HOME UNIVERSITY LIBRARY
OF MODERN KNOWLEDGE
i
THE SCIENCE OF WEALTH
BY J. A. HOBSON, M.A.
LONDON
WILLIAMS & NORGATE
HENRY HOLT & Co., NEW YORK
CANADA : WM. BRIGGS, TORONTO
V.
RICHARD CLAY & SONS, LIMITED,
BREAD STREET HILL, E.a, AND
BUNQAY, SUFFOLK.
CONTENTS
CHAP. PACK
I THE MEANING OP WEALTH , . 9
II THE BUSINESS AND THE TRADE . . IT
HI THE INDUSTRIAL SYSTEM! . . . SO
IV HOW THE INDUSTRIAL SYSTEM WORKS * 42
V COSTS AND SURPLUS .... 64
VI UNPRODUCTIVE SURPLUS . . . .87
VII WAGES . . . . . . .117
VIII PROFITS 141
IX EXCHANGE AND PRICES . . .164
X DEMAND AND SUPPLY . . , .183
XI THE LABOUR MOVEMENT AND STATE
SOCIALISM ...... 208
XII FOREIGN TRADE , 231
XIII HUMAN VALUES . 249'
PREFACE
THIS volume contains a study of the
structure and working of the modern
business world in which wealth is made and
distributed as income to those who have made
it or can lawfully get hold of it. It describes
the ways in which the productive powers of
Labour, Ability, Land, Capital and Society
are applied in the various trades, arts and
professions, for the production of material
goods and services, and the ways in which
the payment for this work is regulated and
carried out. No knowledge of economic
facts or principles is presumed, except such
as every intelligent man or woman acquires
in the ordinary experience of life.
So brief a presentation of so large a subject
will suffer necessary defects. It will be apt
to be too unqualified in statement and too
dogmatic in mode of argument. It will
shirk some important points of controversy,
Since the line of interpretation taken here
has been more fully defended in a larger
volume entitled The Industrial System^ I
may be permitted to refer to it those readers
who may wish to follow out the argument in
more detail
J. A. HOBSOK,
February 6, 1911.
vii
NOTE ON BOOKS
STUDENTS desiring to follow the growth of the
of Wealth in this country will begin with Adam
Wealth of Nations, following with Ricardo's Principle^*
and 3. S. Mill's Principles of Political Economy for tito
** classical " theory. In Jevons' Theory of ' Politi&c^
Economy they will find a challenge to the older theory"*
and a new interpretation of economic " value." Tlio
best authoritative statement of modern " orthodox * *
theory is in Marshall's Principles of Economics (MacmQlan)*
while PhiHp H. Wicksteed's Common Sense of Politicc&Z
Htconomy (Macmillan) presents a valuable psychological
interpretation.
A reliable brief account of the growth of the science may
be found in L. L. Price's Political Economy in England
(Methuen), whilst E. Cannan presents a very usefiil
criticism of much of the earlier work in his Theories of
Prndwctfam cm& Dis&ibwtwm (P. S. King). In Foxwell*s
Introduction to Monger's Right to the Whole Produce of
o&mtr is found an interesting account of the l^ginnkigj
of socialistic theory in England, in connection with whielbt
HyndingHi'a Economics of Socialism and Bernsteirx's
Evolutionary Socialism may be read.
For a fuller statement of the method of description ao.<3L
interpretation adopted in this volume I may refer to my
Evolution of Modern Capitalism^ (Scott) and The IndwtrtciZ
System (Longmans). Among innumerable special studios
of the facts and problems of modern industry, I would
refer among the larger works to Booth's Life and Ldboi&r
in London (Macmillan), and Rowntree's Poverty (Mac-
millan), Schloss's Methods of Industrial Remuneration
(Williams and Norgate), Dr. ShadwelTs Industrial Efflc'Z-
ency (I*onginans), and Brassey and Chapman's TForfe an*&
Wa^es (JLoi^mans), But the laxgesl ordered mass o
information upon present-day industrial conditions lios
in the Beports of flie Poor Law Commission.
On Finance two excellent elementary textbooks msiry
be found in Withers' The Meaning of Money (Methuen.),
and Armitage Smith's Principle* and Methods of
(Murray).
THE SCIENCE OF WEALTH
CHAPTER I
THE MEANING OF WEALTH
COMMON usage in the present day confines
the term " Wealth '? to things capable of being
bought and sold, measuring the amount of
wealth they represent by the quantity ol
money they would fetch in the market. When
we think and speak of " a wealthy man," we
reduce to terms of money all his saleable
possessions, including not only the lands,
building^ machinery, materials, cash, he
owns and employs for business purposes,
together with the share certificates and other
paper documents which give him claims upon
the produce of the future, but also his house,
furniture, pictures, books and other private
possessions which he has no intention ol
selling. All have their market value and his
" wealth " is the sum of these values.
The " wealth " of a nation may be estimated
in a similar manner. Taken at any given
10 THE SCIENCE OF WEALTH
time, it will consist of the total sum of market-
able goods owned by the State and by the
citizens who are the units of the nation. It
will, of course, include some goods which lie
abroad in foreign countries, and will exclude
some goods which, though lying inside the
country, belong to foreigners.
The wealth of Great Britain, thus conceived,
will not include any money estimate of her
geographical position or climate, or any other
natural advantages which are of use for
individual and commercial purposes. The
Thames, as a business asset for the nation,
will only rank as national wealth indirectly,
in so far as it affords facilities to businesses
engaged in the carrying trade. There are
two good reasons for excluding these natural
advantages from a business estimate of
national wealth. In the first place, they are
not for sale and no market valuation can be
set on them. Secondly, if such a valuation
of climate, position, harbourage, etc., were
attempted, it would cause overlapping and
duplication in the " national accounts,'.' for
all these natural advantages, utilized as
they are for countless purposes in private
businesses, would then be reckoned twice
aver.
Thus, whether we regard individuals or
nations, it will be convenient for business
purposes to confine " wealth ?! to marketable
THE MEANING OF WEALTH II
articles taken at their market value. This
rule has its difficulties and its defects. Things
which are " wealth " in one place or at one
time are not wealth in another place or at
another time. When the population of a
country grows, much land which was not
wealth becomes wealth : water, air and
sunshine pass from " free " into marketable
goods in the rise of city rents. Though, slave
labour is far less productive than free labour,
the emancipation of slaves in the United
States cancelled a vast amount of private
wealth.
Again, reckoning wealth by market prices
not merely implies a constant change in
the amount of wealth any particular goods
represent, but changes in the wealth of a
nation, or of the world, without any corre-
sponding change in the quantity or quality of
the " goods." A general rise or fall of prices,
due to monetary causes, will thus produce a
shrinkage or an expansion of " wealth '* which
has no substance. Though statists can make
corrections of such errors, the reliance upon
current prices as the measure of " wealth ?!
will continue to be a source of some confusion
in the study of wealth.
When stock is taken of the things which
constitute " wealth, 9 ' the ordinary conception
of it will be found too materialistic. The
good-will of a business must rank as wealth,
12 THE SCIENCE OF WEALTH
Just as much as its factory buildings : though
immaterial, it is saleable. Sometimes it has
been contended that the efficiency, skill and
other qualities of business ability or labour
power, should be reckoned in the national
wealth. But this would be wrong. Under
slavery the productive capacities of the slave
are parts of the saleable commodity he is ;
but when persons are not wealth neither are
the capacities that are inseparable from them.
Only the particular services which they can
render and hand over to a purchaser are
wealth. Thus the skill or knowledge of a
doctor is not wealth, but the operation he
performs or the opinion which he gives upon
a case is wealth. So it is with all sorts of
professional and personal service. The
cooking and the waiting are wealth in the
same sense as the food which they prepare
and serve : the lesson ranks as wealth on
equal terms with the text-book. Where,
however, personal skill or effort is applied to
material goods so as to change their form or
place, it is usual to consider this skill or effort
as entering into the goods and so adding to
their wealth. So wage-labour and work of
management are not commonly accounted
wealth, but are included in the wealth of
the goods they help to produce. In reckon-
ing wealth from the social standpoint it
is clear that they cannot be counted both
THE MEANING OF WEALTH 13
ways, and it is far more convenient to count
them in the goods whose market value they
enhance.
If stock were taken at a particular moment
of the wealth of a man or of a nation, of
course only material forms would count, for
services involve a lapse of time. But
professional, domestic., recreative and other
services, which are not merely applied to the
production of material goods, must evidently
rank as separate sorts of wealth, if they arc
sold. In any inventory of the wealth of a
nation taken over a period of time they must
be included. The part they play in the
general fund of wealth will be more evident
when we treat of " income,"
The arrangements for producing or pro-
curing these various sorts of tangible or
intangible wealth we call the economic* or
industrial system. The hitter term it will be
more convenient to use. But it will recjuire
a stretching of the term " industry," so us to
cover all those activities which go to make
any sort of wealth, including the services of
the judge, the clergyman, the acrobat, or
the trade-union secretary. So not only the
extractive industries of agriculture and mining,
the manufacturing, transport and distributive
trades concerned with material goods, but the
work of government, the learned professions)
the fine arts, all gainful recreations and amuse-
14 THE SCIENCE OF WEALTH
ments, must be brought under the " industrial
system."
The product of all these forms of Industry
is wealth and its amount is estimated at its
market prices.
There is, however, another broader and
widely different use of the term wealth which
identifies it with human welfare or well-being.
" There is no wealth but life. Life, including
all its powers of love, of joy and of admiration.
That country is the richest which nourishes
the greatest number of noble and happy
human beings ; that man is richest who,
having perfected the functions of his own life
to the utmost, has also the widest helpful
influence, both personal and by means of his
possessions, over the lives of others." 1
John Ruskin and some other prophets of
this wider wealth have denied the validity
and the utility of -the narrower Political
Economy. Mere statements about marketable
goods, measured in terms of money, do not,
they urge, afford any useful information as to
the effects of their production and consump-
tion upon human life and happiness. Other
students of society have also questioned the
|l| validity of separating the study of economic
processes from that of other social processes
and making of them a " science " of industry,
I This criticism, so far as it has point, is
| l RusMn, Unto this last.
THE MEANING OF WEALTH 15
applicable to all scientific specialism. The
whole world of phenomena is a unity of
intimately connected parts, and every break-
ing off of any section for separate study is of
necessity an act of mutilation. But such
separate studies are essential to intellectual
progress, and the mutilation is not fatal to
their use, provided that it is kept in mind, and
the subject of the special study is not treated
as a completely rounded whole. The chief
danger from such scientific specialism arises
where the science is made into the basis of an
art and maxims of human conduct are erected
on. it. The scientific study of industry may
show that certain acts of individual or
national policy make for an increase of
marketable wealth. To convert this "is"
into a "must," and to urge this discovery as
a sufficient ground for individual or national
conduct, without taking into due account
other effects upon public welfare which may
or must arise from this commercially profitable
policy, is evidently unjustifiable. For when
a person or a nation is considering what line
of conduct to pursue, he must take into account
at one and the same time all the probable
advantages and disadvantages. In a word,
he must take for his criterion of conduct the
wider standard of wealth which identifies it
with welfare. The advice which the mere
economist may offer to the statesman must
tr-
ie THE SCIENCE OF WEALTH
therefore always be adjusted or corrected by
reference to this larger conception of the
public good. An immediately or even a
permanently profitable business policy may
be negatived by considerations of wider
utility.
But these admissions do not mean that
either a science or an art of industrial
wealth is invalid. On the contrary, both
are essential to the progress of the wider
science and the wider art of " politics " or
social conduct. Not only do we need to
learn, by separating the industrial from the
other social phenomena for closer inspection,
how the industrial system is made and works,
but we also need to know what are likely to
be the effects of proposed changes upon the
working of this system and the quantity of
marketable wealth it yields. Both sorts of
knowledge are of service to citizens and
statesmen. Neither is sufficient as a guide
to conduct : both are but tributaries to the
wider current of information that helps to
mould the policy of the commonwealth.
CHAPTER II
THE BUSINESS AND THE TRADE
To a young man first entering an occupa-
tion as an artisan, clerk, tradesman or pro-
fessional man, the larger business world
necessarily appears as a confused., intricate
mass of vague forms and happenings, frag-
ments of which float before his vision and his
mind in the talk of his friends and neighbours,
in the columns of the newspapers, in shop
windows and street life, and in the acts of
retail purchase in which he spends his earn-
ings. His single focus of clear vision is
furnished by the definite regular work in
which he is personally engaged. The unity
of industry, the very notion of it as a system,
long remains hidden from him, or is at best
a vague generalization. But the reality, the
structure and the working of the business
establishment to which he is attached soon
impress themselves clearly on his mind.
Though at first he may know intimately
only the process in which he works and the
other workers doing similar work near him,
he soon picks up some knowledge of the
17
IB THE SCIENCE OF WEALTH
other processes in his department, and, as he
moves about and makes acquaintance with
his fellows, he learns more of what goes on in,
other departments. If it is a manufacture,
he sees the raw materials and the finished
products, and, according to his intelligence
and Interest, gets to know something about
the machinery and the skill used in the
several stages of the manufacture. Gradually
he will acquire a clear grasp of the business
organization which underlies the manufac-
turing processes, the work of overseers and
of the management, some comprehension of
what goes on in the office where the clerks
are registering all the doings of the factory.
Even of the acts of buying and selling most
remote from his personal part he may get
some understanding, especially if he is organ-
ized in a trade union with his fellows and
learns the ways in which buying and selling
may affect his work and wages.
An intelligent operative thus builds for him-
self a pretty accurate image of the material
structure and the personnel of the factory or
workshop in which he is engaged. The pre-
mises, the buildings, the machinery and tools,
the ^ power, the raw materials and produce at;
various stages of manufacture, some money
^ n the till and the bank, the various grades?
<* employees and the management, will stand,
out as distinguishable features. The clerk:
BUSINESS AND TRADE 19
in the factory office, the timekeeper, the
manager, will see substantially the same
picture, but, looking at It from a different
angle of vision, they will see or realize some
parts more clearly than others, and assign a
different importance to the different parts.
Disregarding human considerations and re-
garding the factory merely as an industrial
instrument, it will be seen that the manager
Is in the best position to assess the relative
importance of the various factors as co-
operative parts In the business. This does
not imply that the manager is more unbiassed
or disinterested in his motives and his judg-
ments than the workman. In both cases
special interests will to some extent distort
vision and valuation. The advantage of
the manager is a technical one ; he Is in a
better position than the process- worker to
see the various parts of the business in their
several sizes as contributory to the whole.
For management,, as we shall recognize, is the
unifying, cohesive and adjusting factor in
the business : the manager also aolne knows
the monetary " cost ** which each Involves,
and has thus a common standard measure of
importance which he can apply. For these
reasons It is desirable that an operative or
clerk, who seeks to get a most reliable image
of the business, should try to supplement
his wage-earning point of view by seeking
I?
P:
20 THE SCIENCE OF WEALTH
to assume that of the manager and to realize
how the business looks from that situation. ^
The business, or smallest organized unit
of industry, thus roughly visualized, would
take some such shape as this
If instead of a factory, we took a mer-
cantile establishment, a mine, a retail shop,
a farm, though all the details would be
different, the general structure would be
found to be the same. Raw materials,
stock, tools, premises, labour and manage-
ment would all be there co-operating to a
single industrial end, though in widely
different proportions. In a commercial
house, plant would play a much smaller
part, there being little machinery or tools;
materials and stock would be only a different
arrangement of the same goods, and money
would figure more prominently. In the farm,
as in a mine, premises, including land, would
of course bulk far more largely than in a
BUSINESS AND TRADE 21
factory. Again, many businesses are not
tightly contained in single premises. A brick-
layer, working for a firm of builders, will
realize the business as consisting, not in a
fixed yard and office, but rather in a number
of changing jobs. A railwayman will have
to bring a wide vision and imagination to
realize the structure of his business.
Businesses belonging to the same trade will
be found differing enormously in size and in
structure. In farming at one end of the
scale will stand the peasant working a small
plot with his own hands for the subsistence
of his family, at the other, some vast cattle
ranche or some bonanza grain-farm worked
by costly machinery. In goldmining you
have the solitary placer or the gigantic Rand
company. So in almost every species of
industry, transport, manufacture or com-
merce. But in the handling oC material
wealth all the factors which we found in the
factory will be present in some sort or size :
there must always be some premises, tools,
materials, stock, money, labour and manage-
ment, though the last two may be performed by
the same persons in the simplest businesses. 1
1 The private factors of production are conveniently
grouped under four heads as Laud or Nature* Labour,,
Ability j and Capital. The separateness of these four has
often been challenged and w not always capable of logical
defence. In particular, it has been urged tnat Land might
be treated as a form of Capital, for most laud that has
22 THE SCIENCE OF WEALTH
Even when applying, as we must, our
wider conception of industry to the produc-
tion of non-material goods, we find the same
general outlines of the business structure
applicable. Turning to the theatre, the doc-
tor's or lawyer's " practice," the school, the
hairdresser's, or any other organized arrange-
ment for producing and selling * 6 services," we
shall find that though the material apparatus,
premises, tools, etc., are sometimes reduced to
very small dimensions in comparison with the
factor of personal skill and energy, they are
always there. Indeed, some of the service-
producing businesses, such as a theatre or a
value is " improved," and the improvements incorporated
todth it are clearly capital. Moreover, for most purposes
of finance and book-keeping, land values are included in
capital. But in our concrete account of industry it is
important to maintain the distinction. For in origin and
Nature Land differs from every sort of capital, and an
intelligible theory of payment for the use of the factors
enforces the need for the distinction.
Concrete capital will consist, then, of (1^ buildings and
other fixtures, (2) machinery and tools, (3) materials and
stock, (4) money. The two former are often called
^fixed^" capital, standing as they do fixed at some point
in the industrial stream to assist in driving- raw materials
i ., r goods towards their final destiny as producers' or con-
|| ; sumers' commodities. The two latter, (3) and (4), are
usually called "circulating" capital, for their industrial
work keeps them moving from one place in the industrial
1 1* system to another.
4 The separateness of the factors does not imply a separ-
ateness in their ownership. In most of the smaller or
simpler types of business the worker, or some of the
workers, own also some of the capital or the land, and
give out the ability required in conducting the business.
BUSINESS AND TRADE 23
school, involve a very elaborate material
equipment which brings them under the most
advanced form of modern capitalist enterprise.
But in our endeavour to get a firm con-
ception of a 4C business " as the unit of
industrial structure, we are not yet out of
the wood. It is clear that many of the fac-
tories, shops, etc,, which we are taking into
consideration are not separate independent
businesses. They are only separate establish-
ments. Though formerly it was very unusual
for several factories, mines, shops, to be owned
and managed by the same persons, it is quite
usual now in some branches of industry.
It is the unity of financial control that
gives unity to a business. All the mills
belonging to a single company must there-
fore strictly be regarded as making one
business, just as all the retail stores of Lipton's
or Wanamaker's make one business. Nor
need a single business in this sense consist
always of a number of mills or shops of the
same sort in various places. It may extend
its operations into several different trades,
as where a great departmental store has
attached to it a farm, a furniture removal
department and a carpet factory, or where
a railway owns and operates engineering
works and coal mines. Nor is this the only
way in which the plain outline of the single
business may be blurred. Many apparently
24 THE SCIENCE OF WEALTH
separately controlled establishments are in
their finance or management, or both, depend-
ent on some larger and stronger firm. Many
shops in such trades as tobacco, jewellery,
shoes, ironmongery, if not mere branches,
are virtually agents selling on commission
certain classes of articles belonging to par-
ticular manufacturers or furnishers. Other
workshops, producing subsidiary articles or
executing repairs, are often closely attached
to and dependent upon some big manufac-
turing neighbour. Many subtle forms exist
of such connections between what at first
sight appear separate businesses. The ques-
tion of financial and even of managerial in-
dependence is thus seen to be a matter of
degree in many instances. But it is not
|! necessary for our purpose to require the
I } application of rigorous logic in such defini-
^ tions. It will suffice to recognize that what
binds together the different elements of a
business, and gives it unity of structure and
productive efficiency, is what is called the
management. If a fair amount of discretion
and substantial liberty in the conduct of
the establishment is possessed by the ixxanager,
his mill or mine or shop may reasonably
rank as a separate business for the purposes of
a general description of the industrial system,
although the supreme and ultimate decision
may be vested in some body of shareholders.
BUSINESS AND TRADE 25
We shall, then, treat the single complete
establishment as a separate business for the
purposes of our survey, except when it be-
comes necessary to give emphasis to capi-
talistic combination and control. The indus-
trial system is thus first realized as an elaborate
arrangement of business-cells grouped to-
gether by certain resemblances of form and
purpose into Trades. Businesses making or
handling the same sorts of goods are con-
sidered to belong to the same Trade, even
though their methods of work may differ
very widely. Watchmaking by hand is a
very different sort of work from watch-
making by machinery, but since the products
are in both case watches, they are regarded
as belonging to the same trade.
So with other work which is partly hand-
work, partly factory work. Not only the
mode of work but the materials may differ.
Houses may be built of stone, wood or brick,
but they come under the general head of the
building trade, Generally, however, a marked
difference of material is held to denote a
different trade. So the iron bedstead makers
are a different trade from the wooden bed-
stead makers. The test is the Market.
Businesses that compete effectively for the
sale of their goods in the same Market are
taken as belonging to the same trade. But
here, too, no hard and fast line can be drawn*
26 THE SCIENCE OF WEALTH
Hand-made and machine-made watches cer-
tainly so compete : so do wooden and
matches : these evidently belong to the
trade. But though wooden and steel
ture compete, their competition is less
and their markets not identical. Gas
electricity compete for lighting, and yet
must be classed as different trades. It i^
sometimes convenient to speak of the bi3iil<3L""
ing trade, sometimes of the building trades-
The woollen or the shoe trades break up into
special trades, often on a local basis. Different;
grades or qualities of the same kind of goods
sell in a different market, and are regarded
by the makers and the buyers as different
trades. Again, locality is a basis for dis-
tinguishing trades, especially when, as is
common, it involves some difference in work oar
product. So the Clyde and the Tyne have tlaeisr
own ship-building trades, the South WoJes
coal trade stands apart from other English
coal-mining, Leicester and Northampton havo
"r their own shoe trades. These illustrations
1^*. wiH suffice to show that as much latifro.de>
1 1 in the ordinary use of the term Trado
jl as in that of Business. But upon the wfa.ole
J j it is best to consider the limits of a Trade as
; ( defined by those of a Market, and to regsurci
I businesses, whose products meet and compete*
dosely in the same Market, as members
of the same Trade. A Market is defined to
BUSINESS AND TRADE 27
be not any particular market place In which
things are bought and sold, but " the whole
of any region in which buyers and sellers are
in such free intercourse with one another that
the prices of the same goods tend to equality
easily and quickly/-
Thus there is a world-market for Consols,
for gold, diamonds and a few important
durable goods and materials such as wheat
and wool ; for most others the national area
covers the market ; and in the case of very
bulky, perishable or immovable goods, a num-
ber of small local markets exist. Of course
inside each market there is room for some
differences of make and quality and reputation,
which affect the competition and the price.
But the main distinctions here suggested
need not prevent us from holding that busi-
nesses can be grouped Into separate trades
according as they are engaging in supplying
goods to a common market. So the operative
in a spinning mill at Bolton, or a shoe factory
at Leicester, will soon extend his economic
vision from the particular establishment In
which he works to the groups of similar
establishments which constitute, first the
local, and then the national cotton or shoe
trade. The vaguer looser conception of an
international or world trade may come later
as a slight qualification of the narrower and
more practically valuable conception.
28 THE SCIENCE OF WEALTH
Of course the unity and solidarity of his
trade will be seen to be much weaker than
that of his business. At first it will appear
as a number of separate and competing
businesses. But among the local members
of a trade some concerted action and some
organization will usually be found. The
employers in each trade are apt to meet in
a society or federation to gain information
and to safeguard and advance their interests
relating to purchase of materials and labour,
methods of production, markets, etc. The
workers in the same trade also join together
for various economic and social purposes.
A further development of trade structure
consists in the formation of a machinery of
I j agreements, conferences and conciliation
If boards for adjusting the interests of capital
|| v and labour in relation to wages and other
conditions of employment.
The worker will thus come to set a definite
meaning upon his Trade. In getting this
knowledge he will gather a notion of how this
trade stands in relation to some others. He
will perceive the very close dependence of
his trade upon other trades which supply
the materials on which he works and upon
the trade or market which buys the product
of his trade. If he is a shoe operative, he
will find his trade especially affected by any-
thing that happens to the tanning trade
BUSINESS AND TRADE 29
which furnishes the leather, or to the mer-
chants or retail shops which take from the
manufacturer the shoes. If he is a woollen
weaver, he will realize the close dependency
of his trade upon the conditions of the raw
wool trade on the one hand, the clothing
trade upon the other. For he will see impor-
tant forces that affect his work and wages
issuing from cither of these directions. If he
carries his inquiry and reflection further, he
will make the important discovery that the
trade in which he works is but a link in a
chain of industries engaged in converting
raw materials into finished goods and putting
them into the hands of consumers.
If he is a shoe operative he will see his
chain running thus
Farmer Timnor Hhoomakor .Shoe merchant,., ...Shoe shops,
If he is an engineer they will run thus-
Mining Smelting Steol work* Machine shops,
But every trade will be found to have
some other trades linked directly with it and
working towards the production and supply
of the same articles. There will be some
branch of farming or mining engaged In
extracting raw materials from. Nature. Then
will follow one or more manufacturing pro-
cesses, and after that some wholesale and
retail distributive trade.
CHAPTER III
THE INDUSTRIAL SYSTEM
OUB shoe operative, weaver or other special-
ized worker* now looking out from his trade,
will realize it as a member of a series, all
bound together by common interest in for-
warding the production of some particular
goods. Though he may know little about
other trades, he will rightly conclude that they,
too, similarly nm In series of productive and
distributive processes. As a consumer buy-
ing various sorts of food, clothing and otlier
commodities, he will recognize that he is
tapping one end of a number of similarly
constructed industrial chains. So industry
wfll begin to widen out to his vision as a
immber of series or streams of processes,
each series or stream engaged In the separate
task of forwarding some raw materials on
the road to consumers* goods. He will see,
not only the boots he wears, but the loaves,
shirts, tables, books, tobacco, and otlier
tilings he buys, as the ends and objects of
a special series of trades. But he will soon
30
THE INDUSTRIAL SYSTEM SI
observe that the separateness of the goods,
loaves, boots, shirts, etc., gives an exagger-
ated notion of the separateness of the lines
of trades through which they pass in the
making. For he will recognize that there is
no complete series of trades entirely devoted
to making, moving and selling boots. The
farmers who supply hides to the tanners,
supply also carcases to butchers, grain to
millers, and enter into other series of pro-
ducts. The tanner, too, furnishes leather
to other manufacturers besides shoemakers*
Many retail shops sell other articles besides
shoes. The same will turn out to be true
for any other series of trades. The streams
of production merge or overlap at certain
points. Certain early extractive and manu-
facturing processes will be found to figure
in a great many of the series. Farmers,
miners and others who get raw materials
from Nature, must perform the opening
process in all the great productive series.
When their extractive work is done, the
great variety of materials it affords is sorted
and is put through a number of different
processes. The later manufacturing processes
are more numerous and more specialized,
while the work of distributing and selling
goods often brings together in the same trade
or business a quantity of goods which in
their manufacture belonged to different trades.
I a* THE SCIENCE OF WEALTH
I H, then, we take the symbol of a stream,
H and speak of currents of Industry carrying
raw materials past the different stages of
K production, until they flow over the retail
it counter into the hands of consumers, we shall
K find the stream issuing from a few sour.ce^
E cimdiag into an increasing number of sepaf-
1 sfee currents as it flows on in manufacture,
1 and again gathering into comparatively few
|l channels as it passes .along the mercantile
y towards the consumer.
I But the actual structure of industry is, of
|T* course, much more complicated than this
I picture would imply. Some of this com-
| plexity will appear comparatively early to
|, our intelligent workman taking observations
| Ms place in a factory, a mine, an office.
f. He will recognize that all trades, are not en-
| gaged directly in the work of pushing raw.
I *v materials through the main stream of in-
| * dustry towards consumers' goods. The shoe
|f operative will be aware that there are one
>' ^ or two trades we have not mentioned which.
I ace neariy as important in their bearing on
I 1 manufacture as : the tanning trade itself,
< * viz.. the trades which supply the machinery
* ; sad power used in his factory. This machin-
\* cry and power are of course themselves
^ the final products of a series of productive
! j processes, converting raw materials into these
! ; forms of capital. They do not figure at the
THE INDUSTRIAL SYSTEM 33
^ of our Industrial system as " consumers
| goods." They find their goal in becoming
! " capital," and are used up, not as commodi-
* jties, but as plant and other aids to production,
la examining the structure of a business we
recognized that premises and machinery as
well as materials were needed. It is only the
materials which are the objects of the process
of manufacture and which flow down the
.. stream towards consumers' goods. The build-
ings, machinery and other plant are used as
means to this end. But they have to be
produced, and their forms arc gradually
worn out in the work of assisting to make
hides into leather, or leather into boots, or
4 ia some other useful work,
.. The shoe operative, then, will see that his
.main current of trades, converting cattle
into shoes, must be reinforced by various
tributary trades engaged in supplying the
tools, power, buildings,, etc., required at each
stage In production.
Taking the single factor of machinery, he
will correct his picture as on p. 34,
But there are other trades which he will
see assisting to produce and maintain the
buildings and other appliances of the factory,
sthe light, heat and power required : these,
too, he must fit into his fuller picture. Since
it is evident that the farmer, tanner, mer-
chants and retail shopkeepers, who stand in
84* SCIENCE OF WEALTH
the direct stream of industry, likewise
plant, machines and other products to assist;
them In their work, It follows that at eael*
process the main stream must be fed
tributary streams which flow, not to
ultimate consumer, but to some single
in production, supplying new stores of auxili-
ary goods to producers.
Of course. If one likes, it is possible to regard
the machinery, buildings and other plant
being gradually worked up into the goods
they assist to produce, and so flowing down
the main stream to consumption. But this
view need not concern us here.
Now these tributary trades, supplying ..the-
41 fixed capital " to the main stream, are often
larger and more important than the special
trades they feed. For some of them supply
with, the same sorts of fixed capital not
THE INDUSTRIAL SYSTEM 35
but many trades in the main stream of in-
dustry. The iron, steel, engineering and
machine-making trades are important tribu-
taries at every point of the factory system.
So are the building trades. The mining,
the principal metal and building trades are
chief supports of the permanent fabric of so
many special trades, that they are often
spoken of as " fundamental " industries. j.
When anything serious happens to any of
them, the effects are soon seen in every part
of the industrial system.
But there are other bonds of common
interest between the trades in the main
stream of production besides these " funda-
mental " industries.
The same sort of raw material may be
utilized either as a chief ingredient or as a
subsidiary in many main branches of pro-
duction. The chief grains, timber, textile
fabrics, iron, coal, stone, clay, etc., form raw
material in the making of many different
commodities, and the different trades using
any one of them are related by powerful
bonds of sympathy and antipathy. Such
is, for example, the relation of shoe-making
to saddlery and upholstery (through leather),
of jam-making to biscuits or to aerated
waters (through sugar). Where such com-
munity in use of material exists, it breeds
a sympathy between trades. For anything
36 THE SCIENCE OF WEALTH
which improves or impairs the supply of their
common material causes gain or injury to
all So far there is sympathy. But any-
thing which gives one trade a better pull
than others upon the supply injures these
others. So far there is antagonism. Oil
and rubber are instances of the recent growth
of two ingredients of vital importance to many
trades.
Some trades are in close enduring sym-
pathy, because they supply important com-
plementary ingredients to one or several
important industries. The iron and coal
trades furnish the most obvious example.
But this sympathy is very strong in many
special trades, as between the fruit-growing
and sugar-refining trades, or wine-growing
and bottle-making, or between the various
trades furnishing materials to the building
trades.
On the other hand, a keen antagonism is
set up between certain trades by reason of
the possibility of substitutes. When differ-
ent materials can be used to supply the same
wants this hostility exists. Wood and iron
in many sorts of furniture or building ;
cotton, wool, linen in articles of clothing ;
tea, coffee, cocoa among drinks, will serve
as instances. So electricity, gas, oil and
steam compete against one another as sources
of industrial, locomotive or domestic energy.
THE INDUSTRIAL SYSTEM 87
These trades, and others subsidiary to them,
are thus brought into conflict, and anything
which benefits one is apt to injure the others.
The substitution may sometimes be in.
materials, sometimes in process, sometimes
in final commodities; but wherever it operates
it breeds opposition.
Among what first appear as separate
trades engaged in converting raw materials
into commodities,, we perceive, then, many
connecting bonds of union and opposition.
The series of industrial processes cross, fuse
and separate at various points : no series
runs a completely isolated course.
But there are two sorts of industry which
deserve particular attention as unifying in-
fluences, viz. transport and finance. They
are not fundamental like mining and agri-
culture, but pervasive and connective, Wher-
ever any business is carried on, a constant
conveyance of materials to the business, and
of finished goods from the business, is in-
volved : every act of buying and selling
involves some act of conveyance, The group
of trades concerned with such conveyance
must, therefore, occupy a place of peculiar
prominence in the industrial system. Taken
as a whole, they form an apparatus corre-
sponding to the vasomotor system in an
animal organism. In one sense, indeed, all
physical work is movement of matter, and
38 THE SCIENCE OF WEALTH
much of it forms part and parcel of every
business operation. But in modern indus-
trial societies transport in its special sense,
the conveyance of persons, goods and in-
telligence from one place to another, becomes
a highly specialized and important work.
The railway and the steamship find a place
in almost every series of productive pro-
cesses. They furnish the physical links that
give efficiency and continuity to the whole
movement. Any stoppage of a great railway
or a great shipping service paralyses a whole
industrial area : even the cutting of telegraph-
wires confuses and retards the whole working
of industry. As industry becomes more
complex, materials and labour are drawn
from more distant and more numerous places
to take part in more delicate and complex
processes of co-operation, and the commercial
working of the system depends more and
more upon rapid and reliable information
about their movements. For this reason
transport is found in every civilized country
to play a larger and more imposing part in
industry, absorbing an increasing proportion
of capital and labour,, and presenting the most
critical problems of control. When, as is
the case in many large countries, the railroad
is the sole effective means of transport, it
may wield a power over the life, prosperity
and industry of the population which is
THE INDUSTRIAL SYSTEM Sfi
despotic unless the government intervenes.
Every improvement of transport facilitates,
every breakdown of transport damages, simul-
taneously, all the industries concerned with
the production of material wealth.
Equally pervasive and more authorita-
tive in its general control over all modem
industry is finance. Under that term we
include all business connected with the
production, protection and conveyance of
money, or purchasing power, and with the
creation of and dealing in stocks, shares and
other negotiable securities. We saw that
our science is concerned entirely with things
that have a marketable value and with
processes each act of which involves a pur-
chase. So it is obvious that the industries
concerned with the production and applica-
tion of purchasing power are in their influence
as critical and as pervasive as the work of
physical transport. The familiar saying
4< Money makes the world go round " is a
popular testimony to the importance attach-
ing to the sort of business enterprises which
produce and regulate the supply of financial
power. The forces issuing from finance are
operative everywhere throughout the in-
dustrial order. A great banking crisis paralyses
all industrial activities as surely and even
more completely than a breakdown in the
railway system.
40 THE SCIENCE OF WEALTH
Thus, though we recognize a certain sort
of independence and completeness in a
business or in a trade, we also recognize a
number of ways in which businesses and
trades are related to and dependent on one
another. The common use of some particular
material or source of power, the substitution
of one material for another, afford special
bonds of amity or enmity between certain
trades. A few farming, extractive and manu-
| fecturing trades stand as common starting-
l" points for a great variety of later processes.
Hie industries of transport and of finance
i < present a general connective apparatus.
li But, finally, it remains to be observed that
S there exists a more general sympathy and
? opposition between all trades, due to the fact
that they draw the very breath of life from
common sources. Fresh streams of capital
and labour continually enter industry to
i I maintain, invigorate and enlarge its structure
LJ and its vital energy. In its first emergence,
', f as productive energy available for use, this
fresh supply of capital and of labour power,
^ the new crop of young labourers and of new
; '" ! savings, is, in a " free " country, at liberty
to apply itself to any special sort of industry,
and all trades must draw for their needs
upon this common and constant supply.
They have, therefore, a supreme common
interest in the size, quality and reliability
15503
THE INDUSTRIAL SYSTEM 41
of this supply, and in the terms upon which
it is procurable. So every cause affecting
the volume, the fluidity and the efficiency
of the new capital and labour in a community,
will affect all the several trades, As we
examine the working of the industrial system
in more detail, we shall see that many barriers
block or impede the free flow alike of labour
and of capital. But so far as labour and
capital have liberty to enter different trades,
or to transfer themselves from one employ-
ment to another, they must be regarded as
forming common funds of industrial energy
pulsing through the whole framework of
industry, as the blood courses through the
various organs and cells of the body, giving
organic unity to the entire system.
r
CHAPTER IV
HOW THE INDUSTRIAL SYSTEM WORKS
PART I
WE have now obtained a comprehensive
picture of an industrial system in which
many clusters of businesses are grouped into
trades, while these trades are arranged in
order by series to carry on the work of con-
verting the raw materials and forces of Nature
into commodities and services for the use of
man. The diagram on p. 43 presents the
main features of this picture.
The mechanism of industry, continually
taking in fresh supplies of materials from
Nature by means of the extractive processes,
carries them through a series of manufactur-
ing,, transport and commercial processes which
changes their shape, composition or place,
until they finally are tumbled out of the retail
" hopper " as consumers' goods.
At each stage in the process stand supplies
of the factors of production, land, labour,
fixed capital, ability, engaged in this regular
work of forwarding production, and all these
factors, as they are used up or worn out in
42
HOW THE SYSTEM WORKS 43
their productive work, are replaced by new
factors themselves composed of materials
drawn from Nature and prepared by a series
of productive processes for the place they are
to occupy. So the industrial system has its
many suckers in Nature, everywhere drawing
out materials and forces to be worked up,
partly into consumers' goods, partly into new
instruments of production.
However intricate the system may be, there
is nothing mysterious about its actual working,
Every one knows, or can find out, how the
chief kinds of materials, such as grains, fruits,
animals, timber, textiles, coal, clay, metals,
are worked up by different trades into the
immense variety of finished articles which we
use. The regular course of their productive
career sometimes calls forth the image of a
river, sometimes of a machine, sometimes of
an organism. The organic metaphor is the
44 THE SCIENCE OF WEALTH
most useful, suggesting the likeness of industry
to the processes of taking in food, digesting
and assimilating it, converting it into working
energy and new tissue, and excreting the
waste. But none of these images is quite
correct. All suggest more regularity .and more
smoothness of action than actually exist.
None of them takes proper account of one
essential fact, viz. that each productive act
done to the material in any process requires
| the co-operation of a number of conscious
I agents, the owners of the different factors of
I production that are used. The bodily and
I mental energy of countless little business
l groups in a workshop or factory, a mine, a
[ railway station, a warehouse, must be got
\{ into play over and over again to perform the
[" innumerable acts required to keep materials
k moving down the industrial stream. These
If , acts are separate productive acts and they
H require the application of separate stimuli.
fL,' How is the constant stimulation applied ?
I Here again there is no mystery. Through
\\ the industrial system there is a constant flow
of money which quite evidently performs the
U work of calling forth the application of in-
I dustrial energy from the owners of the different
\ factors of production. This flow of money
< ? moves in the reverse direction to the flow of
I materials and goods. The latter flow from
I the extractive processes through the manu-
HOW SYSTEM WORKS 45
facturlng and distributive processes until they
pass over the retail counter. The former enter
the system chiefly at the retail counter and
move up through the distributive, manufactur-
ing and extractive processes in due course,
Take as an example the series of trades
concerned with producing boots.
The regular working of the boot trade re-
quires that at each stage there shall be disposed
a proper amount of factories and other fixtures,
machinery and tools, employers and work-
men, engaged in converting hides into boots
and placing the boots in the possession of
wearers. All this apparatus is kept in being
and in. operation by a continual succession
of payments of money made to the workers,
employers, capitalists, landowners at the
several stages of production. These pay-
ments for the factors of production constitute
wages, profits, interest, rent. Whence do
they come and how are they paid ? A practical
answer to these questions is given by posting
oneself at the counter of a ready money shoe
store doing a regular business with a turn-over
of, say, 100 per week. Customers buy and
take away shoes, paying for them in cash.
What docs the shopkeeper do with the 100 he
thus receives ? Out of it he pays the weekly I
wages of his employees, sets aside something
towards the quarter's rent and towards the
interest on his borrowed capital, replenishes
46 THE SCIENCE OF WEALTH
Ms stock, and keeps what remains as wages
of management or profits. All these pay-
ments are necessary stimuli to the retail
process in the shoe series. They induce the
owner of some factor of production to apply
it in a new productive act which helps to
maintain the supply of shoes intact in the
retail store. The 100 we see is partly used
to pay wages, interest, profit, rent in the retail
business. These costs of retailing do not,
however, take more than, say, 20 out of his
100. The 80 is handed on to the wholesale
merchant, in an " order ?! for more shoes
to replace in the retail store those which
have been sold. The merchant who receives
this 80, in his turn, applies part of it to
pay the wages, rent, interest and profits in
Ms office and warehouse, the rest, say 60,
he uses to buy shoes from the manufacturer
to replace those he has sold to the retailer.
Similarly the manufacturer pays out of his
60 his current costs of production, say 30
in wages, rent, interest and profit, laying out
the other 30 in a new purchase of hides and
other materials. The tanner receiving 30
from the manufacturer will make a similar
apportionment of the money at his stage of
production, paying the farmer 15 for some
fresh Mdes, wMch sum the farmer in his turn
will use up in the payments he is called upon
to make for raising cattle
_,
HOW SYSTEM WORKS 47
Here is the process we describe
'Farm.. .Tannery $toc Factory ShwMatfet SlweS&re
It matters not whether the proportion given
here for the distribution of the 100 spent on
shoes corresponds to any known condition
of the trades. What is certain is that the
100 paid over the retail counter circulates
through the connected series -of trades in the
way described, that each payment out of it
directly evokes a new productive activity,
and that this is the means by which the
industrial system is kept working. The
prices paid in demand for finished goods are
broken up and circulate through the productive
processes, so as to maintain at each stage the
activities required to keep up the supply.
If for boots we substitute loaves, shirts,
books, bicycles, or any other article, the same
analysis applies. The retail prices paid for
the finished articles break up into a number
of payments made at the different stages of
production.
It will no doubt occur to some that trade,
even under ordinary conditions, does not work
in quite this simple, regular fashion. The
credit system, for instance, does not always
oblige a shopkeeper or a merchant to wait for
48 THE SCIENCE OF WEALTH
cash from the customer in order to pay his
way. The manufacturer, again, does not
always wait for the merchant to order goods
and to accompany the order by payment. He
often produces in advance, and himself tries
to stimulate demand.
But these niceties of actual commerce may
be ignored in a presentation of the fundamental
facts. It is evidently correct to say that in the
regular working of the industrial system money
enters as the universal stimulus through de-
mand for commodities. Such demand visibly
acts as the "demand " for labour, capital,
land, ability, in each of the several processes,
The simplicity of our illustration requires,
however, one qualification. Our picture of
the industrial system showed that at each
stage a tributary set of processes was engaged
in furnishing the buildings, machinery and
other fixed capitaL It is evident that the
" wear and tear" of this capital must also be
provided for out of the only course available,
'''*"! viz. the retail payments for commodities.
f ; ; When, therefore, we assign at the retail stage
f ; 20, out of the 100, as costs, a part of which
,! ; is to be paid to Capital, that payment must
include depreciation or provision against
wear and tear. Similarly with the payment
;; made for capital in the warehouse, the factory,
the tannery, the farm. Whenever fixed capital
is iised,^ some addition must be made to the
HOW SYSTEM 49
payment so as to stimulate those tributary
trades required to reproduce the buildings,
machinery and other plant which are continu-
ally being worn out.
It, then, we apply to the economic system
as a whole the working model furnished by
the series of trades engaged in making and
selling shoes, we seem to have a clear picture
of it both as an industrial and a financial
system. The constant regular flow of all
sorts of raw materials through the various
extractive, manufacturing, distributive pro-
cesses, each furnished with a proper quantity
of the different factors of production organized
in businesses and trades, gives the industrial
aspect* Its financial counterpart is a cor-
responding flow in the reverse direction of
money, put in at the retail end, and working
its way up the stream, stimulating, as it
passes, each factor of industry so as to evoke
a fresh activity.
PABT II
This picture of the circulation of goods and
money appears to give equal prominence to
the two. To do this, however, would be
unduly to exalt the part played by money in
the industrial system. Though to the business
man considering his investments and his profits,
money often figures as the end and object of
his activity, this is not actually the case.
; 50 THE SCIENCE OF WEALTH
Important as money is, it is a means and not
an end. A means to what ? A means to the
- distribution of industrial energy on the one
hand, and of industrial products on the other.
As it circulates about the system, it is seen
bringing labour, land, capital, ability, in
different sorts and sizes, to the places where
they are wanted, and apportioning the product
; among the owners of these factors. Since
i production is admittedly a means to con-
!f sumption, the distribution of the industrial
I product must be accounted the primary object
f I for which money is used. We have seen how
l f : money orders and stimulates industry in its
(f ** various stages. It remains to recognize that
il ', ( this stimulation really takes shape through
\l , a distribution of the product. Money itself
fa has no power to stimulate industry. Though
[jr habit makes money seem an end, a thing
I * desirable on its own account, this of course
f| i { is an illusion. The labourer wants not money
flj I but money's worth. So does the capitalist
^ in seeking the payment of his interest, and the
< landlord in the payment of his rent. The
'*' actual work, then, upon which Money is
if * engaged, as the retail payments dissolve and
circulate through the system, is the distribu-
! tion of the varied products of industry.
In the particular series of processes which
end in the sale of boots, the sole product con-
sists of boots, and if a primitive distribution
V
HOW THE SYSTEM WORKS 51
prevailed, the wages, rent, interest and profits
along the whole line would be paid in boots,
which each recipient would have to wear, or
to " swop " against bread, shirts, or some
other goods paid in similar fashion as wages,
rent, etc., in some other line of production,
Then, at the close of an intolerable series of
acts of barter, the shoe operative might get
as the product of his labour, not shoes, but
various other commodities, which are what
he wants. Money was invented to save the
risks and trouble of such barter, and to enable
every special sort of worker to be paid in
general wealth. For the money-wage he
receives is nothing else than a general order
upon the product, not of this or that set of
trades, but of the whole industrial system,
The tendency of civilization is to confine each
worker ever more closely to a .single narrow
sort of work, a bit of a single process in one
trade : the money -wage he gets reverses the
process, putting him in possession of a bit of
the product of every other trade. So, though
he is only a laster or a finisher in his own trade,
he is likewise miller, baker, spinner, weaver, car-
penter, etc., through his capacity to get a share
of the product of each of these other trades,
As a producer he is specialized, as a consumer
he is generalized. It will be well to realize
clearly how this transformation of special
worker into general consumer is brought
52 SCIENCE OF WEALTH
about. How Is it that a worker in a shoe
factory, whose work may consist in nothing
else than stamping leather, can change his
services into loaves, shirts, chairs* tobacco,
etc. ? His particular work is worthless taken
by itself; stamped leather is of no use to any
one. Only when the stamped leather has
passed through various other processes, and,
being made up into shoes, has been sold to a
customer, is the utility of Ms work realized.
Then out of the money-payment, which
measures the social utility of the whole set of
shoe-making processes, he gets his share.
Clicking, lasting or finishing has thus been
converted into money by means of the sale
of shoes. The clicker, laster or finisher, can
now take pieces of this money, and going
himself to one retail shop after another, can
convert it into the loaves, shirts, tobacco, etc.,
that he wants. As he buys loaves at the
baker's he sets a money stimulus at work along
the line of processes which go to make bread :
the baker and his assistants, the miller and his
men, the farmer and Ms labourers, get each
a bit of. the money our .shoe operative has paid
for loaves, and each of them with it buys at
the retail shops the various articles he needs.
Among these articles are shoes. So, some of
the very money wMch, paid over the shoe-
eoimter, passes to the shoe operative in wages,
is Hie money with wMch the shoe operative
X
HOW SYSTEM 53
himself bought loaves. The shoe operative
needs bread, the baker and miller need shoes.
We see how money, the price of shop-goods,
enables each to supply his needs by exchange
with the other.
Let us, however, set out this process of
exchange a little more fully. Take the repre-
sentative needs of man, say, loaves, boots,
shirts, coats, chairs, meat, sugar, milk, books,
crockery. Apply to each of these our image
of a stream of production, each product having
a separate series of four processes engaged in
producing it. Suppose these to be the only
economic wants, and that each man in the
community wants the same amount of each.
For convenience, substitute A, B, C, D, etc.,
for these ten products. The producers of A
will then spend one-tenth of their pay in
buying A, the commodities which they help
to produce, one-tenth in buying B and one-
tenth in buying C, and so with each of the
other seven products. Similarly, the pro-
ducers of B, C, or one of the other sorts of
goods, will spend his pay, each using one-
tenth to buy the finished products of the series
of processes in which he works, the other nine-
tenths to buy equal amounts of each of the
other products.
It matters not where any man happens to
be working, at A 8 , B 4 or D, he will take his
pay, and apply one-tenth of it at each of the
I''
1:1
54 THE SCIENCE OF WEALTH
retail stages, A 1 , B 1 , C 1 , D 1 , etc., so using an
equal proportion of It to stimulate each series
of trades. In this way the general product
of the industrial system would be seen to be
distributed in its entirety among all the
different groups of special producers. The
means by which this distribution was ac-
complished would be the money paid at each
stage of production out of the retail prices of
the finished products.
A*
C*
D*
'&*
H*
Z*
JST*
A*
D3
&
D 2
J2
JT 2
S 1
I 1
4
B
C
D
E
F
a
H
I
K
Though the actual process of exchange and
distribution is, of course, far more complex,
this is a true account of its essential character.
Every man exchanges portions of his special
product for the special products of every other
man. So we see how the needs and actions
of the consumer, expressed through money,
form a perpetual bond of union between all the
\ Industrial processes. The industrial system
\ thus primarily as a great co-operative
#?..
HOW THE SYSTEM WORKS 55
society of consumers. For it Is the pecuniary
stimuli proceeding from consumers that are
seen to maintain the industrial structure at
each point and to stimulate its regular activity*
This industrial apparatus, thus depicted,
seems to resemble an elaborate automatic
machine for the supply of chocolate and
matches. Put a penny in the slot, you receive
an article and its removal causes each other
article, placed at a greater or less distance
from the outlet, to. move one step nearer. So
in our machine the money paid over the retail
counter stimulates a movement, first along the
main line of processes, then down the tributary
trades engaged in feeding this branch of pro-
duction. Its secondary effect, the spending
of the income received by each class of
producer, which applies a stimulus at each
other retail trade, seems equally automatic.
Thus we get an image of a fixed system of
industry, grinding out products and distribut-
ing them with mechanical exactitude. Every
owner of a factor of production, worker, land-
lord, capitalist, employer, receives a portion
of the price of the final product his factor helps
to make, the money accurately furnishing the
stimulus necessary to maintain his factor of
production and to evoke a new productive
act. The whole product, constituting the
" real income " of the industrial community,
would be distributed among the owners of the
j 56 THE SCIENCE OF WEALTH
J
I factors, according to some law of mechanical
I necessity, just as the energy generated by a
\ dynamo is applied at each point in the factory
| | where it is wanted, in amounts accurately
I adjusted to the " work " there to be done.
[ I The " real income " of every man, i. e. the
! ] amount of general commodities which he got,
j and his "money income," i.e. the money
' | payment received for the use of his labour
f power, capital, land or ability, would be just
t !j what they must be to enable Ms factor to
i function. There would be no problem of
i distribution. The real income of the com-
I munity would consist entirely of the aggre-
J gate of finished goods and services which
>' 1 regularly came out of the industrial machine.
* ; Such an account differs in two important
* ways from the actual system of iBodem
;, { * industry. It assumes complete fixity of
!, industrial structure, and it assumes that the
j product of industry leaves no surplus over
what is required to maintain the system and
evoke its regular activity. Now both these
assumptions are false. The industrial system
? is no rijpd mechanism. Its structure, com-
;t < position and working are not fixed. Its con-
'] stituent trades and businesses grow and decay
or change their character. The quantity and
the sorts of plant and labour and other factors
alter with changes of industrial technique or of
busliiess organization, and such changes are
HOW THE SYSTEM WORKS 57
always taking place. Within the last genera-
tion, the supersession of hand- work by machine-
work In the manufacture of shoes has com-
pletely transformed the structure of that trade.
In every industry and every country similar
changes are always taking place at a slower or
a faster pace. In an age of industrial progress
we must above all things study the laws of
industrial growth, how a business or a trade
increases its size and improves its structure
and its working.
Equally false is the second supposition, viz.
that the product of industry only just suffices
to supply the necessary stimuli to keep the
system working. When the boots, loaves,
shirts, and other final commodities turned
out of the various streams of industry, are
sold, the incomes paid for producing them are
not entirely absorbed in payments for the
various retail commodities.
Part of the money paid as rent, interest,
profit, wages is not applied, as we have hitherto
assumed, to demand consumers* goods. It is
applied not at the end of the various lines of
production, but at some interim point to cause
the creation of new f onus of producers* capital.
In other words, it is saved, not spent.
So important is a clear apprehension of the
terms " saving " and " spending 3 * that we
will here recall our outline diagram of industry.
If the working of this system were such that
' ?
V
58 THE SCIENCE OF WEALTH
the quantity of consumers' goods it could turn
out at E only just sufficed to supply the needs
of the various owners of instruments of pro-
duction at A, B, C, D and E, and at the
different points in the tributary streams a 1 , b 1 ,
c 1 , etc., no growth of the system would be
possible. All the incomes, or money pay-
ments, made at the various stages, would be
regularly taken to E to be spent in consumers'
goods. But, if the system were able to turn
out a larger quantity of consumers' goods than
were required for the bare satisfaction of these
needs, it would be possible to apply some part
of the apparatus, not to the production of
consumers' goods, but to the production of
more plant and other fixed capital and to
getting with this increased machinery of
production larger amounts of raw materials
and power. Though the ultimate object of
such a proceeding is, of course, to cause more
HOW THE SYSTEM WORKS 59
consumers' goods to be procured, the immediate
effect is to cause less consumers' goods to be
produced. In other words, some of the money
paid as income to the owners of capital, land,
labour, ability, instead of being applied to
demand more consumers' goods at E, is applied
at, say, a 1 or c 1 . So, instead of money pay-
ments circulating, as we have shown, from E
through the direct line of productive processes
from E to A and down all the tributaries, this
money is applied at a 1 , a 2 , a 3 , or c 1 , c 2 , c 3 ,
as a special stimulus to the creation of more
plant to be established at A and C.
This is the true industrial meaning of Saving,
the spending of money income, not in buying
consumers' goods, but in buying producers'
goods; not in stimulating production along
the main line of production of consumables,
but in stimulating a series of productive trades
engaged in making plant or other forms of
capital at some particular stage. This abstain-
ing from the purchase of consumers* goods, in
order to buy more plant and other producers*
goods, is evidently the only means of effecting
the growth and improvement of the material
system of industry. Here again money is seen.
as the directing force. The saving or the
spending of l causes directly the same
stimulus to industry and to employment of
the factors of production, but the stimulus is
applied at different points of the industrial
60 THE SCIENCE OF WEALTH
system and has a different effect. In the case
of spending it acts directly down a series of
main processes of production, evoking energy
to produce consumers' goods which are taken
out of the industrial system to be consumed.
In the case of saving it acts directly down a
side channel of producers' processes, evoking
energy to produce more capital goods, which
; | are not taken out of the system but remain
there as instruments of further increase of
production. To the ordinary business man
saving, at first sight, seems a merely negative
industrial act, i. e. not spending, and putting
the not-spent money in a bank. But actually
it is as positive an industrial act as spending.
Indeed, as we see, it is spent, but in paying
people to make more capital goods instead of
paying them to make more consumers* goods,
This is what spending and saving of income
mean from the standpoint of the industrial
organism and society. Of course it is true
that an individual may save in another way,
viz. by lending his " savings " to another
person to spend them. A great deal of
" savings " passes in this way into the hands
of spendthrift individuals or bogus company
promoters and other business sharpers, who
spend the money which " saving " persons
thus fail to save. Such false saving adds
nothing to industrial capital, it simply means
that one set of persons buys consumers' goods
HOW THE SYSTEM WORKS Gl
instead of another. The " paper savings " thus
effected are devoid of industrial substance.
True saving, however, is the means by which
the industrial system, on its capital side, grows.
It always implies that certain individuals,
instead of applying some part of their money
income in stimulating production, by purchas-
ing retail consumptive goods, apply it in
stimulating production by purchasing capital
goods in addition to those which hitherto
sufficed to maintain the current of production.
Some hoarding of consumable goods may be
classed under saving, but in a general sketch
of the working of industry it may be dis-
regarded. The usual result of saving is to
increase the quantity or improve the pro-
ductive quality of the industrial system, thus
enabling it to produce an increased volume of
goods in a given time, provided that a sufficient
rise in the rate of future consumption main-
tains the activity of the increased plant.
Turning once more to our industrial system
as a mechanism for producing ten sorts of
commodities loaves, boots, shirts, etc.; and
distributing them so that one-tenth of each
sort passes to each of the ten classes of pro-
ducers, we must revise our picture. If pro-
vision is to be made for the industrial growth
of such a society, we must suppose that the
quantity of loaves, boots, etc., which such a
system, could turn out, is in excess of what is
62 THE SCIENCE OP WEALTH
needed by its members, or at any rate by some
of them, and that some of the industrial energy
which might have gone to making loaves,
boots, etc., is able to be diverted into making
Improved machinery for flour mills and boot
factories, or into producing new sorts of plant
for making sorts of goods not included in the
ten accepted lines of necessaries. This division
of industrial energy is caused by the process
which we call saving, or the application of
purchasing power at points of the industrial
system other than the retail shop. As the
application of money stimulates not only
capital but the other factors, so " saving " not
only causes more plant, machinery and other
forms of capital to come into existence, but
causes the other factors, including labour, to
dispose themselves differently from what they
would have done if there were no saving.
For as a demand for, or purchase of, con-
sumable goods is seen to act as a demand for
the employment of capital and labour all along
the series of productive processes, so a demand
for more productive capital, due to saving,
acts as a demand for more employment of
capital and labour in the machine-making and
other plant-making industries.
In an industrial system, where progress by
saving is thus attained, the real income is no
longer measured merely by the quantity of
products produced for consumption in a
I
: I
& ( |
HOW WORKS 63
given time. The new machinery and other
capital added during the year to that which
previously existed, also belongs to the income
of the year. If, therefore, we aeeept the sum
of 1,800,000,000 as measuring approximately
the year's money ineome of the British nation,
the " real " ineome corresponding to it will
consist partly of the goods and services which
during the year have been withdrawn for
consumption by consumers, partly of the
additions made during the year to the various
sorts of fixed and circulating capital. When-
ever a money income has been received by any
one as payment for the use of his labour, land,
capital or ability, one of these two sorts of
product, or " real " income, has been produced
to correspond. For the receipt of such money
payment is nothing but a financial register
of some productive act performed either by
the recipient or by some productive instru-
ment he owns. Whether this productive
act consists in altering the shape of some
sort of material, changing its place, or assisting
to get it into the hands of some one who
needs it, or whether it consists in rendering
some professional, official or personal service
which ranks as " wealth," all such acts con-
tribute to the real income of the nation, i. e.
that sum of tangible or intangible goods which
have a market value and have been added
during the year to the total stock of wealth.
CHAPTER V
COSTS AND SURPLUS
THE product of industry, which, constitutes
the real income of a community, is, as we
see, entirely distributed in payments to the
owners of labour, land, capital and ability
for the use of these factors. These payments
made at the several stages of production are
" expenses of production."
These payments, we recognize, must make
provision in a stationary industrial system
for the maintenance of the fabric of industry,
i. e. the various factors in their existing size
and efficiency. In a progressive industrial
system, such as that with which we are
familiar, they must in addition evoke an
increase and an improvement of the fabric.
In a stationary system the whole of the
payments, which formed the money income
of the owners of the factors, would be spent 4
in buying commodities, the retail goods and I
services turned out by the different series of |
productive processes. These goods and ser- I
t
COSTS AND SURPLUS 65
vices when bought would be withdrawn from
the industrial system and consumed,
In a progressive system a part of the
income of the owners of the factors would be
applied not to buy commodities but to buy
new plant and other forms of productive
goods capital, which when bought would
remain as a permanent addition to the
structure of industry, representing an in-
creased power of producing commodities.
But if the size and efficiency of the indus-
trial system is to be increased, provision
must be made not only for increased size
and efficiency of capital but for some cor-
responding increase in labour and ability.
Now this increase of labour and ability is
procured by buying consumable goods which
by their consumption promote economic
efficiency in preference to buying those
which do not, i.e. by what is called "pro-
ductive " instead of " unproductive " ex-
penditure. If saving persons furnish in-
creased or improved machinery of production,
the full advantage of their action can only be
reaped on condition that the general expendi-
ture upon commodities is such as to provide
an increased quantity and an improved
quality of labour and ability.
This does not imply that all expenditure
on luxuries or upon comforts and amusements
which do not make directly for economic
o
66 THE SCIENCE OF ?
efficiency is absolutely wasteful
For there are other purposes of
the economic. But it does imply *~i a '
expenditure shall be such as to provide
-I 1 Vk rf"Vl "I T* (BrlJlO.
increase and improvement of laooi**
ability as shall keep pace with the Increase
and improvement of the capital striictrure,
(The increased application of land, tfa.e otner
factor, being procured by an appli ca/tlo:ri
new capital, e. g. by road-making, does
I require separate recognition here.) I*
I advancing industrial community, then,
| income will be applied in three ways. One
| part will go to costs of maintenance for the
I several factors, one to costs of increase, and
I a third to unproductive expenditure. Now
f I each factor of production has its own costs
H \ of maintenance. First let us look at labour.
f I The costs of maintenance mean provision
| of necessaries of life for the various grades of
I / workers, with any further expenditure for
[/ ( keeping up the supply of labour at the existing
*' level of efficiency This is commonly known
[ as a subsistence wage. It just suffices to
! enable and induce a worker to keep on working
;: , and to bring up a family large enough to
f supply another worker to take his place when
\ ' he is done. For various grades and quail-
J ties of labour the amount of this subsistence,
.; of course, will differ. There will be some
dMerence for individual workers -. WL
COSTS AND SURPLUS 67
occupation, according with their particular
physique and their circumstances. This pro-
vision may be regarded as a " wear and tear "
fund, the minimum towards which wages
were always supposed to tend according to
" the iron law/ 3
Where higher elements of skill or intelli-
gence are involved in work, this bare sub-
sistence may rise considerably higher than
the mere maintenance of physical life, con-
taining some provision for education, recre-
ation and other forms of expenditure, so far
as they are needed to maintain the existing
fund of physical and mental energy. Mana-
gerial or professional ability may thus, even
if we ignore the conventional part of a stan-
dard of comfort, require a relatively high
salary as pay for bare subsistence.
To this subsistence wage of the human
factors must be added a corresponding pro-
vision for capital and land. Here an import-
ant distinction comes out. The provision
for maintenance of labour forms a part,
usually the largest part, of Wages. But the
payment for the maintenance of capital is
not included under interest, nor the payment
for maintenance of land under rent. The
maintenance of capital is furnished by a de-
preciation fund applied to replacing worn-
out or obsolete forms of plant, etc. Interest
is an additional payment to owners of capital
02
68 THE SCIENCE OF WEALTH
after this depreciation has been met. Similarly
in the case of land, the provision for the re-
placement of productive powers taken out
of the land is not rent : a tenant must engage
to " keep up " the land and to pay rent as
well. Economic rent, like interest, is a pay-
ment over and above the provision for main-
tenance of the factor of production.
The costs of maintenance of the industrial
system consist, then, of (1) a number of &ub-
sistence wages and salaries for the various
sorts of labour and ability, (2) a number of
" wear and tear " funds for the upkeep of
the various sorts of capital and land. These
may be considered a first charge upon the
industrial product. Unless adequate pro-
vision., is made for all of them, the system
is starved, its fabric is " let down " and its
productive power reduced. Such starvation
sometimes occurs, even in countries where
upon the whole a high development of indus-
fcry has been attained. Under a bad mode
of tenancy farmers may let down the land.
Undo: -the pressure of shareholders for divi-
dends a railway or an industrial company
may not make a sufficient payment out of
gross profits into the depreciation and insur-
ance funds ; or a telephone or tramways
business, about to pass under public owner-
sMp upon agreed terms, may fail to maintain
its plant in full efficiency. Such incidents,
COSTS AND SURPLUS 69
however, are abnormal. In general the ob-
vious self-interest of the controllers and
managers of industry secures the payment of
the costs of maintenance.
If the whole of the industrial product were
absorbed in these costs of maintenance there
could be no industrial progress. But if there
remains some surplus, after this provision
has been made, the whole or part of it may be
applied to increasing the size or improving
the quality of the industrial system. The
payments made for this purpose may be
called " costs of progress." They will con-
sist of the minimum payments needed to call
into industrial use the various sorts and
quantities of additional labour, land, capital
and ability needed for effective co-operation
in the enlarged structure of industry. Each
of these additions involves the application
of an extra stimulus beyond that required
to secure the mere maintenance of the exist-
ing factors. More or better labour power
can only be obtained by the payment of a
wage higher than the bare subsistence wage.
This " wage of progressive efficiency " will
operate in several ways to increase and im-
prove the supply of labour in any trade to
which it is applied, or in the industrial
system as a whole. By the higher standard
of life which it admits, it will evoke and main-
tain a better physique and morale among
f
'II
fit
I''
$
70 THE SCIENCE OF WEALTH
the workers. Better food, housing and cloth-
Ing will improve the ** home/ 5 raise the
standard of personal dignity and intelligence
for the worker, enable the seeds of higher
education to take root and to bear fruit in a
better use of money and leisure, and in the
development and satisfaction of higher wants.
All these improvements of the mind and body
of the worker have their economic significance
in the larger quantity or better quality of
labour power he is enabled and induced to
give out. Perhaps the most important direct
result is the better care and education of the
children, giving them a more favourable
start in life and thus raising the efficiency of
the next generation. This " economy of
high wages " is, of course, attended by certain
wastes, due to individual defects of character
or bad customs, which impair the rate of
progress and efficiency. But the familiar
instance of a quick rise of wages resulting in
an increased expenditure on drink need not
be regarded as other than a passing and
exceptional effect.
Although in more civilized countries a
general rise of wages is not now attended by
an increase in the birth-rate, nevertheless,
by reducing the still high infant mortality,
by lengthening the effective working life,
and by securing that larger mobility of labour
which brings workers from all parts of the
COSTS AND SURPLUS 71
world to the place where their work is most
productive, it increases the quantity and
efficiency of the supply of labour in a progres-
sive industrial system. " The amount of in-
come needed to evoke and sustain the enlarged
and improved supply will, of course, differ
in different industries, countries and condi-
tions of the arts of industry. But these
varying wages of progressive efficiency are
necessary " costs of progress." If the wages
of any class of labour, or the salaries of
any class of ability, are increased at a pace
so rapid that the increase is not absorbed
in higher efficiency, or even evokes a smaller
or a worse output of energy, as sometimes
happens, such payment comes under a differ-
ent head, to which reference will be made
lower down.
We have seen that the payment of interest
is not required to maintain the existing fabric
of actual capital. 1 The depreciation fund
suffices for that. But if more or better
plant, machinery, and other forms of capital
are wanted, as they are in a progressive
1 This does not, however, imply that the payment of
such interest is illegitimate or inadvisable. It is both
legitimate and advisable. For if payment of interest on
existing capital were sought to be suspended, it is likely
that the owners of the capital would cease to make pro-
vision against depreciation, using this fund instead for
temporary payment of interest while the plant was being
" let down."
i
72 THE SCIENCE OF WEALTH
society, some positive payment of interest is
usually necessary. For though the time
may come when a sufficient number of persons
can be got to " save," and put new industrial
capital into the system, on condition that
when later on they want to spend what they
have saved, they can do so, without requiring
that interest shall be paid them in the mean-
time for the use of their capital, that time
has not yet arrived. A sufficient quantity
of new plant and other capital goods can
only be got by paying individuals to save,
instead of spending, some part of their
incomes. The notion sometimes entertained
that all interest is an unnecessary or a wrong-
ful payment because the new plant and other
forms of capital are " produced by labour, 5 '
involves a double error. In the first place,
labour does not by itself, unaided and un-
organized, produce anything in modern in-
dustry; it is only one of several co-operating
factors. In the second place, reflection shows
that saving involves among a large proportion
& savars aa effort or sacrifice (sometimes
called " abstinence,"' sometimes "waiting")
wMch is necessary to the creation and
functioning of new capital. This effort or
sacrifice, like other productive services, must
be bought and paid for. The necessary pay-
is interest. Though some saving would
be clone wore no interest obtainable, the
COSTS AND SURPLUS 73
full amount of new capital needed and its
apportionment among the several industries
cannot be procured in a competitive indus-
trial society without interest. 1
The payment, then, of the minimum
interest needed to evoke the saving that shall
supply fresh capital to feed the growing
industrial system, is a necessary cost of pro-
gress. While the wear and tear fund for
the maintenance of capital will 3 of course,
vary in amount for different sorts of plant,
buildings, etc., it might appear at first sight
that the rate of interest required to evoke
100 worth of new capital would be the same
whatever concrete shape the new capital
might take. And this is actually the case
so far as fluidity of capital and freedom of
investment exist. It is open to every saving
person to put his savings into a new foreign
loan, into Canadian rails, or into any of the
countless new industrial stocks quoted on the
Stock Exchange. He is thus helping to build
warships, or to make locomotives, or to
furnish machinery and other plant to some
new capitalist enterprise. The real rate of
interest which he will be paid for this service
will tend to be the same whatever investment
1 A Socialistic society,, were such otherwise feasible,
though it too must practise abstinence and "save" for
any increase in its capital,, need not pay interest to any
one. It will pay ''real interest" to itself in the gains
accruing from its enlarged fund of public capital.
74 THE SCIENCE OF WEALTH
lie selects. This uniformity is concealed by
the fact that what is called "interest!!
commonly includes an element of insurance
against risk which is not true interest. If
allowance is made for this payment for risk,
which differs very widely with different
investments, the actual rate of interest, or
payment for use of capital, will be found
to be fairly uniform over those fields of
industry open to all saving persons for free
investment. With the growth of modern
methods of finance, especially the spread
of joint-stock enterprise, an increasing pro-
portion of the industrial structure comes
under this uniformity of interest. An Eng-
lish doctor, or shopkeeper, or skilled artisan,
who has saved a couple of hundred pounds,
ean apply his savings to lay down rails in
Alberta, to set up a motor plant in Birming-
ham, to sink a shaft in the Transvaal, or to
furnish electric light to some city in Argen-
tina, and, allowance being made for difference
of risk, he will get his 3, or so, for each 100
worth of saving that he does. This minimum
interest will, of course, rise or fall somewhat
according to the quantity of fresh capital
required and the amount of surplus wealth
available for saving. But at any given time
there is a rate of interest which is just enough
I , to evoke the required flow of new capital into
|i these open fields of enterprise,
COSTS AND SURPLUS 75
But it must be borne in mind that a large
proportion of the business world does not
lie exposed to the free flow of new capital.
Large numbers of small or middling-sized
businesses all over the world are furnished
with the capital they need by the private
savings of business men, supplemented by
family or local borrowing. Thus in addition
to a World Market for capital we have
myriads of little detached local markets. In
these markets there will be various special
rates of interest, corresponding to the
special rates of wages in the various labour
markets,
A rise of interest, like a rise of wages, will
operate in two ways to evoke a larger or
better supply of productive power. It will,
in the first place, stimulate the owners of
existing plant and other capital to make a
fuller use of it. Machinery will be speeded
up ; where possible, double shifts will be put
in ; reserve machinery will be brought into
use ; credit will be stretched to its fullest
forms, and every other economy of capital
will be practised. In the second place, it
will evoke more saving, causing some persons
to curtail their spending, in order to get the
higher payment offered for new savings.
What now of Land ? We have seen that out
of the product a provision must be made for
the " upkeep " of land, but that this " cost
76 THE SCIENCE OF WEALTH
of maintenance " is not rent. In a growing
industrial system more use of land will be
required to co-operate with the larger quan-
tity of labour and capital. The land already
employed must be cultivated more intensely
or otherwise put to better use, or else land not
hitherto used at all must be brought into re-
quisition. Both these processes involve expen-
diture. In order to bring into use more land,
roads must be made, land must be cleared,
drained, fenced and otherwise equipped for use.
If land already in use is to be cultivated more
intensely, more expenditure of capital in so
cultivating it is incurred, and a larger pro-
vision may be required to meet the more
rapid exhaustion of the soil. In both cases,
however, the "cost" involved is a capital
expenditure. It is not rent. So far as main-
tenance and improvements are concerned
land is capital. The payment called Rent
belongs to a different category.
We are now in a position to make a pre-
liminary reckoning of the payments or pro-
visions to be made out of the annual product
for maiatenance and growth of the industrial
system. First, there are the costs of main-
tenance, or wear and tear fund, for the
different factors of production.
Secondly, there are the costs of growth,
operating in two ways : (1) by evoking a better
use of the labour, land, capital
COSTS AND SURPLUS 77
or ability already in use, (2) by calling into
use new supplies of these factors.
If the whole product were compelled by
some necessary law of Nature to apportion
itself among these several uses so accurately
that it was wholly absorbed in these costs of
maintenance and growth, we should have
a completely rational and socially satisfactory
system of production and distribution of
Wealth.
So far as mere maintenance and its " costs
of production " are concerned, powerful laws
of necessity do compel a fairly full and
accurate provision. For though workers in a
trade may be " sweated," in the sense that
they are not paid a true subsistence wage,
this can only occur where either these workers
are subsidized from some other source, or
where this worn-out labour power can be
replaced out of a reserve of " waiting " or
unemployed labour kept alive out of some
public or private charity. Apart from these
abnormal circumstances (a consideration of
which will be found in Ch. VII.) " sweating "
does not pay, and a trade habitually practising
it cannot live. The case is even clearer as
regards the costs of maintenance of capital
and land, A failure to make regular and
adequate provision against wear and tear
means nothing else than the starvation of
the business. Individual unsuccessful busi-
78 THE SCIENCE OF WEALTH
nesses suffer this starvation, but trades do
not thus perish, unless some change in the
needs or tastes of consumers render them, no
longer useful, A provision which may be
regarded as almost automatic is thus made
for the maintenance of the industrial fabric.
But as regards costs of growth there is
no such security for adequate provision. The
surplus of wealth remaining after costs of
maintenance are defrayed does not auto-
matically distribute itself among the owners
of the several factors of production in such
proportions as to stimulate the new pro-
ductive energies required to promote the
maximum growth of production. Instead
of disposing itself in these proper proportions,
the surplus may be so divided as to furnish
excessive stimuli to some factors and defec-
tive stimuli to others, thus retarding that
full progress of industry which requires a
proportionate growth of all the factors.
In other words, portions of the " Surplus "
may be wasted, or, what is the same thing,
employed " unproductively." Whenever any
owner of a factor of production receives a
payment for its use in excess of what is
needed to evoke its full use he receives " un-
productive surplus." The simplest instance
Is the rent of land. We have seen that rent
is neither a cost of maintenance nor a cost
of- p0wit. Its payment does not affect the
COSTS AND SURPLUS 70
supply of land available for use in an indus-
trial society. It is, of course, true that where
private property in land exists, the payment
of various rents may be necessary in the sense
that the landowners may succeed in demand-
ing them as a condition of giving the use of
their land. But they are not necessary in
the sense in which costs of maintenance
or costs of growth are necessary, i. e. as pay-
ments for some voluntary effort or sacrifice.
Their payment evokes no productive power,
A general rise of rent does not bring into use
an increased supply of land nor does a fall
of rent put land out of use. (A rise of rent
for a particular use of land, e. g. wheat growing,
will, of course, increase the supply for that
use, but by diverting some land from other
uses.) If a landowner can get a high rent
he takes it, if he can only get a low rent he
takes that : so long as he can get some rent,
however little, he will not refuse the use of
his land, He will, of course, apply his land
to that use for which he can get most rent.
So long, therefore, as land remains in private
ownership, it may be contended that, in
order to induce owners to choose the use
for their land which is most productive, they
must be paid some trifling premium. To
this extent only can rent be deemed necessary
in the sense in which wages or interest are
necessary,
fc#, '*
Hf
"
80 THE SCIENCE OF WEALTH
The same Is true, however, of any payment
of interest in excess of the minimum, say
3 per cent, required to evoke the quantity of
saving needed for the growth of the indus-
trial system. If capitalists, willing to apply
capital at 3 per cent, receive 6 per cent., the
extra 8 per cent, stands precisely on the same
level with rent. It is unproductive surplus,
stimulating and supporting no useful effort,
It is taken because it can be got; if it could
not be got the capital would be supplied just
the same. The same is true of any element
of salaxy or of wages in excess of the needs of
progressive efficiency for ability or labour,
Any payment to a factor of production in
excess of the costs of maintenance and pro-
gress thus ranks as unproductive surplus.
It is a source of industrial waste and damage
in three ways. First, it furnishes no stimulus
to production Secondly, it takes away a
portion of the income, or annual wealth,
which might have been productively applied,
if it had passed to some other factor. Exces-
sive payments to some factors involve defi-
cient payments to others, and since industrial
progress depends upon proportionate growth
of all the factors, the receipt of unproductive
surplus must be considered an obstacle to
industrial progress. Finally, in its effect
^pon the factor to which it provides excessive
payment, it not merely does not promote
COSTS AND SURPLUS 81
activity, it depresses it. For as the receipt
of rent, or excessive interest or any other
form of unproductive surplus, enables the
recipient to satisfy his wants without any
output of personal productive energy, it must
be held to have a negative influence upon
production, retarding the growth of industry.
It acts simply as a demand for idleness.
So far as the industrial system provides
for the regular distribution of the product
in payments which stimulate the factors to
maintain or to increase their output of pro-
ductive energy, industrial health is secured,
and complete harmony prevails between the
several factors. As it is not to the advantage
of employers or capitalists to refuse to labour
such share of the product as is necessary to
sustain labourers and their families in the
level of efficiency needed to co-operate with
capital, so it is not to the advantage of labour
to beat down interest or profits below the
level needed to evoke the fullest use of capital
and managing ability. Not merely as regards
the maintenance fund, but as regards the
application of the productive surplus, there
is a harmony between the respective interests
of labour, capital and ability. Friction,
even violent conflicts, may sometimes arise
through the failure of one or both parties to
understand or to interpret correctly this
harmony of the three factors, Industrial
82 THE SCIENCE OF WEALTH
progress, doubtless, has often been retarded
by endeavours of unenlightened employers,
to beat down wages at the expense of the
efficiency of labour, or of unenlightened
workers to attempt to secure for labour higher
wages or shorter hours or other improvements
which the " profits " cannot bear. But so
far as the industrial situation is clearly seen by
all the parties concerned, there is a solidarity
of interests in the proper apportionment of the
I ! costs of maintenance and the costs of surplus,
Discord arises over the emergence of
u unproductive surplus." It is not to the
;^ , interest either of the labour or the capital
i ) in any trade that a share of the product should
'* ^ be paid in rent. Both are prima facie gainers
f j ( by a reduction of rent, even to extinction,
F { ! though we shall see that both do not stand an
| t } \j equal chance of securing and holding the
I j/j t < gain. The same is true of any other payment
\* ]| '!f of unproductive surplus, e. g. abnormally high
jj| j interests or salaries or fees. The only true
! $ 1 bone of contention, the only valid cause of
1 j| \| conflict between capital and labour, land,
f & i| ability, is the unproductive surplus. It lies
I I ! i| in the industrial system a source of continual
i; 1 ,5 disturbance, breeding economic maladies.
i- ; ; is For this surplus of rents and other un-
f, earned and unproductive elements of income
5 represents a large and growing volume of
l industrial energy diverted from its socially
COSTS AND SURPLUS 83
useful purposes and put to positively noxious
uses. A large part of this injury consists,
as we have seen, in the mal-distribution of
the product as between the claims of the
several factors to a share. Rent or excessive
profits to certain forms of capital imply that
labour and other forms of capital are inade-
quately fed for purposes of industrial growth.
But there is another injury, sometimes
even graver, which the taking of unproduc-
tive surplus causes. In our simple picture
of the industrial system we have, in conform-
ity with usage, left out of consideration one
factor which plays an important part in
modern industry, namely, the State. For
though the State exists to perform other than
merely economic functions, a large and a
growing part of the work of government is
concerned with the protection and promotion
of industry. The defensive services of the
army, navy and police, a large part of
criminal and civil administration, are con-
cerned with the protection of private property
and of the economic activities of the people.
Directly or indirectly, the public expenditure
on sanitation, education and other services
for improving the physique and morale of
the people, must be considered as contribut-
ing to economic efficiency. Much legisla-
tion and administration, central and local,
is industrial in its express intent, concerned
84 THE SCIENCE OF WEALTH
with improving the conditions of labour,
regulating the conduct of business and safe-
guarding the interests of the consumer.
So far as this work of the State contributes
to the security and progress of industry,
it is rightly regarded as a factor of production,
co-operating with the labour, land, capital
and ability of the individuals who engage in
industry. Although the State is not recog-
nized as standing at each stage in the pro-
cesses of industry, demanding its payment
for work done, like the owners of the other
factors, it is none the less true that the State
must have its share. It also needs its costs
of maintenance, and of progress, to be paid
out of the only ultimate source of all pay-
ments, the product of industry. We shall
concern ourselves later on with the methods
by which the State comes to take her share.
It is here sufficient to recognize that she takes
it by the same natural or reasonable right by
which the other factors of production take
theirs, on the ground that she assists to pro-
duce it and cannot render this assistance
properly unless she is paid her share. For
unless proper provision is made out of the
industrial product for the upkeep and im-
provement of the State, defective public
services may bring such insecurity and in-
efficiency as will stop the flow of capital and
to the industries where they are
COSTS AND SURPLUS 85
needed, or prevent them co-operating effect-
ively for the production of Wealth.
The reason why it has been necessary to
make this passing reference to the economic
work of the State is that without doing so
the full measure of the waste and damages
involved in the unproductive surplus would
not be understood. For the surplus consists
onjy in part of wealth diverted to owners of
land and of favoured forms of capital and
ability from other private factors of pro-
duction. It consists in part also of wealth
rightly regarded as belonging to the State,
because it is needed for the efficient operation
of the public services. When unproductive
surplus forms a large proportion of the wealth
that is distributed, it entails starvation alike
of the other factors in the private industrial
system and of the State.
Taking account, then, of the claims of the
various factors of production, public as well
as private, and of the scheme of distribution
by which the industrial product is appor-
tioned among the owners of these factors,
we may thus summarize the result
Maintenance (cost of subsistence)
Productive Surplus (cost of growth) B
Unproductive Surplus (waste)
86 THE SCIENCE OF WEALTH
A. Maintenance includes (1) minimum
wages necessary to support the various sorts
of labour and ability required for the regular
working of the industries in their present
size and efficiency; (2) depreciation for wear
and tear of plant and other fixed capital ; (3)
a wear and tear provision for land; (4) a pro-
vision for the upkeep of the public services
which the State renders to industry.
B. The Productive Surplus includes (1)
t ,jL minimum wages of progressive efficiency,
% to x evoke a larger quantity and better quality
t of labour and ability for the enlargement and
: 4\ improvement of the industrial system; (2)
t\\ such a minimum of interest as suffices to
rjl evoke the supply of new capital needed to
'</* co-operate with the enlarged and improved
f| supply of labour; (3) a provision for the
IH improved size and efficiency of the public
It I services rendered by the State to industry.
^ I C. The Unproductive Surplus consists of
4) I (1) economic rents of land and of other
V I natural resources ; (2) all interest in excess
\] I of the rate laid down in B; (3) all profits,
1 ; ; I salaries and other payments for ability or
\^ I labour in excess of what would, under equal
"! | terms of competition, suffice to evoke the
1 * sufficient use of these factors,
CHAPTER VI
UNPRODUCTIVE SUEP'LUS
WE have seen that the actual process of dis-
tribution consists in the innumerable money
payments made out of the prices of finished
articles to the different workers, capitalists,
landlords, managers, engaged in helping to
produce the articles. Not only are the costs
of maintenance thus paid out, but in the
prices paid for the use of the labour, land
capital, ability at each stage of production
are included such elements of surplus, whether
productive or unproductive, as the owners of
these factors are able to get for themselves.
If, then, we deem it necessary to study the
part played by the unproductive surplus, it
is in the buying and selling of the factors of
production that we must study it. We must
examine the terms upon which wages, rent,
interest and profits are obtained.
It will be most convenient to begin with
the rents paid for the use of land. For rent
evidently affords the plainest example of an
unproductive surplus. As soon as thought
87
88 THE SCIENCE OF WEALTH
began to be directed towards a science of
wealth and industry, it was perceived that
the rent of land differs from other payments
in that the landowner undergoes no personal
effort or sacrifice, and gives out no personal
productive force in return for the payment
he receives. The labourer gives the pro-
ductive powers of his body for his wages, the
employer gives his energy of mind and his
time for his profits, even the capitalist post-
pones some present enjoyment in order to
furnish the capital for which he is paid interest.
The landlord . alone takes his payment for
doing nothing. He has not helped to make
the land for the use of which he is paid rent.
It is true that sometimes he helps to improve
the land, making it more fertile or more acces-
sible, by expending thought and capital, upon
it. But in such cases he gets a further re-
muneration which, though sometimes lumped
along with rent, is not really rent. For rent,
? ; i! I the price paid for the use of the natural
rf* | properties of the soil, its fertility, its advan-
tages of situation, is not a reward for any-
thing the landowner has done, or an induce-
ment for him to do anything, it is simply the
price of certain services rendered by the bit
of Nature which he has secured for his private
property. If, therefore, we clear " rent " of
other payments for improvement of the land,
we see that economic rent is entirely aut
UNPRODUCTIVE SURPLUS 89
unearned, entirely an unproductive, surplus.
Its rise and its fall have no effect upon the
supply of land : the landowner simply takes
as much or as little as he can get. That rent
in this sense was a surplus, differing from the
payments made to induce workers, capitalists
and employers to apply their powers, was
early and clearly recognized. To many early
economists rent was the only surplus.
Workers competed with one another for the
sale of labour power until the wage they got
was the lowest sum upon which they could
subsist, or for which they would consent to
work. Capitalists and employers competed
with each other so that interest and profits
tended to be cut down to a minimum. After
these necessary " costs " of labour, capital
and ability, had been defrayed out of the
product, the remainder, the surplus, went to
the landowner.
This was the doctrine widely accepted by
many thinkers who were not at all concerned
with the equity of the proceeding, and who
drew no conclusion adverse to the rights of
landowners to receive the rent. It is held to-
day by many who base upon it an attack on
private property in land, or the doctrine of
" the Single Tax/ 5 So strong is their convic-
tion that economic rent is the only surplus,
the only unearned and unproductive element
of income, that they attribute to the landlords
90 THE SCIENCE OF WEALTH ;
the power to take in increasing rents the whole
of the increase of Wealth produced by the
modern arts of industry, beyond the bare
costs of maintaining the necessary stores of
capital and labour. To their mind rent is the
unproductive surplus.
Now, if land were absolutely limited in \
supply and were a strict monopoly this view
of rent would be substantially correct. The
sole owner of an island would be able to take
in rent all the product, not only of agriculture f
but of every other industry, over and above
the wages of bare efficiency and other mini-
mum costs of capital and ability. He could
dictate his terms to the owners of the other
factors, for he could refuse to each of them all
use of land, without which their labour, capital
or ability would be useless. There have been, |
and still are, landlords who possess in some f.
localities this power almost intact. The
squire who owns all the village with the \
surrounding country is able to impose on
all the villagers the terms on which they shall
work and live, fixing the rate of wages and
the rents, the occupations, recreations, the
religion and the politics of the inhabitants.
If any one objects, he is at liberty to leave his
native place and find work and a home else- *
where, if he can. The ground landlord in
some towns has the same sort of power over
many of his tenants. If he owns the whole
UNPRODUCTIVE SURPLUS
91
town, or the whole of some district with
special residential or commercial advantages,
he can rackrent the shopkeeper, the doctor
or the workman, whose trade, practice or
employment compel him to live in that town
or district. The extreme instance is that of
the shopkeeper dependent upon local cus-
tomers. The landlord, on a renewal of the
shop lease, can evidently raise the rent so as
to take the whole or nearly the whole of the
business gains attributable to the skill and
industry of his tenant, or the increased profits
due to the growing population and needs of the
neighbourhood.
But though such extreme cases of land
monopoly exist, they are the exception, not
the rule. The power of landlordism is seldom
unqualified. The supply of land available
for any given use is seldom absolutely limited,
and the whole available supply does not
usually belong to one man. Although the
Duke of Devonshire may own the whole of
Eastbourne, he could not raise his ground
rents above a certain level, for if he did many
would-be residents and lodging-house keepers
would decide to settle in Bournemouth or else-
where, and tradesmen would follow. With
cheapening transport of persons, goods and
fuel, a manufacturer is less bound to a particu-
lar locality than formerly, and the increased
mobility enables him to get land for factories.
92 THE SCIENCE OF WEALTH '
warehouses, etc., on easier terms. The mere
fact that a small number of men own all the
best sites in a city does not give them the
power of monopolists. Most men starting a
business or seeking a house to live in are not
bound to a particular estate, they can choose
between the vacant sites or houses belong-
ing to several landlords. Though London
is still growing very fast, and all the land
is private property, these facts have not
prevented a large recent fall of rents in many
residential neighbourhoods. A firm of print-
ers, wishing to establish printing-works in the
country, can buy or hire land at a little
over the agricultural price. They can do so,
because any landowner who should refuse them
land upon such terms would know that they
could go elsewhere and get it. The fact, then,
that all the land of a city or a country may
be owned by a comparatively few men does
not enable rents to rise so as to absorb the
whole industrial surplus.
Rent depends for its existence and amount
not upon monopoly but on scarcity. For
every sort of business some land is essential.
Farmer, mining company, brewery, cotton
factory, city warehouse, grocer, lawyer, must
buy the use of some land. So rent must
figure as an expense in every business. Every
t>ne, again, needs a bit of land for a residence,
and so must pay a portion of his income as
UNPRODUCTIVE SURPLUS 98
rent. Now it must be clearly understood that
in each of these eases what is bought and paid
for by rent is a particular sort or use of land.
It is arable land, pasture, market-garden land,
suburban ground, city site for a house, a shop,
a warehouse, a profession, that is wanted.
Now though every sort of business requires
some land, it is quite evident that land plays
a much more important part in some businesses
than in others. In farming and mining it is
a factor of paramount importance : in the
professions and in some branches of wholesale
trade or in finance it is a comparatively trivial
factor. Now those businesses for which very
little land is needed, and for which it is not a
matter of the first importance just where that
land lies, can evidently buy the use of land
on easy terms. For their demand for land
is small and the supply of available land for
their purposes is large. They will thus be in
a strong position to bargain with landlords,
for they can make them compete with one
another so as to beat down the price. On the
other hand, those businesses which need
much land or need land of a particular quality
or position must pay dear for it, because their
demand for the sort of land they want is large
in proportion to the available supply of it
Farm rents in Ireland, before the time of
Land Courts, were raised to an intolerable
height, because the growing population in the
94 THE SCIENCE OF WEALTH
land were compelled to seek a livelihood in
the neighbourhood where they were born by
bidding against one another for a strictly
limited quantity of sufficiently fertile land. A
mining company must usually come to terms
with the owner, or one of a few competing
owners, of a very restricted supply of coal or
iron lands, its requirements for successful
operation being large. We have already
seen why the manufacturer not tied to a
particular spot is able to get cheap land for
a new factory while the local shopkeeper is
liable to be rackrented on each renewal of
his lease. The difference in the various cases
is in the pressure of the scarcity of land. The
fact that the quantity of land in England is
limited, and the fact that the quantity of
land within a convenient distance of the
centre of each town is still more limited, do
not give landlords the power to charge what
they like for most uses to which land is put.
Though the pressure of scarcity for certain
purposes in certain places, e.g. for shops in
Bond Street, for banking premises in the
City, for allotments outside some towns or
villages, may give landlords a tremendous
pull, for many business or even residential
purposes land can be got at what is hfeld a
" reasonable " rate, because the effective
supply of suitable land, though of course
limited, is. large in comparison with the
UNPRODUCTIVE SURPLUS
95
demand. The fact that an insurance com-
pany, making enormous profits, wants a site
for a new branch office, does not enable a
landowner to charge a higher price than he
could get from an ordinary shopkeeper or
other business man for the premises. For
if no special advantage attaches to the particu-
lar site, the insurance company has a large
supply of competing land out of which to
choose and need pay only the current market
rate.
The price of land use, then, is determined
directly not by its utility but by its scarcity,
and that scarcity differs in different places
and for different purposes. Band might have
a^high utility and yet obtain no rent. This
is the case in a newly opened country with
plenty of fertile and accessible land and a
small population. Good land can then be
had for the asking, or for some quite trifling
sum per acre. The natural fertility does not
enable its owner to extort a more than nominal
price or rent, so long as there is plenty of it
not yet taken up. Only when the farming
population begins to press upon the fat lands,
so that there is not any left, can a price or a
rent be got. If in a fertile valley owned by
several men there were room for twenty farms,
equally well placed, and there were only
nineteen settlers, the rent would be merely
nominal, because the supply of land would
96 THE SCIENCE OF WEALTH
be in excess of the demand, and each settler
by making the several owners compete with
one another could drive down the rent. But
as soon as there were twenty-one settlers
asking for farms the rents for all will rise up
to a considerable sum per acre. 1 When
there were nineteen settlers, land was in
abundance, labour scarce ; with twenty-one
settlers labour is abundant and land scarce.
It is the coming in of scarcity which gives
a price or rent to the land. As the scarcity
increases, up goes the price of the land for
sale or for hire. The fertility, the contribu-
tion Nature makes to the productive processes
of agriculture, remains the same. The rise
of rent is due entirely to the intenser scarcity,
L e. to the fact that more persons need the use
of land.
Now most land, at any rate in a civilized
country, is capable of being put to several
alternative uses. Even as agricultural land
it may be used for pasture, or for arable, or
perhaps for fruit-growing. If it is near a
town, it may have other possible uses, e. g. for
market gardens or for suburban building
sites. Now, if we take these different uses of
(j, land in the order in which they are here
named pasture, arable, fruit-growing, market
1 In fact, up to a sum slightly higher than the least
efficient or the poorest of the twenty-one settlers finds h
can afford to pay.
UNPRODUCTIVE SURPLUS 97
garden, suburban site, it is evident that they
represent a rising scale of rents. An acre of
land available for all these uses would gener-
ally earn the lowest rent as pasture, the
highest as suburban site ; the other uses
fetching different rents between these ex-
tremes. Now why are pasture rents per acre
lowest and suburban site rents highest ?
Not because the use of land for a house or
garden is intrinsically higher than its use for
raising cattle. These varying scales of rental
are not determined by utility but by the
varying degrees of scarcity which they inter-
pret and express. An acre of suburban land
fetches a high rent because the number of
available acres near the town is strictly
limited, and the suburban population is
growing. There is a scarcity of supply. An
acre of pasture land fetches but a small rent,
because there is commonly a large supply of
remote land available for this use. Remove
the scarcity of suburban land by some
method of cheap quick transit which opens
up large quantities of equally good resi-
dential land further out, down will go sub-
urban site values. Prohibit the import of
foreign cattle, up will go the rent of English
pasture lands, which will now acquire a
scarcity value. Though, then, it is the
utility or service of land that is bought by
rent, it is the scarcity of the different sorts
98 THE SCIENCE OF WEALTH
of land that determines the amount of the
rent.
The growing needs of an increasing popula-
tion in a country thus bestows a set of prices
" , and rents for the different uses of the land,
according to the scarcity of supply for the
I , satisfaction of these different needs. So,
f taking the land as a whole, an average acre
! of pasture will fetch say 10$., an acre of wheat
| land say 205., an acre of hop land say 805.,
I while brick land, market gardens, suburban
| lands will have their higher prices for an
J, average acre. These may be regarded as
the market prices for the use of land for
different purposes. Of course there will be
a great many of these market prices in differ-
ent parts of the country. Each suburb, for
instance, will have a price of its own at which,
or thereabouts, good building land is for the
time being procurable.
i
These local or other differences are all
matters of the degree of scarcity, the pressure
of the needs of the population on the supply
of land.
The price of a particular use of land, e. g,
for market gardening or for building, being
thus determined, the different acres of actual
land will of course fetch a higher or lower
rent according to the amount of this use
which they contain.
If scarcity gives a value of twenty shillings
UNPRODUCTIVE SURPLUS 99
per acre to ordinary wheat land, then wheat
land which is better than the ordinary will,
of course, get a proportionately higher rent,
wheat land which is worse a proportionately
lower. And so it will be with the rent for
every other use of land. What is bought
and paid for by rent is so much utility of
land, whether for wheat-growing, fruit-
growing, or site-use. When one acre possesses
a larger amount of this utility than another
acre, of course its rent is higher, just as the
weekly earnings of an efficient workman on
piece wages are higher than those of an in-
efficient workman.
A lot of mystification has been imported
into political economy by erecting into " a
law of rent " these self-evident facts that a more
productive acre fetches a higher rent than a
less productive acre, and that if the least
productive acre fetches no rent or but a
nominal rent, an acre which is ten or twenty
per cent, more productive will pay the whole
of this superior productiveness in rent.
In point of fact there is no law of rent at all
but only an application to the sale of land-
uses of an arithmetical truism, equally applic-
able to the sale of everything. You buy
everything because it contains something
useful that you want, and the more it contains
of that " something useful " the more you
pay for it. If one acre of wheat land is twice
D a
; 100 THE SCIENCE OIF WEALTH .
I as good for growing wheat as another you pay
twice as 'much for it, if ten times as good you
> pay ten times as mueh. 1
| In the case of wheat land, what you buy is
! the ability of the land to produce a quantity
J of wheat in excess of the cost of cultivation.
1 If that " surplus * ' or excess is a merely nominal
? amount, the price, or rent, paid is also merely
| nominal : if the surplus is large, the rent is
proportionately large. When the necesstoy
\ labour and capital for cultivating the land
can be got at * 4 cost " price, the price of the
land*tiSe, the rent, is equivalent to the entire
f; ' Surplus.
| Put simply, this means that where labour
I and capital are abundant and land is scattje,
1 the whole of the produce due to the co-opera-
f tioti^f these favors is tekfcft by the landtag
| In other words, 'rent is the sc&mty-pri6e of
'| land : it is the result of what has been called
1 "the niggardliness of Nature/- i.e. the fact
f that in many places and for many industrial
| purposes there is a shortness of supply of
fertile or convenient land.
A ' :: cotisiderable section of u the unpro-
1 This does not, however, mean that an acre yielding
3D bnshels gets a rent just twice as much as does an acre
yielding 15 bushels. That would only be the case if wheat
grew without human labour or capital. If 10 bushels pay
the cost of labour and capital, then 5 remain as a f f sur-
plus*' for rent, in the worse acre, and 20 in the better
wMth iii that case is four times as good.
UNPRODUCTIVE SURPLUS 101
ductive surplus " passes as rent to landowners
by reason of this scarcity. But the belief that
this element of surplus must always and every-
where grow, because Nature has set an absolute
limit on the supply of land, is unwarranted.
The supply of land-use is not fixed* The
mere facts that nothing can be added to the
surface of the globe, and that no considerable
amount of land can be reclaimed from the
sea, are immaterial. For we are concerned
with the quantity of land-uses available for
economic purposes. Now for these purposes
the supply is not fixed* Great Britain, for
instance, does not depend for her land-supply
upon her own small acreage. For her in-
dustrial life, and her food, she has the world
to draw upon. And the world is expanding,
so far as effective land supplies are concerned.
Every new railway in Western Canada, every
improvement in irrigation inEgypt or Australia,
adds more land to the economic supply of
Great Britain and of the world. Moreover
each improvement ia the arts of cultivation,
spreading as it does ever more rapidly over
all civilized countries, though adding nothing
to the area of cultivation, increases the quantity
of productive energy got out of the land, which
is just as good. Modern science applied to
agriculture is showing that enonnous increases
of yield can be obtained out of land, with
no proportionate increase of labour. This is
102 THE SCIENCE OF WEALTH
equivalent to a large addition of new fertile
land. So far as the interior resources of the
* land are concerned, the improved modes of
discovering and working mines, so as to get
out and obtain coal and metals, are adding
enormously to our available supplies. If,
again, we turn from the fertility and treasures
of the land to the use of its surface for building
and other occupations, we need not assume
an indefinite and necessary increase of the
scarcity which expresses itself in rising site-
values. The spread of cheaper, quicker and
more convenient transit adds enormously to
the quantity of land available for these uses,
and so reduces its scarcity value. The effect
of a cheap electric train and motor service in
reducing town rents will be considerable.
If the growth of population kept pace with
these improvements, or if the population,
though increasing more slowly, developed
, t f| standards of consumption making greater calls
<m j upon the use of land for food, housing and
|j |i other material uses, the scarcity of land would
\ '* undoubtedly enable landlords to take in rent
f ik;*, a larger share of the "surplus." So far,
? j! however, as the civilized world is concerned,
I h| the net tendency appears to be the other way,
' t|! a dwindling rate of growth of population with
"4 an increasing quantity of available land. In
| f f Great Britain, though the growth of town life
* i 1 1 has led to a great increase of site- values, the
liij.
1 1 ,
UNPRODUCTIVE SURPLUS
total pull of land upon the surplus wealth has
probably declined steadily during the last
century; not indeed absolutely, but relative! y,
Though no close calculation is possible, it is
tolerably certain that the wealth of Great
Britain has grown considerably faster than the
aggregate of rents.
If scarcity of land produces rent, scarcity of
any other factor of production, capital, labour
or ability, may be expected to yield a similar
result. And so it does. There is only this
difference. Since the landowner undergoes
no effort or sacrifice requiring compensation^
the whole of rent is scarcity value. But, as
we saw, labour, ability and capital have to
receive from the product their costs of main-
tenance and growth. It is only what they can
sometimes get in excess of these that corre-
sponds to rent. Wherever, however, one of
these other factors can get into the position
which landlords occupy when they draw rent^
i. e. if they can make their factor scarce, they
can get a similar surplus.
Because capitalists commonly compete with
one another, it is sometimes supposed that the
interest which they receive cannot contain a
" surplus " or scarcity value. A picture is
presented of savings pouring into the industrial
system through the various channels of invest-
ment, and filling up by their free circulation
every avenue for the employment of capital
i p
( h
104 THE SCIENCE OF WEALTH
so that all interest is forced down to a common
level, the minimum rate sufficient to induce the
saving public to continue the saving process,
There are, however, in this description two
assumptions which, so far as many employ-
ments of capital are concerned, are false. The
first assumption is; that all capital can flow
freely into all employments, seeking the most
remunerative investment. The second is;
that in no branches of industry can capital be
found scarce, in comparison with land and
labour. The first assumption is known to be
false by every business man. Large profitable
fields of industry are in every country fenced
off against intruders from outside, so that the
favoured capital employed therein can earn
high dividends. If more capital is required
by such businesses for the extension of their
trade, existing shareholders or other favoured
persons alone obtain the opportunity to invest
it : if capital is wanted from the outside public,
it is borrowed at the market rate, those who
furnish it not sharing the large earnings of the
company. Well-placed capitalists do not let
in outsiders " on the ground floor," i e. giving
them any share of the high remuneration which
their capital may help to " earn, 9 '
In every developed branch of modern indus-
try some businesses enjoy a position of high
remuneration for their capital: sometimes
by amalgamation or by trade arrangements
UNPRODUCTIVE SURPLUS 105
whole industries may be in this position. The
ordinary investor either cannot put his savings
into such industries, or he must buy existing
shares upon terms which only secure for
a minimum return, though the seller takes In
an inflated price a large anticipated future
gain. In the great manufactures, in profitable
mining areas, in certain branches of transport
business by sea or land, in semi-public services f
in some of the distributive trades, in banking,
insurance and finance, there are large blocks
of well-placed capital obtaining for their
original or present owners rates of interest fax
in excess of the free competition rate* Later
inquiry will indicate the nature of the advan-
tages which such capitals enjoy. Here it is
sufficient to recall the notorious fact of their
existence. There does not exist that perfect
freedom of competition between all owners of
capital which brings all interest down to a
common minimum level. Large masses of
capital are lifted to various higher levels of
interest. Nor can it be said that these higher
earnings are passing strokes of luck or trade
booms. Though all dividends are liable to
fluctuate, these strong, protected businesses
are less liable to fluctuate than others, and
their normal average earnings over long
periods of years attest their power to take
44 surplus. 5 ?
The plain facts of modern business show that
106 THE SCIENCE OF WEALTH
capital like land can get a share of unproduc-
tive surplus. It gets it in the same way,
through scarcity. But while land takes its
surplus by a natural scarcity, capital takes its
surplus by making itself scarce, i. e. by arti-
ficially restricting the flow of free capital
into certain channels of employment. These
restrictions, whether maintained by securing
advantages of raw materials, power or situa-
tion, by tariffs or other State aid, by trade
agreements or combinations, all signify checks
1 \ m upon the free entry of capital into a trade
which is thus enabled to secure a scarcity rate
of interest for the limited supply. Does any
one suppose, for instance, that, if any company
were really able to set up in England the busi-
ness of banking so as to compete oix equal
terms with the existing banks, the earnings
upon paid-up capital in that branch of industry
would be what they are ? Capital put into a
|ijj' place of vantage, so as to be screened from free
SJj 1 competition, sucks up surplus just the same as
t|; land. The fact that the whole of rent is
1 J< " unproductive surplus, 3 ' whereas part of
interest is earned, must not prevent us from
recognizing the identity of the two sorts of
surplus. Both are unearned incomes, got
because the natural scarcity of land or the
contrived scarcity of capital enables the
owners of the scarce factor to take all the
surplus product that remains when the bare
UNPRODUCTIVE SURPLUS 107
" costs " of the more abundant factors have
been defrayed.
If the term rent be applied to all forms of
scarcity-payments to factors of production,
this surplus-interest is a rent. But so is the
remuneration which some sorts of ability or
labour are able to secure in excess of their wage
of efficiency. Instances of groups of wage-
earners occupying a position of scarcity in
comparison with other factors of production,
and thereby enabled to take a rate of wages in
excess of the current demands of efficiency,
are not unknown. Cases occur in new countries
where plenty of good virgin soil is available
and where capital is readier to flow in than
labour. Trade-unions in well-organized trades
have sometimes been able to secure for a time
scarcity-wages in towns or districts where
capital is plentiful. But these cases will be
recognized as exceptional when a fuller
analysis of the condition of the labour market
has been presented. It is only the higher
forms of human productive energy, to which
the term " ability " is given, that show a
normal capacity to secure scarcity pay. To the
rents of land and capital may be added this
" rent of ability." Now many of those who
admit the rent of land to be unearned, and
recognize that capital may often take excessive
dividends, are apt to boggle at the view that
any part of the remuneration of ability can be
108 THE SCIENCE OF WEALTH
rightly included under the same head. This
is due partly to the fact that whereas the
landowner and the owner of capital can live
idly on the proceeds of their land and capital,
the man of ability often gives out continuous
personal productive energy. It is generally
felt not merely that he must be paid but that
it is bad policy to stint his pay. Personal
ability of inventors, organizers, overseers,
officials, professional men, artists, skilled
technicians of every sort, must be paid upon a
scale sufficient to evoke their best work, for
the higher the quality of the utility of the
work the greater the loss from failing to get
it at its best. Since the nature of such work,
its essentially intellectual, moral or artistic
natureprevents the application of the ordinary
piece and time measurements which regulate
the pay of most manual labour, it is felt that
a generous remuneration is advisable, so as
to be on the right side. Where, as has some-
times happened in the co-operative movement
or in municipal services, attempts have been
made to buy ability cheap, this economic
lesson has been driven home by disastrous
consequences.
But the difficulty and delicacy of ascertain-
ing the rates of pay needed to sustain and
evoke the various sorts of industrial ability
must not lead to the conclusion that ability
is necessarily worth whatever price it can
UNPRODUCTIVE SURPLUS 109
in the sense that it would not work as well
if it could only get a lower price. At present
in England the fee among the recognized first
rank of surgeons for- a delicate and difficult
operation may be 100. A private patient
may not be able to get it done for less, and if
he has the money it may be well worth his
wbik to pay it. In one sense, then, it appears
to be a payment necessary to evoke the appli-
cation of this sort of skill. But it m&y very
well be the case that in Germany this operation
is performed with equal skill for a fee of 40,
or in Switzerland for 20. Why so much
cheaper in these other countries ? For two
reasons. First, because the wider spread of
opportunities of good higher and professional
education bring to the front in Germany and
Switzerland a larger proportion of natural
talent. In this way the supply of first-rate
surgical ability would b^ increased. On the
other hand* the proportioi* of rich families
t&ble to p^y a fee of 100 would be smaller in
Germany and Switzerland, so that the effective
demand for the operation at such a price would
be smaller than in England. So, with a greater
supply of this sort of ability and a smaller
demand for it at a high price, the fee must fall.
While, therefore, I must pay 100 in England
at the present time for this operation, if
improved and enlarged education brought
more first-rate surgeons to the front, I should
110 THE SCIENCE OF WEALTH
be able to buy the same ability for, say, 20.
Although, therefore, it may appear at first
sight as if the 100 fee were a wholly necessary
and reasonable payment for some rare kind
of natural skill, it is .evident that 80 of it
is simply a rent of scarcity, shifting up and
down with the degree of scarcity.
Or take the case of the Town Clerk and other
high officials of a large British Municipality. It
is reckoned bad public policy to pay such men
less than from 1000 to 1500 for their ability.
But in Germany or France there is every
reason to believe that men of at least as good
qualifications for such posts are procured at
about half the salary. The explanation is
obvious, more equality of educational oppor-
tunities on the one hand, fewer opportunities
to able men of entering other careers in which
large surplus-incomes are frequently pro-
curable, upon the other, bring to these official
posts a larger number of well-qualified appli-
cants. It is sometimes argued that a few
high-paid places may be necessary as prizes to
tempt a sufficient flow of ability into pro-
fessional or business careers in which there
are so many blanks. But whether applied to
professional fees or to business profits, this
I* |i gambling appeal is a bad economy. The low
* l and even " sweating " salaries paid to strug-
; glmg doctors and engineers can afford no
! economic defence of the necessity of the
UNPRODUCTIVE SURPLUS 111
extremely large incomes got by a few men at
the top of these professions. They are not
warranted in claiming that whatever rates
they are able, under the present circumstances,
to obtain, are a just or. permanent measure of
their personal services. Indeed, it is quite
evident that just as certain groups of favoured
and protected capitalists can take excessive
interest, so certain cliques or grades of pro-
fessional, official and business men of ability
can take excessive salaries, fees or profits.
These payments are of the same nature as the
rent of land; all are scarcity payments for a
factor of production which by nature or con-
trivatice is short in supply.
Thus interpreted, such of the surplus-
product as is not distributed in costs of growth
is apportioned among the owners of the several
factors of production in proportion to their
" pull." The particular channel into which
the unproductive surplus flows varies in the
various parts of the industrial system. In
some countries and in some industries land is
strongest and scarcest, and the bulk of the
siirplus goes for rent. In other countries and
industries capital or ability is short and land
relatively abundant; there interest or salaries
and profits take more surplus.
This general conclusion as to the distribution
of the surplus is conformable with common
knowledge in all countries where national
112 . THE SCIENCE OF WEALTH
wealth is on the increase. The notion, for
I - ; instance, that in such a country as Great
ti Britain landlords are the residuary legatees
who take in rent all surplus wealth is opposed
to the plainest evidence of facts. Even the
widest interpretation of " economic rent "
cannot assign to it more than some fifteen per
cent, of the aggregate national income, while
ten per eent. is a more reasonable computation.
That many wealthy families are sustained in
luxury and idleness out of other sources of in-
come than rent of land is obvious. Indeed, there
is good reason to believe that the aggregate
income in this country which would count as
dividends or profits has during the past century
grown at a far faster rate than rent. Though
much of these dividends and profits may rightly
count as 1* costs " for the upkeep and service-
able increase of the growing capital and organ-
izing power in modern industry, there can be
| I no question but that a great proportion is
unearned or " scarcity " payment, involving
no corresponding effort or sacrifice on the part
of its recipients. The richest men in most
i advanced industrial countries to-day do not
i derive their riches in the main from land, but
from the possession of other instruments of
i manufacture, transport and finance, and the
control of markets.
UNPRODUCTIVE SURPLUS 118
i
APPENDIX
THE SOCIAL WASTE OF UNPRODUCTIVE
SUBPLUS
THE prominent position given In this
analysis to the Unproductive Surplus makes
it necessary here to clear away one miscon-
ception which is likely to arise as to the
part it plays in industry. Although the
rents, excessive interest and other elements
which comprise this surplus, perform no
useful service in stimulating the industrial
activities of their recipients. It may appear
that their general effect upon industry is
salutary. The luxurious expenditure which
they render possible imparts activity to a
large number of trades, while that which is
not expended but saved goes to swell the
industrial capital of the nation. Therefore,
though this surplus is not " productive " in
the sense of sustaining or evoking the pro-
ductive energy of those who receive it as
" unearned income," it may be thought to
be productive in its further uses, whether it
be spent or saved. But a closer scrutiny
disposes of this notion. For, as regards the
portion that is expended upon luxuries, it
adds nothing to the total volume of industry
and employment. If, instead of passing as
114 THE SCIENCE OF WEALTH
unproductive surplus to a receiver of rent
or excessive profits, it were assigned by a
more equitable distribution as cc efficiency ?!
wages to labour, it would still have been
spent in demanding commodities. These com-
modities, instead of being luxuries for the
rich, would have been conveniences of life
t for working families. Instead of increased
f employment being afforded in the luxury
trades, the same amount of increased em-
ployment would be imparted to the trades
producing working-class conveniences. But
the consumption of the luxuries would con-
tribute nothing to the working power of the
industrial system, whereas the working-class
expenditure would leave a a result an im-
proved efficiency of labour-power. So much
for the portion of the " unproductive surplus "
spent on luxuries.
It may seem that the portion which is
saved, at any rate, must be industrially
beneficial. " Unproductive surplus ' ' saved and
4 } put into new forms of capital, it may be
argued, is quite as beneficial as higher wages
expended in raising the efficiency of working-
class families. More capital is as serviceable
as more labour-power.
But it cannot be taken for granted that
surplus which is saved and put into more
capital is of necessity as socially serviceable
as if the income which formed that surplus
in- 1
UNPRODUCTIVE SURPLUS 115
had gone to raise wages and the efficiency
of labour. For we have recognized that
industrial progress depends upon a rightly
proportioned increase of the different factors
of production. If then there were a tendency
to increase new capital at a faster rate than
the efficiency of labour were increased, such
a tendency would be wasteful, regarded from
the standpoint of society. Now the " saving "
of large masses of unproductive surplus
causes just this sort of waste. For to make
large additions to the capital structure of
industry, while the efficiency of labour is
not proportionately increased, has two in-
jurious effects. First, it upsets the adjust-
ment of the factors of production, labour
lagging behind capital as a productive power.
Secondly, it stimulates production beyond
the pace required to supply the final com-
modities to consumers, and so brings about
the periodic congestions of the markets
which are seen in trade depressions. This is
the inevitable result of a distribution which
creates unproductive surplus out of income
needed to raise the efficiency of wage-earners.
For the rising consumption of the wage-
earners, who form the vast majority of
consumers, is necessary in order to take out
of the industrial system the increasing quan-
tity of consumables which its growing powers
enable it to produce. That is to say, out
116 THE SCIENCE OF WEALTH
of the surplus product in a progressive society
only a limited quantity of income can ad-
vantageously be put into new capita], the
rest being needed to raise the general volume
of consumption so as to furnish full employ-
ment for this new capital and the new labour-
power which such a distribution will evoke.
The chief waste attending the accumulation
of unproductive surplus is that it causes an
excess of the new capital to come into being
plant of various sorts being increased so fast
that m attempt to work the industrial
system thus overloaded soon brings about a
glut, followed by a fall of prices and a stop,
page of industrial processes, which con-
tinues until the glut has been worked off,
and tirade reviving, the same vicious round
of HBder-aonsuinptio^, over-saving, over-
production and consequent depression a^ain
recurs, &
CHAPTER VII
WAGES
LABOUK stands on so different a footing
from the other factors of production in regard
to the conditions o! its sale that a separate
law of wages has often been propounded.
Such procedure, however, is quite un-
warranted. For the price of labour is deter-
mined like the price of the other factors by
considerations of cost and scarcity affecting
the relation of the supply to the demand.
(Supply means the quantity of anything
offered for sale within a given time at the
current price, or the rate at which anything
is put upon the market. Demand means the
quantity of anything bought within a given
time at the current price, or the rate at which
anything is withdrawn by buyers.) But
while there is no special law of wages, there
are conditions peculiar to the sale of labour,
which deserve a separate discussion. Unlike
land and capital, labour cannot be detached
from the person of its owner. When its
productive power is used, this use requires
117
118 THE SCIENCE OF WEALTH
the presence of the owner on the spot, and
commonly entails certain effects upon his
liberty and life which are not easily or ade-
quately counted in the cost. Risk to life
or limb, incident upon employment, seldom
figures in the wages bargain, while dirt,
disease or degrading character of work have
little influence upon the rate of pay. The
wage-earner can seldom, like the landlord or
the capitalist, withhold the offer of his pro-
ductive agent for a while so as to raise its
price. For, in the first place, he has usually
no other means of livelihood to keep him
while he waits. Secondly, if he could wait,
his waiting would not merely waste his labour
in the interval, but, by the starvation and
the idleness it entailed, would damage the
efficiency of his labour afterwards. The
employer, the capitalist, the landlord, can
wait, for they have a reserve on which to
live, and, though their waiting involves
some present loss, they can usually recover
it in the terms which they are able to exact
when they once more apply their land or
capital which has not suffered any wastage
of productive efficiency from a temporary
withdrawal.
Most workers, in a word, must sell their
labour continuously for whatever it will
fetch. But the natural condition of the
labour-market has another disadvantage for
WAGES
119
the sellers. Their labour is contained in
a large number of little separate pieces : the
capital is usually concentrated in large
masses wielded by a few employers. The
sellers of labour, then, are many, the buyers
few. This is an obvious advantage to the
buyers, whose competition with one another
is likely to be less free and continuous.
Though it is the object of trade-unionism
by collective bargaining to turn the edge of
this natural disadvantage, it can only succeed
by maintaining a more complete solidarity
of labour than that which the employers
can achieve by their combination. Now
employers, being fewer and better informed,
can usually maintain a stronger organization
than labour, with a far larger reserve in case
of hostilities. Again, where labour is more
successful, the conditions of its powerful
combination usually involve so rigorous a
guard on the trade entrances as to increase
the difficulty of an equally effective com-
bination for other sorts of labour. This
brings us to the central defect in the capacity
of labour as a claimant for the " surplus
product.'! For the distribution of this sur-
plus, as we saw, depends upon the scarcity
of the respective factors. Now land is
attended by a natural scarcity, only to be
overcome partially and with difficulty. Capital
acquires a position of scarcity by organized
i\
if
120 THE SCIENCE OF WEALTH
._, contrivance. Ability has some natural and
mil some contrived capacity. But labour is
naturally abundant and has shown no ade-
quate power to establish and maintain scarcity
of supply.
A few rare local instances have occurred,
in the building or carrying trade of some
|1 American city, or among the shearers or
|| other season workers of some new low-
|'j populated country, where a combination of
!| , labour has for a brief time enjoyed the same
flA advantages of shortage which the ground-
C*| landlords of every large city, the employers
;4ll in every well-organized industry, enjoy all
\%,i the time. But the normal continuous con-
j|Vj dition of labour in most countries is one of
4 I over-supply, in the sense that there is usually
more labour offered than is bought. Labour
is the only factor of which the supply gener-
ally and permanently exceeds the demand.
Though restraints upon the birth-rate and
improved organization of workers doubtless
tend to diminish this over-supply, they have
not got rid of it. And so long as any over-
supply exists, its necessary effect, so far as
f J free competition operates, is to drag down
|; * ' wages to that lower level which covers bare
' ! ) costs of maintenance, or such slightly higher
* 4 level as law, public opinion, custom or
?/ humanity prescribes. For if there are thir-
'*; teen mm competing for twelve jobs, the
WAGES 121
struggle of each to escape being the excluded
one will drive the price of labour to a mini-
mum nearly as effectually as if there were
twenty men competing instead of thirteen.
We may, then, summarize the general con-
ditions which distinguish the labour-market
from the markets for the sale of other factors,
by saying that labour is naturally more
abundant than the other factors and is less
capable of correcting its abundance by
organized contrivance.
A clear understanding of the nature of the
wage bargain compels us to look more closely
to the relation of the individual worker to
the labour-problem. In our general state-
ment of the price of labour as a " cost " we
assumed that the price could not be less than
would suffice to keep the worker in his ordin-
ary health and strength, and enable him to
support a family sufficient to replace him
when his working time was over. In a
progressive industrial society wages must be
higher than this mere " wear and tear "
pay, including a stimulus and maintenance
of more labour-power for the growth of
Industry. If every family were of about
the same size and were supported entirely
by a single wage-earner, an intelligible theory
of wages might be constructed on this basis.
But neither of these conditions is fulfilled.
Working-class families vary in size and in
122 THE SCIENCE OP WEALTH
the number of their members who are earning
wages. Now, from the standpoint both of
the industrial system and of humanity,, the
subsistence or efficiency wage means the
weekly income of the family. There is, how-
ever, nothing in the conditions of the single
wage bargain to ensure this family subsist-
ence. For what is sold in that bargain is a
given quantity of productive power. The
same price is given for a unit of this power,
whether it is given out by a man who must
support a wife and six children out of the
price he gets, by a man who has only himself
to keep, or by a man whose wife and children
are all earning money. If the wage were
a full maintenance for the first case, it would
yield a surplus for the second, and a still
larger surplus for the third family. If, on
the other hand, it is only sufficient for the
single worker, then the man supporting a
family out of it is evidently " sweated " and
unable to maintain his own and his family's
efficiency.
It is true that by process of bargaining there
is some tendency to fix a wage sufficient to
defray the ordinary, or average, expenses the
worker has to meet. In most male employ-
ments, for instance, wages must lie somewhere
above the amount needed to support a single
man, for otherwise married men with families
to keep would not work in those trades and
WAGES
123
the supply of labour would be deficient. So,
in most metal or mining centres, wages for
men are somewhat higher for the same level
of skill than in textile towns where there is
fuller and more remunerative employment
for women and children. But though thus
indirectly there is some tendency to make
wages conform to the needs of family subsist-
ence, the tendency is exceedingly defective.
Whereas a vigorous young Lancashire operative
may, while unmarried, earn a weekly wage
that yields a surplus on his needs, when
married with a young family to keep he often
finds the same wage deficient for their proper
maintenance, while afterwards, if he still
keeps his earning power when they are old
enough to get employment, he may once
more find his wages adequate to meet his
needs. This fact that maintenance of labour
depends on the composite family wage,
while the wage bargain regards merely the
quantity of labour power given out by the
individual worker, is the greatest crux of the
wages question. The typical wage bargain
for the price of labour per piece or per hour,
is doubly defective from, the sound economic
standpoint. It does not secure a weekly
wage for the continuous subsistence of the
individual worker, much less does it secure
the whole or any fixed proportion of the
family subsistence. Yet, from the standpoint
124 THE SCIENCE OF WEALTH .
of the industrial system, it is this last fact
that is essential.
Even where family needs have some
indirect influence in fixing individual wages,
ordinary family conditions alone count. The
wage-system cannot take into account the
shoals of exceptional cases, where the family
is larger tha& usual, wherfc there is an invalid
wife or sickly children, or where the death 0?
disability of the fchief mge^mer throws the
entire suppose of thf faitoly Upon the Woman.
This la&t cotisicteratiOii brings Up the
sp^M fe&ttireS of the labour bargain in the
case of women. Its most onerous effects
fall more heavily on Women than on men.
For thfe feet that the male wage is based in
part upof* a loos^ principle that & man is
tte sole '- tibi&f support 0f a family, while
a wdDaaft i ftot, ^xarciSfes A depr^sing in-
fluence on the price 5f female labour* In
most work the earnings of a man Would any-
how be greater, because of the larger amount
of productive power he can give out. But
this ^sumption, th&t the man supports
Whild th woman does not, has op&r-
^fed to raise i&ale w^ges to a higher level
over female wg^es for similar work than
would otherwise havfc happened. It has
helped to make the customary wage of men
about twifee that of women* instead of, per-
one-third more.
WAGES
125
The assumption, otherwise expressed, is
that every woman is partially supported by
some man. The depressing effect of this
assumption is such that the ordinary wage
for able-bodied efficient women-workers in
most skilled and unskilled trades is below the
level of separate maintenance. It is not a
question of &ome low-skilled, irregular, home
industry like matchbox-making or shirt-
makiftg. The ordinary woman's wage re-
garded as the sole source of her income is a
sweating Wage, The 10s. or 12$., the usual
factory Wage outside Lancashire, is not
enough to keep a Woman living by herself
iti full efficiency a&d to eli&bifc her to provide
against ordinary emergencies. Far niore
cruel is the effect of the wage-system on the
large number of women who have to keep
not merely themselves but a family 6ut of
their earnings, for they feel the full brunt
of a system of bargaining which may drive
the piece-wage or the weekly-Wage of the
individual Worker indefinitely below sub-
sistence point. Though this is no place for
discussing remedies for industrial diseases,
it may be pointed out that the Mere ittbist*
ence, either by legal or co-operative action,
that women shall be paid at the sa&ie rate
for the same work as men, would not, by
itself, be likely to do very much to raise the
industrial status or the wages of women.
126 THE SCIENCE OF WEALTH
For, In the first place, there are not many
occupations in which women are doing identi-
cal work with men. Again, where they are
doing the same or nearly the same work,
they usually hold that employment on the
condition of taking lower wages, and if, by
legal or trade-union pressure, they insisted
upon equal pay with men, they would be
driven from the trade. Finally, if we are
regarding wages from the social-economic
standpoint as maintenance, since most women
have not to contribute so much as men to the
family maintenance, it is not so obviously
just and desirable, as it sometimes seems,
that they should be paid as highly as men
even for the same work. Looking at labour
as a mere commodity it seems equitable
that tibe same price for it should be paid to
female sellers as to male. But looking at
it as a means of support for a working family,
it is more important that the chief wage-
earner should be highly paid than that the
same rate should be paid to the subsidiary
wage-earner. Only in as far as the growing
economic activity of women tends to make
her as important a factor in the earning of
the family income as the man, is it obviously
desirable that the same rate of pay should
prevail. This conditional defence of the
Mgher rate for men, however, does not dis-
pse of the numerous cases where the woman,*
jf
WAGES
127
not the man, bears the whole or the chief
burden of supporting the family. These
numerous exceptions require exceptional treat-
ment which, if the competitive wage-system
is not competent to accord, should be a matter
for public provision. The fact that women
are physically debarred from many highly-
paid employments, and that the chronic
over-supply of the labour in those open to
them forces them to underbid men and one
another for wage-work, cannot be adequately
met by a policy of equal pay for equal work,
and unless a public provision for unemployed
women formed a foundation for co-operative
action among wage-earners, the enforcement
of this general maxim of equality might
seriously worsen women's economic condition.
This will suffice to show that, whereas the
conditions for the sale of the use of land and
capital must always be such as to make
provision for full maintenance of these factors,
the conditions of the labour bargain do not
necessarily secure the subsistence of the
single worker or the working-class family.
If individual bargaining were general, and
the economic forces above described had
unrestricted sway, the condition of the wage-
earners as a body would be much worse than
it actually is. There are, however, counter-
forces to be taken into account. The most
important of these is the intelligent self-
128 THE SCIENCE OF WEALTH
interest of the employer. In many trades
it would not really pay the employer to buy
all his labour at the cheapest rate at which
he could get men to work. For certain
qualities of personal efficiency, affecting the
quality of skill, intelligence, responsibility,
etc., could not be got from " sweated "
labour. The good-will of the workers also
enables a business to be run more smoothly
and with less supervision. The recognition
of these obvious facts has caused a policy,
which was always applied to salaried officials
in public or in private business, to be extended
in many cases to the better grades of wage-
earners. This policy is sometimes called
" the economy of high wages," and is based
on the truth that if you pay a man a higher
rate, you will get more or better work out of
him. For he will be able to give out more
labour-power by reason of the higher standard
of physical and intellectual comfort his wages
allow him to support, and he will be willing
to do so, because he will recognize himself
as having a personal stake in the success of
the business. Sometimes this extra-wage is
given by some " bonus " or " profit-sharing "
method. But it always tends to raise the
family-wage above the point of bare sub-
sistence and to stimulate increased efficiency
of labour.
Some have laid so much stress on this policy
WAGES 129
as to suggest that if employers could all be got
to recognize its full validity, high wages and
short hours would generally prevail, and all
conflicts between capital and labour would
disappear. But this is a view that ignores
important qualifications of the policy. For
there are many cases where " sweating 5> is
a more profitable present policy for the
employer than high wages. In most of the
domestic workshops and other low-organized
businesses where women or " green " male
* hands are employed, it would not be profit-
able to pay anything but sweating wages.
Even under the factory system and in many
offices and retail stores, there are large
numbers of workers on starvation or bare
subsistence wages who would not respond
to higher wages in a proportionate amount
of increased productivity. It is foolish to
pretend that sweating is always an unen-
lightened policy from the profit-making stand-
point. So long as there stands a plentiful
supply of idle hands, ready to take the place
of the labour exhausted or used up, it is
often " good business " to pay the lowest
market price for low-skilled labour. Again,
where there is some disposition among better
employers to pay a higher wage which would
come -home later on in increased efficiency,
the competition of greedier or shorter-sighted
rivals often prevents its application.
I
*i 1
1
ISO THE SCIENCE OF WEALTH
While, then, it is indisputable that this
factor has played an important part in raising
the standard of wages and of comfort in the
skilled artisan classes, it cannot be relied
upon to secure for labour in general an ade-
quate wage of progressive efficiency. Per-
haps its chief effect has been to co-operate
with the forces of public opinion, trade-union
action and industrial legislation, so as to
help to build up and maintain a number of
different levels of working-class comfort,
roughly corresponding to the skill and in-
telligence involved in the various staple
trades.
It is important to recognize the causes
and supports of these higher grades of wages
and of the standards of living which depend
on them. Some sorts of labour are more
arduous, more disagreeable, more degrading,
more dangerous than others, and it might
seem natural that these disadvantages must
be offset by a higher rate of pay. But this
is seldom the case. For unless these dis-
advantages are of such character as posi-
tively to exclude the ordinary worker from
competing for the employment, they do not
apparently raise the wage-level. Most heavy,
dirty, repulsive, unhealthy labour is paid for
at the lowest rates, because the over-supply
of low-skilled workers of average capacity
is such that they cannot afford to take these
WAGES 131
conditions into consideration. Only when
some unusually high standard of physique
is necessary, as in the case of certain steve-
dores and foundry workers, does the arduous
nature of the work tell upon the rate of
wages. Danger or degradation hardly counts
until it reaches the limit of the steeplejack
or the hangman. This statement, however,
requires one qualification. Though heavy,
disagreeable, or dirty work seldom gets paid
at a much higher rate, light, easy and genteel
conditions, on the other hand, especially
for women, depress wages below the ordinary.
This partly explains the low pay of ordinary
clerks and shop-assistants. The only large
employment in which personal feelings much
affect wages is domestic service, where servil-
ity and loss of independence are compensated
by relatively high pay. Trades involving
skill, intelligence and responsibility, gener-
ally have higher levels of wages. To some
extent this is doubtless due to the considera-
tion already adduced, viz. that a certain
level of comfort and security conduces to
the efficiency of these sorts of labour. But
a more important cause is the relative scarcity
of numbers of workers qualified to do such
work. When the working classes had little
access to ordinary schooling, the wages of
clerical skill were relatively high; free popular
education has pulled them down, not because
E2
r
182 THE SCIENCE OF WEALTH
less skill and knowledge are needed for a
modern clerk, but because a larger proportion
of young men and women are able to attain
these qualifications. In a word, skill, in-
telligence and other personal qualities, like
the positive disagreeabilities attaching to
various kinds of work, can only raise the
wage-level in one of two ways, either by
requiring a higher standard of subsistence
for the physical or mental energy to be given
out, or by restricting the number of qualified
applicants in the labour-market.
A main purpose of trade-unionism has been
to assist these two tendencies. By helping
to maintain higher levels of class comfort for
the grades of skilled workers, and by resisting
the downward pressure exercised by bad or
unenlightened employers, or by organizations
of employers in bad times of trade, they have
assisted to maintain the labour conditions
essential for industrial progress. The par-
ticular restrictions upon entrance into a trade,
upon output and the use of machinery,
have all been directed to maintain a relative
scarcity of labour in the trade, without
which collective bargaining would be in-
effective. Parts of this policy have been
shortsighted and mistaken, as regards the
immediate interests of the workers concerned,
especially the resistance to labour-saving
machines in trades, where, as in printing,
WAGES ' 133
cheapening of production would quickly
stimulate demand so largely as to enhance
the aggregate employment in the trade*
But even here the circumstances of each
trade must be taken into account. While
labour-saving machines and other economies
tend, in the long run and as regards the
general body of the workers, to raise wages
without diminishing employment, the method
of their introduction, under the spur of com-
petitive profit-seeking is often truly detri-
mental to special bodies of workers immedi-
ately affected; and though the "long run "
may bring compensations, the narrow margin
of their lives and means compel them to
safeguard as far as possible the " short run."
Nor is the resistance of organized wage-
earners to rapid changes of method justifiable
merely from the standpoint of their imme-
diate group-interests. It is justifiable also
from the wider social-economic standpoint,
provided the resistance is gradually relaxed.
For the swift wholesale changes which com-
petitive profit-seeking often prompts, are
fraught with wider social and industrial
dangers. So far as trade-union opposition
only moderates the pace of these industrial
changes, it not merely serves its own interests,
but incidentally the social interest.
Industrial laws, regulating the hours of
labour and other conditions in different
i
THE SCIENCE OF WEALTH
trades to various extents, assist in making
the scarcity and the organization of labour
more effective in some trades than in others,
and so in raising and maintaining the differ-
ent levels of standard wages which we find.
If there had been no factory laws, no Acts
protecting the lives of workers, or discriminat-
ing age or sex for purposes of employment,
the incentives which evoked those improve-
ments of machinery and methods that de-
mand higher qualities of skill and morale in
factory workers, would have been far weaker
than they have been, and the opportunities,
of which the higher grades of specialized
labour have availed themselves for organiza-
tion, would not have existed.
Thus we see how a combination of technical
conditions, legislation and organization, has
removed labour from a common low level,
disposing it in a series of graded terraces,
with rising standards of wages and of com-
fort. No modern treatment of the wages
question can take labour as a single market
amenable to some one " iron law !! or other
simple formula.
There are many sorts of labour, each with
its own market and its own price, just as we
saw there were many markets for the use of
land and capital. Though the young raw
labourer has some choice of occupation, for
most workers this choice is very restricted
WAGES . 135
both as regards trade and locality. The
lower grades, requiring low skill and training,
are more accessible to one another, so that we
may speak of " labourers " in towns as if
they formed a single market and had a single
price, which indeed is substantially the case.
The same is true of women's factory work
in all but the most highly skilled trades.
The degree of skill wanted can be acquired
so readily by most young women that in
effect a single market and a single price exists.
The higher the skill or quality of the labour,
the smaller the proportion of the ripening
wage-earners able to qualify and enter this
labour-market, and the more inaccessible it
is to workers hitherto engaged in other sorts
of work. So, for skilled male labour there
exists a number of very distinct labour-
markets, protected against rushes from outside,
and so less likely to be hampered by a large
permanent excess of supply. Wage-earners
in this condition, being more intelligent
and better paid, are enabled to organize
themselves for bargaining far more effectively
than wage-earners in the lower grades. So
they are able to raise the level of their wages
to a larger extent than the mere superiority
of skill would appear to warrant. Because
a compositor may on the average earn a wage
twice as high as a cotton or woollen weaver,
one is not entitled to assume that the work
136 THE SCIENCE OF WEALTH
lie does is twice as skilful. What mainly
determines the wage-level is the plenty or
scarcity of the supply of available labour in
the trade, not the degree of skill required,
except so far as the latter condition affects
the former. As in the use of land and capital,
scarcity of supply is the direct determinant
of the price of the various sorts of labour.
As in the case of capital, so in that of labour,
it is the chief object of organization to pro-
cure and maintain scarcity by making it
difficult for outside labour easily to enter the
trade, and by restraining full freedom of
competition inside the trade.
The establishment of a number of wage-
levels for different trades does not, of course,
signify that all the workers in the same
trade tend to earn the same amount of money
in a week or in a year. As more productive
land or capital gets higher rent or interest
than less productive in the same employment,
so it is usually the case with labour. Where
piece- wages prevail, this is, of course, obvious.
i|j J A quicker or a better worker will take in a day
| j or a week a larger sum, representing the larger
* size of his output or the smaller deduction for
faulty work. Since a quicker or better worker
gets more out of a machine, he will also often
get in addition to the wage a bonus which
merely measures the greater quantity of
piece-work done. These differences of in-
WAGES
dividual earnings will vary very greatly in
accordance with the conditions of the work.
Where the machine closely sets the pace,
and only those are employed who are com-
petent to follow machines well speeded up, the
individual differences of earnings will not be
large. But where pace is largely or entirely
a matter of individual deftness or nervous
energy, one worker at the same piece-rate
will often earn twice the money that another
earns.
These individual differences of earnings
correspond to the difference of rent which
follow the differences of fertility in acres of
land, or the differences of interest which
follow different hundred pounds of capital
well or ill invested.
In every industry at any given time there
is some labour, as there is some land and
capital, which is only just worth while employ-
ing at the market price. This labour, land
or capital, is said to be " on the margin " of
employment. When wheat prices in England
fell below 30s. per quarter some years ago,
large tracts of poorer wheat land in Essex
and elsewhere went out of cultivation, to be
brought under the plough again when wheat
prices rose, as it became once more worth
while buying these acres back from pasture.
So in many manufactories there are machines
which, being somewhat out of date, are not
138 THE SCIENCE OF WEALTH
worked in ordinary times. But when a
pressure of orders comes and good prices
prevail, it pays to bring these once more into
operation. Most labour markets contain,
though they do not maintain, a similar re-
serve of labour, somewhat inferior to the
average labour employed in ordinary times,
but brought into temporary use in periods
of booming trade.
For every industry that is not a close
monopoly more land, labour and capital
is usually available than is in actual use.
That is to say, there exist portions of the
factors which lie below the present margin
of employment. This does not necessarily
mean that they are not employed at all.
They may be employed in some other in-
dustry. Acres of land not good enough for
growing wheat at present wheat prices
may be used for grazing cattle ; workers not
good enough for getting coal may be employed
in agricultural labour. But if the price of
wheat makes it worth while, some of this
pasture land will be brought into arable
use; if the price of coal impels the opening of
more pits, some rural labour will be drafted
into coal-mining.
For the higher price of wheat or coal will
make it worth while to use land or labour
less productive than the worst formerly in
use, and to pay a price high enough to bring
WAGES 139
in the necessary quantity from some other
employment if there is not enough lying
unemployed.
So we must recognize that for every industry
employing land, capital and labour of differ-
ent grades or qualities, there exists a supply
of all these factors, either lying idle or put to
some other use, which is not good enough at
the present price that must be paid to get
them, but which will be brought into the
industry if a rise of prices of the product of
the industry makes it profitable to employ
them. The marginal land, labour or capital
in any trade will thus shift with the more
or less remunerative condition of the trade.
This moving up and down of " margins ~-
in the factors of production is the actual
process by which each trade feeds itself with
the increased quantity of labour, or capital, or
land it needs for its growth. Of course some
of the new land or capital thus brought in
may, after it has been acquired, prove to be
as productive as that in former use. The
fact that formerly it was below the margin,
in the sense of not being w r orth using at the
price, often means that some preliminary
barrier has been overcome. For some land
below the margin is more fertile than some
land in use, but it costs a good deal to clear
and prepare it. Some agricultural labour
may make excellent mining labour but will
140 THE SCIENCE OF WEALTH
take time and training. So it appears that
trades and businesses compete with one
another not only for the increased factors
of production but for those in use. This
competition, in fact, is the usual way in which
the industrial system tries to put the proper
quantity of land, capital, labour and ability in
the places where each can be most profitably
employed. So far as profitable employment
corresponds with productive employment,
and only to that extent, this competitive
ordering of the factors secures the maximum
production of wealth. This leads to a con-
sideration of the part played by the business
man, the person directly responsible for
ordering the factors of production for the
attainment of profit.
CHAPTER VIII
PKOFITS
THE business man directly engaged in organ-
izing the processes of industry is sometimes
described as the capitalist-employer, because
he owns or controls the capital and hires the
labour in a business. But it is not as owner
of capital that he here concerns us. For,
though the controller of a modern business
may own the whole or part of the capital,
such possession is not essential to him as
business man. Indeed in the big organized
joint-stock businesses the detailed control or
management is often in the hands of men who
own little or none of the capital.
The typical business man hires his capital
as he hires his labour, paying the current rate
of interest for it. His practice is to buy the
use of the labour, capital and land he wants
at the lowest market prices, organize their
co-operation in some productive process, and
sell the products at a price which leaves a
margin after defraying his expenses of pro-
duction. This margin represents his pay-
141
142 THE SCIENCE OF WEALTH
ment for Ms business ability. It is usually
termed his " profit/ * and we shall reserve
this word to describe the payment for the
ability or energy which he and other business
men apply. But one may as well admit that
popular usage has given such loose and shifty
meanings to the word as to make its use in
a scientific work very difficult. It is liable,
in the first place, to be confused with interest,
for where a business man owns his own capital
he is apt to include the interest on that
capital in his net profit. Indeed, in. the
book-keeping of a private business there is
usually no attempt to distinguish the two.
Or profit may also include a payment for the
risks to which the capital is exposed, though
that should properly be accounted for as
insurance cost. Moreover, managerial salaries,
directors' fees and bonuses, form part of the
true net profit though not usually included
in it. Finally, a good deal of profit goes to
enhance dividends in enterprises where the
terms on which the capital was raised are
such as enable the shareholders to benefit
by the skilled management or good fortune
of the undertaking.
But after due allowance is made for these
irregularities of use, it will be convenient to
regard the business men who organize and
control the industrial processes as taking
in the form of net profits the margin that
PROFITS
143
remains after all expenses are defrayed. A
great variety of energy and ability goes into
the work of this business man. He is respon-
sible for planning the size and structure of
the business, deciding what plant is to be
used, what processes employed, and how
much labour of different sorts. He next
must hire the requisite capital and labour,
organize its co-operation for the processes
of production, and buy the proper sorts of
materials on favourable terms : the final
product he must market advantageously.
These processes of buying and selling, of
technical business organization, the control
of labour, and the book-keeping and finance,
require a combination of sagacity, know-
ledge, enterprise, industry and self-command,
the virtues of the good business man. Where
large quantities of other people's money are
involved, honesty and a high sense of respon-
sibility are important ingredients of the
business character. Much of this work only
demands, however, a sort of ability which
is tolerably plentiful in any civilized country
where ordinary means of education are
widely available. So a manager of a mill
in a staple trade can usually be selected from
an ample supply of qualified applicants at a
salary not greatly exceeding the wages of
foremen or skilled artisans in the best-paid
processes of manual labour.
144 ' THE SCIENCE OF WEALTH
Although this ordinary work of manage-
ment involves many acts of judgment which
contribute to the success or failure of the
business, it may be regarded as tolerably
routine in character, and as distinct from the
critical plans and judgments formed by the
man responsible for the general direction of
the business.
This business man is thus a link between
the producer (or owner of a productive agent)
and the consumer. His work consists in
arranging and conducting the most economical
co-operation of various sorts of capital and
labour, and his pay, or profit, consists of the
difference between the expenses of buying
the factors of production and the price he
can get for the product. At first sight it
may appear as if he were merely a mercantile
middleman, buying something cheap and
selling it dear. But even among commercial
business men there are few whose profitable
operations merely amount to this. For the
merchant organizes distribution, gathering
his various goods from different sources,
selecting and arranging them, and placing
them at the disposal of retailers in greater
quantities and ampler choice than would be
possible if each retailer had himself to seek
producers of each article he needed to stock
Ms shop. The middleman who thrusts him*
self needlessly and officiously between two
PROFITS 145
classes of producer, or between producer and
consumer, is the exception, not the rule,
though it is true that many middlemen con-
sume their energy more in competition with
one another than in the proper part which
belongs to them, the organization of markets*
But the head of a manufacturing firm,
the manager of a railway or of a mine, per-
forms a more obviously productive operation.
The separate bits of capital and labour that
he buys only attain their full productive
power when they are brought together. The
whole is more productive than the mere sum
of the productive value of the parts. A
worker, say a carpenter or shoemaker, can
produce very little by himself, or with such
tools, material and market as he can himself
command : only when he is brought into a
fully equipped business, with all the advan-
tages of division of labour and specialized
capital, are his energy and skill fully pro-
ductive.
If, then, a business man can buy his labour
at a price which represents its small pro-
ductivity as a single unit, and sell the greatly
enlarged product which comes from using
it with other units of labour and of capital,"
he will appear to make an immense gain in
actual wealth which he can take for his
profit.
This indeed is what he tries to do, and, as
146 THE SCIENCE OF WEALTH
we saw, there is a socialistic theory which
virtually explains all " surplus " as con-
sisting in this sort of gain. But there are
several considerations which prevent the full
acceptance of this explanation of " surplus/!
In the first place, the business man does the
same thing with the capital he uses in his
business. A typical modern business requires
him to collect from many different little men
of capital, investors, a number of bits of
capital. Each of these by itself is much less
productive than when he has organized it
into his business structure. Here, too, he
seems to buy it at a price measuring its
smaller separate productivity, to make it
more productive by combination, and to keep
to himself the whole gain, or profit, of the
proceeding.
Thus there seems to be a surplus value got
out of capital corresponding to that got by
buying labour cheap. And it is quite true
that profit may be taken to consist of the
difference between the smaller productivity of
labour and capital used in other ways and the
larger productivity when applied to the
organized business in question.
If a business man could really get and keep
for himself as profit all the difference between
what a worker, or 100 of capital, could
produce " by itself " and what he or it could
produce as a factor of an organized business,
PROFITS
147
profits would swallow up the whole of any
industrial surplus that could be found. But
no business man can get all this. For he finds
other business men bent upon the same object.
This competition checks profit in two ways.
The first business man who came among a
population of small peasants and set them
working in a factory or mine would get them
at a wage slightly exceeding what they could
earn each working for himself upon the soil.
The aggregate increase in the product of their
labour would be great, and he would be able
to keep nearly all of it as profit. The early
" clothiers " and other factory owners did in
fact get this advantage when they exploited
a locality hitherto untouched by the new
industry. But, as other business men came
into the same field, their surplus -profit was
liable to be cut into at both ends. For our
clothier could no longer always buy labour
at a price just above the agricultural earnings,
but found himself bidding against other
business men trying to do the same thing.
In order to get the labour he wanted he was
obliged to pay a wage slightly exceeding, not
the agricultural earnings, but the wage it
was worth while another factory owner to
offer to the peasant. In other words, when
his available supply of raw labour was limited
and a good many business men were begin-
ning to exploit it, its price would rise so as
i
148 THE SCIENCE OF WEALTH
to cause a rise in the cost of working the
factory or mine.
And what applies to labour would in some
measure apply also to capital and land. The
first-comer among the business men would
evidently get the land for building a factory,
or for working minerals, on easier terms than
afterwards, when other business firms were
competing for the best sites or the likeliest
seams. So competition among business men
in buying the factors of production will keep
down profits by raising expenses. The same
cause will cut down profits at the other end,
by reducing the price at which the product
of the factory or mine is marketed. The
first-comer here again has the pulL For he
not only buys his labour and other factors
cheap, but he can sell his product dear, so
long as he remains alone in the field. But as
the competition of other business men be-
comes effective in the market for his products,
as well as in the labour market, he finds his
handsome profit, i.e. the difference between
the low price of the factors and the high price
of his product, cut down simultaneously at
both ends. If the competition becomes not
merely effective but intense, his profit may
be reduced to a bare minimum.
Thus, as a matter of mere theory, the
business man, as the owner of a factor of
production, viz. business ability, appears
PROFITS
149
to be in the same position as the owner of
any of the other factors. Scarcity or mono-
poly may yield him a large surplus of un-
earned income, abundance or competition
may reduce his " profit " to a minimum just
sufficing to evoke the use of his business
ability.
In practice profits vary so much more
than wages, or interest or salaries, for the
same sort of organizing work in the same
trades, that it seems as if no general state-
ment could be applied to them. In certain
trades some well-equipped businesses will
be taking very high rates of profit, others
very low. The difference is commonly put
down to the ability of direction and manage-
ment. Where two manufacturing businesses,
two large hotels, two retail general stores,
are worked with adequate capital under the
same external conditions, and one succeeds
while the other fails, it seems evident that
either luck or skill of management must explain
the difference. Though luck plays a larger
part in the business world than is sometimes
supposed, management is commonly accounted
the efficient cause. And this is doubtless
a true view. But to jump from this view to
the theory that the creative power of business
ability has brought into being a great fund
of wealth which belongs to the business man,
as the necessary reward of his superior
150 THE SCIENCE OP WEALTH
mental energy and skill, fails to take into
account the full conditions of such business
success.
Take an illustration most favourable to
this superstitious view of human ability, the
case of two equally well-situated hotels or
shops, one of which gets high profits while
the other only just pays its way. Ability
of management undoubtedly has a great deal
to do with the difference of result. This
ability will operate in two directions. The
successful business will be better organized,
i. e. the capital and labour will be better chosen
and better directed. But a little reflection
enables one to see that, though the initiative
in this better organization may proceed from
the ability of the single manager, its efficacy
depends upon the capacity of all the various
employees for co-operating to carry out the
manager's directions. In other words, there
is a sort of ability which oozes from the whole
organized personnel of the business to help
towards success. This cannot be ignored,
it is not merely a condition but a joint-agent
in the success. Every just-minded manager
of a successful business recognizes that a large
share of his success is due to the co-operation
of his subordinates or employees. Again,
much of the success of the hotel or shop will
be due to the fact that it has gathered a special
clientele who think they can buy there some
PROFITS
151
quality of article or some comfort or accom-
modation which they cannot get elsewhere.
This superiority is often very slight, often
indeed a mere matter of form or fashion,
resting on no substantial basis of merit, but it
serves to lift a business out of the ruck of
competition, and secure it a control of the
market.
The whole profit of a successful business,
beyond what is really minimum wages of
ability, is a scarcity rent or surplus, attribut-
able, like every other surplus, to a restraint
upon free competition by limiting the supply
of the factor of production that receives the
surplus. The conduct of modern industry
lends itself to this scarcity. For, though
there is most likely a plentiful natural supply
of efficient business ability of various orders,
only a small proportion of its owners can find
an opportunity of training and applying it.
Many men of natural ability cannot get it
recognized, or cannot get the confidence of
men with capital needed for their gift to
fructify, or they cannot find or make a good
business opportunity for employing it. There
may be thousands of men fitted by nature
to be heads of a great shipping firm or of
a banking company, but the number of men
required for such posts is counted by tens.
The small number of effective competing
firms in many of the highly-developed enter-
152 THE SCIENCE OF WEALTH
prises means that many of the profitable
orders or contracts are not really made the
subject of close bargaining. They pass to
one or other of the firms that has acquired a
special reputation for "that class of busi-
ness, 53 or else the competition of the few firms
competent to undertake the work is qualified
by combination or arrangement. So a very
large quantity of work is done on terms
yielding a rate of profit far in excess of what
would have been got if such competition
operated as prevails between rival grocers
in the same street.
The same paucity of the number of close-
competing firms, of course, not only raises
selling prices but lowers the price of labour
and of free capital. For it is evident that
labour can get better terms, if there exists
a number of keenly competing firms bidding
for the best supply, than if there are only half-
a-dozen whose profitable state stimulates
them to organize a strong employers 3 asso-
ciation. A general survey of the industrial
world would perhaps distinguish the trades
where close competition is maintained be-
tween considerable numbers of standardized
routine businesses from those where each
business does a more or less separate class
of work and has a market that is to some
extent its own. Both may belong to great
capitalist enterprise, but the ordinary profits
PROFITS
153
of the former will be low, while many
businesses of the latter class will be able to
make great profits even in the ordinary
course of trade.
It is probable that in advanced industrial
countries, such as Great Britain and the
United States, a constantly increasing share
of the " surplus " figures as net profits to
the successful " business man." This state-
ment is probably correct, even if full allow-
ance is made for losses of unsuccessful " busi-
ness men/ 5 Of the aggregate " surplus "
which we term " unproductive " because it
exceeds the necessary inducement to apply
a factor of production, business ability takes
a considerably larger share than land or
capital.
The justification of this statement would
involve a more minute examination than is
here possible, and it would be necessary to
include under profits a good deal that is con-
cealed under interest and rent. But it is
supported by a general appeal to experi-
ence. Most of the families of evidently
growing wealth have made their wealth out
of " trade. 33 By this is meant that profits,
rather than rent or interest, constitutes the
origin and substance of their wealth. Part of
this wealth may reasonably be regarded as
the costs of ability, the remuneration necessary
to evoke and encourage the larger quantity and
154 THE SCIENCE OF WEALTH
variety of business skill which modern in-
dustry requires. But a large part will rank
with economic rent of land and surplus interest
as " unproductive surplus." The general
trend of modern industrial development has
been to assign more importance, more power
and more wealth, to the employing and direct-
ing class. " Capitalists," as such, though
increasing in numbers and in the amount of
capital they own, are of relatively less im-
portance. They have become investors, and
though they take in interest a large share of
the whole product, their control even of the
use of the capital they own is diminishing
and passing more and more into the hands of
directors and employers.
But an understanding of the modern
system would be very imperfect if it did not
include a special consideration of one parti-
cular species of " business men," viz. those
concerned with the general organization of
industry by means of finance. For as the
ordinary little capitalist is in effect controlled
by the managers of the business he has put
his money in, so the latter are in an increasing
measure the dependents and agents of great
financial houses.
The business man, as such, is not an in-
ventor of new processes. The ability of a
Stevenson, an Edison, a Siemens; belongs to
a different order. Only when it has been
PROFITS 155
acquired and taken over by a business man
does it rank as industrial power. Of course
some inventors are also business men and so
are able to exploit industrially their genius.
But these are rare exceptions. The ability
of the business man requires, not that he
should invent, but that he should have a
true eye for the business value of other
people's inventions. This, in fact; should be
considered as his first function in an age
of progress. He is the man with an eye for
profitable notions, whether the notion be a
new machine, a new product, a new market,
or a new business method. He will dis-
tinguish profitable from unprofitable notions,
buy the former as cheaply as he can, make or
adopt a business structure to embody his
notion, and get his profit by conducting such
a business or by selling it to some other
business man. Most of these notions are
industrially productive as well as profitable.
When a mechanical invention cheapens manu-
facture, or transport, or introduces a new
comfort or convenience of life, utilizes a
waste product, or opens up a new market,
the inventor or series of inventors and the
business man between them have been directly
instrumental in causing an addition to the
world's wealth. Other notions equally pro-
fitable to the business man may, however,
carry little or no industrial productivity.
156 THE SCIENCE OF WEALTH
An artful mode of advertising, a cheap para-
sitic imitation of an established article, a
skilful method of company promotion, may
be quite as profitable, though destitute of
any productivity. It may be just as pro-
fitable to get business away from another
firm as to establish a new business, and
though upon the average this success in com-
petition implies the substitution of a some-
what better or cheaper article, there are
many cases where no such gain can be as-
sumed.
Where business ability is thus applied to
the exploitation of a profitable notion, that
exploitation may be achieved in a single
stroke or by a longer business process. The
financial dealer in profitable notions pro-
motes or reconstructs a company, sometimes
taking out at once in cash, or in shares which
he at once " unloads," as much as he can of
the anticipated future profits of the working
of the company. Sometimes he retains a
holding of shares, using them either to earn
dividends or for profitable dealing on the
Stock Exchange. The part played by this
type of business man is of rapidly growing
importance in modern industry, and the
proportion of the general wealth which passes
to Mm as " profit " is increasing.
In countries where joint-stock enterprise
is most highly developed, as in Great Britain
PROFITS 157
and* America, it is probably the case that
three-quarters of the fresh supply of capita!
goes into companies and pays heavy toll to
the financial organizers. This profit, how-
ever, though often excessive, is by no means
all unearned. For under our competitive
system the financier is an indispensable
being, and upon the skilled performance of
his will the economical working of the indus-
trial system more and more depends. Though
he is " out for profit," the work for which he is
paid consists in the direction of the new supply
of industrial energy to the places where it is
wanted for the growth of the industrial sys-
tem. For the money or paper values, with
which financiers seem to be exclusively con-
cerned, are the machinery by which not only
real capital but labour and business ability
are drawn to the industrial points where they
can be productively applied* The floating
of a bogus rubber company, by which in-
vestors are duped into entrusting their sav-
ings to financial sharpers who use them for
their private purposes, is the exception not
the rule. The proper work of the financier
is to cause money-savings to take shape in
steam engines and steel rails for a Canadian
railway, dynamos for some electric-power
company, spinning-frames and factory build-
ings for a textile company, and to draw
from the general supply of labour a sufficient
158 THE SCIENCE OP WEALTH
nnmber of the right sort of workers to co-
operate with these various sorts of plant.
Now that a larger and larger number of
the staple trades are passing tinder joint-
stock enterprise, while the apparatus for
gathering and conveying capital and labour
is becoming more complex and more wide-
spread, it follows that the work of financial
direction grows more delicate and more im-
portant. Firms like J. P. Morgan's, Roth-
schild's, and the like, are engaged in directing
the flow of immense streams of new indus-
trial energy to various parts of the earth, for
the making of roads, the discovery and
development of mining and agricultural re-
sources, and for the construction of various
sorts of machinery and plant. Along witli
this productive work there goes a good de^l
of obstructive or destructive work, some of
which is equally profitable to financiers.
But the difficulty of disentangling the socially
useful from the useless or noxious operations
must not lead us to question the great im-
portance that attaches to finance as a gena-
inely productive agency. Under a different
social-industrial system much of this work
might be dispensed with or done otherwise,
but, as matters actually stand, the work of
the financier is of immense value and must
like. -other work be paid what is necessary
to gel it done efficiently.
PROFITS 159
This does not, however, imply that the
profits taken by financiers are an accurate
measure of the services they render or a
minimum inducement to their rendering. On
the contrary, there is no sort of work more
likely to be overpaid. For the nature of
these financial services frequently excludes
effective competition. The floating of loans
or the financing of big companies can only be
undertaken by a few great houses or groups,
and the conditions of close bargaining, so as
to drive the profits to a minimum, seldom
exist. There is no market price for such
work : it is a matter of special opportunities
and special terms. The secrecy or semi-secrecy
which enshrouds many of these financial
operations also favours excessive payment.
There can, therefore, be no question but that
the profits of this class of business contain a
larger proportion of unearned or unnecessary
income than any other sort of profit.
It will be convenient here to present a
summary of the results of the inquiry, made
in this and the three preceding chapters, into
the respective claims made by land, labour,
capital, and ability upon the industrial pro-
duct, and into the methods of enforcing these
claims. The common Interest of all parties
concerned requires that out of the product,
or income, as it is produced, proper provision
160 THE SCIENCE OF WEALTH
should be made for the maintenance of ea
factor needed to carry on the process
production. Whera anything is taken
of the land in the way of fertility of soil
other natural powers, it must, where po
be restored : the land must not be let
^Proper provision must be made for wear
dajoaage to buildings, machinery and
instruments, and for the risk of having
replace them by better sorts of instrument^-
-Along with these depreciation and i
funds for land and capital must be
such part of the wages of labour and
sas goes to maintain the various sorts of pro-
ductive human powers required to
the work of production, A part of wages
salaries will thus be classed not with
aa&dl Interest but with " wear and tear " pro-
vision.
These are all the payments necessary to
secure the existence and continued operation,
of the Industrial system as it stands. In.
a primitive industrial society they migta.t
exhaust the product, but under modejrint
eoaclltkns the co-operation of the factors
yields a product far in excess of what is needod
for mere maintenance. This excess or " sur-
plus ** may be used to feed the growth of ttio
industrial system by a properly apportioned
distribution, or it may go as wasteful oveir-
to the owners of any factor
PROFITS
101
enough to take it, A large part of the sur-
plus does go in the shape of minimum interest
and profit, and wages of progressive efficiency,
to evoke larger and better supplies of the
various sorts of capital, ability and labour,
required in a progressive industrial society.
The state, -too, requires and obtains similar
allowances for maintenance and growth,
obtained by payments made out of the indus-
trial product which the public services have
assisted to produce.
The whole of the industrial product, the
general income, could advantageously be
applied to these purposes of providing for
the maintenance and proportionate growth
of the factors of production. But it is evi-
dent that the whole of the surplus need not
be, and in fact is not, so applied. Much of
it is paid, not as provision for maintenance
or growth, but in excess of what is necessary
for these purposes. Going to landowners as
rent, to capitalists as excessive dividends, to
business men as excessive profit, sometimes
to workers as excessive wages, it retards
industrial progress. It takes portions of
wealth which might have been applied to
promote industrial growth and pays them as
" unearned income " to persons who thereby
not merely are not induced to increase their
output of personal energy but are enabled and
induced to diminish or withhold such pro-
162 THE SCIENCE OF WEALTH
| | ductive energy as they might otherwise have
given out. For all unproductive surplus
acts as an endowment of idleness.
This *' unproductive surplus," whether ob-
tained by owners of land, capital, ability or
labour, is obtained in the same way, viz. by
establishing a shortage in that factor and
rackrenting the owners of the other factors.
A natural or contrived monopoly or scarcity
is the origin of every overpayment. It is
manifestly false to attribute to one of the
factors the sole power to take this surplus.
Neither the landlord, nor the employer, nor
the capitalist, possesses this exclusive privi-
lege. Sometimes one, sometimes the other,
finds or makes his factor " scarce " and gets
a u pull 2! proportionate to that scarcity.
In thickly populated countries the land-
owner tabes a large share of this unproduc-
tive surplus in rising site- values and in agricul-
tural and mining rents, except so far as easy
and cheap access to large external supplies
of foods and other materials qualifies his pull.
In sheltered industries, where the possession
of some natural or organized advantage gives
certain capitalists the power to keep out
" free " capital and to restrain free com-
petition, capital may take its " pull " in high
dividends and business men in high profits.
Since such shelter and the scarcity it brings
are usually achieved by the genius, skill,
1
PROFITS
163
Industry or luck, of business men, the pro-
portion of such industrial gains which rightly
ranks as profit is probably much larger than
that which ranks as interest. A conjunction
of trade-unionism and favouring circum-
stances occasionally gives a group of wage-
earners a short-lived pull, enabling them to
secure some unproductive surplus in their
wages. In every case this unearned and
unproductive surplus is the result of a natural
or contrived shortage of one factor of pro-
duction in relation to the others whose co-
operation is required for the production of
some sort of wealth.
CHAPTER IX
$
EXCHANGE AND PKICES
WE are now in a position to understand
why a ton of kitchen coals in London may be
bought for the same sum as will buy a pair of
medium quality blankets, a britannia metal tea-
pot, half-a-dozen cotton shirts, or forty loaves
of bread. If each of these purchases can be
made for a sovereign, it is because the various
expenses of production, the payments to the
owners of the different productive agents in
the successive processes through which each
of the articles has passed happen to add up
to this same amount. In each case the
sovereign contains a great number of little
bits of price paid for the labour, ability, use
of capital and land in the farming, mining,
manufacturing, transport, distributive busi-
nesses, required to produce and put on to the
market the ton of coals, the blankets, the tea-
pot, shirts and loaves. If we traced each
from its earliest stage and followed the raw
as they moved through these pro-
we should see the aggregate expenses
164
EXCHANGE AND PRICES 165
mounting up until the retailer's profit com-
pleted the amount. At any of these stages
we should find that the total expense of the
productive process consisted of a variety of
little expenses for the different sorts of labour,
capital, land, ability required, some of these
expenses bearing minimum or " free competi-
tion " costs, others being loaded with some
" surplus " representing the monopoly or
scarcity of some one or other factor. The
different articles selling for a sovereign will
not by any means be composed of costs and
surplus in the same proportions. It might
be the case that the 20$. paid for a pair of
blankets contained only 4s. or 20 per cent, of
surplus (little rent or surplus profits being
involved), whereas the 20$. paid for the loaves
might be loaded with S$. or 40 per cent., the
rent of wheat land, a corner of wheat, a
millers' or a bakers' combine, going to swell
the final sum. It would require a special
study of the history of each commodity to
enable us to say how much of the final price
the consumer had to pay for it was " cost "
and how much " surplus," or again, taking
the surplus, how much of it was productive,
making for industrial growth, how much
unproductive, i. e. wasteful or detrimental.
It has been sometimes held that " rents "
and other surplus do not enter into and
increase the final price of commodities, that
166 THE SCIENCE OF WEALTH
they are only extra payments which owners
of particularly advantageous land or capital
can get. But our analysis, which identifies
a * 6 surplus " with a shortage and an enhanced
price of the entire supply of some sort of land,
capital,etc.,required in a process of production,
disposes of this objection. For where there
is a natural or contrived scarcity of any
supply of productive power, the whole of that
supply, whatever sort of standard measure
is applied to it, rises in price. If hop-land
is short in supply the price of hops will
register that shortage. The fact that some
acres of hop-land are better than others,
and that the worst acres may get little more
rent than they could get for growing wheat,
does not affect the fact that the tc scarcity "
of hop-growing land raises hop prices. Of
course what is called the " differential " rent,
measuring the difference between the hop-
growing power of a good and a bad acre, does
not enter or affect the price. Why should it ?
The price, like every price, is paid for a given
quantity of commodity or service. If one
acre gives out twice as much of this productive
' }! service as another, of course it is paid twice
:i as much in rent. This has nothing to do
with the " surplus " or " scarcity " element
that enters into the price of a unit of hop-
growing power.
Or, if oil or steel rails fall under a combine
1
EXCHANGE AND PRICES 167
or other business arrangement, limiting the
number of wells or mills allowed to work,
and restricting the market supply of oil or
rails, this scarcity will raise the price of all
the oil or all the rails, that produced by the
worst wells or the most inefficient plant 1
equally with that produced by the best wells
or the most efficient plant. The real profits
made by the worst wells or mills will, of course,
be lower than those made by the best, but
only because they give out a smaller quantity
or a worse quality of output in a given time.
All the sorts of surplus which we have
traced, taken by landowners, capitalists,
employers, etc., in any process, extractive,
manufacturing, transport, commercial, pro-
fessional, financial, go to enhance the final
price of the commodities purchased by con-
sumers.
If there were absolutely " free competi-
tion " everywhere and equal abundance of
all the factors of production, all prices would
stand equally at a minimum, and all goods
and services would exchange according to
the sum of their " costs/' Our blankets,
teapot, shirts, bread and coal, unloaded of
all their composite surplus, would, of course,
no longer sell for a sovereign each, but at
various lower levels. Some writers in Political
Economy construct a theory which assumes
this freedom of competition and this com
168 THE SCIENCE OF WEALTH
plete fluidity to exist, and then make allow-
ances for " friction " or exceptions. But this,
as Ruskin pointed out, is like starting the
study of human anatomy on the supposition
that the body is absolutely elastic and after-
wards making allowances for its actual
inelasticity. Scarcity and combination are
as real and as normal features of the actual
situation of our industry as are competition
and abundance. In fact it is impossible to
give any intelligible account of the working
of the system without a doctrine of shortages
and surpluses.
In our explanation of Markets and Exchange
a clear comprehension of this fact is essential.
Goods and services exchange against one
another in proportion to their expenses of
production or loaded costs, not in proportion
to the quantity of labour-time they contain,
or any other measure of " natural " costs
of production.
The price, and therefore the expenses of
production, of every portion of a supply of
goods are the same. But the costs of each
portion are not the same. The " costs " of
growing a quarter of wheat are less in a fertile
field than in an infertile one : the " costs ?!
of producing 1,000 tons of steel are less in a
well-equipped than in an ill-equipped works.
" costs " plus surplus compose expenses,
implies, that the surplus element in
EXCHANGE AND PRICES 169
expenses and supply price varies, being
biggest in the best type of business (farm,
factory, mine, etc.), smallest in the worst,
If one took account of all the farms growing
wheat for a particular market, one might
find a farm which it only just paid to put to
wheat-growing. That means that, in the
co-operation of land, labour and capital
which went to the raising of a quarter of
wheat upon this farm, more productive power
of labour and capital had to be bought to
make up for the smaller quantity of land-
power which was available. The same ex-
penses of wheat-growing per quarter were
incurred in this farm as upon the better
farms, but a larger proportion of the sum
went as " costs " in paying capital and labour,
a smaller proportion as " surplus " in paying
land,
Similarly in the case of steel rails. Here
the worst plant in the industry corresponds
with the poorest wheat-farm. A larger pro-
portion of the price per ton for steel rails
will go for wear and tear and maintenance
of capital and labour in the worst establish-
ments, " profit " standing at a minimum.
In fact, the " expenses " of a ton, represented
by its price, say 805., will be virtually absorbed
in these necessary costs, leaving no surplus
interest for investors or profits for the entre-
preneur.
170 THE SCIENCE OF WEALTH
But if there are some farms contributing
to the supply of wheat which only just
remunerate the capital and labour, leaving
jr |i no surplus for rent, how can it be said that
||' rent enters into price, enhancing it ? If
some establishments contributing to the supply
of steel rails only just pay their way and yield
no surplus profits, how can it be said that
there is any surplus element in the expenses
and the price of steel rails ? The answer is
that the scarcity of good wheat-lands is the
cause of the high average expense of raising
a quarter of wheat, enabling landowners to
charge a high price for the fertility of Nature
and loading the " costs " of labour and
capital with this surplus. The fact that
some land used is so infertile that Nature
contributes very little to the production of
a quarter of wheat, labour and capital doing
nearly all the work, does not affect the argu-
ment. If there had been plenty of fertile
land available, the surplus (rent) would be
very little, and the expense and price per
quarter would be so much lower.
It is this scarcity of better land that brings
worse land into use, by loading expenses of
wheat raising and prices with so large a surplus
that capital and labour can be employed re-
muneratively upon some poor land.
Similarly, the scarcity of well - equipped
steel- mills causes the average expense of
EXCHANGE AND PRICES 171
producing steel rails to be higher than it
would be if there were an abundance of such
mills, and by the high prices resulting from
this scarcity a few worse-equipped mills are
enabled to survive and just pay their way.
The well-equipped mills will sell rails at a
high profit, the ill-equipped mills will only
cover costs. But all the same, the surplus
profit which the scarcity of best plant enables
the well-equipped mills to earn is represented
in and is got out of the high expenses and
price of rails : it is these prices, thus deter-
mined, that enable the few backward mills
to keep on working.
This argument means that supply prices
are not determined, as has sometimes been
contended, by the costs of production of
the most costly portion of the supply, i. e. the
wheat produced in the worst land, and the
rails turned out by the worst-equipped mills.
This " marginal " land, as it is called, and
these " marginal " mills are made just worth
working by the fact that the scarcity of better
land and better plant has loaded the expenses
and the supply price with a surplus measuring
the degree of that scarcity. Discover a new
large rich wheat country, most of this surplus
or " rent " that has entered into expenses
and raised prices of wheat will evaporate,
and with the fall of prices the bad wheat-land
will pass out of use. Set up a lot of new
(' 172 THE SCIENCE OF WEALTH
well-equipped steel plants, the scarcity value
of the existing plants will collapse, profits
and prices will fall, and the ill-equipped or
64 marginal " mills will be driven out of use.
Expenses of production and prices of supply
are not, then, determined by the worst or
most costly businesses, but by the ordinary
standard business. In most staple manu-
facturing industries the vast bulk of the
production is done by establishments of
approximately equal equipment. Almost all
the mills or factories in a trade will have
up-to-date machinery and methods, and will
tend towards a common size or pattern.
In competitive trade, in order to hold its
own, a business must enjoy the same advan-
tages as its competitors in buying its materials,
m working them, up -and in selling the product.
So in each of the staple textile or metal
industries there emerge from competition
one or two types and sizes of business more
I |t ; effective and economical than any others, and,
since all the new capital put into the trade
1 1^ ! into those shapes, they may be taken
& f\ as i^resentative firms. It is the expenses
i ^' " of production in these representative firms,
do the bulk of the trade, that deter-
the supply prices of the goods. There
be a few firms in the trade enjoying some
advantages or economies in the shape
01 or secret processes or management,
EXCHANGE AND PRICES 17S
and so able to produce a little better or more
cheaply than the representative type. There
may also be a few firms of backward or
obsolete type, with old-fashioned machinery
or methods, struggling for their life and
doomed to early extinction, unless they can
be reconstructed and brought up to date*
But these few superior and inferior firms will
not appreciably affect expenses and prices.
The representative firms, producing, say,
90 per cent, or more of the total supply, will
regulate the prices. Superior firms will thrive
upon these prices, enjoying high profits :
inferior firms will starve upon them. When
it is said that yarn or cotton cloth of a particu-
lar quality costs so much to produce, or that
steel rails, rolled desks, wine-bottles, etc.,
can be turned out at such and such a price,
it implies a reference not to the best and most
prosperous business in the trade, nor to the
inferior firm that barely pays its way 9 but
to the normally efficient business.
There will, of course, be many trades where
the variety of products and of processes is
so great, and the changes of method so refined
and numerous, that it will be difficult to find
a standard type. In such trades as the
chemical, electrical apparatus, motor car,
there will be many sorts of product enjoying
special markets within the general market,
and produced by businesses which are under-
i
I
ll
174 THE SCIENCE OF WEALTH
going transformations. But though here it
may not be possible to point to any single or
few normal business types., it will none the
less be the case that expenses and supply
prices for these classes of goods will be deter-
mined by the representative rather than by
the exceptional business. The price of chemi-
cals, electric lamps, motor cars, will be based
upon the expenses and the competition of
ordinary, big, well-equipped businesses.
Even in agriculture, where the variety in,
size and sorts of businesses seems illimitable,
the same principle holds good. When an
English farmer tells us that wheat cannot be
grown at a profit when the price is under 80s.
a quarter, he means that a good-sized farm
employing modern machinery and with rea-
sonably good management and labour in an
ordinary season will make a living profit Jor
himself by growing wheat for sale at this
price. There will, of course, be farms with
special advantages that will make a bigger
margin of surplus out of wheat at such a
price; other farms will still be unable to make
it pay. The normal farm, in size, equipment,
working, management, is always in the
farmer's eye when he says that farming can
or cannot pay with wheat at such a price,
although he may not be prepared to explain
exactly how he arrives at this normal farm.
When one comes to special sorts of farming,
EXCHANGE AND PRICES 175
such as fruit-growing, poultry-farming,, etc.,
the business type becomes more clearly
marked, although a great variety of ordinary
farms may also contribute to the supply.
So far as capital and labour are able freely
to enter any trade and compete for business,
this competition will tend to select one or a
few best types of business into whose hands
will fall the bulk of the trade, and which will
determine the ordinary expenses of production
and the supply prices in the markets. If
competition in these trades yields to combina-
tion, and trade agreements, pools, or trusts
come in, it will still be these representative
businesses that will determine prices, so long
as the bulk of the supply remains in their
hands. By restricting output they may
raise " expenses " so as to include a large
surplus-profit. But it is they who will
regulate the market prices, not the starving
independent firms outside the ring. These
latter will usually "accept" the "ring"
prices, making what they can out of them.
So when tie Standard Oil Trust raises the
price of oil ^pr gallon, or the Sewing Cotton
Trust the price of thread, small outside
producers generally raise their prices too,
instead of exposing themselves to danger
by under-cutting. As trade information be-
comes more rapid and exact, reaching a
larger number of producers, the standardiza-
176 THE SCIENCE OF WEALTH
tion of sizes and methods of production gains
ground, and the number of competing busi-
nesses which vary from the approved models
becomes smaller. Of course it will always
remain true that exceptional ability and
management or some special advantage in
patents, access to raw materials or markets,
will enable some particular firm or group to
suck high profits out of the ordinary market
price determined by their representative
competitors.
If, however, these exceptional firms use their
full business opportunities, they will gradually
acquire a larger proportion of the trades.
For, combining with strong trade rivals, they
will force weaker ones to come in upon their
own terms, or will crush them. When by
these means they have formed a combination
strong enough to enlarge or contract the
whole supply of the market as they desire,
they can fix selling prices so as to load costs of
production with a large monopoly or surplus
element. They do not, we repeat, need to
absorb the whole trade in order to possess
this power. A " trust," pricing 50 or
60 per cent, of the supply, may sufficiently
control output and prices, provided the
outsiders are small and uneoxnbined. Even
if in some sections of its market there is
effective competition at lower prices, other
sections may yield monopoly conditions.
EXCHANGE AND PRICES
177
The economic origin and supports of such
trusts, combinations and agreements are
familiar. Sometimes they are rooted in
access to the best, largest or cheapest supply
of raw materials or powerl Such is the basis
of the De Beer's diamond trust, and the
United States Steel Corporation derives much
strength from possession of superior ore and
coal. Sometimes railroad or other facilities
of transport enable them to market their
goods more cheaply than competitors. Such
was the historic origin of the Standard Oil
Company. Sometimes the possession of
public favour or privileges, in the shape of
tariff aid, public contracts, licences or charters
of monopoly, is the main source of strength.
Many companies for local services, e. g. gas,
water, tramways, electric lighting, etc., come
into this class. Large size of capital, reputa-
tion and special knowledge, have in certain
instances enabled businesses to attain local
or even wider control of markets. Perhaps
the most conspicuous example of businesses
enjoying high profits from this source Is
afforded by the present state of banking in
Great Britain.
There is a popular notion that in an age
of capitalism, since the larger business in a
trade is always economically stronger and
more profitable than the smaller, it is only a
question of time for the whole trade to pass
178 THE SCIENCE OF WEALTH
into the hands of a few monster firms which,
after trying to slaughter one another, will
end by combining. Thus it is conceived
will competition work itself out in all the
1 industries, leaving a single trust or combine
in complete control of the market, and able
fj| ji '. to dictate prices to the consumer. In a good
' many industries the modem development of
business life seems to sustain this view.
Modern machinery of manufacture and of
transport and modern credit have in many
trades made the survival of small businesses
impossible, and have handed over the industry
to a few giant companies. An increasing
number of trades appear to be going this way,
both in the staple manufactures, transport,
mining, commerce and finance.
But for all that the generalization is unsound.
, A large proportion of industry does not
| exhibit this tendency towards concentration.
; Even in the textile and metal industries large
I numbers of little businesses survive. Some of
f them, indeed, are only semi-independent, being
1 tied more or less firmly to larger firms whose
t minor wants they supply. But in, every great
' |{| industrial province are found numerous genuine
n *>; survivals of the small business, worked in the
1 1 \ f 'j home or the small workshop with no expensive
"'< machinery and power. The essential irregu-
< larities of human nature are largely responsible
i for such survivals. Where the personal need,
EXCHANGE AND PRICES 179
or taste, or fit, is the basis of a demand, the
routine economies of the big business are at
fault. There is no tendency for a high-class
tailoring or dressmaking business to grow
beyond such reasonable size as will admit the
keen personal control of a capable manager.
In all the luxury trades, where irregularity
of demand is chronic and where personal
taste and caprice impose themselves, small
businesses are found. Work of repair forms
a basis of livelihood for many artisans, such
as shoemakers, carpenters, blacksmiths,
though the making of the original goods has
passed under large business enterprise. In
agriculture, in mining, and in transport,
there are many kinds of work which are best
and most profitable in small forms. The
small farmer still holds his own for many
purposes. In retail trade, though the monster
store has made great inroads, the high-grade
shop and the local shop for minor and for
perishable goods widely survive.
Moreover, even where the economy of
production on a large scale prevails, it does
not follow that no limit can be set upon the
advantage of size. Because a big business
can produce more cheaply than a little
business and so can undersell it, it does not
follow that a still bigger business can beat
the big business at this game. Even in those
industries where the size of capital counts
180 THE SCIENCE OF WEALTH
for most, there will be a maximum type which
cannot be exceeded without damage. When
a business grows in size and complexity
beyond a certain scale, there will be waste of
central control in the co-ordination of the
parts which will outweigh the mere economies
of size. After a manufacturing business has
grown to a scale enabling it to buy its materials,
to organize its labour, to market its produce
and to obtain credit, on the best terms, any
further addition to its size will weaken it and
render it less profitable. This size of net
maximum efficiency will vary widely in the
different trades. In some trades it will only
be reached by a giant business which in its
growth has swallowed its competitors and
stands alone in the market, a monopolist.
But such trades are the exception not the
rule, even in countries where a protective
tariff favours them by isolating the national
market. Mere advantage of size, unaided
by natural or legal supports, very seldom
suffices to put a business into the position
of a monopolist, able to dictate prices to
buyers.
The real risk to which consumers are
exposed in modern industry is rather that of
suspended or mitigated competition among
a few larger businesses than that of a com-
plete monopoly. The economy of big pro-
duction seldom hands over a market to a
EXCHANGE AND PRICES 181
single firm, but it often reduces the number
of effective competitors to a paucity that
enables them by agreements to regulate output
and fix prices high enough to yield them a
considerable surplus profit. A great amount
of experimentation in methods of federation
and agreement among big firms in the same
line of business is continually going on, and
perhaps constitutes at the present time a
graver menace to the consuming public than
any domination of the " trust. 55 The metal
and machine-making trades, for instance,
in Great Britain and America, are riddled
with agreements for regulating selling prices,
while shipping and railroad, insurance and
banking companies, are continually form-
ing " combines," " conferences " or other
associations for regulating services and prices.
Wherever one turns in modern industry,
combination shows itself as real and almost
as pervasive a force as competition. Now,
since the prime motive and meaning of all
these forms of combination is the acquisition
of " surplus " profit, it is evident that no
survey of market prices, or rates of exchange
between different sorts of goods and services,
can ignore the loading which these surpluses
involve.
The history of every stock of goods exposed
in shops for sale, if thoroughly investigated,
would show that, at various stages in their
182 THE SCIENCE OF WEALTH
handling, the expenses which they accumu-
lated contain pieces of unproductive surplus
that, entering into the market price at some
earlier stage, are handed on to the later
stages with fresh accretions, so that in the
final shop-prices cost and surplus are inex-
tricably intertwined, the proportions between
the two differing in all the various kinds of
articles,
CHAPTER X
DEMAND AND SUPPLY
*
REGARDING the Industrial system as a
machinery for the production of wealth, we
have naturally been led to find the origin of
that wealth in raw materials which, passing
through the various productive processes,
gather value or importance from the work
which is put into them, until as finished
commodities they pass out of the machine
into the hands of consumers. The growing
quantity of work which they embody is repre-
sented in a continual growth of expenses and
of price as the goods near completion, these
expenses containing the sum of all the costs
and surpluses entering at the different stages
of production.
This picture of raw materials and goods
constantly absorbing productive energy and
expenses as they flow towards consumption,
ignores, however, the controlling part exercised
by the consumer. The end and aim of this
application of productive energy is the satis-
faction of the wants of consumers. 1 We have
1 This general truth, like most others, needs qualifying.
Some productive activity is desired on its own account.
183
184 THE SCIENCE OF WEALTH
already seen how the money paid over the
retail counter for commodities, circulating up
the stream of production as payments for the
various productive agents, continually stimu-
lates the output of productive energy. By this
demand for commodities the will of the con-
sumer controls and regulates the entire system
| [I of production. That system exists to furnish
him with "utilities. 5 - To him the commodi-
ties he buys are storehouses not of produc-
tive costs but of utility. The raw materials
and goods in their various stages of production
take all their value or importance from the
final part they are to play as means of utility
or human satisfaction. The machinery and
other instruments of capital are similarly
endowed with a utility from the consumable
commodities whose production they assist.
The whole of the industrial system can be
regarded, from this standpoint, as an arrange-
ment of goods and instruments containing
various sorts and quantities of utility.
The utility of which we here speak is not
* the intrinsic worth of things, their " values "
in Huskies sense as yielding true vital service
by their consumption. It merely measures
the actual current satisfaction which con-
sumers impute to various sorts and qualities
of goods, not the satisfaction they " ought "
to impute to them if they understood their
true interests. Thus a sovereign's worth
DEMAND AND SUPPLY
185
of raw whisky must, for our present purpose
of scientific analysis, be deemed to have the
same utility as a sovereign's worth of bread
or " bes* books." It is the actual desires
that are operative. But a mere desire for
" utilities " and commodities containing
them has no effect. In order that a desire
may be 4t effective " it must express itself
through purchasing power. The unsatisfied
needs and desires of poor people for goods that
are beyond their meagre incomes have no
economic, though they may have a deep
social significance. The only utility that
counts expresses itself through the use of
actual incomes. The use of incomes, indi-
vidual and collective, may thus be regarded
as the final regulator of the industrial system.
In our business analysis we arrived at the
conclusion that business men organized the
various trades and businesses, actuated by
the desire for profits. We have now to realize
that these organizers and administrators are
themselves the instruments or agents of the
consuming public. For the business men,
who by their demand for capital and labour
determine how much of these productive
forces shall go into this trade or that, are
governed in their turn by calculations of the
quantities of products they can market at a
profitable price. Thus, in the last resort,
it is the actual and expected demands of
186 THE SCIENCE OF WEALTH
customers that really determine how much
industrial energy of various sorts goes into
the different trades.
The order and the disorder of industry,
then, are mainly attributable to the will of
the consumer operating through demand for
commodities. It is to the urgency and im-
portance of the different " demands " of the
consumer that we must look for a chief
explanation of the size of the different trades
and the proportion of the productive force
that they employ.
The simplest way of understanding the
control of the consumer is to begin with a
one-man system, the case of a Robinson
Crusoe. How would such a man who had by
his own efforts to supply all his needs dispose
of Ms time ? His principal requirements are
food, clothing, a hut and some tools and
weapons. If the climate is tolerable, a certain
minimum of food will rank first among his
needs. An average of, say, two hours' work
in hunting and preparing food, let us suppose,
will give him that amount. If he wants more
variety or quantity of food, and, not content
||| 1? 1 with picking fruit and killing game, wishes
to till a piece of land so as to raise crops, that
will take a third and a fourth hour a day.
But some clothes, though less urgent a need
|| ,V than the food obtainable by two hours* work,'
;i* j may be as desirable as the food which a third
' DEMAND AND SUPPLY 187
hour would secure and more desirable than that
of a fourth hour. So he has to balance cloth-
ing against food for the use of his third and
fourth hours in the working day. He can.
make and repair the barely necessary clothing
in one hour a day, though two hours would
give him a change in case of bad weather or
damage. But a hut is nearly as essential as
the first suit of clothes and more essential
than the second. So he may decide to give
only the third hour to making clothes and
the fourth to making a hut. But a really
commodious hut will take more than one hour
a day to make and maintain. Shall he give
his fifth hour also to hut-making ? Some
tools or weapons also have their claim. Shall
they come in at this point, or only in the sixth
hour of his working day, after two hours are
given to hut-making ? But the extra supply
of food, postponed for the sake of clothing
and a hut, may here again press its claim.
He must evidently balance the three claims
in his fifth hour, that of improvements in his
hut, the making of an axe, or the laying In
a further store of food. Of course the real
problem will be a good deal more complex
than this. There will be several sorts of food
competing with one another for his time and
energy. When he has got a certain amount
of fruit, though he could do with more, he
would prefer hunting for some flesh and fish.
188 THE SCIENCE OF WEALTH
So with the other needs, not only an axe
a spade, abow, a hammer, are very useful : tliey
also have claims upon his time. If he is a
thoughtful man, he will adjust these various
claims upon an economical principle, so as
to make the best use of his working time.
He will not go on making food when he has
enough to satisfy his hunger, because though
he could do with some more, the need of sonae
clothing will assert itself more strongly* So
with all the other needs, he will balance
them against one another, so as to get the
maximum of utility out of his day's work.
He will stop doing each sort of work as nearly
as possible at the point where any further
product will be felt by him as slightly less
desirable than some other thing that he could.
employ the time in making. At that second
thing he will go on working until he has got;
as much as is quite necessary, and a third
want becomes more urgent than an increased.
satisfaction of the second want. So far as
he thus apportions his working time to the
best advantage, it will be found that the last
quarter of an hour which he gives to food is
neither more nor less usefully employed than
the last quarter he gives to clothes-making,
to his hut or to making tools. For if we
supposed the last quarter of an hour given to
iood produced a greater utility than that
given- to hut-making, it would be a wasteful
DEMAND AND SUPPLY 189
use of time. So far as he consults clearly
Ms best interests, he will arrange his different
employments so that the last portion of the
products of all of them are equal in the use
or enjoyment they afford.
Now suppose that other people come and
settle upon Crusoe's island, and he is able to
get an income for himself by letting or selling
desirable building sites. With this income
he now satisfies his needs by setting other
persons to produce various sorts of goods which
he buys from them. The expenditure of his
income will be conducted on the same lines
as the expenditure of his working day when
he worked for himself. Instead of laying
out just so much time in making each several
sort of food, clothes, house, etc., he will lay
out just so much money. Part of his income
he will spend on food, part on clothes, part
on housing, etc. Though the first part of his
food will have a very high utility, being the
first necessary of life, the last addition to
the food supply he buys will have the same
importance or utility for him as the last
addition to his clothes, housing or any other
goods. Say that he spends 10 a year on
bread, though the loaves he buys with the
first five of these ten pounds have an enor-
mous utility for him, the loaves he buys with
the last pound could easily be dispensed with,
and have neither more nor less utility for him
11 ,
I '
190 THE SCIENCE OF WEALTH
than the last pound's worth of the 10 he
spends on clothing or the last pound's worth
of the 5 he spends upon cigars. The last
pound's worth of loaves, clothing and eigars
he buys must have the same importance or
utility for him, so far as he lays out his
income thoughtfully, for if we supposed the
last loaves he bought to contain more utility
than the last cigars, he would have acted
irrationally and uneconomically in not in-
creasing his expenditure on bread and reducing
his expenditure on cigars.
So far, then, as a man uses his income
economically so as to get the largest amount
of utility from spending it, the last or least
serviceable portion of each sort of goods he
buys will have the same utility. Though
he may estimate the total importance of his
weekly supply of bread far higher than that of
his weekly supply of tea, and the latter higher
than that of his supply of tobacco, the last
shilling he spends on bread must be deemed to
furnish him the same quantity of satisfaction
as the last shilling spent on tea or tobacco,
Now what applies here to the expenditure
of an individual will be equally found applic-
able to the more complex expenditure of the
income of a whole community. This aggregate
income of the members of a community is
spent partly in buying supplies of various
sorts of foods, clothing and other prime
DEMAND AND SUPPLY 191
necessaries or comforts, partly in buying
innocent or noxious luxuries. Though it is
evident that the first half of what is spent
in foods and other necessaries provides far
more utility than the first half of what is
spent on luxuries, it remains true that the
last or least useful portion of the bread, meat
and other " necessaries " that is bought for
consumption is just as much or as little
useful as the last portion of any of the luxuries.
The fact that the last portion of the bread
supply might "have a very high utility, if it
could get into the homes of needy persons,
is not here relevant. The last portion of the
bread supply actually sold goes to swell the
waste of the servants' hall in wealthy families,
and gives out no more utility than the last
box of cigars or the last bottle of champagne
consumed in the dining-rooms of the same
families.
If, then, we were to take the real income of
this country, the supply of loaves, fish, flesh
and fowl, the clothing, furniture, housing,
jewellery, etc., turned out of the industrial
machine in a year, we should find that the
least serviceable part of each of these sorts
of goods, when consumed, yielded the same
amount of utility or satisfaction. For this
balance at the bottom of each supply is
rendered necessary by the consideration that
consumers are always comparing and balanc-
192 THE SCIENCE OF WEALTH
L ing against one another the different objects
| i of their desire in laying out the last portions
' of the money they have to spend. As, then,
each individual gets the most for his money
, by purchasing a number of supplies the last
|l| portions of which represent to him an equal
|| amount of utility, so. it will be with the
aggregate of individuals.
The objection will no doubt occur that,
with the very unequal distribution of ijicomes
among the various classes, a great waste of
aggregate utility will occur. For the loaves,
shirts, chairs, meat, which, forming the least
serviceable expenditure of the rich, have
least utility attached to them, might have a
high utility if they could have been purchased
and consumed by the poor. But that critic-
ism,' Talid enough against the distribution of
income, does not impair the accuracy of aa
'^ analysis of utility based upon existing facts of
distribution. In considering the control which
the actual consumer exercises upon industry
through demand for commodities, it is im-
portant clearly to recognize the equalization
of utility at the base of each supply as the
immediate instrument for regulating industry.
In this levelling process of expenditure on
the part of a person or a society there is
nothing mysterious. It is simply " economy,"
tie laying out of money or of effort to the
best- advantage. Every child who, with a
DEMAND AND SUPPLY 193
shilling to spend, decides to spend twopence
on chocolates, threepence on shot, sixpence
on a cinematograph show and a penny on a
comic paper, performs this operation of com-
paring and equalizing marginal " satisfactions "
or " utilities." So far as the greater part of
expenditure is concerned, the process involves
no thought, it runs by routine. If a man has
an income of 500 a year, no question arises
as to how 450 shall be laid out. But as
regards the last 50, how much of it shall go
for holidays, how much for theatres, books,
subscriptions, how much for savings, that
wiH be a matter for some careful calculation
or individual adjustment. No two men with
500 will spend the last 50 in the same way :
no man will distribute this expenditure in
the same way two years running. As with
an individual so with a whole society. Most
of the income of a nation, as of a person, is
by necessity or habit allocated to
expenditure in maintaining a standard of
consumption. Only the last portion, or any
increase of income, is subject to the process
of adjustment which we describe. IMs
great interest and significance to the last or
" marginal " portions of income in
changes of industry. The introduction of
a new luxury, the stimulation of a new
in a consuming class, will evidently a
flow of capital and labour into the industrial
194 THE SCIENCE OF WEALTH
processes which are needed to supply the
article. The sudden direction of a large
portion of the " spare " income of the well-
to-do into a demand for motor cars has
brought masses of new capital and labour
into the trades providing them, has helped
to make a rubber boom, and has injured
the carriage trade and certain other luxury
trades. So it is through all the grades of a
society: new articles of consumption, music
halls and skating rinks, cheap reprints,
canned meats, bananas, popular drugs, force
their way, first as casual claimants, then as
habits, into the expenditure of some grade
of the working classes, with important direct
and indirect reactions upon the trades that
supply them, or that supply other articles
which they have displaced.
One is tempted to conclude that in these
changes of taste or valuation which regulate
the last items of expenditure are to be found
the governing forces of industrial life. And
great significance does rightly attach to them
as indexes and instruments of economic
movement. But it is a mistake to find in
them the special causes or determinants of
industrial change. For this would be to
neglect two important considerations. In
speaking of the new demand for motor
cars we assumed that it originated in a new
taste of rich consumers. But new inventions
DEMAND AND SUPPLY 195
and economies of production which put
reliable cars on the market at lower prices
stimulated and made effective this new
demand. And in most cases where a large
rapid increase of expenditure upon any
article takes place, improvements and econo-
mies of production have served to stimulate
the increased demand. In a word, there is
interaction between the forces of supply and
demand. A large cheap supply of cars stimu-
lates an expansion of demand, expanded
demand stimulates a cheapening and enlarge-
ment of supply. So it is with almost all
economic changes. The same economy, the
same constant process of adjustment towards
an equilibrium, is taking place in production
as in consumption. The new or unappro-
priated capital and labour and utility tend
constantly to flow into those trades in which
some recent increase of demand has raised
the rate of interest, profit, wages, slightly
above the ordinary level of other trades, and
it goes on flowing until the increased supply
of products in the chosen trades, by lowering
prices, has restored the profit, interest,
wages, to the common level. The increased
supply and falling prices thus brought about
in the special trades in question, will cause
consumers to demand larger quantities of
these products and will extend their uses
to other grades of the consuming public, until
G2
1 '
196 THE SCIENCE OF WEALTH
a new balance or equilibrium has been reached
in the utility or satisfaction of the consuming
public. Those disturbances and readjust-
ments are always going on, alike in the costs
of industry by inventions and improvements,
and in the utilities of consumption by changes
of taste and growth or decay of needs.
Another consideration is equally important.
If we watched a number of tanks of water
connected by pipes with one another, all the
changes we saw would appear to be taking
place at the surface, by a rise or a fall of that
surface. If an additional supply of water
were furnished to one tank, we should see the
surface rising in each other tank in its turn
until the common level was reached again.
But though for observation and registration
it would be best to confine our attention to
the changes on the surface, it would be wrong
to conclude that the causes which brought
about these changes had any particular
reference to the portions of the water on the
top. For it might well be the case that the
new supply of water to the first tank were
made not at the surface but below, and that
all the pipes connecting the tanks and causing
the readjustment discernible upon the surface
lay deep down. So in industrial changes both
on the side of production and consumption
tlxe direct forces of change need not operate
at the " margins, 3 ' the least efficient portions
DEMAND AND SUPPLY 197
of industrial power or the least pressing needs
of the consumer. In industry some new
general economy applied by all the repre-
sentative firms of a trade, or a series of trades,
some new economy of fuel, or the utilization
of a waste product, will, by raising the margins
of profit throughout the whole industry,
regulate the distribution of the new capital
and labour, so as to secure, as far as free
competition exists, an equilibrium of profit
among the various industries. So in the
public consumption, the initial movement
of change may be found not in the stimula-
tion or expansion of some new taste just
struggling into fashion, but in some altera-
tion in the past standard of consumption in
large sections of the public, as, for example,
in a general weakening of the taste for alcohol,
or a general rise of such an item as an annual
seaside holiday in the scale of values of the
large mechanic classes.
The changes at the margin, the readjust-
ments of the least valued items of expenditure,
of the least profitable items of industrial
energy, are thus to be regarded rather as
instruments fpr registering changes than as
the determining causes.
What is supremely important is that
students of industry should clearly recognize
the methods by which the continual changes
in the arts of industry and the valuations or
198 THE SCIENCE OF WEALTH
taste of consumers alter the structure of the
industrial system. These forces from the
supply side and the demand side meet in
what is called a Market, and their opposing
tendencies are reconciled in the market price.
A market price is that price which equalizes
the rate of demand with the rate of supply,
i. e. just enables all the goods offered in the
market to find buyers. Take the instance
of a cattle-market where a sale of bullocks
is taking place. For simplicity we will
suppose that all the bullocks for sale are
known by all the parties concerned to be of
the same size and quality. Some of the
sellers are in urgent need of cash and would
be prepared to sell a bullock at a low figure,
say anything above 5. Some of the buyers
are better off than others, and, being keener
to buy, would pay a price as high as 12
rather than fail to get a bullock. Let us set
out the market according to the number of
willing buyers and sellers at different prices
Price No. of sellers No. of buyers
5 2 12
68 12
74 10
86 8
97 7
10 9 6
11 12 4
12 12 3
DEMAND AND SUPPLY 199
If the bidding begins at 5 there are only
2 bullocks offered at that price and 12 willing
buyers, all willing to pay more if necessary,
The market price evidently cannot stand
at 5, for at that price 10 willing buyers
would be left without a bullock, and to
prevent being left would bid more than 5L
They would first bid 6. But at that price
there would only be 3 bullocks for sale and
12 willing buyers. The latter, still bidding
against each other, would force the price to
rise higher. At 7 and at 8 the same diffi-
culty would remain. Though the number
of bullocks offered and the number of willing
buyers approached nearer, so long as there
was one more buyer than there was bullock,
he, fearing to be left, would bid against the
others so as to raise the price. When this
excess of buyers over sellers had thus driven
up the price to 9, there would be found t
be 7 sellers and 7 buyers at that price, i. e.
supply is equal to demand. Could the price
rise higher ? No, for at 10 there would be
9 sellers and only 6 buyers, and the com-
petition of the extra sellers would force the
price down to 9, just as the competition
of the extra buyers had forced it up to that
level. 9 is seen to be the only possible
market price, for it is the only price at which
the number of willing sellers and willing
buyers is the same. So long as supply
200 THE SCIENCE OF WEALTH
exceeds demand the price rises, so long as
)| demand exceeds supply the price falls.
The market price is at the point where supply
is equal to demand.
This is true of every market where any-
thing is bought and sold by processes of
bargaining. Where buying and selling is
continuous, as in most wholesale and retail
markets for the sale of wheat, cotton or other
produce, stocks and shares, or loaves, fish,
shoes, coal or other commodities, it is not
a fixed quantity of supply or demand that
determines the price but the rate of supply
,, and demand. The market price in London
\ for wheat at any time will be determined at,
say, 25$. a quarter, by the fact that at that
price the rate at which wheat is offered at
Mark 'Lane is equal to the rate at which it
is being bought by millers and other pur-
chasers. Where the market is a continuous
i process, Supply and Demand are to be re-
garded as " flows " measured over a period
of time rather than as fixed quantities bought
and sold at a particular time, as in our instance
of the cattle market,
When Midland Railway Stock is said to
sell at a firm price of 65, that means that for
some time the number of shares offered at
figure continues to be the same as the
of shares bought*
of price always mean aa upset in
DEMAND AND SUPPLY 201
the equilibrium between the rate of supply and
the rate of demand.
So long as the body of sellers in a market
can go on selling their goods at the same pace
as hitherto, they will not lower and they
cannot with advantage raise the price. If
they lower the price, they do so either because
there is a fall off in the pace at which buyers
ask for the articles, or because they have
increased their stocks and wish by lowering
prices to raise demand so as to meet the
increased rate of their supply. If they raise
their price, it is either because buyers are
buying more frequently, or more largely
than before, so depleting their supply more
rapidly, or because they are finding a difficulty
in getting a supply of goods at the same price
as before. Thus the immediate cause of a
rise of price is always a decrease of supply
or an increase of demand : the cause of a fall
of price is always an increase of supply or
a decrease of demand.
Whenever the equilibrium between Supply
and Demand is thus disturbed, the price
continues rising or falling until a new level
is reached where the two are again equal.
This readjustment is a natural tendency.
For if an increase in Supply has caused prices
to fall, that fall will in itself stimulate an
increase in the number of buyers or rate of
demand. Similarly, if a decrease of Supply
202 THE SCIENCE OF WEALTH
causes prices to rise, that rise of prices will
reduce the number of buyers. The pace at
which this tendency works will differ with
different commodities. In some cases a small
rise or a small fall of price will have a con-
siderable effect upon demand. This will
usually apply to luxuries, which do not satisfy
any strong desire, or to articles for which
there is a convenient substitute. In the case
of necessaries or articles with no easy substitute
a moderate rise or fall of price may be attended
by little increase or decrease of demand. In
the former case the cc elasticity of demand "
is said to be small, in the latter case large,
The rise in the price of spirits, following the
recent increase of liquor duties, caused a
large reduction in the demand for spirits.
A corresponding rise in price of wheat would
not cause a corresponding reduction in de-
mand for bread. It might even cause no
reduction, so far as large classes of the workers
were concerned. For the rise in price of
bread might cause them to buy less meat or
other foods, in order to be able to keep up
their consumption of the staff of life. The
effect which a rise or fall of 10 or 20 per cent,
in the price of any article will have upon
demand will evidently depend upon a great
number of circumstances, and will differ in
different social classes and grades of income.
Where the change of price is effected from
DEMAND AND SUPPLY 203
the demand side, similar effects will be pro-
duced upon rate of supply. la some cases
an increasing sale will enable goods to be
produced more economically than before, so
that the rise of market price will be very
slight and very temporary, resulting soon in
a new equilibrium of demand and supply at
a lower price than before. In other cases
an increasing sale may stimulate supply only
by causing a considerable rise of price, as
where in order to create the new required
supply worse land or dearer labour must be
brought into use. According as supply does
or does not respond easily to the stimulus of
rising prices we speak of it as " elastic ?! or
" inelastic."
All these important occurrences in the
economic world which are said to affect
prices work by means of this mechanism of
Supply and Demand. A bad harvest, a new
discovery of gold, a war, a rapid growth of
population, a new invention for cheapening
electricity, a temperance movement, affect
prices, sometimes temporarily, sometimes
permanently. But in all cases the modus
operandi is to be traced in changes of the
relation between supply and demand in the
markets.
Most markets with their market prices are
liable to numerous minor fluctuations from
a variety of passing and casual causes. But
204 THE SCIENCE OF WEALTH
If? ' behind or beneath these slight oscillations
are to be traced large and abiding changes
due to more important alterations in the arts
of production or consumption. These normal
or lasting changes in prices will arise from,
or be expressed through, rises or falls in the
ordinary expenses of production on the one
hand, or in the ordinary utility of consumption
upon the other.
Expenses of production will rise or fall
either (1) by reason of some alteration in
methods of production affecting costs, or
(2) because of some increase or reduction in
the " surplus " with which expenses may be
} loaded.
* (I) Under alteration of methods of produc-
tion will come (a) all those improvements in
the arts of industry due to mechanical,
chemical and other sciences, which are the
leading feature of the Industrial Revolution;
(6) improvements in business organization and
' ', enterprise, both on their productive and their
commercial side; (c) improved skill, physique,
education and character of the workers,
, 1 1 < . j (2) Under influences affecting the " surplus 2
^ ' ' element we may include (a) discovery or de-
velopment of natural sources of wealth, or
1 the depletion of such sources causing increased
scarcity and a larger surplus to arise in some
necessary process ; (6) an increase or decrease
of the flow of capital into any country or any
DEMAND AND SUPPLY
205
industry, raising or lowering the expenses of
production. This flow of capital is, of course,
affected by innumerable causes related to the
size and distribution of income, security of
property, foresight, thrift and other condi-
tions affecting saving and investment; (c) an
increase or decrease of the flow of labour into
the several countries and trades, determined
by growth of population, facilities of informa-
tion and of transport, and influencing division
of labour and the labour-costs of production.
All these causes affecting expenses of pro-
duction will impress themselves upon prices
through enlarging or restricting Supply, Some
of them, being of a general character, will affect
most of the industries of a country, or of the
world, though in different degrees, as, for
instance, improvements in generating power
for manufacture or transport. Others, being
of a special kind only applicable to some
trades, will raise or lower the expenses of
certain products and affect their rate of ex-
change with other products.
Corresponding to these forces playing
through expenses of production upon Supply
are other forces, playing through utility upon
Demand.
(1) An immense number of changes are
always going on in the arts of consumption,
i. e. in the utilization of the various forms of
wealth. An improved fire-grate saving fuel,
206 THE SCIENCE OF WEALTH
a change in taste or habits of food or dress, a
keener appreciation of books or recreation,
and a thousand other changes, will result in
increased or reduced demand for various
commodities. New tastes and desires are
constantly competing with and displacing
old ones, and often by their adoption involve
many other alterations in consumption and
expenditure. The reduced use of alcohol, for
instance, may involve less consumption of
meat and a higlier valuation for dairy produce
and vegetable foods.
(2) Apart from such changes in tastes and
habits, a mere Increase or decrease in the size
of the income of a nation or a class will bring
about changes in the proportion of expendi-
ture upon the various products. The general
growth of income in large sections of our
workers has expressed itself in an increased
appreciation for holidays and amusements :
the large growth of a " super-tax " class has
brought an increasing demand for motor cars
and other expensive luxuries.
Such are the forces which at every point
of the Industrial system are operating upon
Supply and Demand to bring about the
shifts of prices that are constantly taking
place.
If we regard the Consumer as calling into
being, maintaining and directing, by his needs
aad -tastes, the whole of this great elaborate
DEMAND AND SUPPLY
207
system of industrial forces, we shall see this
Consumer's will operating everywhere through
demand, first for commodities, and secondly
for the various productive steps and instru-
ments which are the necessary means to his
end.
If, on the other hand, we take the stand-
point of the business man, or Producer, we
shall see the same structure and operation
of the industrial system as a gathering stream
of material and energy given out by various
co-operative groups of factors of production,
land, labour and capital, under the local
guidance of business ability, moving towards
the creation of quantities of finished market-
able goods and services.
CHAPTER XI
THE LABOUB MOVEMENT AND STATE
SOCIALISM
THE saying that all progress consists in the
elimination of waste has a special applicability
to the art of economic progress. It furnishes
a test for the validity of the various methods
of social-economic reform which play so
conspicuous a part in modern history. In
particular it can be seen that the Labour
Movement on the one hand, and the enlarge-
ment of the industrial functions of the State
upon the other, are virtually dependent on
the existence of a surplus. It will be worth
while to make this dependence clear.
If there were no unproductive surplus in
the hands of capitalists, landowners and
business men, the validity of the Labour
Movement would hinge almost entirely upon
the economy of high wages, short hours, and
other improved conditions. For if the com-
petition of employers and capitalists through-
out the industrial system were everywhere
so keen and constant as to keep down profits,
208
THE LABOUR MOVEMENT 209
interests, and other business emoluments at
a minimum, any co-operative action of the
workers, involving an additional cost of
labour without a corresponding increase la
the productivity of labour, would evidently
prove disastrous for all the partners in
industry.
In other words, the success of the Labour
Movement would be confined to cases where
higher wages, shorter hours, etc., raised the
efficiency of labour so much as to involve
no net increase in the labour-cost. If this
view were correct, all conflicts between
capital and labour would be wanton acts of
folly on one side or on both. For if higher
wages and improved conditions of labour
of necessity were followed by a corresponding
rise of productivity of labour, how foolish
and inhuman for employers to resist such
demands ! And how wrong trade unions
would be to urge demands which, going
beyond " the economy of high wages," could
not be conceded by employers without ruining
their businesses !
But the existence of a large composite
surplus not required to maintain the other
factors of production, but taken by them to
be applied to purposes of luxury and waste,
supplies a rational basis for the Labour Move-
ment. If the workers by organizing, alike
in their several trades and as an economic
210 THE SCIENCE OF WEALTH
and political unity, can secure portions o
t ,, this surplus, applying it in the form of higher
i j[j f) wages and more leisure to raise their standard
ljri1 - of life and work, they are converting waste
into genuine wealth. If trade-unionism,
through collective bargaining, can secure
higher wages, by reducing the payments
made as rent, surplus-interest, and surplus-
profit, no damage is done to the other factors,
while an important contribution has been
made to the improved efficiency of labour.
To this main object the policy of collective
bargaining is directed. Its success, like that
of other policies, depends upon the know-
ledge, skill and temper with which it is
applied. Our analysis discloses many wide
differences in the quantity of surplus avail-
able for distribution in the different trades.
In some cases a large portion of the product
goes as surplus-profit, or excessive interest,
or is paid away in rents. This is the case
where free competition has given place to
combination among employers, or where
some landowner, royalty-owner, patentee, or
other monopolist, is able to rack-rent an
industry. Other trades stand on a different
footing, close competition among employers
keeping down interest and profits at a mini-
mum, and landlordism taking comparatively
light toll. The same trade will at one time
exhibit a large surplus profit, at another none.
THE LABOUR MOVEMENT 211
The tactics of Trade Unionism consist in
applying pressure at those industrial points
where it can be applied with safety. An
indiscriminate demand for higher wages,
shorter hours, or any other condition involv-
ing a higher wage-bill, would prove injurious
to industry and the injury would rapidly
react upon the workers. For an industry
where keen competition keeps down profit
and interest to a minimum has no surplus
capable of being applied to raise wages, and
if by sheer strength of organization higher
wages could be got, the trade may suffer
damage in one of two ways. If foreign or
other outside competition prevents the em-
ployers from raising the price of the product
so as to meet the enhanced expenses of pro-
duction, the trade will perish because no
fresh capital will flow into it, and the wear and
tear of existing capital will not be replaced.
If it is possible to raise the price of the pro-
duct, that rise of prices, as we have seen,
must cause a shrinkage of demand, and this
will mean a reduction of employment of
labour which in its turn must damage the
efficiency of the labour organization. The
validity of collective bargaining as an instru-
ment for raising wages, or shortening hours,
clearly depends upon the directing and the
timing of demands so as to secure for the
workers the whole or part of some unpro-
212 THE SCIENCE OF WEALTH
i ductive surplus ascertained to be in the
possession of one of the other factors with
< which labour is co-operating. It is not the
! true interest of labour to seek to encroach
> upon such interest, profits, or other elements
} of income as are necessary to evoke the full
' use of other* factors of production. But
where any payment in excess of this amount
Hijl ' is made, organized labour is economically
! justified in trying to divert this surplus into
, higher wages.
Whether, and to what extent, Trade
' Unionism can succeed in thus raising wages,
* or otherwise improving the conditions of
J labour, at the expense of surplus-interest
K or profits, depends upon the relative strength
of the organizations of workers and of em-
ployers. When a strong organization of
labour has placed effective restrictions on
, , the competition of " free " labour, it has
t/| , ' often been able to bring such pressure on
|$|' > keenly competing employers as to raise
[ 1 1 \ ' ! wages at the expense of surplus interest or
\ |i; ' * profit. But where employers have organized
to meet such pressure, placing restrictions
r }" '" \ ;__ A.I jt _ ; JL! 1_ ' _f it J i*
IJl
\ l/V
in their turn upon the inroads of " free !
capital entering tlieir trade, they have usually
: / 1 f succeeded in defeating the pressure of or-
6 ? i^ ( gwiized labour. For their smaller number,
* I' \ " resources, and better information,
l> their organization more effective in a
i THE LABOUR MOVEMENT 213
& conflict. Even in skilled and well-organized
^ departments of labour there is a growing
e recognition of the inadequacy of Trade
'$. Unionism as a method of securing for the
workers a sufficient share of the surplus
1 wealth. Moreover, it is made continually
t more evident that the very policy which
t strong trade unions must adopt to limit
y the inflow of " free " labour from outside
& t renders it more difficult for lower-skilled
workers to organize their labour markets,
e which are flooded with the labour excluded
t 9 from entry into the higher grades of employ-
,f ment.
t The recognition of these facts is driving
3t the Labour Movement into politics. There
4, is a disposition among the workers, who form
,jf the majority of citizens, to use the State in
st order to supplement trade union and other
s private co-operative and philanthropic efforts
ri j to raise their standard of work and life,
e Although history shows that the State has
r always been utilized for the economic benefit
ff of any class which acquired political control
s or influence, virtuous citizens have always
? protested against the partiality and corrup-
^ tion involved in such use of politics, and now
* profess concern lest the working classes
should injure both the State and industry
by unwise interferences with private enter-
a, prise and with the rights of private property.
214 THE SCIENCE OP WEALTH
" Because landowners, manufacturers, and
other business classes have in the past used
politics for their own economic ends, making
and administering laws, treaties or tariffs,
and using the diplomatic and military forces
of the State for their business purposes, that
is no reason why the workers should, if they
get the power, follow the same dishonest
and misguided policy in the interests of their
class." Such is the objection. In reply,
it is often deemed sufficient to insist upon
two points. In the first place, it is con-
tended that where the working classes form,
as they do, the overwhelming majority of the
electorate, their voice and their interests
may be considered as the voice and interests
of " the people " in a country where majority
role fe acknowledged. Secondly, it is con-
tended that many or most of the demands
which the workers would enforce through the
State consist in the alteration or reversal
of legal rights or other advantages secured
^ by landowners, capitalists, and other business
; classes formerly in control of the State,
* Now, though both these answers have
I some force, they do not suffice to meet the
! economic objection, that the wage-earning
; classes might use their political power to
] injure the industrial system and to check
\ tike growth of wealth, by a short-sighted
j endeavour to raise wages and improve the
THE LABOUR MOVEMENT 215
condition of labour at the expense of the
propertied classes.
The only effective answer is to show that
the demands which labour seeks to enforce
by means of the State, though primarily
motived by the interests of a class, are ulti-
mately consistent with and conducive to
the interests of society as a whole. This is
not proved merely by pointing out that the
workers are by far the largest class. It must
be shown that the policy they advocate is
not in the long run injurious to the structure
of industry. Now the acceptance of the
doctrine of an unproductive surplus un-
doubtedly supports this interpretation of
the labour policy. For so far as it is accur-
ately directed to convert portions of the un-
productive surplus into increased wages and
leisure and other improved conditions of
labour, the labour policy can claim to be a
social policy. By transforming unproduc-
tive into productive surplus, it makes for
industrial health and < growth. To divert
rents or surplus profits into a fund for secur-
ing a fuller subsistence for wage-earners and
for enabling them to acquire for themselves
and their families a larger share of the com-
forts and conveniences of civilized life, with
ampler leisure, recreation and education,
is a double social gain. It enhances the f
amount of utility and satisfaction got from I
II
1
I,,,
f"
\ '. i
It
216 THE SCIENCE OF WEALTH
the income thus directed, and it promotes
industrial progress by raising the efficiency
of labour,
The contribution of a reasonable labour
policy to a social policy is best illustrated by
the struggle for the " minimum standard. 3 '
Whatever be the exact form or contents
of our conception of social progress, it de-
mands as a first indispensable condition a
solution of the economic problem of poverty.
This problem is of complex structure, distin-
guishable into several strata. At the bottom
it appears as destitution, and the slowly but
surely growing recognition that the safety of
society requires the abolition of destitution
has brought the State at many points into
sympathetic contact with the Labour Move-
ment. Public opinion everywhere dtma&ite
that preventive measures shall be taken by
society against low wages, over-work, neg-
lected childhood, insanitary housing, sickness,
accidents, intemperance, unemployment, help-
less age, adequate public remedies being sub-
stituted for inadequate and degrading private
charity.
For this purpose a series of public health,
educational, industrial and philanthropic pro-
visions are in course of adoption by modem
States, based upon two assumptions : first,
that large sections of the working classes are
unable, as individuals or by private co-
THE LABOUR MOVEMENT 217
operation, to make adequate provision against
many injurious and degrading incidents of
their economic situation; secondly, that it
is a sound social policy to utilize the resources
of the State to assist them in doing what
they cannot do themselves. Free hospitals,
old age pensions, fuller provision against
unemployment, and wages boards are illustra-
tions of several branches of this new State
policy.
It is noteworthy that in all these services
the State is supplementing or displacing
recognized activities of the Labour Move-
ment, and is being brought at several points
into direct co-operation with that movement.
But security against physical destitution
is no sufficient foundation for a civilized life.
It is the interest of every society that all
its members shall, in return for work rendered
to society, enjoy an income sufficient to
enable them to maintain themselves and
their family in full physical efficiency, with
access to all reasonable opportunities of
general and technical education, and to such
social intercourse, recreation and liberty of
travel, as are needed for a good workman and
citizen. Now modern statesmen clearly re-
cognize that for the great mass of workers
some or all of these socially desirable condi-
tions are not attainable by individual or
collective bargaining. Neither competition
I 218 THE SCIENCE OF WEALTH
nor combination in modern industry yields
to workmen any sufficient security for such
a standard of work and life as is required.
The State must supplement the labour policy.
It does so directly in two ways. First, it
$, , imposes conditions of employment expressly
4* designed to regulate wages, hours or other
conditions in a manner favourable to the
workers. The Wage Board experiment in
Australia is the most advanced example of
a policy which in this country is at present
confined to a few selected " sweated " trades.
But State regulation of wages here applies
not only to the growing number of public
employees but to the large amount of private
industry affected by public contracts. The
policy here pursued is a definite recognition
that private bargaining does, not secure eon*
I ditions of labour conducive to the social
\ welfare. The great body of modern indus-
'11 trial legislation in Factory and Workshops
I Acts, Employers' Liability, Shop-hours and
* other regulative Acts, is an expression of
'' this fuller policy of protection for labour.
It is a piecemeal endeavour to build up a
* standard of employment consistent with the
; nMmintim demands of our current civilization.
It is reinforced by another body of State
which, regarded from the stand-
of the workers, aim at improving their
of living. Under this head may
THE LABOUR MOVEMENT 219
be grouped much sanitary legislation, food
adulteration Acts, and other protection against
dangerous goods and services, while free or
subsidized education and recreation, includ-
ing libraries, parks, baths and other amenities,
may be brought under the same policy. The
chief economic effect of these various public
services is to enable the workers to make a
better or a more economical use of their
earnings than they could under a complete
system of laissez-faire, and to furnish to them
at the public cost certain services they could
not otherwise obtain. Regarded from the
special standpoint of the economic interests
of the working classes, this double set of
State activities is engaged in expending public
resources to build up a minimum standard
of health, knowledge, enjoyment, taste, char-
acter and conduct, for those classes who are
unable to make an adequate provision for
these things out of the income they earn by
the sale of their labour-power. It is an
elaborate indirect attempt to readjust the
adverse conditions of the wage-bargain.
This is, of course, but a one-sided and
partial interpretation of a wider social policy.
For while some of this public work and expen-
diture has exclusive reference to wage-earners,
much of it claims a fuller social bearing.
Though the poorer classes may get most
benefit out of public money spent on educa-
I- 220 THE SCIENCE OF WEALTH
tion, recreation and even sanitation, it will
be rightly held that these services are directed
and Intended less to fill the deficiencies of a
class than to protect and improve the social
organism as a whole. When we approach
the higher grades of State activity, such
I as higher education, the encouragement of
I] science, literature and the fine arts, the
1 expenditure upon transport or the aesthetic
I Improvement of our cities, we recognize that
* the social policy is less and less identified
with the Interests of any class.
These State services, anti-destitutional,
educational, developmental, together with.
^ ty those defensive services which consume so
much of the revenue of most States, involve
the expenditure of a large and growing public
revenue. The provision of this revenue Ifeself
|i t occupies a place of growing prominence m
|l r the art of government. The chief difficulty
i^ j in this art of public finance arises from a
& & defective understanding of the part played
!' t f ' J by the State in industry and therefore of
Its claim to revenue. The notion that the
State exists merely to protect the lives and
property of Individual citizens, and that for
the performance of this duty it Is entitled
to a contribution from each citizen,
proportionate either to his means or to the
benefit he receives from the State,
the common conception of
THE LABOUR MOVEMENT 221
,jj public revenue. The effect of this view has
*j been to impose narrow limits upon State
5 activities, and to regard the greater part of
1 the public revenue as derived from confisca-
v^ tion of the property of individual citizens.
*fa At the present time the theory and practice
' I (. of public revenue is slowly emerging from
g these misconceptions. On the one hand,
\ c we see most civilized States transgressing the
* old protective limits by engaging in a large
\ variety of constructive measures for the
development of the economic and human
I resources of the nation. On the other, we
|! see a growing recognition of public revenue
as an income to which the State has a right,
on the ground that public services have
' earned it. This latter doctrine is, indeed, as
,| r yet not accepted in its completeness, except
as regards the public revenue taken in the
ordinary way as profit or rent from publicly
^ owned property or publicly administered
? industries. The rents of public lands, mines,
* or other estates belonging to the Crown,
the profits of the Post Office, of a municipal
? water or tram service, are evidently public
income on the same footing with the similarly
i earned income of any private corporation.
Wherever the State or city performs a par-
9 * ticular service and takes a price from the
' recipient, whether that price is paid retail,
; as in the case of the Post Office, or wholesale
222 THE SCIENCE OF WEALTH
as by some annual rate or fee, the public
evidently ranks with other businesses and has
the same sort of right to its profit.
Of course the public may abuse the right,
exacting a higher payment than it ought for
what it sells. Being usually a monopolist,
excluding or limiting private enterprise, it is
often in a position to abuse its power of fixing
prices. Many of the services it undertakes
are for the supply of necessaries or primary
conveniences of life, such as transport, water,
lighting. It is therefore able to swell the
public revenue by exacting what would be
in a private business surplus-profit. Some
States and cities practise this finance, using
certain monopolies, such as salt, matches,
tobacco, alcohol, as instruments of public
This is sometimes denounced as
If it were an abuse precisely on all fours
with the similar exactions of a trust or other
monopoly in the business world. But it is
not. For there are two differences. The
surplus-profits of a State monopoly, though
unearned by the specific services rendered,
go to a public income designed for expendi-
ture upon socially useful services, whereas
the surplus-profit of a private trust goes to
an unproductive surplus of private
individuals. Again, the high prices exacted
by the State may be dictated by considera-
merely of public revenue, but of
; ; THE LABOUR MOVEMENT 223
public order, as in the case of alcohol or
explosives.
But when a public monopoly is made a
means of exacting profits higher than the
I ordinary business rate, it must be admitted
that this excess is of the nature of taxation
A and must be defended as much. It is,
d therefore, to the new conception of taxation
* as the chief means of providing public revenue
; that we must turn for an understanding of
the relations of the State towards the indus-
' trial system. This new conception takes
1 practical, experimental shape in the distinc-
tion between earned and unearned income,
and in the insistence that the State has a
I right to share in the latter. Indeed, it is
evident that to elements of private income
f and property regarded as " unearned " every
! modern State is beginning more and more to
|. look for the increasing revenue required to
fulfil the larger modern functions of a pro-
I gressive State. The two conceptions react
gh on one another. The perception that there
^ i are " large unearned " sources of wealth to
li- tap enables and incites modern States and
as cities to undertake new constructive services
fe O in education, housing, town-planning, " social
to reform," which were not formerly considered
K i * financially feasible. This fuller realization,
a- on the other hand, of what a State or city
3f can and ought to do for the common good.
224 THE SCIENCE OF WEALTH
incites governments to a clearer recognition
mud a closer scrutiny of " unearned " wealth,
The self-interest of governments is every-
where driving them to seek more public
revenue from " unearned " incomes and pro-
|f. perty. Such finance, at any rate in countries
where forms of representative government
prevail, lies along the line of least resistance.
Everywhere it is felt and seen that rents
of land, profits and dividends from liquor
licences and from other businesses which,
escaping the full brunt of competition, are
able to regulate output and selling price,
contain large elements of gain which can be
taxed without injury to the industries affected.
If it were possible to track down all sorts
of unearned wealth to a single source, as do
of the disciples of Henry George, or even
to a few clearly ascertainable and measurable
sources, a fairly simple policy of securing
such wealth for public revenue might be
enforced. One of two methods could be
adopted : nationalization .or specific taxation,
The first method would mean the acquisition
ownership by public authorities of the
* f I 1 # land, or of such portions as possessed any con-
siderable amount of present or prospective
land-values. The effective working of this
ownership policy might also necessitate the
public ownership and operation of railways,
quarries, and perhaps buildings, as
THE LABOUR MOVEMENT 225
being in such intimate connection with the land
as to suck value out of it. Along with this
would go the public ownership of other natural
monopolies, the retail liquor trade, banking
and insurance, the telegraph, telephone, and
some other means of transport and communi-
cation, the chief municipal services, and per-
haps certain of the distributive trades in which
the arts of combination or adulteration were
likely to be used by private traders to the
j public detriment. This limited State Social-
ism, though motived partly by other con-
siderations, such as the defence of the
consuming public against high prices or
inferior qualities of goods or services,
would be directed primarily to secure pub-
lic revenue. It would furnish the State
income from the ownership and operation
of monopolies.
The other method would leave the land,
the railways and other instruments of " sur-
plus " income in private possession and use,
I but would secure for the State such share
| of the surplus as it required by direct taxa-
j tion. Economists have agreed that taxes
I upon economic rents of land cannot be shifted,
and that not only do they inflict no injury
upon the socially advantageous uses of land,
but they may be so applied as to improve
those uses. What holds of the rents of land,
: holds also of other monopoly values. Since
; H
I
I,
226 THE SCIENCE OF WEALTH
the monopolist has usually fixed the rents
or other charges for the goods or services he
sells at the figure which he estimates will
yield him the largest amount of revenue,
he will not raise his prices in consequence of
the taxation he is called upon to bear. For
It will not usually pay him to do so. The
taxation is likely to stimulate him to more
economy in methods of conducting his busi-
ness, as it stimulates the landowner to put
his land to more profitable use. It will not
induce him to restrict his output, or to
withhold any personal service which hitherto
he had given forth. This economic doctrine
of the taxation of " monopolies " is generally
accepted.
But the analysis of industrial processes set
I ft I forth m this book indicates a much wider and
more various application. For if it be the
case that surplus income emerges not only
from the possession of land or of some few
definite "monopolies," but from a great
number and variety of circumstances and
situations which afford a scarcity value to
some sort of capital or ability that has gained
a "coign of vantage," the amount of "surplus "
available for public revenue through taxation
Is greatly enlarged. The profitable fruits of
business trusts, combinations, pools and
price-agreements, the gains from corners or
xoanipiilation of markets, from tariffs, charters
THE LABOUR MOVEMENT 227
or other public aids, from inventions or
superior business organization, from high fees
and salaries, are all in various degrees amenable
to the taxing policy. The fact that most of
these businesses or professional activities
involve a genuine output of useful personal
ability, though complicating the taxing
policy, does not affect the principle. The
incomes derived from them contain elements
of scarcity value, unearned elements which,
though not directly separable from the neces-
sary wage of ability, or minimum interest
and profit, are nevertheless a proper object
for taxation. Some of them are as large
and more enduring than the incomes derived
from city lands or liquor licences, others are
fortuitous and fluctuating. But, forming as
they do a very large share of the unproductive
surplus, public policy requires that due
attention be devoted to them as a source of
public revenue.
Their complex character and the difficulty
of measuring them, however, render specific
taxation unsuitable. The variety, complexity
and aggregate size of these more shifting
" surpluses " furnish the true economic justi-
fication for general progressive taxation of
incomes and inheritances. All taxes liable
to fall upon any income which is a true cost
of subsistence or of growth, i. e. the efficiency
wage of labour, the minimum interest, profit
H2
228 THE SCIENCE OF WEALTH
or other payment of ability, are bad taxes,
For, by impairing the efficiency of a factor
of production they injure the future production
of wealth, and reduce the surplus capable of
contributing to future public revenue. All
taxation, therefore, should be confined to
" unproductive surplus," taking out of it
such revenue as the State can advantage-
ously expend in the sustenance and develop-
ment of the public services. The general
Income and inheritance taxes, which in most
civilized states play a part of increasing
importance, are the best instruments for
securing this contribution. Their progressive
graduation is defensible upon the ground
that the proportion of " unproductive
surplus " varies directly with the size of the
income or estate. This supposition may
certainly be accepted as valid. The larger
the income or estate, the larger the amount of
unproductive surplus it usually carries, and
so the larger the amount it can contribute to
the State without injury to the factor which
received the income.
The difficulty of discriminating such
" unearned ?! income from the " earned "
incomes in which it is often incorporated,
however, obliges the State to proceed in
an experimental manner. Grave practical
difficulties confront a State endeavouring to
tax surplus out of large incomes. Conceal-
r
THE LABOUR MOVEMENT 229
ment of income is often possible, and modern
international finance makes it possible and
easy for some sorts of " surplus " to dodge
taxation by emerging abroad and coming
home in disguise. As internationalism in
business grows commoner, it will become
exceedingly difficult for any state to proceed
much faster than other states in the taxation
of current income. Partly to avoid these
difficulties, but more largely because in-
heritances are admittedly unearned by the
recipients, there is a growing disposition to
rely upon death duties more than upon
increased income tax for revenue.
Financial statesmen have been driven
along these roads of revenue more by con-
siderations of financial opportunism than by
the clear-eyed acceptance of economic
principles. But it is particularly desirable
for those who realize the necessity under
which a modern state continually finds itself
of needing increased revenue, to understand
the proper sources of taxation and the
rationale of the taxing process. Taxation is
not a confiscation of the earned property or
income of individual citizens, the product of
their personal effort or ability. It is a means
by which the State, as the representative of
social activities and needs, asserts its claim
to the income which society has earned by
the various aids rendered to its individual
230 THE SCIENCE OF WEALTH
members. The State collects its income
through the taxes, and expends it, so far as it
is rightly advised, in the defence, develop-
ment and improvement of the services it
renders to society*
CHAPTER XII
FOREIGN TEADE
A CENTUBY and a half ago a band of British
immigrants landing in North America made
their way into an extreme southern part of
the province of Ontario, where they settled
down in a fertile valley traversed by a river,
along the banks of which they built the.
clusters of log-huts that presently grew into
a populous and prosperous village. The
north side of the river had most of the better
grazing land, and a creek running down from
the neighbouring hills made it easier to work
lumber on that side. But the south side
had land more fertile for wheat and better
protection for fruit and vegetables. There
were specially favourable plots of soil on either
side under the shelter of the hills, which took
the fancy of some settlers, and other advan-
tages of climate, soil or position, led to special
sorts of cultivation and industries connected
with them. A few smiths, carpenters, weavers,
tailors, shoemakers, settled, according to
personal convenience or family connections,
on the north or south side of the stream.
231
282 THE SCIENCE OP WEALTH
Remote from other settlements, this village,
with its neighbourhood of farmers, lumber-
men, etc., formed a virtually self-supporting
industrial community. There was a bridge
across the river so that persons and goods
passed freely to and fro, and market arrange-
ments enabled every special advantage of
soil or position, or any special skill which some
artisan or manufacturer might possess, to be
most fully utilized for his personal gain and
for that of the whole body of customers who
were free to buy what he had to sell. Here
was a simple example of the economy of
division of labour on a basis of free exchange,
It was evidently advantageous for the villagers
living on either side of the stream that there
should be the closest contact and the freest
commercial intercourse over the bridge. Any
one suggesting that the bridge should be
broken down, or that a toll should be set up
for persons and goods passing across, with
the object of enabling each side to supply its
own needs whenever it seemed possible to
do so, would have been dubbed a lunatic*
Now it came to pass, after the American
revolution had led to the establishment of
the Republic, that a delimitation of frontiers
between Canada and the new United States
took place, in which the river passing through
our village was a boundary line. Politically
the village was cut in two. The inhabitants
FOREIGN TRADE 233
of the northern part remained Canadian
citizens, obeying the laws and paying the
taxes of Ontario as heretofore, the inhabitants
of the southern part became citizens of the
United States. In process of time the political
severance would possibly affect the feelings
of the two sets of villagers towards one another
and lead to a diminution of social intercourse.
But could It make that division of labour
and that freedom of exchange, which were
advantageous formerly, less advantageous ?
Would it be any less damaging than before
to break down that bridge, or to put a toll
upon the produce which sought a market
across the stream ? It would indeed be
feasible, as it was before, to break the economic
community into two, following the line of
the river. But it would be just as evident
that every person who had anything to sell
would have only half the market he had
before, while for everything he wanted to
buy he was similarly restricted in the supply
available to him. It might be possible for
all the villagers to supply themselves with all
they needed by dealing with neighbours on
their own side of the stream, but they evi-
dently lose their share of the natural advantages
or special skill belonging to some villagers
upon the other side, and the new restrictions
on the market for the things which they are
in a superior position to make rob them of
284 THE SCIENCE OF WEALTH
part of the fruits of their own industry.
Each villager manifestly loses, both as buyer
and as seller, by any impediment put upon
that free intercourse which existed before.
The political division does not affect the
true economy of industry. It was advantage-
ous before that the young men and women
who grew up on the north side should be
perfectly free to take up land or a trade upon
the south side if a better opportunity presented
Itself there than on their own side. Such
liberty of movement evidently led to a better
development of the whole district, an advan-
tage in which all would share. Similarly, if
any thrifty farmer on the south had laid by
a sum of money and saw a better use for his
savings by putting up a saw-mill on the
north -side, instead of starting some less
likely business on his own side, it would
evidently be detrimental to the interests of
, all the villagers on either side to stop him
from this most profitable use of his capital
For they would all gain more by the cheaper
timber his saw-mill would supply than by any
other use to which he eould put his savings
through employing them upon his own side
of the stream. Under such circumstances
any interference with the free flow of labour
or capital Is seen to be as injurious as any
interference with freedom of markets. For
the inhabitants of either or both sides to
FOREIGN TRADE * 235
adopt a law of settlement which kept the
growing population to its own side of the
frontiers, or restrictions upou the export
of timber or machinery or other sorts of
" capital," or by a tariff to prohibit or impede
the importation of commodities which could
be produced better or more cheaply on the
other side, would manifestly be a suicidal
policy.
If the villagers upon the north out of
some mistaken patriotism adopted such a
policy of exclusion, they could damage the
villagers of the south. But they would
damage themselves to a somewhat greater
extent, because the costs of collecting the
tolls, keeping out smugglers and administer-
ing the whole protective policy, would fall on
them. Supposing, however, that they were
so foolish as to attempt this economic separa-
tion, would the villagers of the south be
well-advised in their turn to meet the injury
inflicted on them by copying the exclusion
policy ? Why should they stop northern
capital which sought to come in and develop
their resources from doing so, or stop skilled
labour from crossing the stream to help
northern capital in their advantageous work ?
Why should they prevent their villagers
from getting the better or cheaper produce
which the northerners still sought to supply ?
To follow the bad example of the north
236 THE SCIENCE OF
would be to double the injury for their citizens
as well as for the others, and to saddle them-
selves with the same costs of administering
the exclusive policy.
So long as the village was all inside Ontario,
it was quite obvious that the fullest co-opera-
tion among all its members, by division of
labour, freedom of markets and full liberty
of movement for capital and labour, was
f conducive to the common welfare of the
I village as a whole and of each section of it.
*' ! It might be true that the soil and other natural
conditions were upon the whole much more
favourable on the south than on the north,
and that consequently the young labour and
the new savings went chiefly to the develop-
ment and settlement of that section, But
it would be quite evident that the villagers
who stayed on the northern side were not
made worse off but better off, by reason of
the fuller development of the better resources
on the southern side, and that if any foolish
sentiment had operated to keep their young
labour and the savings from seeking more
profitable employment across the river, they
would have been heavy losers. Now this
evident economy could not be reversed or
even modified by the purely political event
which split the little industrial community
into two political communities. What was
good business before would remain good now.
o f
U j
FOREIGN TRADE . 237
" and any political interference with the liberty
of movement for men and goods would evi-
dently injure business. For if either of the
sections of the village could be advantaged
by restrictions upon free movements of men
or goods, it might equally be argued that
further barriers between the two parts of
the north divided by the creek which ran
into the river would be serviceable, at any
rate to one part of the north, and this policy
of subdivision might be carried so far as to
make each street and finally each family a
self-contained individual community.
This illustration will suffice to set forth
the simple and sound doctrine of industrial
and commercial relations between nations.
What these two sections of the frontier village
are to one another, are also the two nations
to which they relatively belong, Canada and
the United States. If an unimpeded flow
of capital and labour and products is
advantageous for both sides of the divided
village, so is it for the two nations. And
what is true for Canada and the United
States is true for any other nations, whether
possessing a common frontier or not. The
inhabitants of every country benefit by the
freest possible intercourse with all other
countries, for in that way they can get most
wealth, utilizing most completely and effect-
ively any special qualities of natural resources
238 THE SCIENCE OF WEALTH
or acquired skill they may possess, and sharing
by exchange the similar advantages which
the inhabitants of other countries possess.
The main currents of modem industrial
life involves the increasing recognition of this
truth. Enormous strides in modern industry
and wealth are attributable to a constant
increase in the fluidity of capital and labour
and commodities. Local markets for labour
and for goods give place to markets over
larger areas : the suckage of labour into large
industrial towns extends over the whole
country : modern machinery of investments
carries capital more easily over the whole
range of national industries. But the flow
does not confine itself to the limits of a single
country or nation. The most striking feature
of the last generation is the expansion of
economic internationalism, the growing forces
that are conveying capital, labour and com-
modities over the whole earth, so as to develop
more fully the general resources of the earth,
and to distribute them more advantageously
for the inhabitants of the earth. About a
half of the new savings made by citizens of
Great Britain finds a more profitable use in
other countries, and the new capital of France,
Holland, Germany, and other advanced
industrial nations, similarly shows a tendency
towards increased employment abroad. Most
of this capital has gone into railways and
FOREIGN TRADE
other developmental work, by which vast
new tracts of land and populations in South
America, and elsewhere, have been made
accessible as growing areas for the world-
supply of foods and raw materials, and as
markets for manufactures. Much capital has
also been loaned to foreign governments or
to municipalities, and when the primary needs
of backward countries have been met, foreign
capital flows into their internal industries of
manufacture and commerce. Along with this
flow of capital has gone a flow of labour from
the more congested, or less fertile, to the less
congested or more fertile countries. As
might be expected, the streams of capital and
labour have generally taken the same direc-
tion, the flow from all the European countries
into North and South America forming by
far the largest instance of this economic
internationalism. Not less significant has
been the corresponding distribution of business
ability, engineers, bankers, merchants, factory
managers, planters, spreading in ever growing
numbers over the industrial world. The
common object and result have been to
" standardize" the world, so far as the roads,
the structure and equipment of cities and of
the leading industries are concerned, and
even to force up towards a common level the
practices of honesty and efficiency for govern-
ment and business life.
240 THE SCIENCE. OF WEALTH
The actual increase of foreign trade and
the growing relative importance of that trade
for every country form an aspect of this
) Internationalism closely related to the foreign
| Investment and immigration upon which we
j>' have dwelt. Though Great Britain and a
{*', few of the continental countries are in advance
of the rest, the inhabitants of every country
in the world are becoming more dependent
upon the inhabitants of other countries for
things they want to sell and buy. Every
year larger and larger quantities of goods
flow across the national frontiers and seek
purchasers in foreign markets.
Apart from the ordinary exchange of goods
for goods, the flow of capital to which we have
alluded involves a large quantity of import
and export trade. Capital invested abroad
goes out in the shape of goods, for we have
no money to send out, and it is not money
but money's worth in goods that foreign
borrowers want. Investment of capital
abroad, therefore, is only a large department
of our export trade, implying the sale abroad
of British engines, rails, machinery and other
British manufactures, sent out either to the
country where the borrowers live or to some
other foreign land. It also involves imports
coining into this country in payment of
on the capital, and eventually in
repayment of that capital. For these pay-
FOREIGN TRADE
241
ments, too, will mainly be made in the shape
of goods, A very large proportion of the
foreign trade of Great Britain and of some
other countries consists of this flow of capital
abroad and the payment of interest in return.
But, apart from this, there is a growing
interchange of goods passing by ordinary
process of exchange between countries which
are different in their resources and their
industries and which find such exchange the
cheapest way of getting what their people
want.
This flow of the factors of production and
their products across national barriers is
going on at an accelerating pace, and has
important results, political as well as eco-
nomic. It binds members of different political
communities more closely by bonds of plain
business interest. The striking fact that the
people of Great Britain draw not much less
than one-tenth of their total income in
interest from overseas investments is not
rendered less significant by the knowledge
that the great bulk of this income is enjoyed
by a very small class of well-to-do people.
For it means that one-tenth of " economic
England," in the sense of the property owned
by Englishmen, lies outside these isles, in
various parts of the habitable globe. This
means a powerful interest in the peace, well-
being and progress of those foreign countries,
242 THE SCIENCE OF WEALTH
felt by those Englishmen who own this pro-
perty and receive this income. When we
reflect that the growth of this cross-ownership
between members of different ^ nations is
going on everywhere, and that as intelligence,
ease^of transport, and security of government
increase, so will this cross-ownership increase,
we cannot fail to recognize it as the most
powerful material factor in internationalism.
As its chief direct effect is to make countries
better known, and more accessible to one
another, it evidently lays the foundation for an
enlarged and more regular flow of ordinary
trade.
These broad world tendencies towards
internationalization of industry do not, how-
ever, work unimpeded. Political interests,
real or imaginary, impel governments in many
countries to place obstacles on the free passage
of persons or of goods from one country to
another. Considerations, partly social, partly
economic, have caused some new countries
to impose prohibitions and restrictions upon
immigration, so as to regulate its pace and
character. This has operated as a very
considerable check upon the flow of labour
from Asia Into the United States and our
self-governing colonies, and to a less extent
upon immigration from European countries,
This policy has been motived partly by the
FOREIGN TRADE 248
determination of the working classes in new
countries to defend their standard of wages
and of living against the competition of new-
comers accustomed to a lower standard.
Though economists point out that the usual
effect of admitting such immigrants has been,
not the displacement of native labour, but
its elevation to a higher level of employment,
and that the early development of the rich
resources of such lands as British Columbia
and North Queensland is impossible without the
free admission of lower races, such arguments
do not generally prevail. The restrictive
policy is defended by political and moral
considerations relating to the difficulties of
assimilating and converting into good citizens
large masses of aliens of widely different stock
and habits from those of the existing inhabi-
tants of the country. For these and other
reasons considerable checks are placed upon
that free fluidity of labour which seems con-
ducive to world-industry.
Most modern states, partly for purposes
of revenue, partly because they wish to keep
their home markets for their home producers
and to make their country as economically
self -supporting as possible, impose restrictions
upon the free importation of foreign goods.
Some they strive to keep out, others to admit
with duties which reduce their quantity and
raise the price. The tendency towards
244 THE SCIENCE OF WEALTH
periodic gluts under modern industrial con-
ditions has impressed upon most nations the
difficulty of finding sufficient markets for the
goods their producers can turn out, and has
led them to suppose that, by keeping their
own markets to themselves as much as possible
they were increasing the total quantity of
market for their national trades. But this
they cannot do. For there is no way of
increasing either the total wealth or the total
market of a country by impeding freedom
of exchange. On the contrary, every impedi-
ment must diminish the average productivity
and the reward of capital and labour inside
the protected area, as was evident in the case
of our divided village. It is only by looking
at one trade at a time, or trade with one
country at a time, or trade for a brief selected
period, or by some other " separatist " and
fallacious consideration, that protection can
be made to seem a profitable economic policy
to any nation. Certain favoured protected
classes or industries can gain at the expense
of others, but the wealth of the nation as a
whole must be diminished. This considera-
tion of wealth may, of course, be offset by
some other consideration such as national
defence or variety of occupation. But it is
well to recognize quite clearly that any
military or other object gained by a protective
tariff must be paid for in economic wealth.
FOREIGN TRADE 245
Much confusion of thought is due to the
habit of speaking of nations as if they were
trading bodies, and of citing records of
imports and exports as if they were national
balance sheets exhibiting the sales and pur-
chases of nations. Nations are not commercial
units. Germany, Great Britain, the United
States, do not trade with one another, nor do
they compete with one another to sell to other
nations. Certain persons or firms in Great
Britain sell to or buy from certain persons
or firms in Germany or the United States,
and vice versa. German firms compete with
English firms for orders from other business
men in England and Germany or elsewhere,
but the competition of the German firms with
one another, and of the English firms with
one another, is more incessant and keener than
that between firms of different nationality.
Kent hop-growers fear the rivalry of Sussex
hop-growers more than of French or Germans,
and would benefit much more by their exclu-
sion or taxation.
The false notion that nations' trade is
accompanied by the equally false notion that
in the processes of so-called international
trade the interests of the several nations are
opposed to one another. This fallacy is
attributable to that misconception of trade
which lays more stress upon the selling than
the buying side. Because business men in
, 24G SCIENCE OF WEALTH
the same trade find themselves rivals in the
!' markets where they meet, they wrongly
| conclude that trade is composed of warring
| interests. Yet this is manifestly false. Our
analysis of the industrial system shows it
\ as essentially co-operative, competition only
\ \ serving as an instrument in the co-operative
I process. Only by isolating the selling side of
(i | a business does trade appear in essence hostile,
For trade does not consist in buying or in
selling, but in both ; it consists in exchanges
V,f between goods, which are only effected by
j the sale of one set of goods and the purchase
, i of another. If an English business man buys
yl goods from a German firm, he compels that
German to buy English goods which would
not otherwise have been bought, or to get
some other person to do so. If an English-
man sells goods to a German, he compels
some English firm to buy German or other
foreign goods which would not otherwise have
/ been bought. Exactly how this is brotight
$\ about need not concern us here, but it is
1 evident that, since money does not pass
between the two countries to any appreeiable
extent, payment for goods passing from one
country is taken in goods passing the other
way. Since the gain of trade to every person
engaged in it comes equally by selling well
and by buying well, it follows that he gains
most who has access to the largest and freest
FOREIGN TRADE
247
market for both purposes. And since a
nation consists' of a number of individuals
whose interests thus lie in selling and buying
freely in the world market, the policy is also
the true economic policy from the national
standpoint. A state, therefore, which pre-
vents its citizens from buying or selling
abroad as freely as at home, injures their
economic welfare, reducing the aggregate
wealth of the nation.
The tariffs, treaties and other trade policies
which states adopt, regulating the trade done
by their own subjects with the subjects of
foreign states, have, however, an excessive im-
portance attached to them. Considerable as
their influence is in determining the import and
export trade between certain countries, they
are not comparable in power with the great
economic tendencies towards internationalism
which we have described. The real interests
of investors, merchants and wage-earners lie
in the direction of the freest possible flow of
capital and labour and the freest possible
exchange of goods, and the magnitude and
variety of this economic intercourse between
the different countries of the world are con-
tinually increasing.
One point relating to imports requires
attention. It is sometimes held that import
duties need not be considered impediments
to trade, but that they are means by which
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248 THE SCIENCE OF WEALTH
foreigners can be made to contribute to our
public revenue. The foreign goods will come
in as before, paying a tax which will not raise
their price but will be taken out of the profits
of foreign producers, merchants or shippers.
Now the validity of the contention can be
tested by the general law of taxation derived
from the distinction between costs and unpro-
ductive surplus. It is simply the question of
the effect of taxing different sorts of goods,
Whether the goods taxed are foreign imported
goods or home produce makes no difference.
If a tax is placed upon goods produced under
such competitive conditions as keep prices
at a level which only covers the ordinary
costs of production^ it cannot be defrayed by
the producers. For it will check production,
reducing the supply of goods and raising their
price, thus throwing the burden on the con-
sumer. This applies equally to domestic or
to foreign goods. If, however, there are cases
where imported goods sell at prices which
contain a " surplus " over the necessary costs
the foreigner can afford to pay. If his own
Government has neglected to take advantage
of its prior opportunity to tax his " surplus,"
a foreign Government might do so by means
of import duties. But only in such excep-
tional cases can the foreigner be made to
pay.
CHAPTER XIII
HUMAN VALUES
OUR survey of industry shows us an
elaborate system of businesses and trades
by which the productive powers of Nature
and of man are brought into operation for
the supply of human wants. This system
exhibits much detailed skill of adaptation
and co-operation. The harmony of structure
and of working in an ordinary modern
business, a factory, a mine, a bank, a shop,
is very exact. Though the owners of the
different factors of production in the busi*
ness are mainly moved by considerations of
personal gain, viz. the wages, interest, rent,
profits they expect to receive, there is a
sufficiently close and constant harmony of
these individual interests to supply a sound
business economy. Though friction causes
some evident waste, and larger disturbances
sometimes arise, the ordinary business works
harmoniously and economically at most times.
When we turn to the group of businesses
which form a trade, and to the series of
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250 THE SCIENCE OF WEALTH
trades required to supply some sort of com-
modlty to consumers, we still find a remark-
|'| , able amount of accurate adjustment. If we
consider the enormous number of minutely
divided activities required to furnish London
with any of its food supplies, the working
of the industrial machinery appears mar-
vellous. But here closer inspection shows
much greater irregularity and waste. Twenty
businesses are often engaged in doing the
work which ten, or even five, could do as well;
congestions and temporary stoppages of con-
siderable magnitude occur; there is a good
deal of miscalculation and of misdirected
energy. The economy of a trade structure is
evidently less exact than that of a business.
The needs of humanity require, however,
that a great variety of trades shall produce,
carry, and distribute innumerable goods in
the proper proportions simultaneously and
continuously at ten thousand different places.
We have seen how this is achieved by the
establishment of an industrial system which
sets the required quantity of land, capital,
labour and ability in operation at each
point of industry, and causes the new flow
of capital and labour to repair the waste and
to provide for growth. Few of the millions
engaged in such work know or care at all for
the larger purpose which this work serves.
The farmer in Argentina or Alberta, who is
HUMAN VALUES 251
preparing bread for families in Manchester
or Dresden, is not consciously concerned
with any step beyond his bargain for delivery
of the wheat at the elevator or the nearest
railroad.
As we pass from the single compact business
to the wider system, less and less clear con-
scious purpose appears to animate the
system. And yet, as we see, a good deal of
order emerges in the working of the whole.
This order, however, is attended also by a
good deal of disorder. The modern industrial
system as a whole does not exhibit anything
like the same degree of harmony or economy
as is found in the single business. This is
natural enough. For we saw that in the
business a single control existed and a single
dominant purpose, that of profit-making.
Now in the industrial system as 4 a whole there
is no adequate central control or purpose.
To a large extent, indeed, finance constitutes
a sort of central power station for the dis-
tribution of capital and labour. But its
grasp is very partial, and its methods are not
accurately adjusted to supply the general
needs of industry. The central purpose, as
we see, is the regular supply of the needs of
consumers. And it is this purpose which
does maintain such harmony as is found in
the industrial system. But the elaborate
circuitous ways by which the interests of
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252 THE SCIENCE OF WEALTH
the consumer operate through the veins of
Industry are a poor substitute for the keen
interest of the profit-maker in, the organiza-
tion of the business cell No conscious
controlling motive of social profit-making
I I animates the whole.
Some indication of the nature and some of
the extent of this harmony and diseord has
been given in the distinetion between costs
and surplus which our analysis disclosed
So far as costs of maintenance for the various
factors of production was concerned, we
recognized that the industrial system worked
almost automatically and accurately. With
regard to costs of growth, though there was
an ultimate harmony of interests between the
factors, present considerations of gain caused
discords to arise* a scarcer and therefore
stronger factor encroaching tipon the fund
needed for the growth of some other factor,
and taking for itself some surplus-gain. The
needs and claims of the State, we also saw,
were liable to similar depredations on the part
of a powerful factor of production.
The discord and waste thus caused was not,
we saw, measured merely by the quantity
of surplus-wealth thus taken. For a proper
distribution and utilization of the whole pro-
duct would maintain a larger volume of
production, giving full regular employment
not -merely to the existing industrial structure
HUMAN VALUES 253
but to a structure enlarged by a better
apportionment of nutriment to the separate
parts.
A first line of social-economic reform Is
suggested by such analysis. The absorption
and social utilization of the whole surplus, by
converting the unproductive surplus into a
productive service for labour and the State,
would secure for industry as a whole a
harmony resembling that which prevails in
a well-ordered single business. Though the
owners of the several factors of production,
and the several businesses and trades, would
each continue to endeavour to secure for
themselves the largest payment, the economy
of distribution which prevailed would keep
them working together in economy and
harmony. This is the ideal which laissez-
faire, operating on a false basis of unequal
opportunity, has often claimed but always
failed to secure.
But in no case could mere self-interest of
the separate factors, however enlightened,
suffice for social harmony in industry. For we
have seen that such a harmony of individual
interests leaves out of account the claims
of society, as an organic whole, expressed
through the State. Now society, we recognize^
must be considered as co-operating every-
where with the individual owners of land,
labour, capital and ability, and as entitled
254 THE SCIENCE OF WEALTH
to a regulative voice in industry and to its
share of the industrial product. This truth
is everywhere finding expression in the en-
larged economic activities of modern States. I i
Though there is no general tendency or I
f ^ conscious policy vesting in the State the ?' ;
|f 1' ownership and operation of all industries, the j '
|f State in every civilized country is entrusted I !
with growing regulative powers over private I I
industry, designed, first, for the protection I ,
of its members, as workers, consumers, or f/ I
Ur,/ citizens, against risks or injuries incident to !* '
|j?;i profitable processes; secondly, for the direct f* 1
|V| participation of the public in the wealth
which social as well as individual energies I
have helped to produce. I |
f '*> " " The complete measure of State Socialism |
is commonly applied only to such economic |
processes as, left in private hands, tend * '
either to become monopolies, or to breed / j
dangers or disorders which defy mere regula- | j
tion. To these are added, in some countries; I '
trades -which are made convenient instru- 4
ments of public revenue. Though the *
economies of modem capitalistic production, I
and growing facilities of combinations of large \
businesses drive an increasing number of \
trades into this condition of monopoly or k
defective competition, qualifying them for *
public enterprise, it cannot be concluded that ^
these coneentrative forces are of universal |
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HUMAN VALUES 255
or of general application. Moreover, even
in cases where they operate powerfully, the
public policy in dealing with them will be
determined by the capacity of the State to
undertake in the public interest the conduct
of such industries. Where the State feels
competent to undertake an industry, or
. where the difficulties of mere regulation seem
too great, full socialization will occur. But
when the State does not possess the requisite
strength, skill or integrity, the social interest
may be better secured by regulation and
participation in the surplus profits of the
trade. The particular industries subjected to
one process or the other will vary with the
degree and character of economical and
political development attained in the several
countries. But everywhere the State, as a
social instrument, will be found playing a
larger economic r61e as manager or regulator
of industry and as participator in the income
which it yields.
The essential meaning and value of these
processes lie in their contribution to the
wider and more human art of wealth. This
art of wealth they further in two ways. By
removing from private income unearned and
excessive elements which by their payment
and expenditure represent waste, and by
applying such income to socially serviceable
uses, they impart increased health and vigour
256 OF WEALTH
to the industrial system and enlarge the
aggregate of satisfaction it affords by the
consumption of the product. By establishing
a more adequate central direction over
industry, commensurate to its increasing
complexity, they abate the waste of friction
due to conflicts of interest among individuals
and groups, and make for the production
of a maximum of human utilities with a
minimum of human costs.
THE END
Cla.ii & Son, limited, London mid Bunff
