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Charles Goldring 






MACMILLAN & CO., Limited 






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




All rights resewed 


COPTBIGHT, 1911, 1915, 1921, 

By the macmillan company. 

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







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. 

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. 




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. 



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. 

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

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 affecting rent, 65 — Sec. 3. Qualifications 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 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. 


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. 


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. 

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. 


CHAPTER 46 vol. ii 


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. 


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. 


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 



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. 


„ . . 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. 


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 


VOL. n 


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. 


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. 


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. 


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 



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. 


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. 


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. 




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. 


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. 


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 


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 


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 



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 



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. 

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. 

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 



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. 


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. 



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? 


. , . . 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 



CHAPTER 68 vol. n 


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, 


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. 


Taxes on Land and Buildings 539-551 

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. Qual- 


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, 


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 



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- 
co me 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. 



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. 


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- 

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, 


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 


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- 


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 

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 


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. 


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 


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. 


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- 


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. 


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. 


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 


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. 


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 ■ — -'^ 


§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. 


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. 


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 



t hat a ccu mula tion 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 ofte n 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 — 
w hether^ 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. 


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 invo lve, s aving, 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- 

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 


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. 


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 


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 

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 


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- 



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 


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

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. 



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 


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 £^ 



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. 


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- 



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 tjni e-consum ing 
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. 



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, 

§ 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 



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." 


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- 


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 

§ 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 


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 


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 


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. 


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 


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 

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 


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. 


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 


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- 



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 



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 


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. 


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 


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 


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 econ omists 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. 



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 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 


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

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? 


/[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, t o 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. 


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 


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 i s agre ed 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 


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, 


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 


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. 


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 

^ See the Chapter on Crises (Chapter 28). 

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 



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. 


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 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; 


otherwise the total supply will not be forthcoming. The supply 
which can be raised at 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 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. 


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 


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 


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. 


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 


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 

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. 


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, 


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 


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- 


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 



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. 


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- 


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 r eturn on capital . Tenancy raises some inde- 
pendent questions. ^ 

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


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 >•" 


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 





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- 


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. 


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. 

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 



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 


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 historica l and complex, and some- 
Jimes w tjjmsicaL 

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 som e 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 sh ows 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 


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 


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. 


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. 


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 t he 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 p rogress an d_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. 


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. 

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 

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- 

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, drilli ng a nd 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 

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. 


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 
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 



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. 


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 


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 


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 

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 


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 


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. 

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. 



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 

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 


print their books without making payment, are not inaptly termed 

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 

"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 

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- 

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. 


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 

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 

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 


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- 

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. 

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 

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 



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 


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 


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. 


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. 


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 


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. 


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" 

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. 


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. 

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 


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 


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 a nd 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- 


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. 


§ 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. 


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 

§ 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 


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

Exp ense 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, h ut th e 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 



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 


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 


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 


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: th e 
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. 


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-"" 


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 


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 prima rjly 
to swing themselves into the position of the leisure class. Bu si- 
_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. 


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 


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- 


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 


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 


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. 


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 


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 

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. 


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. 

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. 



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. 


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. 


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. "^ Cha nges 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. 


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. 


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 



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. 

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 



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 


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, ) 


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. 


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. 


§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 


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

,£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 


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. 


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 

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. 


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 

§ 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 


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. 


§ 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 


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- 


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. 


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. 


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. 

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 


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? 


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. 


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 niorea jy^antag eous 
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 


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 


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 

§ 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- 


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 

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 


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- 


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 

» Compare Chapters 67 and 58. 


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 


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. 

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. 



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 

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* 



§ 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- 

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. 


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 


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. 


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. 



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- 


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- 


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. 


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. 


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. 


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. 


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. 


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 


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. 


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. 


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 


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 


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 


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 


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 


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- 

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 

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. 



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 o f subsist- 

§ 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 


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 

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 


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 

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. 


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- 


thus gave the names PQ^ ti^ ^a nd prevent iv e^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 l ook 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 

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 



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 






England and Wales 




45 (Max.) 



15 (ilfira.) 


Excess of 

30 (Max.) 



(in Years) 



rate sinks to much more moderate figures — little above 20 per 
1000 for France, and noticeably below that figure for England and 

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 


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. 


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 em igration. 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- 


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 




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 
















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 


Malthiisian propositijsiiisJiiiipregnable. A limitation of numbers 
is not a cause of bigli wage s, 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 


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 

» See Cnapter 57. 


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. 


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 

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 

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: ^ — 




Professional and independent classes 

1 The often-cited figures of Ogle, in Journal Royal Statistical Society, 1890, 
pp. 274-275. 





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: — 


Very poor quarters 


Comfortable . . 
Very comf oi table . 


Very rich . . . 























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 



[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) 

Birth Rate 


Death Rate 


Birth Rate 


Death Rate 


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 


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- 


POPULATION (Continued) 


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 










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. 


Birth Rates fer 1000 Women aged 14-49 





Native mothers 




Foreign-born mothers 


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 soci al ambitio n — forethought to the point of timidity. J 
People's nations as to what is a p roper mode o f living steadily be- I 
come more exacting, and the expea^e^pf m aintaining..a .iaajily on | 
the conventional scale becomes g reater. Marriage s t ake plajc e at ■ 
a comparatively la te ag e, and the proportion o f those who do not / 
marry at all is considerable. \Miere there is accumulated property, 
large families are a\ '£)ided lest the in heritance b e 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. 


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 

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 


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. 


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 



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 « 


.^00,000 " 




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 . . . . 


Per Cent op 

OF Persons 

THE Population 






















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." 




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 


Per Cent op 







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. 


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 



731,700 persons 

had property from 

6,000 to 20,000 



11 i( 

20,000 " 32,000 



U li 

32,000 " 52,000 



a u 

52,000 " 100,000 


U (( 

100,000 " 200,000 


u u 

200,000 " 500,000 


u u 

500,000 " 1,000,000 


ti « 

1,000,000 " 2,000,000 



" 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. 


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 




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 


^.u^•a::.9 of pdkons ■ 


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. 


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. 


§ 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). 


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 


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- ' 

§ 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. 


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. 


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, 


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. 


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 

§ 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. 


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 

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. 


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 \ 


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. 


§ 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^^^-^frsitli lgom e, 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. 


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. 


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. 


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. 


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 

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. 


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). 




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 


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 l arge- 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 


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, 


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 


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 hir ed 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 — ' 
press ure 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 

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 


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- 

§ 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. 


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 


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. 


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. 


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 coul d have n o 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 l ack 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 


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 

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 

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 

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 accotQ plish 
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. 


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- 

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- 
compa njed-in Gre at Britai n by a check on progre ss, 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 


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- 


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- 


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 

§ 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 


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. 

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 par t 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 



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 

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 


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—,- 
jealous y betw een 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. 


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- 


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- 



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. 


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. 


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, 


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- 


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. 


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 


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 


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/^v ing " wage rests on tbjs samejba sis^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- 


ferent from those considered in the preceding sections; and yet, if 
pushed to its farthest consequences, it might easily raise a new 

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 


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. 


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. 

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 


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 


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 

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. 


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- 


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 


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 


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 


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? 


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 

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, 


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 


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. 


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. 


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. 


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 


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. 

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 



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- 

§ 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 


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- 

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. 


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. 


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. 


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 

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 


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 


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 


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 


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 


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 — 


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 


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- 


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 


" 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 


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 

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. 


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 


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- 


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. 


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 

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. 


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- 

§ 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 


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 


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- 


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 

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 


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 

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 

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 

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 


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- 

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. 




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 



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 


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 


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 

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 


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 


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 


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 


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. 


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 


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. 

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 in directly , by promoting 
the general tendency to large-scale production. They have had the 
same effect more directby', thriTthfe tendency to i ncreasing gaij ns 
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 ad vance 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 



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 

§ 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 


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 

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 


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 

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 

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." 


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- 

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 


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 

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 

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- 


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. 

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 




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 

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. 


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 


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 


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, 


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 


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 


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- 


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. 


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