way routes ordinarily entails greater
expense than evasion of the duty would make worth while. In
the eighteenth century the situation was different, and smuggling
was a factor much to be reckoned with in the administration of im-
port duties.

All these, however, are matters of detail, often very important
detail, to be dealt with in special books on taxation and finance.
Our concern is with some general questions concerning the eco-
nomic effects of these taxes

§ 2. Consider first the simplest case: an internal tax, or excise,
imposed at some stage in the p-oduction of a commodity. A stage
in manufacturing operations is usually chosen, because manu-
facture means concentration of operations and hence ease of sup)er-

554 TAXATION [71- §2

vision. Suppose the commodity to be one produced under the
conditions of constant cost and free competition. Then the effect
of the tax is simple. The price oi the commodity will be raised by
the amount of the tax. The producer will shift this amount on the
consumer, and the real burden w 11 thus fall on the latter.

This result will not be necessarily reached at once. The first
effect of the tax is to add so much to the manufacturer's expenses
of production. He will, of course, desire to raise his price so as to
make good the additional expense. In strict theory, he cannot do
so except in consequence of a decrease in supply. Price is deter-
mined directly by the equilibrium of demand and supply (or, in
more technical language, by marginal vendibility), and it will not
rise, the conditions of demand remaining the same, unless supply be
lessened. But the higher expenses of production and diminished
profits will tend to lessen supply; and normal equilibrium will be
restored when the manufacturers are again getting their usual
returns, with lessened output and higher prices. Evidently the
extent of the eventual change in the volume of output depends on
the elasticity of the demand for the article. The result may even
be reached, under some not improbable circumstances, without
any change in supply at all. In a growing country, or for a com-
modity for which demand is growing, there may be no actual de-
crease in supply, but only cessation of increase. Demand is simply
allowed to catch up with the new situation.

All this supposes that the industry i> in a normal : tate at the
time when the tax s imposed — that the capitalists engaged in
it are making normal profits, and will be led to lessen their output,
some of them perhaps even to withdraw enti ely if their profits
are cut down. It is perfectly possible that a tax may be imposed
at a time when an industry is unusually profitable. Then its
incidence may be apparently on the producers only; they may be
able to pay the tax and still sell to consumers at the ordinary
profit. Wliat happens in such cases is not that the consumers pay a
higher price, but that they are prevented from getting the lower
price which competition would eventually have brought about.
This process is of course much more convenient to the producers

71-§3] TAXES ON COMMODITIES 555

than that of imposing a tax when an industry is in its normal state ;
obviously it constitutes no real exception to the rule that the tax
eventually falls on the consume r.

Some industries are so much of an aleatory sort that the work-
ing of competition, and therefore of taxes, is irregular and uncer-
tain. This seems to be in no small degree the situation with brew-
eries, which depend for the sale of their product very much on
reputation, trade ma k, and the control of dramshops. A brew-
ery is apt to be either a highly profitable enterprise or a disastrously
losing one; much as is the alternative in the case of a large hotel
or a city newspaper. A tax on beer at a moderate rate is likely to
be swallowed up in the oscillations of brewery expenses and profits
and to have hardly a noticeable effect on the retail price of the
brewerage. Similarly, a reduction in an existing tax may simply
lessen the brewer's expenses by so much, and not affect the retail
price. Evidently this would be true only of moderate charges. A
large increase or decrease of tax would be felt by the consumer with-
out question. And even moderate charges would necessarily show
their effects in time, tho very likely not so much in altered retail
prices as in a decrease or increase (as the case may be) of the cus-
tomary contents of the glass, or in a better or worse quality of the
contents. Here, as in almost all economic phenomena, we have to
deal with tendencies that work out their results more or less slowly,
and in ways often obscure. It is to be said, however, that taxes
work out their effects on prices more quickly and surely than some
other influences, such as, for example, improvements in production
or deficiencies in the supply of materials; since taxes are notorious
and the attention of all p oducers and dealers is at once fastened
on them.

§ 3. Consider now some other cases, less simple. The taxed
commodities may be produced under the conditions, not of con-
stant returns, bu under those of increasing or of diminishing
returns; or they may be subject to a monopoly.

The strict theory of these cases, again, is comparatively easy to
work out, being only an application of the general theory of value.^

1 See the statement of this theory in Chapters 12, 13, 14, 15.

556 TAXATION [71- §3

A tax on a commodity produced under diminishing returns may
not raise its price by the full amount of the tax. A rise in price
can come only with a decline in quantity produced. But in the
case of diminishing returns a decline in quantity produced means a
recession of the margin of cultivation, and a lowering of marginal
cost. The effect of the tax in raising normal price is therefore
partly offset by the lower cost due to less pressure on the sources
of supply. Conversely, a tax on a commodity produced under
increasing returns may not only raise its price, but raise it by
more than the amount of the tax. In this case the rise in price,
by checking consumption and lessening the amount produced,
causes the cost per unit to advance, and so the price to rise still
further. The same sort of reasoning may be applied to the re-
mission of an existing tax. Where the remission is on a com-
modity produced under diminishing returns, it is likely to in-
crease consumption, to bring pressure to bear on the sources of
supply, to raise marginal cost, and so to lower price by less than the
amount of the tax remitted. On the other hand, a tax remitted
under increasing returns, by stimulating consumption and output,
is likely to cause a decline in cost per unit, and so a fall in price
greater than the mere remission alone would have brought about.

A tax on a monopolized article — to pursue the theory of these
cases — is not shifted under the same influences and probably not
to the same degree as a tax on an article produced under free com-
petition. A tax directly on monopoly profits cannot be shifted
at all, just as a tax on economic rent cannot be shifted at all. The
monopolist presumably will have adjusted his output in such a
way as to secure the maximum profit, just as the owner of an ad-
vantageous plot of land presumably will have got the maximum
rent; and a tax levied directly on monopoly profits or on rent does
not open any possibility of adjusting matters in a more lucrative
way. The monopolist or landowner must bear the tax with the
best grace he can.

A tax on a monopolized commodity, however, is not the same as
one on monopoly profits. It is a tax per unit of output, not on the
net monopoly gains. The tax on the commodity is much easier

71- §3] TAXES ON COMMODITIES 557

to levy, since it is comparatively simple to ascertain what the out-
put is. It is very difficult indeed to measure monopoly profits
with accuracy and correspondingly difficult to assess a tax simply
on the monopoly gains. The tax on the monopolized commodity,
however, tho simple and comparatively certain in its financial out-
come, is much more uncertain in its eventual result on prices. It
affects at once all the calculations of the monopolist. His expenses
of production per unit rise. If he tries to raise his price correspond-
ingly, he will almost surely have to face a decline in consumption.
If demand is elastic, this decline in consumption may be consider-
able, and he is likely to shoulder the tax in good part {i.e. not raise
his price by the full amount of the tax) rather than incur the de-
cline in profit from a lessening of sales. If the demand is inelastic,
that is, if a rise in price checks his sales but little, he is more likely
to be able to shift a large part of the tax on the consumers.

Theoretic reasoning on this topic may be easily pushed further
still. The monopolist may be conducting his business under con-
stant returns, or diminishing returns, or increasing returns. His
calculations will be accordingly affected. If he is producing under
diminishing returns, a tax and a rise in price and a check on con-
sumption will be less unwelcome to him; since with a lessened
quantity he will also have lessened costs. If, on the other hand,
he is producing under increasing returns, a rise in price and a con-
sequent decline in consumption and output will be very unwel-
come to him; since it will bring an increase in his cost per unit. If
we suppose him to be quite unfettered in his monopoly, rigorously
determined on the extraction of the utmost profit possible, and
thoroly informed both as to the conditions of demand and his own
increasing or diminishing costs — then he has a very pretty prob-
lem before him in readjusting his supply and his price after the im-
position of the tax. He may be supposed to call mathematical
formulae to his aid, and to work out with exactness how far it will
be to his advantage to submit to some part of the tax, how far to
shift part of it to consumers.

The very statement of this last case points to an important
limitation on the pertinence of all such analysis. There is < nger of

558 TAXATION [71- §4

making an intellectual plaything out of intricate reasoning on the
play of demand, varying costs, taxes, and the like. Some econo-
mists have given no small share of attention to problems of this
kind, forgetting that their reasoning is purely hypothetical and that
there is little that corresponds to it in the concrete facts of life.
All economic principles hold good only in the rough. Semi-math-
ematical reasoning, even pure mathematical reasoning, not in-
frequently aids in bringing out with clearness the underlying prin-
ciples; but it can rarely be pushed with advantage into details. It
cannot be so pushed with reference to the incidence of taxes —
neither as regards the modification of incidence due to increasing
or diminishing returns, nor as regards the effect of taxes on mo-
nopolized articles. Increasing or diminishing returns show
themselves slowly and irregularly, and over long periods.
Taxes on commodities affected by these varying conditions
are maintained only in very few cases, if in any, at a uniform
high rate for so long a time as to influence sensibly marginal cost.
For most practical purposes, we may content ourselves with the
simple result reached at the outset, under the supposition of con-
stant returns — a tax on a commodity tends to be shifted to the
consumer by its full amount. And in the same way we can dis-
miss most of the complicated reasoning about the working of taxes
on those commodities which are commonly spoken of as monopo-
lized. It has been noted elsewhere ^ that complete monopoly is
rare. Those cases in which monopoly is supposed to exist are
almost invariably much limited — limited by substitutes, by po-
tential competition, by public opinion, by force of law. A tax on
commodities produced by a quasi-monopoly is not shifted with the
same certainty as one upon a competitive article; but there is a
strong probability that most of the tax will be shifted in the same
way. This sort of rough and general conclusion is alone in accord-
ance with the usual state of the facts; and it suffices for the guidance
of the legislator.

§ 4. Taxes on imports present no peculiarities, so far as taxa-
tion proper is concerned. They are simply one form of taxes on

1 See Chapter 15, § 6.

71- §5] TAXES ON COMMODITIES 559

commodities, and what has been said in the preceding sections
applies to them. They are commonly shifted to the consumer,
and are meant to be so shifted. In the controversy about pro-
tection, zealous advocates of high duties are led occasionally to
maintain that taxes on imports are borne, not by the domestic con-
sumer, but by the foreign producer. This may sometimes be the
case, just as it is sometimes the case that an internal tax is borne
for a longer or shorter period by the producer, and not the con-
sumer. Occasionally, where the producer (domestic or foreign) has
a monopoly, he may bear a part of the tax — conceivably may
bear the largest part of it. Sometimes he seems to bear it, tho he
does not do so in fact. He sells the commodity at the same nom-
inal price, but with shorter measure or poorer quality. Most often
of all, the same unconcealed and simple result ensues both from
internal taxes and customs duties — the commodity rises in price
by the full amount of the tax.

The peculiarity of duties on imports is merely that they may
bring into the market a rival untaxed supply. Levied strictly
with a view to their effect as taxes, import duties should always be
accompanied by internal taxes at the same rates on the same com-
modities. If this is not done, domestic production may spring up,
even tho the domestic producers cannot bring the article to market
at as low a price as it could be imported for, in the absence of the
duties. Whether such a stimulation of domestic production is
wise or not, raises the whole question, sufficiently discussed else-
where, of the effects of protective duties.^

§ 5. Tho the consumer almost always pays taxes on commod-
ities, he is commonly little aware of it. The tax is paid by him in
the form of a higher price. Wlien a given price level is established
for any commodity, people get used to it as the going rate and pay
without grumbling. If every purchaser had to hand out directlj'
two cents each time he bought a pound of sugar, or was called on to
pay a tax of two dollars each time he bought a suit of woolen
clothes (such were roughly the rates at which American consumers
of these articles were taxed for half a century) — we may be sure

1 See Chapters 36, 37.

560 TAXATION [71- §5

that a mighty protest would arise. The fact that such taxes are
concealed and only half understood, makes them tempting for the
legislator. He is constantly confronted by demand for heavier
outlay, and yet finds the public willingness to bear new burdens
lagging behind its demand for greater public se vices. He is likely
to turn to the taxes which wi 1 yield the largest revenue with the
least protest. Such are taxes on commodities.

Obviously commodities which are produced in the greatest
quantities are those likely to yield the largest revenue; and these
again are likely to be commodities consumed in larger proportion
b}" the poor than by the rich. Hence most taxes on commodities
tend to be not even proportional; they are regressive. A poor man
will not purchase as much sugar as a rich one; but he will spend a
larger share of his income on sugar; and a tax on such a commodity
bears more heavily on him. It is doubtless not impossible to
select for taxation commodities used chiefly by the well-to-do and
the rich, such as laces and champagnes. But taxes of this kind
are rarely productive of much revenue. The very fact that a
person is rich brings it about that he distributes his expenditure
over many things, and buys and consumes comparatively little of
any one thing. Taxes on luxurious articles hence are likely to
yield only driblets of revenue and to be expensive of administra-
tion. The lucrative revenue-yielders are the staples consumed
in great amounts, and consumed chiefly by the masses. Such are,
to mention articles now much taxed in civilized countries, sugar,
tea, coffee, petroleum, tobacco, beer, wine, spirits. On these, to
repeat, the taxes are commonly regressive.

Two sets of articles among those just mentioned are usually sub-
jected to taxes, whether excise or customs, at an especially high
rate — alcoholic 1 quors and tobacco. It is supposed that a decline
in their consumption is to be desired rather >han regretted, and
that taxes may be imposed on hem without compunction. This
attitude, to be sure, does not go far to explain the taxation of to-
bacco, nor that of wine and beer on the Continent of Europe, where
these beverages are universal^ used and not greatly abused. Sim-
ple fiscal convenience is the main factor. For whatever reason.

71- §5] TAXES ON COMMODITIES 561

large revenues are secured in almost every civilized country from
such taxes. They are made to yield probably the very largest
revenue by creating fiscal monopolies. That is, governments
undertake their manufacture, or at least their sale at wholesale or
retail, and prohibit all individuals from engaging in the business
thus appropriated. Prices are charged to purchasers which are so
high as to bring 'arge profits; the result for consumers being the
same, tho reached by a different process, as that of taxing the
commodities in the ordinary ways. Tobacco is a fiscal monopoly
in France, Italy, Austria, Spain, and other countries. Spirits are
a fiscal monopoly in Russia and Switzerland. Salt is a fiscal mo-
nopoly in Austria and Italy. The method has the advantage that
evasion is easily detected ; the very fact that any private individual
conducts the business at all is proof that he violates the revenue
law. On the othe ' hand, the system is open to all the objections
to bureaucratic administration, and in particular is the more
unsuitable as the civil service is ill organized and the general
tone of public administration is lax.

Customs duties are made more easily applicable to a large and
varied list of articles than excise taxes. Supervision need not
extend over the whole land ; it can be limited to the ports of entry
into the country. This circumstance goes far to explain the wide
prevalence of protective duties. They are a convenient way of
getting revenue. Once adopted for revenue, their incidental
effects on the course of domestic industry are at first overlooked,
and then, when they have established themselves, are welcomed.
The list of articles on which customs duties are levied in the United
States is an extraordinarily wide one, covering some 1500 different
things. It would be out of the question to le\y excise taxes on any
such list.

In fairness, it is to be said of the customs duties in the United
States, as they developed under the extreme protectionist system
so long maintained, that their incidence was not so c early bad as
is commonly the case with excises. Tea, coffee, cocoa, were free
of duty. Sugar was the only dutiable article of food whose taxa-
tion was clearly regressive. \Miat was true of sugar was probably

562 TAXATION [71-§ 5

true also of wool, the duty on which was perhaps the most objec-
tionable of all the protective duties. As regards manufactured
commodities, many were not affected by the duties, directly or
indirectly. The commoner grades of cotton goods, for example,
are produced as cheaply within the country as abroad; they would
not be imported in any case; duties on them, tho they stand on
the statute book, are merely nominal. The finer grades of cotton
fabrics are largely imported, or made within the country under
the shelter of the duties. The prices of these are raised by duties,
and a real tax is imposed on consumers. But the consumers are,
if not wholly, at least to a great degree, the well-to-do and rich, and
the tax is in so far not open to the objection of bearing with special
weight on persons of small means. The same is probably true of
duties on other textiles, such as woolens and silks; tho as to these
it is not so clear that duties on the cheaper qualities are merely
nominal. The main objection against our regime of high protec-
tion was not so much that it caused disproportionate burdens on
those least able to pay, as that it gave a disadvantageous direction
to the productive energies of the community.

References on Book VIII

C. F. Bastable, Public Finance (3d ed., 1903), covers the whole field
and is able and well-judged, tho not attractively written. Among foreign
books, K. T. Eheberg, Finanzwissenschaft (new ed., 1912), is a good book
of the German type; and P. Leroy-Beaulieu, Science des Finances (new ed.,
1912), is an able French book, full of good sense and information, but not
strong on questions of principle. An excellent set of selections, covering
the main problems, is C. J. Bullock, Selected Readings in Public Finance
(1920). On progression, the view presented in Chapter 68 is similar to
that of A. Wagner, Finanzwissenschaft, Vol. II, § 158 seq. (ed. of 1890), and
is different from that in E. R. A. Seligman's Progressive Taxation in Theory
and Practice (new ed., 1908). The last-named writer's Income Tax (1914)
is a valuable survey of legislation and experience.

INDEX

(Reference should also be made to the analytical Table of Contents.)

Ability, differences of, ii, 138, 169, Australia, gold discoveries in, i, 255,

265, 477.

"Ability" principle of taxation, ii, 510.

Abstinence in relation to interest, ii,
48 ; under socialism, ii, 482.

Accident, insurance against, ii, 353 ;
bad legal situation in United States,
ii, 362.

Acworth, W. M., ii, 501.

Advances to laborers, in relation to
capital, i, 75.

Advertising, and large-scale produc-
tion, i, 53, 65 ; how far serves a
good purpose, i, 20, ii, 450.

Aftalion, A., i, 443.

Agrarstaat, argument for in Germany,
i, 533.

Agricultural implements, statistics on
manufacture, i, 49.

Agricultural land, incidence of taxes
on, ii, 541.

Agriculture, no tendency to large-scale
production, i, 55 ; subject to dimin-
ishing returns, i, 183 ; cooperation
in, ii, 380, 381 ; position under so-
cialism, ii, 468.

American specie, in sixteenth century,
i, 244, 253.

American Sugar Refining Company,
see Sugar.

American Tobacco CompanJ^ i, 62,
ii. 410, 450.

Anderson, B. M., Jr., i, 442.

Andrews, J. B., ii, 385.

Anthracite coal, tendencj^ to over-
production, ii, 59 ; diminishing re-
turns in mines, ii, 101.

Apprenticeship, obsolete, i, 98.

Arbitration, see Contents, ch. 59.

Arkwright, i, 34.

Army and Na\'y' Stores, ii, 373.

Ashley, W. J., i. 545.

Assignats, i. 307, 320.

Astor. J. J., ii, 105.

Atkinson, F. J., i, 244.

272, 432 ; effects on foreign ex-
changes, i, 473 ; labor legislation in,
ii, 334, 348 ; old-age pensions, ii, 360 ;
railways, ii, 434.

Austria, resumption of specie pay-
ments, i, 314, 317.

Axes, conventional, used as monej', i,
226.

Babbage, C, i, 105.

"Back-loading," analogy to joint cost,

ii, 405.
Bagehot, W., i, 442.
Bailey, ii, 232.
Bank Act of 1844 (England), i, 359,

406.
Bank notes, see Contents, chs. 24 to 27 ;

effect of small denominations, i, 329,

424.
Bank of England, description of, i, 359 ;

policj- of, during crises, i, 362, 404,

410, 422 ; how gold bullion provided,

i, 451 ; policy during Great War,

i, 368.
Bank of France, notes inconvertible

yet not depreciated, i, 315, 356;

description of, i, 355.
Bank of Germany, see Reichsbank.
Barbour, D., i, 442.
Barings, i, 89, 326, 404.
Barnett, G. E., ii, 385.
Barter, i, 110.

Bastable, C. F., i, 544, ii, 562.
Batchelder, ii, 172.
Bedford, Duke of, ii, 94, 105.
Bedford level, ii, 77.
Bellamy, ii, 476.
Berlin, birthrates in different quarters,

ii, 242.
Bernstein, ii, 498.
Bertillon, ii, 232, 243.
Bessemer, i, 194. ii, 114.
Beveridge, W. H., ii, 385.
Bigelow, ii, 172.

565

566

INDEX

Bill brokers in England, i, 344.

Bill of exchange, i, 417, 448.

"Billon" coins, i, 268.

Bimetallism, see Contents, chs. 20, 21.

Birthrates, general statement, ii, 226 ;

figures for various countries, ii, 231 ;

for United States, ii, 234 ; for Massa-
chusetts, ii, 235 ; general decline in

nineteenth century, ii, 239, 245 ;

differences between rich and poor,

ii, 241 ; between native born and

foreign born, ii, 243, 247.
Bland-Allison Act, i, 277.
Bohm-Bawerk, ii, 9, 14, 44, 277, 502.
Bonanza farming, i, 55.
Bonanza mines of Nevada, ii, 99.
Bonar, J., ii, 278.
Booth, Charles, ii, 256.
Boots and shoes, exported from United.

States, i, 541.
Boston, birthrates in different quarters,

ii, 243.
Boulton, ii, 172, 424.
Bowley, A. L., ii, 255, 258.
Branch banking, i, 367, 376.
Brassey, ii, 425.
Brentano, L., i, 545.
Breweries, in relation to taxation, ii

555.
Briggs collieries, ii, 336.
Brokers, productive or unproductive,

i, 26.
Brown, H. G., i, 544.
Biicher, i, 51, 105.
Bullock, C. J., ii, 562.
Business leadership, effect on industrial

efficiency, i, 100.
Business profits, see Contents, chs. 49,

50 ; how affected by rising prices, i,

297.
Butcher's trade, in relation to division

of labor, i, 42.
"By-products," utilization in large

establishments, i, 54 ; explained, i,

215.

Cairnes, ii, 141.

California, gold discoveries in, i, 255,
272, 432 ; paper money fails to circu-
late in, i, 306 ; effects of gold pro-
duction on foreign exchanges, i, 473.

Call loans, fluctuations in rates, i, 347.

Caloric engine, ii, 172.

Canada, banking system, i, 384 ; trade
with United States, i, 477, 509.

Capital, see Contents, chs. 5, 38-40,
46 ; moral and intellectual, i, 103 ;
not created by banks, i, 351 ; "capi-

tal" to the individual, ii, 5 ; produc-
ti\dty of, ii, 11; marginal produc-
tivity of, ii, 12 ; intention of the
owner and making of capital, ii, 21,
22 ; definition of, ii, 43 ; sometimes
classified as artificial and natural,
ii, 125 ; how accumulated under
socialism, ii, 481.

Capital goods, ii, 6 ; how influenced in
value by marginal vendibility, i, 148.

"Capitalistic" production, ii, 10.

Carlton, F. T., ii, 385.

Carnegie, i, 58.

Carter, G. R., i, 105.

Carver, T. N., ii, 14, 277.

Cassel, G., ii, 277.

Cattle, a medium of exchange, i, 110.

Central bank, able to mitigate crises,
i, 403 ; how far protects specie
holdings, i, 458.

Central reserve cities, i, 379.

"Charging what the traffic will bear,"
ii, 396, 418.

Check, legal position of payee, i, 384.

Chevalier, i, 302.

Chicago Board of Trade, clearing sys-
tem, i, 418.

Children, high death rate, ii, 232.

China, silver bullion as money in, i,
227 ; jnerchants' notes as money, i,
417.

Chinese, exclusion from United States,
how justified, ii, 146.

Church, ii, 172.

Civil Service Supply Association, ii,
373.

Clare, G., i, 544.

Clark, J. B., ii, 13, 14, 126, 278.

Clark, V. S., ii, 348, 385.

Clearing-house certificates, i, 409.

Clearing houses, i, 335 ; connection
with theorj' of prices, i, 418.

Closed shop, ii, 304, 310.

Coffee, see Tea.

Coinage, explained, i, 113, 226.

Cold storage, effect on conditions of
supply, i, 142, 158.

Cole, G. D. H., ii, 502.

Collective bargaining, ii, 312.

Colson, C, ii, 501.

Combination, horizontal and vertical
i, 59, 60.

Commercial banks, i, 325, 327, 398.

Commons, J. R., i, 42, ii, 385.

Communistic societies, ii, 465.

Comparative cost, doctrine of, i, 481.

Competition, its efficacy important for
the classification of capital, ii, 127.

INDEX

667

Competitive margin for capital, ii, 26.

Comte, A., ii, 466.

Comptoir d'Escompte, i, 390, 404.

Compulsory arbitration, ii, 348.

Constant cost, i, 170 ; effect of taxes
on commodities under, ii, 554.

Constitutional limitations, on labor
legislation, ii, 325 ; on income taxes,
ii, 529.

Consumer's capital (consumer's
wealth) not commonly regarded as
capital, ii, 5 ; how it yields interest,
ii, 40-43.

Consumer's surplus, i, 124.

"Continental" paper money, i, 307.

Continuous demand, i, 137.

Convertible government paper, i, 317.

Cooke (Jay) and Company, i, 391, 400

Cooperation, see Contents, ch. 61 ;
also ii, 297, 472.

Copper, corner of 1888, i, 213 ; suc-
cessive discovery of mines, ii, 101.

Copyright books, illustrate monopoly
value under decreasing cost, i, 203,
205 ; a qualified monopoly, i, 209 ;
justification of, ii, 115.

Corner, operations analyzed, i, 210.

Corporations, sec Contents, ch. 6 ;
honesty of management, i, 88 ; con-
nection with crises, i, 397 ; see also
"Public service" industries.

Corporation taxes. Federal, ii, 530.

Cost of production, in what sense used,
i, 169, 183, ii, 153.

Cotton, fiber and seed illustrate joint
cost, i, 214, 216; why exported
from United States, i, 484.

Cotton goods, statistics on manu-
facture, i, 49 ; effect of United States
duties, ii, 562.

Cotton market and prices, i, 145, 148.

Craft gilds, i, 39.

Credit, use of, effect on prices, i, 41f ,
417.

Credit Lyonnais, i, 345.

Crises, see Contents, chs. 28, 29 ; policy
of Bank of England during, i, 363,
403 ; periodicity of, i, 388 ; sun spot
theorjr of, i, 389 ; advantage of a
central bank for mitigating, i, 403 ;
possibly mitigated by combinations,
ii, 455.

Crises of 1857, i, 390, 396, 402.

Crisis of 1873, i, 390, 396, 408, 412;
connected with railway building, i,
395 ; connected with international
borrowing, i, 470.

Crisis of 1893, i, 389, 396, 408.

Crisis of 1907, i, 389, 400, 409.

Crompton, i, 34.

Crops, connection with crises, i, 395,
396.

"Crossing" of checks in England, i,
337.

Cuban sugar lands, predatory cultiva-
tion of, ii, 73.

Custom, effect on retail prices, i, 150.

Cutthroat competition, ii, 449, 451, 456.

Dalton, H., ii, 270, 278.

Darwin, C, ii, 138, 226.

Darwin, L., i, 442, ii, 502.

Dawson, M., ii, 385.

Dawson, W. H., ii, 385.

Death rates, general statement, ii,
227 ; figures for various countries,
ii, 231; for United States, ii, 235;
for Massachusetts, ii, 235.

De Beers Company, i, 201.

Demand loans by banks, i, 347, 348.

Demand curve, i, 137.

Denmark, cooperation in, ii, 380.

Depew, town of, ii, 96.

Depositors, relation to banks, i, 384,
387.

Deposits, see Contents, chs. 24, 27, 30 ;
relation to circulating medium and
to checks, i, 334, 420.

Depreciation of machinery and main-
tenance of capital, i, 77.

Derived utility, i, 148.

Derived value, ii, 124.

Dewey, ii, 276.

Dexterity, how far cause, how far
result of division of labor, i, 31, 33.

Diamonds, in relation to consumer's
surplus, i, 126 ; illustrate monopoly
value, i, 201, 204.

Dickinson, G. L., ii, 502.

Dietzel, H., i, 545.

Differences of wages, see Contents, ch.
47.

Diminishing returns, relation to value,
i, 182 ; in agriculture, i, 183 ; how
far in gold mining, i, 259 ; as to
capital, ii, 14 ; on any one plot of
land, ii, 66, 68 ; on urban sites, ii,
87 ; taxes on commodities produced
under, ii, 556.

Diminishing utility, principle of, i, 117.

Direct taxes, relegated to local bodies
in Prussia, ii, 550 ; economic sense
of, ii, 552.

Discharge, right of, essential, ii, 289,
294, 309 ; disappears under social-
ism, ii, 486.

568

INDEX

Discontinuous demand, i, 137.

Discount by banks, how calculated, i,
332.

Discounted product of labor, relation
to wages, ii, 214.

Dislocated exchanges, i, 463.

Division of labor, see Contents, ch. 3.

Domestic servants, see Servants.

Double standard, i, 262.

Double taxation, ii, 512.

Dresdner Bank, i, 404.

"Dry farming," ii, 76.

Dumont, A., ii, 278.

"Dumping," i, 207.

Dunbar, C. F., i, 442.

Dunn, S. O., ii, 502.

Durand, E. D., ii, 502.

Dutch East India Company, destruc-
tion of crop by, i, 200.

Duties on imports, fiscal effects, ii, 558,
561 ; see also Protection.

Dwellings, rental of, a form of interest,
ii, 40 ; demand possibly discontinu-
ous, i, 155 ; incidence of taxes on, ii,
542.

Dyer, ii, 172.

Dynamic state, i, 172.

Economic area, i, 40.

Economic goods, i, 3, 5.

"Economic rent," ii, 6.3.

Edgeworth, F. Y., i, 442, 544.

Edison, ii, 172.

Education, effect on efficiency, i, 96 ;
expense of, doubly affects wages, ii,
136.

Egypt, usury in, ii, 36.

Eheberg, K. T., ii, 562.

Eight-hour day, ii, 326.

Einaudi, L., ii, 102.

Elastic demand, i, 137 ; when said to
be unity, i, 138, 139.

Elasticity of bank issues, i, 358, 366
375, 426.

Emergency currency, i, 366 ; (under
Federal Reserve system), i, 410.

Emery, H. C, i, 220.

Employee Representation, ii, 295, 297.

Employment not created by protec-
tion, i, 510.

England, rate of interest in eighteenth
century, ii, 31 ; see also Great Brit-
ain.

Entrepreneur, ii, 164.

"Equal pay for equal work," ii, 151,
316.

Equality of sacrifice, as a principle of
taxation, ii, 511.

Equalizing cost of production, as a

principle of protection, i, 517.
Equalizing differences of wages, ii, 132.
Equation of supply and demand, i, 141.
Equilibrium price, i, 144, 146.
Ericsson, i, 41, ii, 172.
Erie canal, free of tolls, ii, 391.
Eugenics, i, 103, ii, 250.
Excess of exports from United States

since 1873, i, 474 ; of imports till

1873, i, 474.
Exchange and division of labor, i, 38,

110, 111.
Exchanges, how developed, i, 159.
Excise, ii, 553.
Expenditure on luxuries, effect on

wages, ii, 209.
Expenses of production, in what sense

used, i, 169, ii, 153.
Extensive cultivation, ii, 75.
External economies, i, 189.

Factory Acts, ii, 320.

''Faculty" principle of taxation, ii, 510.

"Fair price," i, 153.

"Fair wages," ii, .345.

"Favorable balance of trade," i, 475.

Fawcett, H., i, 544.

Fay, C. R., ii, 385.

Federal incorporation, ii, 459.

Federal Reserve Banks, i, 376, 381,
426.

Federal Reserve system, see Contents,
ch. 27 ; administration, i, 376, 377 ;
note issue, i, 377, 378 ; reserve re-
quirements, i, 379, 380 ; policy during
Great War, i, 381 ; as preventive of
panics, i, 410.

Federal Trade Commission, ii, 462

Fetter, ii, 278.

Fiat money, i, 304.

Final utility, i, 121.

"Fiscal" principle of taxation, ii, 508.

Fiscal monopoly, i, 208.

Fisher, I., i, 442, ii, 126, 277.

Fitch, ii, 309.

Fixed prices (retail), advantages of, i,
152.

Flour milling, how affected by dealings
in futures, i, 159.

Foreign exchanges, see Contents, ch. 32.

Forests, varjdng conditions of supply, i,
184.

Fortunes, great, see Contents, ch. 51 ;
easily maintained in modern times,
i, 90 ; causes of, ii, 200.

France, cooperative production in, ii,
382 ; preventive check in, ii, 234.

INDEX

569

"Franchise," ii, 408.

Frankel, L. F., ii, 385.

Free goods, i, 3, 5.

Free trade, see Contents, chs. 36, 37 ;
summary statement of main argu-
ment, i, 507.

Freight charges, effects on imports and
exports, i, 472.

Freight classification on railways, ii,
397.

French peasantry, hoarding by, i, 74.

Friendly societies, ii, 357.

Fulton, i, 35.

Funded incomes, to be taxed at higher
rates, ii, 512.

Futures, speculation in, i, 159, 163.

Gary, town of, ii, 96.

General property tax, ii, 550.

Geographical division of labor, i, 493 ;
how affected by railways, ii, 389,
399.

Germany, workmen's insurance in, see
Contents, ch. 60 ; growth of large-
scale production, i, 51.

Ghent system of unemployed benefit,
ii, 367.

Glasgow bank failure, i, 84.

Glass blowers' union, i, 521 ; in rela-
tion to marginal utility, ii, 156 ;
former monopoly position, ii, 302.

Godin metal-working establishment, ii,
337.

Gold, articles made of, how affected
by rising and falling prices, i,
240.

Gold and silver, how fitted for medium
cf exchange, i, 111, 224; industrial
consumption of, i, 239, 240 ; how
durability affects value, i, 250 ; pro-
duction aleatory, i, 250 ; yet less so
in modern times, 251 ; how far sub-
ject to diminishing returns, i, 259 ;
mining countries export specie, i,
460, 473.

Gold redemption fund. Act of 1900, i,
318.

Goldsmiths, the first London bankers,
i, 330.

Gold standard, adopted in England, i,
270 ; in Germany, i, 274 ; stability
of, i, 321, 440, ii, 112.

Good will, effect on value, i, 175.

Goschen, G. J., i, 544.

Gould, J., ii, 414, 416.

Government employees, high pav of,
ii, 1.33, 430.

"Government stroke," ii, 430.

Graebe, i, 101.

Great Britain, and geographical di\'i-
sion of labor, i, 43, 44 ; system of
customs duties, i, 519 ; contempo-
rary tariff controversy in, i, 536 ;
investments in foreign countries, i,
470 ; international trade illustrated,
i, 494 ; distribution of incomes, ii,
255 ; of property, ii, 257 ; causes of
success in cooperation, ii, 373, 382 ;
income tax system, ii, 522 ; inherit-
ance taxes, ii, 534 ; local taxes,
how levied, ii, 546.

"Great War," 1914—18, effect on prices
in United States, i, 287 ; in Euro-
pean countries, i, 320, 321 ; silver
certificates in United States, i, 278 ;
paper money issues, i, 320, 369 ; part
played by European banks, i, 367 ;
Federal Reserve system, i, 381 ; effect
on foreign exchanges, i, 463 ; in-
terest rates, ii, 38 ; governmental
control of railroads in United States,
ii, 438 ; British income tax, ii, 526,
529 ; taxation in United States, ii,
531, 534.

"Greenbacks," i, 318.

Gresham's law, i, 265.

Ground rents and leases, ii, 93.

Griinzel, J., i, 545.

Guild socialism, ii. 471.

Hamburg, birthrates in different quar-
ters, ii, 242.

Haney, L. H., ii, 502.

Hargreaves, i, 34.

Harrison, A., ii, 385.

Hawtrey, R. G., i, 442.

Hedging, i, 159.

Hedonism, i, 132, 155, ii, 273.

Heilman, R. E., ii, 385.

Helfferich, i, 250, 442.

Heredity, i, 103.

Herkner, H., ii, 385, 502.

Hill, R., ii, 423.

Hindustan, usury in, ii, 36.

Hoarding, i, 73.

Hobson, J. A., ii, 277.

Holding company, ii, 443, 459.

Holland, rate of interest in eighteenth
century, ii, 31.

Hollander, J. H. ii, 385.

Home market argument for protection,
i, 509.

Horizontal combination, i, 59, 191.

Hours of labor, regulation of, ii, 324 ;
influence of shorter hours on wages,
ii, 327.

570

INDEX

Hoxie, R. F., ii, 385.
Hue, i, 417.

Hutchins, B. L., ii, 385.
Hutchinson, W., ii, 149.

"Illegitimate" profits, ii, 195, 515.

"Illegitimate" speculation, i, 163.

Immigrants, how remittances affect
imports and exports, i, 472 ; low
rates of wages, i, 490, ii, 145,
248.

Immobility of labor, how affects inter-
national trade, i, 489 ; influence
on bargaining power of laborers, ii,
300.

Income, money income and real in-
come, i, 130, 131 ; income of a com-
munity, how measured, i, 129 :
how measure a farmer's income, ii,
261; "earned" and "unearned"
incomes, ii, 512, 526.

Income taxes, see Contents, oh. 69.

Inconvertible paper money, see Con-
tents, ch. 23 ; foreign exchange
under, i, 463.

Increasing returns, see Contents, ch.
14; on railways, ii, 393; effect of
taxes on commodities produced
under, ii, 555.

Increment taxes, ii, 108 ; in Germany
and Great Britain, ii, 112; modes
of levjdng, ii, 108.

Indestructible powers of the soil, ii,
73, 75.

Index numbers, explained, i, 286 ;
arithmetic mean, i, 286 ; geometric
mean, i, 288 ; median, i, 288 ;
weighted mean, i, 289 ; proposed
regulation of money by, i, 437.

India, English rule in, i, 25 ; hoarding
in, i, 73 ; drain of specie to, i, 242 ;
silver coinage stopped in 1893, i,
279 ; foreign exchanges under rupee
standard, i, 461.

Indirect taxes, ii, 552.

Industrial Councils, ii, 295.

Industrial democracy, ii, 297.

Industrial Revolution, i, 35.

Industriestaat, argument against in
Germany, i, 533.

Inelastic demand, i, 137.

Inequality, see Contents, ch. 55 ; also
ii, 207 ; inequality of incomes and
maximum well-being, i, 132.

Inheritance, importance for distribu-
tion, ii, 266 ; justification of, ii, 267,
535.

Inheritance taxes, ii, 532.

Instinct of acquisition, i, 118.

Instinct of contrivance, i, 72.

Insurance, workmen's, see Contents,
ch. 60.

Insurance of deposits, i, 386

Integration of industry, i, 60.

Intensive cultivation, ii, 75.

Interest, general statement, see Con-
tents, chs. 38-40 ; how affected by
changing prices, i, 301 ; not affected
by quantity of money, i, 346, ii, 8 ;
how affected by bank reserves, i, 347 ;
possibly negative, ii, 23 ; steadiness
of rate in modern times, ii, 30 ; why
prohibited in medieval times, ii, 36;
on durable goods such as dwellings,
ii, 40 ; variations between different
regions, ii, 45 ; justification of, ii,
48 ; how rate determines selling
price of land and securities, ii, 103 ;
how related to business profits, ii,
187, 191.

Internal economies, i, 190.

Internal tax, on commodities, ii, 553.

International bimetallism, probable
effects, i, 282.

International borrowing, effects on
imports and exports, i, 467, ii, 46.

International Harvester Company, i,
52.

International Paper Company, i, 61.

International trade, see Contents, Bk.
IV ; connection with theory of
prices, i, 429 ; extent of gain from,
i, 502 ; how related to non-competing
groups, ii, 161.

Interstate Commerce Act of 1887, ii,
400, 437.

Investment, promoted by corporations,
i, 90; in relation to saving, i, 174;
maladjustment in, i, 399.

Iron, how far supply elastic, i, 147.

Iron and steel manufacture, statistics
on, i, 49 ; transformation since 1890,
i, 58 ; annual output since 1800, i,
69; elaborate plant, i, 71.

Italy, international trade illustrated,
1,494.

Jackson, C. L., i, 101.

Japan, international trade illustrated,

i, 486.
Jenks, J. W., ii, 501.
Jevons, W. S., i, 389, 442, ii, 13, 427.
Jews, why money-lenders in medieval

times, ii, 36.
Johnson, A. S., ii, 125.
Johnson, E. R., ii, 501.

INDEX

571

Joint cost, theory ol, i, 214; applica-
tion to railways, ii, 395.
Joint demand, i, 218.
Juglar, C, i, 442.

Kartell, ii, 445.

Kautsky, K., ii, 502.

Kemmerer, E. W., i, 442.

Keynes, J. M., i, 442.

Kingsley, Mary, i, 226.

Knickerbocker Trust Company, i, 391.

Kropotkin, ii, 69.

Krupp, i, 58.

Kuczynski, ii, 247.

Labor, what is meant by, i, 8 ; pro-
ductive and unproductive, i, 16 ;
predatory, i, 20.
Labor legislation, see Contents, ch. 58

how far socialistic, ii, 479.
Labor supply, a cause of external econ-
omies, i, 190; in buUding opera-
tions, illustrates joint demand, i,
218.
Labor theory of value, ii, 154.

Labor unions, see Contents, ch. 57.

Laborers, unskilled, why wages low
ii, 146; would be high if scarce, ii.
177.

Landry, A., ii, 278.

Land taxes, see Contents, ch. 70.

Land tenure, see Contents, ch. 42.

Large-scale production, see Contents,
ch. 4 ; connection with combination,
ii, 452.

Latin Union, i, 274.

Laughlin, J. L., i, 442.

Law, in relation to productive labor,
i, 28.

Law's notes, i, 314.

Lawyers, productive laborers, i, 23.

Leclaire, ii, 336, 338.

"Legitimate" business, i, 29.

"Legitimate" profits, ii, 195.

Leisure class, how it emerges, ii, 274 ;
justification of, ii, 275.

Le Rossignol, J. E., ii, 502.

Leroy-Beaulieu, P., ii, 562.

Levasseur, E., ii, 278.

Lewis and Clark's expedition, i, 127.

Liberty, restriction of, ii, 283; under
socialism, ii, 482.

Liebermann, i, 101.

Liefmann, ii, 501.

Limitation of output, ii, 308.

Limited liability, i, 81.

Limited coinage in 1878 and 1890, i,
277.

Limping standard, in France, i, 275;
in United States, i, 276.

List, F., i, 527.

Living wage, a hazy notion, ii, 331;
in relation to taxation, ii, 522.

Locke, ii, 273.

London, birthrates in different quar-
ters, ii, 242, 243; distribution of
incomes, ii, 256, 257.

Lowell, A. L., ii, 432.

Machinery, and identical movements,
i, 36; connection with tariff prob-
lems in United States, i, 541.
Macrosty, ii, 501.
McCulIoch, ii, 510.
McKay, i, 114.

"Making work," effect on wages, ii,
210; no inducement to, under so-
cialism, ii, 486.
Malthus, ii, 225, 228, 229, 240, 245.
Malthusianism, ii, 333, 485.
Mantoux, i, 105.

Margin of cultivation defined, ii, 66.
Marginal producers, i, 179.
Marginal utility, i, 121 ; of money, i,
124 ; ultimate determinant of value,
ii, 157 ; see also Marginal vendibility.
Marginal vendibility, i, 123, 134, 142,
148, 171, 179; see also Marginal
utility.
Marriage, slight variation of rates, ii,

240 ; average age at, ii, 241.
Marshall, A., i, 124, 179, 189, ii, 102,

181, 184, 277.
Martin, ii, 172.
Marx, K., ii, 57, 364, 467, 475, 497, 498,

502.
Massachusetts, birthrates of foreign
born and natives, ii, 247 ; Ten Hour
Act, ii, 320 ; mill conditions in
earlier times, ii, 321 ; railway com-
mission, ii, 435.
Maximum happiness, i, 132.
Mayr, G., ii, 239, 278.
Meade, E. S., ii, 502.
Medium of exchange, i, 110, 223.
Mercantilism, i, 475, 507, 537.
Mergenthaler linotype, ii, 114, 115.
Metals, relative production of different,

i, 225.
Metaj^er tenure, ii, 79.
Mexican silver supply, i, 253.
Meyer, R., ii, 255, 265.
Michigan, birthrates of native bom

and foreign born, ii, 243.
Milk, wasteful competition in supply
i, 64 ; " postage stamp rate " on,U, 67

572

INDEX

Mill, J. S., 1, 105, 237, 544, ii, 108, 154,
252, 268, 328, 422.

Mines, subject to diminishing returns,
i, 184 ; rent of, ii, 98.

Minimum for efficiency, i, 95.

Minimum wages, ii, 331 ; in relation to
taxation, ii, 521.

Mint price of gold, i, 229.

Mitchell, W. C, i, 285, 291, 313, 443.

Mombert, ii, 243.

Money, Cliiozza, ii, 255, 258.

Money, see Contents, Bk. Ill ; what is
meant by the term, i, 110, 432, 433 ;
under socialism, ii, 470.

Money incomes, wherein high range
advantageous, i, 497, 503, ii, 162.

Monopoly, see Contents, chs. 15, 45,
65 ; how connected with internal
economies, i, 191 profit defined, i,
198; industrial, ii, 113; gains
sometimes defined as a kind of rent,
ii, 123; of labor, ii, 135, 305; the
essential characteristic of public
service industries, ii, 420, 429 ; what
are earmarks of, ii, 461 ; effect of
tax on monopolized commodities, ii,
556 ; fiscal, ii, 560.

Morgan, J. P., 89, 326, ii. 416.

Mortgage banks, i, 326.

Moses, i, 307.

Motives of business men, ii, 175, 205,
267, 536.

Multiple standard discussed, i, 434.

Munro, ii, 432.

Napoleon, i, 24.

National banking system in United
States, i, 371.

National Monetary Commission, i, 442.

Nelson Manufacturing Company, ii,
336.

New York banks, position in American
banking system, i, 374, 407.

New York Central Railway, ii, 407.

New York City, value of land in, ii, 86.

New Zealand, death rate in, ii, 228 ;
compulsory arbitration law, ii, 348,
350; old-age pensions, ii, 360.

Newsholme, ii, 228, 232, 239, 244.

Non-competing groups, described, ii,
141 ; connection with theory of in-
ternational trade, ii, 161.

Non-material wealth, i, 19.

Northrop loom, ii, 114, 115.

Note brokers in United States, i, 344.

Officii buildings in American cities, ii,

85, 88, 89.

Ogle, ii, 241.

Ohio Life and Trust Company, i, 390.

Oil, illustrates joint cost, i, 217.

Old-age pensions, ii, 360, 370.

Open shop, ii, 304.

Open union, ii, 303.

Oregon question, in reference to free
trade, i, 509.

Osier, ii, 485.

"Outside paper," when bought by
banks, i, 344.

Overcapitalization of railways, ii, 409.

Overend, Gurney and Company, i, 391.

Overinvestment, see Contents, ch. 41 ;
also i, 397.

Overproduction, see Contents, ch. 41 ;
easily remedied under socialism, ii,
481.

Overvalued metal, under double stand-
ard, i, 263.

Owen, R., ii, 137.

Pain economy, i, 127.

Panama canal, illustrates uncertainty

of labor's product, ii, 216.
Pantaleoni, M., i, 220.
Paper money, see Contents, ch. 23;

based on index numbers, i, 436 ;

efTect on foreign exchanges, i, 462.
"Parasitic" industries, i, 485, ii, 162.
Pareto, ii, 265.
Paris, birthrates in different quarters,

ii, 242.
Partnership, legal position of, i, 80.
Patents, articles illustrate monopoly

prices, i, 206 ; justification of, ii,

114; term of, ii, 114.
Patten, i, 127.
Paulsen, ii, 276.
Pawnbroker's loans, ii, 35, 47.
Perkin, i, 101.
Phelps, ii, 232.

"Philanthropy at 4 per cent," ii, 47.
Piecework, ii, 307.
Pigou, A. C, i, 545, ii, 265, 277.
Pioneer cultivation, ii, 68.
Pleasure economy, i, 127.
Pohle, L., i, 545.
Pools among railways, ii, 403.
Poor laws, ii, 369.
Population, see Contents, chs. 53, 54 ;

movement of, within a group, ii. 158.
Positive checks, ii, 230.
" Postage stamp rate," on railways, for

milk, ii, 67.
Postal rate, uniform because of monop-
oly, i, 207; relation to expenses, ii,

422.

INDEX

573

Potential competition, ii, 154.

Potosi, silver mines of, i, 253.

Predatorj' cultivation, i, 534, ii, 73.

Predatory labor, i, 20.

"Premium on currency" in 1903 and
1907, i, 409.

Prestige value, i, 126.

Preventive checks, ii, 230.

Price, defined, i, 113.

Prices in United States, 1890-1906, i,
291 ; 1860-80, i, 313.

Printers, how affected by inventions; ,
ii, 212.

"Private banks" in Germany, i, 365.

Private property, see Property.

Prizes, effect on remuneration, ii, 134,
181.

Producer's capital, i, 70.

Producer's surplus, i, 187, ii, 63.

Productive and unproductive labor, i,
16.

Producti\aty of capital, ii, 11.

Professors' salaries, why low, ii, 132.

Profit sharing, see Contents, eh. 59.

Progressive taxation, ii, 509, 513, 525 ;
as to inheritance, ii, 532.

Property, grounds of, see Contents,
chs. 55, 66, 67; in land, ii, 81, 82.

Protection, see Contents, chs. 36, 37.

Prussia, distribution of incomes, ii,
254 ; of property, ii, 257 ; purchase
of railways, ii, 427 ; income tax
sj'stem, ii, 527.

Psychic income, i, 131.

Psychology, relation to industrial
crises, i, 391 ; to business ambition,
i, 103, ii, 175, 207 ; to wages system,
ii, 284 ; to problems of socialism, ii,
489, 493.

Public debts, how affected by price
changes, i, 294 ; see also War debts.

Public goods, i, 5.

Publicity, for control of corporations,
ii, 435, 460.

Public ownership, see Contents, ch. 64 ;
how far socialistic, ii, 478 ; how re-
lated to taxation, ii, 506.
"Public service" industries and cor-
porations, i, 83, ii, 116, 420.
"Public utilities," right to strike in,

ii, 291, 292.
Pullman, town of, ii, 96.

Quantity theory of money, i, 233, 415.

Race .«uicide, ii, 251.
Rae, .J., ii, 385.
Raiffeisen, ii, 379.

Railways, see Contents, chs. 62, 63 ;

difficulty of supervising \ahoT, i, 56 ;

construction connected with crises,

i, 392, 395.

Rapidity of circulation, as to money, i,

236 ; as to goods, i, 237.
Rappard, ii, 31.

Ratio (coinage; between gold and sil-
ver, i, 262 ; in United States, i, 264 ;
in France, i, 262, 270.
Ratio (market) between gold and sil-
ver, change after 1873, i, 274 ; course
since 1893, i, 280; steadiness of,
promoted by bimetallism, i, 272,
281 ; how probably affected by inter-
national bimetallism, i, 281.
"Raub-bau," ii, 73.
Raw materials, give no occasion for
protection to young industries, i,
527, 543.
Real estate agents, ii, 90, 94.
Rebates, ii, 402, 448.
Reciprocal demand, theory of, i, 495,

497.
Reciprocity, inevitable as regards
shipping, i, 531 ; with Canada, i. 477,
509 ; how far expedient for Great
Britain, i, 536.
Regressive taxation, ii, 560.
Reichsbank, description of, i, 364.
Rent, see Contents, chs. 42, 43, 44 ;
not a monopoly return, ii, 113, 123;
uses of the term, ii, 124 ; theory
of, how far applicable to business
profits, ii, 180 ; as distinguished from
rental, ii, 540.
Representative firm, ii, 184.
Reserve cities, i, 373.
Resumption of specie paj-ments, in
United States in 1879, i, 318; what
method desirable, i, 315.
Retail prices, how affected by marginal
vendibility, i, 150 ; how related to
wholesale prices, i, 150 ; how affected
by custom, i, 150 ; advantages of
fixed, i, 152.
Retail trading on large scale, i, 56.
Rhodes, C, i, 201.
Ricardo, D., ii, 73, 102, 154, 159.
Rignano, E., ii, 270.
Ripley, W. Z.. ii, 501.
Rising prices, how connected with
prosperity, i, 297 ; effect on wages, i,
1 298 ; effect on business profits, i, 299.
Rochdale Pioneers, ii. 374.
Rodbertus, explanation of crises by,

ii. 57; on unemployment, ii, 364.
Roscher, W., i, 105.

574

INDEX

Rothschild, i, 89, 326, ii, 48.
Roundabout production, ii, 9, 12, 17.
Rowntree, B. S., i, 93.
Royalties on mines, ii, 102.
Rubinow, I., ii, 385.
"Runs" on banks, i, 402, 405.
Rupee in India, i, 279.
Russell, B., ii, 70.

Saver's rent, ii, 28 ; in relation to taxa-
tion, ii, 517.

Saving, stimulated by corporations, i,
83 ; how far dependent on a reward,
ii, 21 ; marginal, ii, 26.

Saving and capital, i, 72.

Savings banks, i, 74, 325.

Scab, ii, 313.

Schffiffle, A., ii, 502.

SchmoUer, G., ii, 276, 277.

SchiiUer, R., i, 544.

Schulze-Delitzsch, ii, 378.

Scissors, simile of, to illustrate theory
of value, i, 180, 188.

Scotch banking system, i, 355.

Seager, H. R., ii, 385.

Seasonal price, relation to market
price, i, 145.

Securities not capital, ii, 5.

Seigniorage, i, 228, 268.

Seligman, E. R. A., ii, 562.

Senior, i, 307.

Servants, high wages in United States,
i, 505, ii, 132, 299; per family in
London, ii, 255.

Share farming, ii, 79.

Sharfman, I. L., ii, 501.

Sherman Act, ii, 403, 444, 461.

Shipbuilding in the United States and
Great Britain contrasted, i, 189.

Shipping, effects of charges, on imports
and exports, i, 472; political argu-
ments for subsidies, i, 529.

Shirtwaist workers, ii, 149.

Shop Committees, ii, 295.

Sickness, insurance against, ii, 357.

Siemens, W., ii, 172, 424.

Silk duties in United States, possible
effects of, i, 528, 542.

Silver, drain to the East, i, 242 ; posi-
tion in sixteenth century, i, 253
production after discovery of Amer-
ica, i, 253; production 1871-1905
i, 279 ; sale of silver bullion to Brit-
ish government during Great War
1, 2'78.

Silver certificates, i, 278.

Silver dollar, i, 261, 264; free coinage
dropped in 1873, i, 276,

Single tax, ii, 80 ; with reference to
urban land, ii, 104 ; with reference to
mines, ii, 106.
Site rent, ii, 67.
Skates, American imitated in Germany,

i, 541.
Skelton, O. D., ii, 602.
Slag, illustrates joint cost, i, 216.
Slatin, i, 227.
Sliding scale, ii, 343.
Smith, Adam, i, 41, 105, 244, ii, 52,

137, 191.
Socialism, see Contents, chs. 64, 65 ;
attitude toward classification of
incomes, ii, 126.
Social stratification, ii, 137.
Soetbeer, i, 256.

Soldiers and sailors, productive la-
borers, i, 24.
Sombart, ii, 265.

South African gold supply, i, 258, ii, 100.
Spargo, J., ii, 502.

Specie premium, general discussion, i,
310; in United States during Civil
War, i, 3x2 ; connection with foreign
exchange x, 462.
Speculatioi . see Contents, ch. 11; in
relation vi "corners," i, 210; in real
estate, ii, 94 ; in railway securities,
ii, 414.
Spendthrift loans, effects on rate of

interest, ii, 34.
Sprague, O. M. W., i, 442.
Stabilized dollar, i, 437.
Stadtwirthschaft, i, 39.
Stahlwerksverband, i, 62.
Standardizing, i, 161.
Standard of living, and protective
tariff, i, 512; how it affects wages,
ii, 237, 238.
Standard Oil Company, i, 217, ii, 402,

410, 443, -146, 449.
Standard rate, of union wages, ii, 307 ;

as to prices, ii, 457.
Stanwood, E., i, 545.
State banks in United States, i, 423.
Static state, i, 172, ii, 252.
Statistics of capital often misleading,

ii, 7.
Steel Corporation (U. S.), and vertical
combination, i, 61 ; how affected by
rising prices, i, 299 ; ii, 456.
Stephenson, i, 35, 40, ii, 172, 424.
Sterling exchange, i, 449.
Steuart, J., i, 307.
Stock Exchange operations, i, 26, 87 ;

evils of, i, 164 ; clearings, i, 418.
Stoppage at the source, ii, 522.

INDEX

575

Street railways, uniform fare the result
of monopoly, i, 207.

"Strike-breakers," ii, 289.

Strikes, defined, ii, 288 ; violence in,
ii, 289, 314 ; the right to strike, ii,
287, 290.

Subsidiary coin, i, 267.

Subsistence and labor eflBciency, i, 93.

Subsoil draining, ii, 77.

Suffolk Bank system, i, 340.

Sugar refining, i, 59, 62 ; bounties of
1890 in United States, i, 531 ; Refin-
ing Co., ii, 443, 446 ; taxation in
Germany, ii, 553 ; taxation in United
States, ii, 559, 561.

Super-tax, British, ii, 526.

Supply curve, i, 143.

Surnames, illustrating simpler division
of labor, i, 31.

Surplus, essential for making capital,
i, 71 ; its accumulation irksome, ii,
20.

Surtax, United States, ii, 531, 532.

"Sweating," ii, 330.

"Sweating" of coins, i, 227.

"Tantiemes," ii, 194.

"Tariff the mother of trusts," i, 521.

Taussig, F. W., i, 545, ii, 115.

Tea and coffee, British taxes on, i, 519 ;

how possibly cheaper in United

States because of protection, i, 524 ;

taxation of, ii, 560, 561.
Technical education and efficiency of

industry, i, 98.
Telephone, rates illustrate monopoly

value, i, 206 ; should be monopoly,

ii, 422.
Tenancy in United States, ii, 79.
Textile inventions, i, 34.
Thomas process, i, 216.
Three-cornered trade, i, 454,
Thiinen, ii, 67.
"Tie-up," ii, 315.
Tin mines of Cornwall, ii, 101.
Tobacco, a medium of exchange, i. 111 ;

how taxed in Great Britain, i, 519;

fiscal monopoly of, ii, 561 ; Trust,

see American Tobacco Company.
Total utility, i, 120.
Toynbee, A., i, 105.
Trade agreements, ii, 346.
Trademark, effect on value and profits,

i, 175 ; relation to dumping, i, 208.
Trade unions, see Contents, ch. 57;

out-of-work benefit, ii, 366.
Transferability of corporate shares,

consequences of, i, 85.

Transportation Act of 1920, ii, 439.

Transvaal mines, i, 258.

Travelers' expenses, effects on imports

and exports, i, 471.
Truck-farm argument for protection, i,

510.
Trust companies, i, 345.
"Trusts," see Contents, ch. 65; and

horizontal combination, i, 60 ; how

far promoted bj' protection, i, 621 ;

how far monopolies, ii, 118; origin

of name, ii, 443.
Tufts, ii, 276.

Underfed laborers, i, 93.

Undervalued metal, under double
standard, i, 263.

Unearned gains, ii, 203.

Unearned increment, ii, 80, 82; on
urban sites, ii, 104 ; on railways, ii,
407.

Unemployment, not remediable by
protection, i, 510; strengthens
fallacy of "making work," ii, 211,
308 ; insurance and other provision
against, ii, 364.

United States, and geographical divi-
sion of labor, i, 43, 44 ; protection in,
i, 538 ; distribution of income in,
ii, 258 ; income taxes in, ii, 529.

"United States notes," i, 318.

United States Steel Corporation, see
Steel Corporation.

Urban sites, causes of advantages, ii,
84 ; relation to prices, ii, 84 ; inci-
dence of taxes on, ii, 541.

Utility, in relation to value, i, 116;
diminishing, i, 118; total, i, 120;
marginal, i, 121 ; marginal, of money,
i, 124 ; to sellers, why usually of no
effect on price, i, 153.

Value in exchange, defined, i. 111;
different meanings of, i, 112; of
money, i, 232.

Vanderbilt, ii, 48, 414.

Veblen, T., i, 105.

Vertical combination, i, 60.

Vested interests, as to agricultural
land, ii, 82 ; as to urban sites, ii, 107 ;
as to corporate securities, ii, 120,
425.

Vienna, birthrates in different quar-
ters, ii, 242.

Violence in strikes, ii, 289, 314.

Wages, money, rates vary between
countries, i, 480 ; effect on gain from

576

"INDEX

international trade, i, 502; what
determines general rate, sec Con-
tents, ch. 52; relation to standard
of living, ii, 237 ; effect of workmen's
insurance on, ii, 356.

Wages argument for protection, i, 512.

Wages system, see Contents, ch. 56;
drawbacks of, ii, 284 ; necessity of,
ii, 473.

Wagner, A,, i, 545, ii, 265, 562.

WaIE;rj:.Ui,_445.

Walker, F. A., ii, 181.

WaiHpum. illustrates influence of con-
vention on money, i, 225.

War debts, a kind of spendthrift bor-
rowing, ii, 5, 37 ; effects on rate of
interest, ii, 31, 37; effects on supply
of real capital, ii, 38 ; incidence of
the burden, ii, 39, 40 ; sec also Pub-
lic debts.

War Industries Board, i, 285.

"Wash sales," i, 166.

Water, as a free good and as an eco-
nomic good, i, 3, 4.

Water power, brings conditions of
varying cost, i, 185 ; how far
suited for public management, ii,
425.

Watt, J., i, 35, ii. 172, 424.

Wealth, see Contents, ch. 1.

Webb, B., ii. 385, 502.;

Webb, S., ii, 385, 502./

Welfare arrangements, ii, 342.

WeUs, H. G., ii, 502.

Welsbach mantles, i, 203.

Westminster, Duke of, ii, 105.

Wheat, cvUturo, i, 55 ; seasonal supply
virtually fixed, i, 147 ; how price may
be affected by corners, i, 212 ; why
exported from United States, i, 482 ;
different positions of United States
and Russia as exporters of, i, 502 ;
predatory cultivation, ii, 74; yield
per acre, ii, 74.

Whitaker, A. C, i, 544.

Wicksteed, P. H., i, 110, 220.

Wiebe, i, 254.

Wieser, F., i, 220.

Wilcox, D. F., ii. 502.

Willcox, W. F., ii, 239.

Williams, G. F., i, 201.

Withers, H.. i, 442.

Wolfe, ii. 243.

Wool, why coarse grades imported into
United States, i, 487 ; varying
natural conditions in United States,
i, 491 ; clothing, amount of customs
tax on, ii, 559.

Wool-scouring and utilization of grease,
i, 54, 216.

Women, wages of, ii, 149.

Workmen's insurance, see Contents,
ch. 60.

Works Councils, ii. 295.

Young, A. A., ii, 247.

Young industries, protection to, i, 526.

Yule, ii, 239.

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