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This book should be returned on or before the date last marked below.

(Continued from front flap)

that the tariff is a sales tax paid
by the consumer through the re-
tailer, directly to the producer,
without the intervention of any
public agency;

1hat the theory of a balanced
budget to maintain high produc-
tion and high employment by de-
flation of prices and wages is almost
everywhere rejected;

that the corporation tax is an evil
tax and it should be abolished;

that private enterprise is the twin of
responsible individuality;

(to name only some of his major observa-
tions), you will find every question he
raises of vital importance to you, whether
as businessman, investor, consumer, em-
ployee, or taxpayer.

Has the Board of Directors become an
inadequate instrument of power? Does
profit-sharing produce effective efforts on
the part of management? How can we
encourage greater equity investment in
business rather than loan investment?
Should any limits on individual compensa-
tion be imposed? Are tariffs better, or
worse, than direct subsidies as a means of
giving protection to our industries which
face foreign competition?

Beardsley Ruml discusses these questions
that challenge the consideration of busi-
ness leaders whose decisions affect the
welfare of millions of workers and con-
sumers. It can be read with enjoyment
and understanding by all, because of the
many modern problems it considers. It
"makes sense. 11

TOMORROW'S BUSINESS

TOMORROW'S
BUSINESS

BY BEARDSLEY RUML

FARRAR & RINEHART, INC.

NEW YORK TORONTO

This book has been manufactured in
accordance with paper conservation
orders of the War Production Board.

COPYRIGHT, 1945, BY BE \RDSLEY RtJML

PRINTED IN THE UNITED STATES OF AMERICA

BY J. J. LITTLE AND IVES COMPANY, NEW YORK

ALL RIGHTS RESERVFD

CONTENTS

PRELUDE AND THEME

1

THE ASPIRATION FOR FREEDOM
CHAPTER i. The Attainment of Freedom 3

2

BUSINESS AS PRIVATE GOVERNMENT

2. The Business of Business 29

3. Business as Rule-Maker 51

4. The Structure of a Business 69

5. Profits and Compensation 94

6. Labor 117

7. Business International 141

FISCAL POLICY AND PRIVATE BUSINESS

8. Profits and Purchasing Power 165

9. Fiscal Policy: Tools and Objectives 179

10. Business Is Taxed 190

11. Fiscal Policy, Public Works and the

Construction Industry 213

12. Fiscal Program 229

FINALE: BUSINESS AND FREEDOM 235

3

1

THE ASPIRATION FOR FREEDOM

PRELUDE and THEME

THIS is a book about business as an instrument of
authority and power, as a source of direction and de-
cision. It looks at business as one rule-maker among many
rule-makers, providing in part the pattern of organiza-
tion and activity in which each human life takes form.

Most businessmen look on their businesses as profit-
making, productive enterprises and ordinarily do not
think of themselves as rule-makers or of their businesses
as rule-making agencies. But since, in fact, these busi-
nesses are both producers and rule-makers and must be
run as both, they should be understood as both.

And so this book about business becomes a book
about power, the power to make rules and to enforce
them. Rules and rule-makers are necessary to order and,
therefore, to human freedom. Business as a rule-maker,
accordingly, stands high in responsibility among human
institutions, as a source of goods and services, to be sure,
but also as a source of order and of freedom.

I

The Attainment of Freedom

1. The New Struggle for Freedom

THE place of business and of business rule-making in a
country dedicated to the advancement of human freedom
can be understood only if first we know what freedom
is and understand the conditions that contribute to its
greater attainment.

For a long time in ordinary everyday affairs, human
freedom has been taken for granted in the land of the
free. In principle, the dignity of the individual was ac-
cepted as a matter of course. But word-of-mouth accept-
ance of doctrines pertaining to human freedom and the
relegation of its protection to the courts, left us insensi-
tive to practices by which these doctrines were being
undermined. World War II has aroused us to the dangers
in this neglect, and the doctrines on which human free-
dom rests have taken on new strength and new meaning
everywhere.

World War II will someday be classified with World
War I, the Russian Revolution, the French Revolution,
and the American Revolution as an important point
along the way. But even today we can feel with some

3

TOMORROW'S BUSINESS

assurance that we know both the place at which we have
arrived and the direction in which we are moving.

We are moving slowly toward the emancipation of
the human spirit, the attainment of personal responsi-
bility through freedom, and the recognition of the
dignity and worth of each human person.

In September, 1939, we P asse d the point when the
deadly challenge was made, the challenge of force to jus-
tice, of bestiality to humanity. We have seen the chal-
lenge accepted by the United Nations in the name of
humanity and justice. The battle was joined, not only
in the dimensions of the earth, but also in mind and
spirit. To our great advantage, our enemies made ex-
plicit their creed of force, violence, and the degradation
of men. We made our denials.

The freedom-loving nations were as little prepared
for the moral struggle as they were to withstand the sharp
edges of the blitz. They reached back into their honor-
able traditions and found good doctrines which they put
to use. These doctrines were dusty but in excellent condi-
tion, and they proved to have the power to inspire men to
effort and sacrifice.

The comprehensive and explicit blasphemies of the
Axis could have been denied only in equally comprehen-
sive and explicit terms. And this denial turned out to be
the affirmation of Christian insights of great antiquity,
and of the essential humane doctrines of the American
and French revolutions. The ambiguities and pedantry of
World War I, and of the Russian Revolution, dropped
into place before the sweep and clarity of this new con-
flict for the possession of the human soul.

THE ATTAINMENT OF FREEDOM 5

The ancient doctrines of freedom were proclaimed
by the leaders of the freedom-loving nations. The heat-
of-war violence and the early searchings of doubt as to
victory gave to these doctrines a life and urgency which
transcended the casuistry of political and literary formal-
ism. The conditions of men in the freedom-loving nations
have already begun to be tested against these ancient and
new living doctrines.

Whatever the future may bring, for the moment the
humane ideals of the Christian, American, and French
revolutions have become active, official doctrine, espoused
positively in the denial of the Axis creed of human
degradation, and accepted by hundreds of millions
throughout the world as the justification for sacrifice.

With victory some of our leaders may become less
vocal about human dignity and freedom. But if some
become less vocal, others will become more so. The
people will continue to believe that the true road leads
toward freedom; and, with ups and downs, the people
will follow according to their understanding and their
intuitions.

2. The Impulse to Freedom

For us in the United States, but not for us alone, the
word "freedom" comes down the years as a rallying cry
for effort and sacrifice, as an organizing principle of
human faith and aspiration. From time to time, freedom

6 TOMORROW'S BUSINESS

has been the central issue in conflicts about religious
worship, governmental forms, political parties, human
labor, industrial organization, education, race, caste, and
the circumstances of birth. Freedom finds its place as
"liberty," and in the Declaration of Independence as an
"inalienable right." The battle cry of freedom was raised
in our Civil War in the last century. Today the Four
Freedoms freedom of worship, freedom of expression,
freedom from fear, and freedom from want set the ele-
mentary goals of the freedom-loving nations everywhere
in the world.

The insistent demand for freedom has cracked open
religious institutions, upset dynasties, inspired revolu-
tions, and armed tens of millions of men and women in its
defense. With victory, the will for freedom must inevit-
ably become a matter of substantial importance for rule-
makers of all kinds, in state, church, home, trade union,
and business. For business, the will for freedom will
transcend the conveniences and the efficiencies of im-
posed methods of production and distribution, if these
methods are inconsistent with prevailing ideas of what
freedom ought to be.

What is freedom? For what is freedom so much
desired?

The meaning of freedom has varied from time to
time, and the purpose for freedom changes with the pre-
dilections of him who invokes it to sustain his cause. For
some and at some times, freedom has meant the condition
of man in a state of nature. For others, at the opposite
pole, it has meant a range of human activity restrained
only by the dictates of reason. At times, freedom seems to

THE ATTAINMENT OF FREEDOM 7

imply mere equality under the law. At other times, free-
dom asserts the elevation of human rights to a position
above man-made statutes.

Today we have our contemporary concept of what
freedom is and what it is for. Today what people want
when they demand freedom is a condition under which
they can realize, with reasonable completeness, the poten-
tialities as persons that inhere in their capacities as in-
dividuals. The demand for freedom is a demand for
fulfillment, for growth, for life not in the material or
biological area alone, but also in the realm of mind and
spirit.

Just as different animals and different plants require
different foods and temperatures and ways of movement
for their unfolding, so different individuals find different
circumstances helpful, indispensable, or irrelevant to
the meeting of their needs. And just as plants and ani-
mals of the same species have common irreducible
necessities for their growth, so, too, do human beings
have in common minimal conditions for the realization
of the fullness of themselves as persons. These minimal
conditions define the common content of freedom, and
as our knowledge of what is useful and good for human
development grows our conception of freedom grows
along with it.

Since the demand for freedom is a demand for con-
ditions that favor the achievement of full richness of per-
sonality and individuality, the specifications necessarily
change from time to time and from person to person. It
is for this reason that so little is required by many, and
so much by a few. The demand for freedom reflects the

TOMORROW'S BUSINESS

culture of time and place and person, the things that
seem worth while, and the prevailing notions as to the
nature of personality. But, within an existing system of
values, the individual human animal will fight for his
freedom as he would fight for his life; indeed, it is his life
for which he fights. Whether the protest against restraint
be directed in the area of religious orthodoxy, hereditary
autocracy, imperfect suffrage, industrial decisionism, or
bureaucratic regimentation, the emotional fury and the
reckless disregard of material welfare reveal the struggle
for what it is a fight for survival in which no price is
too great to pay to save what has been embraced as the
essential core of freedom.

3. The Feeling of Freedom

The fight for survival is the impulse to freedom.
But to understand freedom itself we must go beyond
mere recognition of the impulse. When we go deeper
we find that freedom has two distinguishable phases, the
feeling of freedom and the fact of freedom. We shall
observe that the feeling and the fact of freedom may
exist independently one of the other. This separability of
fact and feeling causes many misunderstandings about
the problem of freedom, since, to satisfy our aspiration
for responsible individuality, we must have both. One
alone is not enough.

The feeling of freedom is a state of mind. It is a

THE ATTAINMENT OF FREEDOM 9

sense of power to make a choice between alternatives.
It is therefore a feeling of power to impose one's own
will on the direction of events. The individual feels that
his own uncoerced act has made events what they have
become, and that, he might have made them different had
he decided differently.

The basis for the individual's feeling of power lies
in his prevision of the consequences for the future that
reside in his yet-to-be-taken choice between alternative
actions. And it is in the feeling of power and in the feel-
ing of the possibility of power over the course of events
that we find the source of awareness of personal dignity
and worth-whileness. In this awareness we have the feel-
ing of freedom.

Three conditions are required for the existence of
the feeling of freedom. First, in the period of choice, the
future must enter into the conscious present as an influ-
ence on a decision yet to be made. Second, at the time
the decision is being made, the individual must be aware
that the decision is being made, and the degree of the
feeling of freedom is related in some degree to the keen-
ness of this awareness. Third, the feeling of freedom de-
pends on whether the area of choice is felt by the indi-
vidual to be adequate for the act. To put it another
way, it depends on whether the act is felt to be
coerced by circumstances or by the laws of man or of
nature.

Let us examine these three conditions for the feeling
of freedom in more detail.

The first condition requires that, in the period of
choice, the future must enter into the conscious present

10 TOMORROW'S BUSINESS

as being formative with respect to a decision yet to be
made.

To feel free, we must be able to see the consequences
of what we are about to do. There is no feeling of free-
dom in blind choice, nor in decisions made merely to
get on from one moment to the next. If we see the
future which we are about to influence as a long one, our
feeling of freedom has more significance to us than if that
future is short. If we can see the consequences of our
choice clearly, our feeling of power is greater than if the
outcome is uncertain or unclear. If the events we de-
termine seem important to us, we feel our free act to be
more important than if the events seem trivial. In any
case, we cannot feel free unless we are aware of a possible
future which our present decision is intended to influ-
ence.

The second requirement for a feeling of freedom is
that, at the time a decision is being made, the individual
must be aware that the decision is being made.

People make decisions with varying sense of the im-
manent act of will. The sense of the act of will must be
keen if the feeling of freedom is to be strong. The degree
of keenness is lowered by fatigue and by the stress of
emotion. It is lowered also by habit; by repetitive de-
cisions, no matter how important, on questions which are
familiar and the solution of which has become more or
less routine. The human animal would have a hard time
making his way in the world if every free decision were
accompanied by consciousness of the act of choice. On
the other hand, the dark of unconscious adaptation and
of depersonalized judgments, expressed under conditions

THE ATTAINMENT OF FREEDOM 11

of fatigue or routine, must be illumined by occasional
moments of explicit awareness of responsible choice.
Without such moments, there can be no feeling of power
and no individual dignity. Clarity of apprehension of the
act of will in the moment of decision is necessary if we
are to have the feeling of freedom.

Finally, the feeling of freedom depends on whether
the area of choice is felt adequate for the act; that is,
whether the act is felt to be coerced. All decisions are
made within a frame of order. As we shall point out in
this chapter, this frame of order is determined by the
laws of nature, by habit and custom, and by man-made
rules. As long as the desired objective can be attained by
the choice of alternatives within this structure, the indi-
vidual feels uninhibited by coercive restraint. The feel-
ing of freedom will, therefore, exist when the area of
choice is wide enough to permit achievement if the cor-
rect decisions are made.

The feeling of freedom does not require unlimited
discretion. Indeed, without a structure of order, the sys-
tem of decision becomes amorphous and freedom van-
ishes. Decision involves a choice of alternatives within a
system of pressures that gives rewards and imposes penal-
ties. These pressures give significance to the act, but the
act itself remains free. The pressures not only do not
limit the sense of individual power, but they define the
scope of risk, reward, and penalty. Accordingly, they give
meaning to effort, success, and failure in determinations
made freely by the personal will.

It follows from these three conditions that the feel-
ing of freedom may exist under conditions of extreme

12 TOMORROW'S BUSINESS

regimentation and restraint. Once an individual accepts
for himself the inevitability and propriety of the human
and natural laws that bind him, once he limits his as-
pirations to achievements that can be had by success-
ful decisions among alternatives within this frame, his
feeling of freedom may be complete. All that is needed
beyond this is present awareness of a future which is
attainable, and clear consciousness in the moment of
decision.

For this reason, the feeling of freedom is not enough.
Unless the fact of freedom is associated with it, the feel-
ing of freedom can become, in the hands of the ambi-
tious, an instrument for the degradation of their race.
The illusion of freedom without the reality will be un-
stable, since, sooner or later, new leadership will arise to
release the basic impulse to freedom. If such leadership
does not arise from within, it will penetrate from with-
out today more easily and rapidly than ever before.
Then, through education, compromise, or revolution,
the march toward freedom will be resumed.

4. The Fact of Freedom

The feeling of freedom, being a state of mind, is
largely determined by inner, subjective influences. The
feeling of freedom exists authentically for one person
under circumstances that would cause another to feel en-
slaved.

THE ATTAINMENT OF FREEDOM IS

The fact of freedom, on the contrary, exists in the
relations of the external world of things, persons, and
events to the individual. As we have said, freedom is a
condition in which people can realize with reasonable
completeness the potentialities as persons that are in-
herent in their capacities as individuals. Obviously, these
conditions are not the feeling which an individual may
have about his world, satisfied or dissatisfied though he
may be.

The individual cannot know completely the condi-
tions that are necessary to assure him the fact of
freedom. He may know, in part, the range of poten-
tialities that are inherent in his capacities, and he
may have some notion as to the circumstances that
are required in order that he may achieve them. But
he does not know all, nor can he. Nor are there ex-
perts who can specify the extent of possible human ad-
vancement. The sciences of physiology and psychology
are incomplete and, in spite of great progress which can
be expected in the future, they will doubtless remain so.
The best that can be done is to draw on the intuitive and
scientific wisdom that is at hand, and to establish in our
society the institutions and practices which will give the
known conditions for the fact of freedom. As our wisdom
grows, the established conditions for the fact of freedom
must grow as well.

Three conditions determine the extent to which the
fact of freedom exists.

The first condition is a healthy and developed body
and mind to serve as instruments of the will. The second
requirement is the opportunity for responsible choice,

14 TOMORROW'S BUSINESS

for making the decisions through which the unfolding of
the personality can in fact be achieved. And the third re-
quirement is that the individual must have access in
large measure to the natural world, to climates, soils,
minerals, and seas, and to a normal human society of
which he is a part.

First of all, a healthy and developed body and mind
are indispensable if the will is to be well served. Many of
the essential conditions for proper development of body
and mind must be established in infancy and early child-
hood. The individual must learn to eat what is good for
him, and he must have the opportunity to do so. Useful
habits and skills must be acquired. He must be able to
use a language, to speak, to write, and to read. A man
who is illiterate cannot realize his potentialities, and
therefore he is not free. A man who knows only one lan-
guage is less free than one who knows more. He must
have facility with the use of numbers. He must be at ease
with ordinary social usage so that he can manage the
conventionalities that will give him access to the social
world which he needs to become a person fully himself.

The requirement of a healthy and developed body
means the protection of the individual from accident and
disease. It means equal access for all to resources for the
repair of bodily injury and the treatment of sickness. It
means a minimum of food and shelter, particularly for
growing children. The meeting of these requirements is
a matter of concern for the people acting together as a
whole, since today the inability of an individual to do all
these things for himself comes in large measure from the
division of labor and the specialization of modern pro-

THE ATTAINMENT OF FREEDOM 15

duction. This specialization has greatly increased our
capacity to produce, and we have encouraged it. It is
appropriate that some portion of our large aggregate pro-
duction should be set apart to make sure that freedom is
possible for all, at least in so far as freedom depends on
healthy bodies.

The requirement of a healthy and developed mind
is no less important than that of a healthy body. Here
the influence of the home, the school, and the church will
be crucial. The role of the political party, the social club,
and the trade union will also be important in enlarging
or limiting the mind of the individual as an instrument
for his freedom. As citizens, we want each of these
agencies to promote reason and to reduce ignorance on
the part of the people over whom they have influence. We
want to restrain them when their leaders reach for power
through the exploitation of ignorance, prejudice, and
superstition, evils which are inconsistent with a strong
and healthy mind.

Our second condition for the fact of freedom is that
of presenting the individual with events and issues where
there is both opportunity and necessity for responsible
choice.

Let us see what this condition has to do with the fact
of freedom. Clearly, a healthy body and a mind of reason
are nothing more than the instruments which make free-
dom attainable. Freedom itself resides in the act of will;
and the value in freedom is the growth of the individual
person through acts of will in moments of decision in-
volving responsible choice. The fact of freedom is not
attainable in a world in which there are no decisions to

16 TOMORROW'S BUSINESS

be made. The opportunity for full realization of what is
potential in a personality depends vitally on the nature
and scope of the situations in which the individual acts
responsibly.

Acts of decision, to be of value for the growth of
character, need not be "important" acts in a public or
historic sense. Many authentic choices of a minor char-
acter are more fruitful for personal development than
are the grand decisions in which the pressure of events
and the numbness of conscience produce an automatic
and meaningless response. The decisions that count are
those in which the individual feels himself free, and for
which he is prepared to be judged.

Not only must the individual feel free, his act being
consciously his own, but the consequences of the act must
be subject to moral, intellectual, or aesthetic evaluation.
Was the act good or evil, wise or foolish, beautiful or
ugly? These questions make decision difficult, and, as a
result, freedom is sometimes a burden.

At this point we touch the heart of the conflict be-
tween the feeling of freedom and the fact of freedom.
When decision is difficult, when evaluation is inescap-
able, then evasion and compromise rise up, and the act of
will for which freedom exists is set aside. The feeling of
freedom may be well-fulfilled in choosing evasion rather
than decision. And the opportunity to evade must exist
to give to the act of will its moral value.

But if the choice made is the decision to avoid the
need for choice, then the feeling of freedom has become
parasitic on the fact of freedom, and freedom as an in-
strument of human fulfillment is dead.

THE ATTAINMENT OF FREEDOM 17

The third condition for the fact of freedom is access
to the natural world. Given all the other conditions, un-
less the richness of nature is at hand within the area of
choice, the unfolding of human talents will be restricted.
The material and social world, as it presently exists, sets
the boundaries of external stimulus and inspiration.

No one person, to be sure, will have the full meas-
ure of his contemporary world at his disposal. But most
people could have more of it than they do have if it
seemed to them important to make the effort to get it.
Everyone can share vicariously in a world larger than
his own through the medium of the arts. Never before
has so rich an experience been possible to so many peo-
ple. The arts, the sciences, and commerce have opened
doors which for our fathers were closed. In this fact, our
generation has an unparalleled opportunity for freedom,
but even this opportunity will seem meager to the gen-
erations which follow us.

Why should the fact of freedom be set beside the
feeling of freedom, equal with it and indispensable?
What importance has the fact of freedom to one who feels
himself free? Whose business is it? Why should people
why should I, myself, carry an unwelcome burden in the
fact of freedom if I can feel free within whatever binds
me? And, particularly, if others do not want for them-
selves the fact of freedom, why should I assume any re-
sponsibility for them or for the conditions of their volun-
tary life? Let me alone with my own freedom to achieve
my own dignity!

There are two answers to these questions. First, no
man can be free in a company of slaves, however well-

18 TOMORROW'S BUSINESS

contented they may be. He cannot be free because they
will not permit him to be free. His words and acts will
be a constant irritation to the easy conventions and su-
perstitions of the mob and of its leaders. Having no con-
science and no faith in human dignity, the unfree will
restrain the free by violence if they are powerful enough
to do so. Accordingly, the choice for the free is either to
assume responsibility for securing the fact of freedom for
all or to amass the force necessary to secure his own
freedom against the unfree.

In the second place, it is good that other men should
be able to achieve, for themselves, the fullness of personal
development and responsibility which one desires for
oneself. It is good that they should have this opportun-
ity, whether they wish it or not; and they must not pre-
vent others from enjoying it, even by persuading them
that they do not want it. The justification of our aspira-
tion for freedom lies, in part, in our purpose to bring
freedom to others and to contribute, in the measure of
our own capacity, to the emancipation of the human
spirit everywhere.

5. Order and Consent

We are interested in business as a rule-maker, not
because we are interested in business, but because we
are interested in freedom. Freedom must be found in a
world of many rule-makers. Rule-making, when it is ef-
fective, imposes controls on the course of events. As a

THE ATTAINMENT OF FREEDOM 19

result of these controls, some things are permitted to be
done and other things are not. Next time, while the rule
lasts, the thing done will be the same. The result of rule-
making, therefore, is order the ordering of our expecta-
tions.

We live in an orderly universe. The only unorderly
element in it is the human will. There are some who do
not believe in human responsibility or in the possibility
of freedom. They include the human will with the rest
of the universe, as determined exclusively by the imper-
sonal laws of nature. For them there is no freedom, only
order; only the illusion of freedom; no men, only
animals.

The point is a crucial one for philosophers and
statesmen. It is dividing the world in a holy war. It must
not divide us. We must act on belief in human responsi-
bility and the possibility of freedom in a world of order.

The order of the universe comes from three sources:
(i) natural law, (2) habit, and (3) the rules of govern-
ments. Natural law gives us day and night, the four sea-
sons, rain in summer and snow in winter, the energy in
oil and the nutriment in grain, the two-day recurrence of
fever in tertian malaria. It gives us the generations of
men and the instincts of men, the compulsions of anat-
omy and physiology. It gives us the possibility of habit.

Habit is order imposed on protoplasm. The capacity
of protoplasm to acquire habits comes from its nature,
from natural law. The habits which it acquires, it ac-
quires from its environment.

Habits may be acquired by plants, animals, and
men. Wind, rain, and sun will affect the pattern of move-

20 TOMORROW'S BUSINESS

ment of branches and leaves. The training of horses for
work and for amusement is the adaptation by habit of
the inner animal to the outer world.

The habits of a man, like those of an animal, are
order imposed on an already ordered protoplasm. Note
the structure of man with legs and arms, and neither tail
nor wings; the tensions, hungers, and sluggishness of his
body; the sense organs he has, and those he has not; the
endowment of organization in nerve, bone, and muscle,
resulting in reflexes, instincts, and special talents and
sensitivities. These are the orderings and the limitations
of his nature.

Habit follows nature, superimposing order upon
order. From the moment of birth, and before it, adapta-
tion to the outer world begins. As adaptation continues,
as the same situations occur over and over again, the re-
sponse becomes certain, efficient and unconscious.

Our behavior is ordered in part by our natural en-
dowments, in part by habit, and in part by conscious
choice, according to the uniformity and the frequency of
particular experiences. But, fortunately for us, we are
not required to pass attentively over the same ground,
over and over again. Habit steps in to relieve us of that
burden.

After natural law and habit, the rules of the rule-
makers give additional form and certainty to our expec-
tations. When rules are wise, they are consistent with
natural law. After rules have been operative for some
time, they are assimilated and made effective as habits.
When they have become habits, they seem as natural as
natural law itself.

THE ATTAINMENT OF FREEDOM 21

Rules differ from habits in that they always have
their origin, at some time perhaps long ago, in the de-
cision of a rule-making agency. Rules are the pronounce-
ments of the human will for the control of the human
will. They display the insight and blindness, the gener-
osity and greed, the care and carelessness of the human
source from which they came.

The order arising from natural law, habit, and the
rules of rule-makers gives us such certainty as we possess
concerning expectation of the future. Certainty of ex-
pectation is indispensable to the exercise of freedom.
Our decisions and our choosings always relate to actions
whose outcome is in the future. We must have some as-
surance that if we decide one way, the outcome will be
so; if we decide the other way, the outcome will be an-
other. Without order in the universe, there could be no
such assurance; and without assurance, without prevision
of the consequences of choice, freedom of choice is mean-
ingless. Freedom and chaos are incompatible.

The fact of order in the universe does not, therefore,
preclude freedom, it gives freedom its moral signifi-
cance.

Judgment as to the moral worth of any pattern of
certainty rests on two considerations: (i) does the area
of choice within the frame of order give scope to the un-
folding of the intrinsic natural personality, and (2) are
the compulsions which shape the structure of order ac-
ceptable to the individual as necessary, desirable, and
valid? The fact of freedom depends on the first considera-
tion, the feeling of freedom depends on the second.

The operations of natural law are generally accepted

22 TOMORROWS BUSINESS

as limitations to which we must accommodate ourselves.
But we need not conform to these limitations with com-
plete docility. We can fight natural law with natural law.
A lens can help us see, an electric current can help us
hear. We have no wings, and yet we fly. We have quinine,
and the recurrent chills and fever of malaria do not
recur. For most of us, the limitations arising from natural
law appear necessary and valid, and we do not raise the
futile question whether they are desirable or not. The
intrepid and dissatisfied scientist and inventor sees in
these limitations a challenge and solves the problem,
using natural law to his purpose. We all gain by this ex-
tension of our area of choice, not necessarily in the feel-
ing of freedom, but in the fact of it since through
activity and experience we can become what otherwise we
might never have been.

Consent to the existing structure of order is neces-
sary to the feeling of freedom; and without the feeling of
freedom, choice is irresponsible and the growth of indi-
viduality inconceivable.

Most people accept the order of the world that
comes from natural law and habit. But the rules of the
rule-makers, if they are unwelcome, seem less necessary.
They are man-made orders for the ordering of men. To
be acceptable when they are imposed, they must be valid;
they must be imposed with the consent of the governed.
Minorities must concur, at least for the time being, in
the decision of majorities. Otherwise, even though the
laws of men be necessary and desirable in the building
of order and certainty, they are unacceptable in a free
society since they have been imposed by one will upon

THE ATTAINMENT OF FREEDOM 23

another will, without the latter's consent and without
acquiescence in their essential validity.

The consent of the governed is sometimes consent
to the rule itself, but, more often, it is consent to the
rule-making of some recognized authority which decides
what seems best. Ordinarily, we cannot know enough
about the complicated issues and essential facts to know,
for ourselves, whether or not a rule is proper. We must
depend on those who make the rules to study the whole
situation and to legislate and to administer fairly in the
best interests of all. Rule by consent is usually consent to
the rule-maker's authority, and from this follows, natu-
rally, acquiescence in the rules themselves.

In the United States we want our national govern-
ment to foster order and to protect freedom. We are also
well-adjusted to our many public and private rule-mak-
ing agencies, our states and cities, our homes, churches,
trade unions, and businesses. The delegation to each of
its proper sphere of control relieves us from uncertainty,
and gives us room of our own to breathe in. We expect
from each of these governments each in its own sphere
order and certainty. But we also insist that order will
not be imposed at the cost of freedom. To protect us
against this danger we have our national government,
our Constitution, and our declared individual rights.
We expect the national government to intervene if
subordinate public and private governments clumsily or
maliciously infringe our basic rights.

What does this mean for business? Business must
be rule-maker to do the job it is the business of business
to do. Business must bring order and certainty to the pro-

24 TOMORROW'S BUSINESS

duction of things for use, to the providing for people of
useful things to do, to the making of a place where sav-
ings can be invested. But, like other governments of
which it is one among many, business must not attempt
to achieve order and certainty at the cost of the freedom
of those whom business governs.

Like any other rule-maker among us, business must
preserve for the governed an adequate area of choice,
and must administer its rules in an atmosphere of con-
sent. Then business will be associated harmoniously in
the pattern of controls for freedom.

6. The Attainment of Freedom

Our study of the conditions for the feeling of free-
dom and for the fact of freedom makes it clear that hu-
man freedom in an absolute sense can never be attained.
Freedom will always be relative, a matter of "more or
less/' The life impulse to freedom will constantly drive
toward "more" and away from "less," even though it be
toward a goal which constantly recedes as it is approached
and is better understood. There can be no day when it
will be said that human freedom has been finally won.
Accordingly, we strive, not for a moment of victory that
will divide the past from the future the dark from the
bright, but for an expanding opportunity for each and
all of us to grow Over the years in human stature. The
obstacles along the way are ignorance, superstition, and

THE ATTAINMENT OF FREEDOM 25

the love of arbitrary power. These obstacles can be min-
imized by science and education, by spiritual insight
revealing the worth and dignity of man, and by a rule
of order established and administered with the consent of
the governed.

In the United States, the dominant governing power
the national state is committed fundamentally to the
ideal of human freedom. It is committed by the declara-
tion of its independence, and by the bill of human rights
which reserve to the individual liberties which even the
dominant governing power may not infringe. Its history,
its internal dissensions, its conflicts with external na-
tional powers all confirm the constant, if irregular,
march toward the goal which inspired its beginnings.
The ideal of freedom is not merely a statement expressed
in various forms in declaration, constitution, and the
speeches of public leaders; but it is deeply embedded in
the mind and culture of the people. The obvious imper-
fections in our attainment of this standard are over-
whelmingly regarded as deviations from a norm, and not
as the repudiation of the ideal. And, generally speaking,
the country is committed to the elimination of these im-
perfections as rapidly as education, insight, and the
orderly processes of rule by consent permit.

In a country like the United States, so deeply com-
mitted to the ideal of human freedom, the various subor-
dinate governments public and private must conform
in their own rule-making to the ideal of human freedom.
Imperfections and inadequacies are tolerated, but they
are not excused. Repudiation of the ideal of freedom is
neither tolerated nor excused. The states and cities may

26 TOMORROW'S BUSINESS

not legally infringe the rights* of the people. The private
governments church, family, trade union, and business
will increasingly be judged by the aid they give to the
struggle for freedom. Even today these private govern-
ments may not impose, on those they rule, ignorance,
disease, and bodily injury as means of achieving their
private purposes.

As the rule-making functions of church, family,
trade union, and business are better understood and
more generally accepted for what they are, these private
institutions will test their rules against the standard of
conditions required for individual growth and develop-
ment; and each in its own way will come into greater
conformity with the supreme ideal in promoting the
attainment of human freedom.

2

BUSINESS AS PRIVATE GOVERNMENT

II

The Business of Business

1. What Is Business?

BUSINESS is one of the most pervasive facts of modern
life. Practically everybody who lives in a city, town, or
village does business with business several times a day,
and practically everybody else has something to do with
business many, many times in every year. We depend on
business for the things we eat and wear, for the home we
live in, for most of our amusements and recreation, for
going places and knowing what is going on in the world.
Most of us depend on business for the kind of jobs we
have. Many of us own some part of a business or receive
some income from lending business our savings. Busi-
ness is so common that we take it for granted and use it
without thinking much about it just as we do any other
familiar facility. And yet, even though we do not give
much thought to business in general, because of this per-
vasiveness of business in modern life, business is impor-
tant in its relation to most people, not only because of
what it does for them, but because of what it does to
them as well.

29

30 TOMORROW'S BUSINESS

In order to understand the part that business plays
in life and the part it is likely to play in the future, we
must have a clear idea of just what business is, of the
things that business does, and of how business operates
to achieve the things that business is for. After that, we
can think about the ways that business helps or hinders
us in the attainment of personal dignity and freedom.

What is business? Some organizations are clearly
business organizations arid their activities are clearly
business activities. They cover a wide range. They in-
clude the New York Central Railroad Company, and
Pan American Airways; New Jersey Zinc, and Homestake
Mines; Sterling Products, and Campbell's Soup; Sears-
Roebuck, and Macy's; Columbia Broadcasting, and
Western Union; Irving Berlin, Inc., the Shuberts, and
Arthur Murray; J. P. Morgan & Co., and the Bank of
Italy; Farrar & Rinehart, and The New York Times
these, and others like them in these and other fields, a
few larger and many smaller and smaller. The proprietor
of a one-man store or the independent salesman working
on commission we would certainly classify as being en-
gaged in business activities even though he be a single
person.

Some organizations are clearly not business organi-
zations. They include Harvard University, and Vassar
College; The United States Post Office, and the Port of
New York Authority; the Federal Council of the
Churches of Christ in America; the International Ladies*
Garment Workers; and the Republican party. Although
these organizations may be businesslike in their opera-
tions, they are not businesses.

THE BUSINESS OF BUSINESS 31

When we come to professional people and farmers
we are not so sure. There is a doubtful zone that contains
many organizations and activities which are hard to
classify, such as Sullivan & Cromwell, the lawyers;
Farmer Brown, the farmer; Ford, Bacon 8c Davis, the
engineers; Dr. Smith, the doctor; Touche, Niven 8c Com-
pany, the accountants; Harrison, Fouilhoux 8c Abra-
movitz, the architects.

From these examples of what is business and what
15 not business we can observe common qualities which
exist to a greater or less extent in every business. A busi-
ness consists of an organization of people with varied
skills which use property or talents to produce something
which can be sold to somebody for more than it costs.
The profit of this operation, after paying taxes, belongs
to private individuals, who, in one way or anther, have
a legal claim on it. A business may or may not be a cor-
poration, although most business today is carried on in
the form of a business corporation whether in fact it is
one or not.

Starting with this idea of what "a" business is, the
general word "business" may be used to refer to all busi-
nesses taken together. Business is more than a simple sum
of separate units. Business includes not only all the sep-
arate units of business activities, but in addition it con-
sists of the many relations of the units, one to another.
Business is the aggregate of Standard Oil Company of
New Jersey, General Motors, Warner Bros., your shoe
store, your neighborhood druggist, and a hundred other
activities which furnish us with products and with jobs.
It is also a vast, complex set of relationships: technical,

32 TOMORROW'S BUSINESS

financial, organizational, and human. It cuts deep into
vital points of our life, far beneath the surface of dollars
and cents transactions. We can see this at once when we
ask the questions, "What is the business of business?"
"What is business for?", and "What does business do?"

This is the business of business: first, to get things
ready for use; second, to provide people with purposeful
activity; and third, to give people a way to save produc-
tively a part of what they earn.

In saying that business is for these three particular
purposes, we do not imply that business is the only way
of getting these purposes accomplished, nor are we say-
ing that it is the best way which can be found or which
could be devised. We are making a simple statement of
fact: this is what business is for and this is what business
does. We make this statement of fact without pretentions
as to the superiority, immutability, or exclusivity of busi-
ness claims as to these purposes and functions.

2. Things to Use

The first business of business is to get things ready
for use. Of course, by "things" we mean both goods and
services.

Final use takes place in the hands of the people in
the hands of Mr. and Mrs. I. M. Consumer, their chil-
dren, and their neighbors. These families use soap and
milk, towels and sheets, radios and vacuum cleaners, beds

THE BUSINESS OF BUSINESS 33

and tables, apartments and houses, fire insurance and the
daily newspaper, and a thousand other things besides.
Mr. and Mrs. Consumer and their family use an incred-
ible variety of things, things they could not possibly make
for themselves. In most cases they do not know where,
how, or even by whom these things are made. They only
know where they can be bought the rest is generally
taken for granted.

Before things can be made there must be available
the raw materials from which they are compounded. The
business of getting these raw materials is carried to the
ends of the earth. Some of these products come from the
ground, some from the sea, and some from the air. Coal,
oil, iron, and copper; bromide and magnesium; oxygen
and argon; tungsten, platinum, and diamonds such is
the range and variety of the raw material industries.
Rubber, copra, tea, corn agricultural raw materials
are largely produced by individuals, the business com-
pany assembling and shipping the product from the
point where it is grown. Some of these agricultural raw
materials, such as rubber and tea, are also produced in
large quantities by business enterprise.

The raw material companies in carrying on their
businesses have greatly extended our knowledge of the
earth's surface and our scientific and practical knowledge
of how the earth's products can be obtained. Some of
these businesses, as, for example, nickel, copper and
aluminum, have shown us new ways in which these
natural materials can be used.

Many of the early trading companies, such as the
Hudson's Bay Company, were centered around raw ma-

34 TOMORROW'S BUSINESS

terials. In these companies and their successors, we find
our clearest examples of private government. Because of
their rule-making powers and necessities, they frequently
found themselves so much entangled with the public gov-
ernment with which they were associated that sometimes
it was difficult to tell which one was which.

Raw materials must be made into things before they
can be distributed. The business of manufacturing is the
process of making changes in the form and arrangement
of materials of one kind and another. The processing of
raw materials requires both fundamental and practical
knowledge with respect to the qualities of raw materials
and the application to them of natural forces, such as
heat and power. Manufacturing also requires skill in or-
ganization, the building up of a trained and integrated
working force, with procedures for timing, testing, and
inspecting the work as it moves along.

The business of manufacturing has preserved for us
a considerable part of the practical knowledge that has
come to us from the past, and in the case of secret proc-
esses, this knowledge is available to us only in this way.
Manufacturing has greatly increased the store of prac-
tical wisdom about nature, and in recent years has made
increasingly important contributions to fundamental
science. The characteristic activity of the progressive
manufacturing business has been to search out the in-
tellectual products of the scientific laboratory or the in-
ventor and to find ways of bringing out these ideas in
practical application in commercial products for ordi-
nary use. The radio, the automobile, the camera, and the
airplane are striking examples of the adaptation of scien-

THE BUSINESS OF BUSINESS 35

tific knowledge to common use by business activity. But
there are innumerable, humbler examples: soap and
shoes and razor blades, and the reproductions of works
of art which are now available at little cost.

The manufacturer must judge in advance what peo-
ple will someday want. The manufacturer's judgment is
expressed in his investment in his plant, in machinery,
and in the design of the product that he thinks people
will use if he makes it for them. Ordinarily, the articles
themselves are not made in large quantities until after
some distributor has made his own decision as to what
these future wants will be and has placed his order with
the manufacturer. This relation between the distributor
and the manufacturer is an essential part of the fabric of
business and is an indispensable element in the opera-
tions of business in getting things ready for use.

Even after having been provided and fabricated by
the manufacturer, the goods of commerce are still a long
way from practical use. Another segment of business, the
business of distribution, now makes its contribution by
taking something which has already been made and
changing its location in time and space. Position in time
and space makes a tremendous practical difference in
whether or not an article is ready for use. It is not ready
for use unless it is at hand when it is wanted. It is the
business of distribution to see that things are where they
are wanted when they are wanted. The activity of ar-
ranging so that things have their proper time and space
positions, ready for use, involves a considerable propor-
tion of business activity as a whole.

In order to get things ready for use, the articles that

86 TOMORROW'S BUSINESS

will be wanted at some future date must be found and
selected from a wide range of present possibilities. The
articles selected must then be hald on hand until they
are needed, and during this time they must be kept in
good condition.

Next, these articles must be ready for inspection.
This means a place of doing business and a way of show-
ing what is ready for use.

The articles must be priced. Usually the pricing is
done by the retailer, but this is not always the case.

Finally, the articles must be delivered to a place
where they are wanted. Sometimes this place is the re-
tailer's own counter, often it is not.

The businesses we have just discussed raw ma-
terial, manufacturing, and distribution are engaged
primarily in getting things ready for use. There is an-
other great group of businesses which we can think of as
' 'utilities/' They supply electricity, gas, and sometimes
water; they provide transportation by rail, bus, ship, and
airplane; they provide for the sending of messages and
information by wire and wireless. The insurance com-
panies and the banks fall into this group of service and
utility companies which operate under special public
franchise and under special public supervision. These
utility and service companies have less freedom in the
prices they charge and in the quality and character of the
services they render than do other businesses. They re-
quire the exemption from elements of competition which
other businesses are subjected to, and, to the extent that
competition is removed as means of regulation, more
formal and organized regulation is needed.

THE BUSINESS OF BUSINESS 37

Distribution, manufacturing, raw material produc-
tion, and utilities are served by other businesses whose
principal dealings are with business. For example,
companies like International Business Machines Cor-
poration, which is engaged in the manufacture of type-
writers, accounting machines, etc., are facilitators of
businesses which themselves are working more directly
for the public. Frequently these servicing companies have
split off from the main stem of business and have sur-
vived because the specialty lent itself to efficient, spe-
cialized development. Testing laboratories, advertising
agencies, and mimeographing services illustrate these
specialized services which are a part of the business
scheme of things.

One important part of the business job of getting
things ready for use is to make sure that the people know
that the various products and services of business are
available, and where and on what terms they can be ob-
tained. A product which has been manufactured and is
available for distribution but which no one has heard
about is like the bell ringing in the middle of the Sahara
that makes no sound since there is nobody there to hear
it. A thing is not ready for use until its existence is
known.

The means of making known the products and serv-
ices which business makes available is advertising in its
many forms. Although sometimes advertising may in-
crease the cost of things, advertising usually makes it pos-
sible to sell things for less. Through increasing the quan-
tity that the people want of a limited range of products
and designs, advertising results in a more efficient use

38 TOMORROW'S BUSINESS

of men and machines. Advertising is an essential part of
the business job of preparing things for use.

Through its advertising and promotional activities
business is also doing a job of practical education of the
people. These activities tend to bring the country into a
common pattern of material culture, and, as a result,
people know of the existence and use of things which
help them do the things they want to do.

A generation ago some of our writers made fun of
the fact that millions of Americans eat the same cereals,
drive the same cars, see the same movies, and wind the
same watches. Today nobody laughs at this. We are be-
ginning to understand the great human values that can
spring from having standard goods, services, and proc-
esses which are now available throughout the country
and which are on the way to becoming available
throughout the world. Consider the implications of our
soldiers' splitting a case of Coca-Cola with the peoples of
Tarawa, Burma, or North Africa, or of having the auto-
mobile that was bought in Cincinnati fitted with stand-
ard spare parts in Casablanca and driven by a citizen of
Cairo.

To say that the first business of business is to get
things ready for use sounds like an abstract definition
perhaps too elementary for thoughtful consideration
but when you translate that abstraction into the infinite
details of everyday life, you conjure up the world. For
business gets ready for use most of the things invented
by the brain and fashioned by the hands of man, it makes
and distributes the goods and services of our civilization.
Getting things ready for use is one of the principal pre-

THE BUSINESS OF BUSINESS 39

occupations of life and for this reason, if for no other,
business is a matter not only of private interest but of
public concern as well.

3. Something To Do

While businesses go about their business of making
a profit by making things people want, at the same time
they serve two other purposes of great importance: first,
they provide people with purposeful activity, with some-
thing useful to do; and second, they give people a place
where they can invest their savings. Neither of these two
purposes is the primary object of the manager of a busi-
ness. To be sure, the manager of a company ordinarily is
pleased if his business is a good one for people to work
in. And he is proud if the securities of his business are
considered attractive by people who have savings to in-
vest. But the central purpose of the business should be to
make a profit by making things people want, and the
business was not started nor is it continued in order to
give people useful work to do. And, although a certain
amount of money has gone into business on its own in-
itiative to seek its own reward, most of the capital of
business today is the passive savings of the people who
are well-served if business gives them, as an incident to
production, a fair rate of return on the money they have
set aside.

Nor are these two secondary purposes a place to

40 TOMORROW'S BUSINESS

work and a place to invest served exclusively by busi-
ness. There are other ways of finding something useful to
do, other ways than going into a business. A person can
practice medicine, teach school, be a deputy collector of
internal revenue, or keep house and raise a family. There
are other places to invest money than in business. An
investor can buy farm mortgages and government bonds.

But, although it is true that there are other ways
than business of getting useful things to do and if pro-
viding places where savings can be invested, the fact re-
mains that, as of today and tomorrow, business is the
vehicle by which these two ends are reached for a signifi-
cant part of the people. It may not have been the inten-
tion of business to do more than to make things to sell at
a profit; however, since in making things to sell at a profit
it does do more, we must examine the broader position
of business in modern life.

First, let us consider the place of business in provid-
ing people with purposeful activity. People, to live
normally and healthfully, need something useful to do.
It is true that there are examples of individuals who have
made indolence a habit and who seem to find in per-
petual rest an abiding satisfaction, but the ordinary per-
son who undertakes to live a life with nothing useful to
do is likely to turn up in a mental hospital. Even the
ascetic and the mystic value the nothing which they seem
to be doing as very important and useful indeed. And
the beautiful and fragile playboys and playgirls o all
ages justify their ornamental activities as providing a
sophisticated standard of consumption.

This impulse to constructive activity springs from

THE BUSINESS OF BUSINESS 41

sources deep in human nature. We enjoy the experience
of creative work in the moment of its being. We take
pleasure in contemplating the product resulting from
our efforts, whether that product be a thing we have
made or helped to make or a reputation for the things we
have done.

Most people get most of their feeling of having done
useful work from the opportunities which arise day after
day in business employment. The tests of utility are per-
petual and concrete. The business, of which the indi-
vidual is a part, is making something that people want
enough to buy at a profitable price. This is not boon-
doggling, no matter what a philosopher might judge by
abstract standards to be the value of the work. Every per-
son who participates in the performance of that business
participates in the creating of something for use.

Since the human need for the feeling of sharing in
useful work is so great and since the fact of sharing in
such activity is so understandable in a successful busi-
ness, management should make certain that an awareness
of the participation in useful work is general throughout
the business. Each employee and executive should under-
stand that he has a useful job to do, and that each has his
useful part to play.

Business not only gives people something useful to
do and a better or worse social setting in which to do it,
but business also provides people with a pattern of in-
struction and direction which gives order, sequence, and
significance to the activities of the day. There are few in
business who spend time in thinking up things to do. To
be sure, there are a certain number in business who are

42 TOMORROW'S BUSINESS

able to choose from among several things, all of which
must be done, which one shall be done first. But for most
people in business, the decision as to what shall be done
and in what order, and the judgment as to whether what
was done was well done, is made by others, not by them-
selves.

On the whole, and for most people, the direction
provided by business in ordering their daily activities is
helpful rather than hurtful. In doing well what has been
assigned, there exists ample scope for the talents and
energies of most people. The task assigned may be a small
one or it may be large. It may be an instruction to a
typist to type a manuscript or it may be one to a vice-
president to organize a subsidiary. In any case, the direc-
tion and the purpose are imposed by the business, and
the individual has the lesser task of doing well that which
the business has given him to do.

There are those who rebel against this imposed di-
rection and who prefer to decide for themselves what to-
do and when. Such persons, if their revolts are well-
founded, are likely to rise fast and far or are likely to go
into business for themselves. However, if their revolts are
mere assertions of wounded ego, business is a bad place
for them and they are bad for business.

The escape from decision-making, which business
provides for most of those who work, results in the con-
centration of decisive power at the focus of the organiza-
tion. Business does not eliminate from life the necessity
for decision, but it does change the position of those who
exercise decision by removing the power and responsi-
bility from those for whom it is a burden.

THE BUSINESS OF BUSINESS 43

Business also provides people a wide range of
choice of the kind of life they want to lead. The choice
narrows with advancing years. But the variety of talent
needed in modern business gives rich opportunity for
differences in taste and skill to find expression.

The variety of needed talents in business results in
the opportunity for specialization for the individual.
This means higher rewards for scarce talent, and for the
community it means the development of latent talent
and, as a result, the wider availability of useful things of
better quality and at a lower price.

Under normal conditions, business can give great
security and continuity of employment to those who are
employed. The momentum of a going concern, even if it
is a small business, carries the individual along with it.
Experience teaches management how to even out produc-
tion and how to supplement regular irregularities with
a planned program of better use of plant and personnel.
Management can do little in the presence of a general
business depression, but even then it holds its basic or-
ganization together in the hope of better days ahead.

The contribution of business in giving people some-
thing to do is not without its darker features. How seri-
ous these conditions are should be judged by comparison
with what otherwise might have been. Some may well
feel that the negative elements so far outweigh the posi-
tive that the whole business system is thereby condemned.

First of all, on the negative side, the effect of busi-
ness on the individual is to increase his dependence on
a continuing need for his special talents. The ordinary
simple ways of sustaining life he does not know. He can-

44 TOMORROWS BUSINESS

not find or grow food in nature, he cannot prepare it, he
cannot clothe himself, nor can he construct his shelter
he frequently cannot learn another job. He is not only
dependent on his specialization, but he is mentally de-
pendent as well. The simple routine, free from respon-
sible choice, has made him soft. Choice and decision have
become fearful things. He does not know what to do
unless business is prepared to tell him.

His interests have become narrow. The circle of his
acquaintances is restricted and consists mostly of people
in business like himself, some a little higher up and a few
a little lower down in the business hierarchy but all in
his pattern. They have formed him and he has formed
them, all within the easy limits of conventionality as the
business or its counterpart, the trade union has or-
dained them.

The efficient routine of the business has created
monotony and, with monotony, pessimism. The feeling
of constructive production for human use is faint in the
employee who realizes that the only thing he supplies to
the machine is the wit to turn it off.

Business must understand these negative, darker
aspects if it is to know precisely where it stands. True,
the main task of business is to make things people want,
but in doing so concurrently and necessarily it affects
the lives of people as it issues its instructions and direc-
tions. Some of the consequences are beneficial, some are
harmful. Prudence dictates the lessening of the harmful
influences, even at the cost of some efficiency in the mak-
ing of things which can be sold.

THE BUSINESS OF BUSINESS 45

4. A Place to Invest Savings

The primary business of business is to get things
ready for use, and we have already seen that in doing this
business provides people with useful work to do. Busi-
ness also provides a place for people to invest their sav-
ings as an incident to its primary job of making things
to sell at a profit.

It is conceivable, and no doubt it sometimes hap-
pens, that a business is started primarily for the purpose
of giving investors a chance to get an income on their
capital. Usually, it is the other way around. The business,
or the idea for a business, is developed and, in competi-
tion with other opportunities in which savings can be
placed, it makes its case as best it can for the attention
of the investing public.

Business is not the only place where savings can be
invested. As we have said, there are farm mortgages and
government bonds. But the business of making things has
been of great importance in the savings it has put to
work.

Like the instinct to do constructive work, the in-
stinct to save goes deep into the roots of human nature.
So deep is the desire to save that saving as such, purpose-
less accumulation, is a matter of common observation in
both human and subhuman species. The squirrel goes on
saving nuts, the boy collects cigar bands and postage

46 TOMORROW'S BUSINESS

stamps, the miser hoards currency, diamonds, and gold,'
if he can get it all in amounts beyond their reasonable
needs. We know the rationalizations of the miser and the
boy, the squirrel makes no effort to explain.

The instinct to save has a value in aiding survival in
a universe of uncertain weather and certain misfortunes.
Saving being an instinct, its exercise is accompanied by
pleasurable feelings in the act itself. It does not have to
be justified by its beneficial consequences, and it will con-
tinue in spite of efforts to discourage it.

Since we shall always have the instinct of saving with
us, we should try to make the savings themselves as help-
ful as we can to the saver and to the community as a
whole. The saving impulse is riot sharply directed toward
particular objects, and within limits it can be affected
by conventions and public opinion.

One type, no doubt the earliest, is the saving of
things which someday can be used. Such savings take the
obvious forms of putting by food and wood when they
are available in abundance. Sometimes, the savings are
books to be read later, or linens, or silver which one day
may adorn a home. The savings in things may take the
form of labor applied to the building of fences, the drain-
ing of fields, or the care of livestock.

All these forms of saving of things themselves are ex-
ceedingly useful, and although there is no way of esti-
mating the amount, it must be large. The development of
the country, until recently, certainly, was based on sav-
ings of this kind.

But in the saving of things there is one limitation,
namely, that what is saved now and what is available for

THE BUSINESS OF BUSINESS 47

use later are the same. The things I am able to set aside
and save today I may have no need for in the future. I
want my savings in a form that will give me a claim in
general on future products; on things and services yet
to be made, or then existing, that correspond to my then
existing requirements.

The form of saving that most clearly conforms to
this desire for liquidity is money, coin or currency. But
money has certain disadvantages as a medium of saving.
It has disadvantages to the individual, because it may be
lost or stolen, and it is wasteful, because idle money pro-
duces nothing. The hoarding of money also is harmful
to the community in ordinary times because it interrupts
the demand for goods and it reduces the level of employ-
ment. The saving of money in bank deposits avoids some
of the objections which can be made to the hoarding of
currency. Although we cannot be sure that the money
so deposited will be put to work, there is a better chance
of it than if the money had beenhidden in a mattress or
in a safe-deposit box.

The capital which business uses comes from the sav-
ings of the people. Sometimes it comes directly when
stocks or bonds have been sold to individuals, sometimes
indirectly when the securities of businesses have been
sold to savings banks and insurance companies. Often the
savings represent the undistributed earnings of the com-
pany, the property of the stockholders held back for the
company's growth or protection.

The savings of the people after they have been put
to work by business consist, for the most part, of tangible
things: factories, machines, warehouses, ships, and inven-

48 TOMORROW'S BUSINESS

tories of raw materials and finished goods. Some of the
savings are intangibles, such as patents and processes,
trademarks and copyrights, and that most intangible of
intangibles, "going concern value" or goodwill. Out of
the manipulation and transformation of these savings,
the production and distribution of things for use takes
place. The tangible and intangible things saved, under
the direction of management and with the application of
labor, help make available to the people far more than
management and labor could have done working alone.

But although the true savings in business are the
tangible and intangible aids to production, these savings
are represented by securities, by stocks and bonds. These
stocks and bonds are held by the people or they are held
by the banks and insurance companies who have credited
deposit balances to the people.

Through this process by which business provides a
place and a medium for the investment of savings, (a)
the savings of the people are put to work, (b) a share of
the increased product can go to the people currently in
the form of interest or dividends, and (c) the savings
themselves can be turned into cash by the sale of the
securities that represent them, when the time comes that
ready cash is needed.

The opportunity provided by business for the in-
vestment of savings is accompanied by risk, not only the
risk that the business itself may not prosper, but also the
larger risks that will continue to exist in a world run by
human beings. These risks have been recognized by the
classification of securities according to priority of claim
on capital and income. There is some feeling that all the

THE BUSINESS OF BUSINESS 49

savings put into business should take the risks and share
the benefits of the holder of common stock. However, as
long as some people prefer greater safety and lower re-
turn to less safety and a higher return, business will no
doubt continue to provide the form most satisfactory to
the investor.

Many people believe that when they buy a bond or
a share of stock on the stock exchange they are making an
investment in business. Ordinarily this is not the case.
All that is done when an investor buys an outstanding
issue of a security is to turn the savings of some other in-
vestor into cash. This in itself is a useful thing to have
done. It improves the general attitude toward savings in
business, and in particular cases it may well be that the
cash will be put into some new or expanding venture by
the person who made the sale.

The purchase and sale of securities in the security
markets does not directly put savings into business or
take them out of business. But healthy security markets
are an important part of business. Whenever the time
comes that new capital can be used by a business, when
the opportunity for the investment of savings arises, then
the security markets perform their service of distribu-
tion, of bringing the place for investment to the attention
of the people who have savings to invest.

50 TOMORROW'S BUSINESS

5. Three Functions

This, then, may be said as to what business does and
what it is for in our complicated modern world. First and
primarily, it is the job of business to get things ready for
use. Second, in doing this work of production and dis-
tribution, business concurrently provides people with
productive activity something useful to do and a
social setting in which to do it. Third, and finally, busi-
ness makes a place where the inevitable savings of the
people can be put to work.

These are great social tasks for any human institu-
tion. In doing the business of business it is the part of
business to see that they are well-performed.

Ill

Business as Rule-maker

1. Private Government

WE have seen what business is tor and what it does. How
does it do these things? A business does these things by
making rules, enforcing its rules when possible, and com-
promising them when necessary.

It is in no sense a figure of speech to refer to a com-
pany like the American Tobacco Company, and to each
of its counterparts, large and small, as a private govern-
ment. A business is a government because within the law
it is authorized and organized to make rules for the con-
duct of its affairs. It is a private government because the
rules it makes within the law are final and are not review-
able by any public body. Some might say that the reason
a business is a private government is because it is owned
by private individuals, but it seems to me that the ele-
ment of private authority is more significant than the
question of ownership.

It is important to note that this private government,
the corporation or business, existing through the author-
ity of public government, is in no sense an interloper.

51

52 TOMORROW'S BUSINESS

On the contrary, it is the method we have chosen by
which to get done, for the welfare of all of us, the work
it is for private business to do. If conflict develops, the
outcome is certain, since public government will neces-
sarily in the end assert its will and private business will
conform.

The reasons why private business has been given its
freedoms, and its authorities, are partly historical, partly
logical, and partly accidental. But the justification for
continuing a similar role for business must be pragmatic.
The grounds are simply stated: executive management,
subjected to the test of profit margins under direct or
indirect competitive conditions, has shown initiative,
resourcefulness, efficiency, tenacity, and willingness to
assume authority and to take responsibility. The returns
of a material character have been vast in terms of the
production of goods and services and in the organization
of the resources of the world for human use.

But this executive management which has brought
forth so much also has certain tendencies that, in a rule-
maker, do not conform too well to our more basic no-
tions of human values as expressed in our public demo-
cratic government. These tendencies and characteristics
are in almost every case excesses in the very traits which
are most desired in private executive management. In-
itiative becomes arrogance; resourcefulness, cunning;
efficiency, greed; tenacity, obstinacy; and willingness to
take authority and responsibility, pride and lust for
power. This is a terrifying set of qualities to encourage
in any rule-maker: arrogance, cunning, greed, obstinacy,
pride, and lust for power. And yet they cannot be rooted

BUSINESS AS RULE-MAKER 53

out without destroying the motives and energies which
draw from private, business its superb contribution to
the public welfare. These traits, like any other powerful
and dangerous force, must be stimulated, used, and held
in check.

Therefore, it follows that in the relations of govern-
ment and business government should take positive
measures to encourage initiative and skill in business for
profit; but, recognizing the dangers of excesses, it must
provide measures for protecting the public against them.

A business carries on its operations through a multi-
tude of decisions under its own rules. The rules made
by a business to govern its operations must not be in-
consistent with the law of national, state, and local gov-
ernments from which it derives its authority and from
which it receives protection. However, within the law,
a business has great latitude in the rules it makes and
in their enforcement.

Just as business as a whole is greater than the sum
of its parts, so too the ramifications of business govern-
ment go beyond a simple addition of the powers of each
member of the business community. The individual
companies which are associated in a group, such as the
National Retail Dry Goods Association, have not only
created a new rule-making body, an agency which is not
a business but which is of business, but they have also
increased their own individual powers and obligations.
The interrelations of business are not confined to trade
association membership, but cover a wide field, from
open arrangements in purchasing and marketing to se-
cret agreements on patents, processes, and pricing. The

54 TOMORROWS BUSINESS

system of private business government must be under-
stood to include not only individual companies, but the
relationships and mechanisms of relation between them
as well.

2. 'One Among Many

The powers and responsibilities of business as pri-
vate government seem relatively less formidable if we
realize that business is only one private government
among many private governments. These private gov-
ernments all exist and function within the frame of pub-
lic laws which have been adopted for their protection
and regulation.

Three private governments in particular, other
than business, affect profoundly the life of every indi-
vidual. These three private governments are the family,
the church, and the trade-union. At some points the
rule-making of business is sharply limited by these other
private rule-makers.

First.let us look at the family as one of these private
governments. The rules of the .family are not a written
code. They are a set of practices and standards of value
that are handed down with appropriate modifications
by one generation to the next. They are not taught for-
mally as a system of conduct, and it would be unusual
if the senior authorities in a family group could easily
recite more than a few of the compulsions that give this
particular family its characteristic quality.

BUSINL 55

The rules imposed by a family on its members are
of two general kinds: first, those which are common to
most of the families of that nation, community, or neigh-
borhood; the others are those which are more intimate
to the individual family. In these are blended the per-
sonalities, the experiences, the successes and failures of
the living senior generations and the traditions which
they carry forward as their own.

The family rule-making protects the simple virtues,
cleanliness, courtesy, thrift, and .honesty; standards of
workmanship and sportsmanship; standards of behavior
toward persons of another sex, race, religion, or national-
ity. These ways of thinking and acting are imposed by
the family authority.

To the extent that a family has acquired strong
attitudes on these points of behavior, each member of the
family is molded into conformity from his earliest days.
The acceptable manner of conduct is displayed to him
by example, right actions are encouraged, and deviations
from proper behavior are punished by force, by ridicule,
or by banishment.

As a result of early, long, and strict enforcement of
the family rules, they become for the most part matters
of habit. Conformity becomes the normal way of life.
Deviations are punished, no longer by a senior authority,
but by the uneasy discomfort of the individual's con-
science.

The rules of the family depend not on regulation,
but on habit and conscience for their enforcement. As
the experiences of life multiply and as we come into con-
tact with the codes and standards of other people,

56 TOMORROW'S BUSINESS

changes take place in our own personal code. These
changes bring our conduct into harmony with prevailing
custom and with our own reasoned judgment as to what
is useful and what is good.

The family as rule-maker stands before, beneath,
and within all others. Its government is informal, flexi-
ble, but definite. If it finds itself in conflict with church,
trade union, or business, the family will more than hold
its own as a*regulatory agency. When it is in harmony
with other private governments, the family is a tower of
strength in achieving authentic consent to a necessary
frame of order and discipline.

A second agency of private government is the
church. The rules of the family are supported by and,
in turn, support the laws of conduct pronounced by the
churches. Although much common ground is covered by
home and church, there are wide differences of method
and approach. Many little matters of great significance
to the individual family are embraced by the church in
the broad dictum of honor and obedience to father and
mother. On the other hand, the family transmits certain
basic rules, such as "Thou shalt not kill," "Thou shalt
not steal/' as the instrument of the church and with its
sanction.

The laws of the churches are explicit, written codes.
The words and meanings of these codes have been
studied and debated for centuries. Differences in inter-
pretation have caused the founding of different faiths,
different sects of the same faith, different forms of the
same sect all to gain, within the narrowed circle of re-
ligious government, uniformity and precision in what

BUSINESS AS RULE-MAKER 57

men generally take to be the most fundamental laws of
all.

The sanctions for the enforcement of the laws of
the church for the members of the church body are the
most terrible and most unescapable. Conflicts between
the laws of the church and those of other governments,
public and private, are resolved in favor of the church
for its own communicants. The churches admit no falli-
bility in the areas appropriate to their insight and they
admit no compromise with the moral and spiritual law
which it is their duty to reveal.

A third private rule-making agency is the labor
union. Important as it is, compared with the family and
the church it has much less authority and significance.
But, in its influence on the working life of the individual,
the labor union takes a full part among other govern-
ments with which business must be concerned.

The trade-union exists because of the unequal posi-
tion of the worker under business rule-making. This in-
equality is particularly evident during a time of unem-
ployment, when the scarcity of jobs has removed the
individual worker's greatest source of strength, the threat
in the ability to get another job with another employer.
The union unites weak elements in a single bargaining
agency, and collectively, under shrewd and aggressive
leadership, the union is able to discuss the rules of em-
ployment with business managers on a basis more ad-
vantageous than the individual employee could possibly
attain.

Trade-union rule-making has had a varied and
mixed effect on the development of responsible individ-

58 TOMORROW'S BUSINESS

uality of the individual trade-union member. Certainly
trade-union organization today is chaotic; it constitutes a
private rule-making agency of many paradoxes, held to-
gether by force and supported by legal sanctions. It has
not been able to resolve its inner ideological and power
conflicts. The individual member has little choice but
to conform to rules to which he may not consent, and
from which there is no escape. The trade-union has a
big problem for the future in protecting in its own do-
main for its own members the constitutional rights and
freedoms which our public government is dedicated to
preserve.

Business, then, is one private government among
many. We have mentioned the family, the church, and
the trade-union, but there are others too, such as the or-
ganized social or fraternal club, which do a considerable
amount of rule-making on their own account. All these
operate in and about federal, state, and local public gov-
ernment, and all taken together provide a diverse and
elaborate pluralism which shapes the conduct of the in-
dividual citizen.

Fortunately, the individual citizen is scarcely aware
of the public and private pressures under which his
choices are made. He sometimes refers impatiently to the
Government, implying that the restraints to his liberty
come from a single source. But the complicated pattern
of public and private rule-making as it in fact exists
requires that our freedom be achieved within a pluralism
of authorities.

The special task of business is to do what it can to
find its own place harmoniously in the pattern of con-

BUSINESS AS RULE-MAKER 59

trols from which the order and certainty of a free society
must be derived.

3. The Governed

If business is private government, who are the gov-
erned? We are the governed.

We are governed by business in one or all of four
possible capacities: (i) as stockholder, (2) as vendor or
supplier, (3) as customer, or (4) as employee.

Let us take these four capacities in which any of us
may stand in relation to business and examine them. In
what sense is the stockholder subject to the rule-making
powers of the business in which he has placed his sav-
ings? One might have thought that it would have been
the other way around, that the stockholders, being the
owners, would have the rule-making power instead of
being subjected to it.

The stockholders collectively elect a Board of Di-
rectors, and the Board of Directors elects a management.
These elections ordinarily take place once a year. At the
time of an election, the stockholders have the legal right
to change the directors and hence to change the man-
agers. They also have the right to vote on specific rules
for the running of the business that may have been pro-
posed in a Proxy Statement. But, except at the time and
place of a stockholders' meeting, the stockholders ordi-
narily have no rule-making power. A large stockholder

60 TOMORROW'S BUSINESS

may have large influence on the rules that the managers
adopt. This influence may come as a result of the power
he may exercise at a later meeting of stockholders, or it
may be deference by the managers to a holder of property
in the business. A small stockholder also may have large
influence if his suggestions are helpful to the manage-
ment. Access to management for the expression of ideas
and criticism is frequently available to the smallest stock-
holder.

But the rules themselves are made by the managers,
except for the few rules that may find their way into a
stockholders' meeting. The rules of the business affecting
the stockholder are far-reaching, and necessarily so. The
amount to be paid out in dividends is determined by the
Board of Directors. So also are borrowings that substan-
tially affect the form of capitalization and the character
of the stockholders' claims on assets and income. The
directors may issue to the stockholders "rights" to sub-
scribe to new stock. These rights give the stockholder
the choice of providing additional capital or reducing his
proportionate ownership in the company.

The freedom of the company in taking actions af-
fecting the interests of stockholders is subject to legal
limitations that experience has shown to be desirable,
and the stockholder has access to the courts to enforce his
legal rights. But the enforcement of legal rights is not the
same thing as the power to make rules. It is only the
power of protection against illegal rules.

The initiating power of the stockholders of a com-
pany as regards rule-making is limited in principle, and
in practice it is even more restricted, due to inertia and

BUSINESS AS RULE-MAKER 61

the sheer mechanical difficulties of getting stockholder
action on any question. On the other hand, the authority
of the Board of Directors in making rules affecting stock-
holders is direct, explicit, and decisive.

Under the private government of business, the
stockholders are definitely among the governed, even
though they may choose the Boards of Directors under
whose authority the rules affecting them are made. Their
position is something like that of the citizens of the state
of Illinois (or any other), who vote for the senators and
representatives who pass the laws which they in turn
obey.

The laws regulating corporations are intended to
give basic protections to the stockholders against business
rule-makers, just as our constitutional rights are intended
to protect us as citizens against the law-making and law-
enforcing agencies of public bodies, federal, state, and
local. In addition to the laws, the stockholder has a final
safeguard against business rule-making that he may find
uncongenial he may sell his stock. True, he may not be
able to sell his holdings for as much as he paid for them.
And, if he wants an income on his savings, he may be-
come a stockholder-citizen under another business gov-
ernment which may please him little better or no better
at all. Nevertheless, he can free himself at a price if he
wishes; he is not locked in. The company he keeps, he
keeps by choice.

The second group among those governed under the
rule-making of business are the vendors or suppliers of
raw or semi-finished materials, manufactured articles for
resale, or services of one kind or another, utilities, trans-

TOMORROW'S BUSINESS

portation, and the like. The vendors are usually, but not
always, other businesses which are making rules of their
own for the business which is to them a customer.

The rules applying to vendors cover all the speci-
fications made by the purchaser on the things that are
purchased, the price that will be paid, when it will be
paid, the quantities, qualities, and nature of the things
supplied, the date of delivery, provisions for return of
damaged or unwanted goods, restrictions on the sale to
others, and all the rest. The contract or understanding in
which these terms are embodied is like a treaty between
two sovereign states. In entering into such a business
treaty, both parties give up in some measure their free-
dom of subsequent action. They give it up because it is
advantageous as compared with the alternative of mak-
ing no arrangement ac all.

Under ideal conditions, each business that is a party
to a contract accedes willingly to the rules imposed by
the other. Such conditions are met most fully when the
vendor has some other independent company to whom
he can sell his goods if he wishes, and when Company X
has another independent source from which it can supply
its needs. It is then possible to discuss terms in a spirit of
give-and-take, and to reach a compromise which, at the
moment of decision at any event, seemed the best choice
among real alternative possibilities.

Such equal conditions are not uncommon in the re-
lations of one business to another. Yet inequality of bar-
gaining power will always exist; when it is too great, im-
posed terms may be the result. The use of force is just
as ugly in establishing the rules of a business contract as

BUSINESS AS RULE-MAKER 63

it is anywhere else. The coerced contract is of course
resented in business, but it is not considered a wrong
business practice. Many businessmen, large and small,
welcome situations in which they are on the upper side
of a business squeeze, and their resentment when they
are on the lower side is not taken too seriously by their
colleagues who happen to be spectators for the moment.

As a matter of fact, one test of survival efficiency in
business consists in not being subjected to coercion too
frequently or too severely at any one time. The last co-
erced act on a business is the step just next to bank-
ruptcy. The inefficient or unwanted business cannot be
protected from rule by force, because its own nature de-
termines that it shall be weak when another is strong.

But if any one business becomes too strong, and too
many of its vendors become too weak, let the buyer be-
ware, not of the quality of the goods he buys, but lest he
turn up some morning legislated a public utility. Or per-
haps the weak, having a common cause, may legislate
themselves into equal or superior strength. Private busi-
ness governments are not averse to using the powers of
public government if they can seize them to ensure their
survival or even to reach what they conceive to be an
appropriate place in the business sun.

The third group of the governed are the customers.
The businesses which are customers of other businesses
we have dealt with in our consideration of vendors. Most
customers, the tens of millions of them, are individuals
buying things and services at retail.

Superficially, the individual customer seems to be at
a great disadvantage in being subjected to the decisions

64 TOMORROW'S BUSINESS

of business management as to what he shall be offered,
where and when he can get it, and how much he will
have to pay for it. The business management can make
its rules and back them up with administrative organiza-
tion, physical plant and equipment, money in the bank,
and propaganda.

But the inequality is not so great as it appears in
fact, the strength may be with David Consumer if he does
not have to buy, or can postpone his buying, or can find
something else that will do, or some other place to get it.
Then the imposing property and organization and re*
sources of the Goliath Corporation become clumsy handi-
caps before David's power of choice. The company and
its rule-making managers find themselves faced with a
debilitating condition called "idle plant expense." Idle
plant expense will slowly but surely force the business
rule-makers to modify their rules to meet the views of the
governed.

Does this mean that the customers make the rules?
Not at all. It only means that when the customers have
the power of choice, the rules that are made will be ac-
ceptable to them. Business management will still decide
what will be offered and when and where and for how
much. Neither individually nor collectively do cus-
tomers have the ability to make rules or to enforce them.
But collectively the customers determine what rules shall
in the end survive.

The customer requires the aid of public government
in order to make his power of choice worth anything to
him. This aid takes the form of giving him the informa-
tion he needs as to what is available and at what price.

BUSINESS AS RULE-MAKER 65

Sometimes public market places are provided so that a
wider choice exists than otherwise would be the case.
Laws covering labeling, misbranding, and the like are all
measures that strengthen the effectiveness of customer
choice.

When there is no choice to the customer, when a
single company is the only source of supply, as is true of
telephone service or electricity or sometimes transporta-
tion, the customer is helpless if the product or service is
indispensable for health and comfort. In these cases of
natural or artificial monopoly, the more important rules
of the company affecting the customer are regulated by
public government.

The fourth group of people governed by private
business are the employees, all of them. The president
of the company, the vice-presidents, the deputies and
assistants, the superintendents and managers, foremen,
bosses, and workers male and female, part-time and full-
time, employed or unemployed all are governed by the
rule-making of private business. Some of these governed
are themselves subordinate rule-makers, promulgating
codes and issuing instructions with the authority of the
business-state by which they are employed.

For most people, the rules that most intimately
affect their lives are made by their employers. Most of
the employed and of those who wish to be employed, but
are not, look to private business for employment. The
rules affecting employment made by private business are
therefore of paramount importance to the individual.

These rules determine for the individual where he
shall work, when he shall work, what he shall do, who

66 TOMORROW'S BUSINESS

will give him orders, who will take orders from him, his
promotion and discipline, the amount he gets paid, and
the time and duration of his holidays and vacations.
These rules are not general conditions and circumstances
of work which, we have already observed, affect the indi-
vidual's health, outlook, and character. These rules are
specific determinations by a superior and authorized
agency of what and how things shall be done. The gov-
erned are governed by these determinations.

The employees, all of them, are weak as compared
with the company that makes the rules and enforces
them. To compensate for this weakness, we must look to
three offsetting balances. The first is the labor laws, of
public government, the second is the trade-union or other
private organization of employees, and the third is the
chance of getting a job working for some other company
or of getting by without doing any work at all.

The labor laws of public government set up a frame-
work in which business government must confine its
own regulations and decisions. These public laws express
standards of health and decency which the community
considers basic to the kind of life it wants for its every
member. The enforcement of the laws reflects the sin-
cerity and skill of the community in translating its aspira-
tions into reality. Good labor laws and sound enforce-
ment put a floor under competitive reduction of working
standards as a means of reducing costs. Unquestionably,
they make a certain number of people unemployable,
since at the standard imposed by law it is not profitable
to employ large numbers of the unemployed.

The fact of trade-union organization, and sometimes

BUSINESS AS RULE-MAKER 67

the threat of it, affects business rule-making generally in
a manner favorable to the employees. Like the labor laws,
the fact of unions establishes minimum conditions for
various classifications of employment. Also like the labor
laws, they make certain people unemployable. The
unions also strengthen the position of the individual em-
ployee in cases where flagrant injustice may be done in
the decisions of an administrative officer.

But neither labor laws nor trade-unions can do more
than give the broad framework of conditions of employ-
ment and occasional protection to the individual in ex-
treme cases of maladministration. Just as the true
strength of the customer in the apparently unequal ne-
gotiation with the business company was found in the
ability of the customer to go elsewhere to do his business,
so too the strength of the employee lies in his ability,
when he has it, to get another job from another employer
or to get along without doing any work. The laws and the
unions may help provide a basic setting for private busi-
ness rule-making, but they can never do enough to give
to the employee a real feeling that in conforming to the
rules affecting him he has exercised responsible free
choice. Even for the executive, the ability to get a job
elsewhere and the courage to do it are the only conditions
under which subjection to business rule-making is sup-
portable by free men. It is obvious that under the large-
scale unemployment of the 1930'$, the reality of freedom,
guaranteed politically under the Constitution, was actu-
ally lost under the economic exigencies of the period. It
was lost, not because business set out to destroy it, but
because where there is no choice of rule-makers, as under

68 TOMORROW'S BUSINESS

mass unemployment, no rule however beneficent can be
accepted by the individual as a matter of responsible con-
sent. The economic system as a whole coerces him even
though the particular employing company does not in-
tend to do so.

Thus we see that tolerable freedom of the governed
under the private rule-making of business, of the stock-
holders, of the vendors, of the customers, and of the em-
ployees of all rank comes from the opportunity to say,
"Nol I will do my business with another business."
When the governed can say "No" they have powers as
great as those of the strongest business.

IV

The Structure of a Business

1. What Is It?

A BUSINESS gets done the things that business exists to
do by means of rule-making activities which are both
necessary and desirable. Because of them, business is
private government in more than name only. Now we
should like to know, what kind of government is this?
How does it work? To answer these questions, we must
find the places in a business where rule-making power
exists, and then find out where that power came from and
how it is controlled. Let us look at the structure of a
business and see how it is put together on the inside.

Companies differ in the way they are run. New
companies, closely held companies, subsidiary companies,
small companies, and the large publicly owned com-
panies show much variety in the way that control is ad-
ministered. The large publicly owned company is easier
to understand because the specialized aspects of control
can be seen at specialized points, instead of being merged.
After studying this separation of powers in the large
publicly held company, we can refer to the less elabo-

69

70 TOMORROW'S BUSINESS

rately organized businesses and make due allowance for
the fact that several functions are being carried on to-
gether. The small, individually owned corporation, such
as a personally owned and operated store or construction
company, will merge, in a single individual, powers of
stockholders, Board of Directors, chairman and presi-
dent. For practical purposes, this owner-manager rarely
needs to ask himself which robes of authority he is wear-
ing when he takes any particular action.

To find out realistically how things happen, let us,
the governed, approach a business from the outside and
work our way in. We can come at the business either as
an employee, a vendor, a customer, or a stockholder.
From whatever point we come, we run into an employee
whose job it is to attend to us. If we are looking for work,
we see an employee of the employment department; if
we call to discuss the job we have now, we talk to the
executive to whom we are responsible. If we are a vendor
with something we want to sell to the company, our first
contact is with a representative of the purchasing agent,
or with the buying office. If we are a customer and wish
to buy something for ourselves, or if we wish to discuss
something we have already bought, we meet a salesman
or an adjuster. If we are a stockholder, we first talk to an
assistant treasurer, or an assistant secretary, or an assist-
ant to the president. In every case, we find that The Com-
pany is represented by a subordinate Someone who has
authority to make certain decisions. In every case, the
Someone who represents the Company gets his authority
from a superior Source in the company's management, a
Source which combines legislative, administrative, and

THE STRUCTURE OF A BUSINESS 71

judicial powers. This superior executive may be over-
ruled by an executive superior to him unless he himself
happens to be the chief executive. From whatever angle
we approach a business, as we rise higher and higher
through the levels of authority, we finally come to a chief
executive who is usually the President of the Company.

In most things in a business the president is the boss.
Working through his subordinates, he gets done the
things that have to be done. In many cases he also decides
on the policies that will have to be followed in doing
them. He can buy and sell, hire and fire, construct or
tear down. Among the few things he cannot do by him-
self are to declare a dividend, open a bank account for
the company, sell its securities to the public, or dissolve
the business. One other thing he cannot do as president
is to appoint himself to his own job.

Sometimes a company has an officer who is called
Chairman of the Board. The powers and duties of a
chairman do not follow a consistent pattern. In general,
the powers over policy that are reserved from the presi-
dent, and are not reserved to the Board of Directors, are
exercised by the chairman. The chairman has particular
supervisory responsibilities including observation of the
work of the president. It is doubtful if the chairman
would give instructions to the president as to how he
should operate the company even if he had the power to
do so. If he did give such instructions, he would then
himself be the chief administrative officer under another
name, and the president would then be his assistant.

The titles of the officers holding top company
authority are by no means uniform in business, and are

72 TOMORROW'S BUSINESS

unimportant for this discussion. What is important is to
realize that there are two related, separable, top func-
tions: (i) that of long-time policy planning with broad
consideration of the company's relations to trends within
the industry, in other industries, in the government, and
in international affairs, and (2) that of day-to-day central
co-ordination of operating decisions covering every phase
of doing efficiently the things that it is the business of the
company to do. Sometimes the name "President" is given
to the officer who does the first; sometimes " Executive
Vice-President" or "Operating Vice-President" or "Gen-
eral Manager" to the second; sometimes the two are car-
ried on together by an officer named "Chairman" or
"President."

The powers that are withheld from the president
and chairman, or chief executive officer under whatever
title, are held by the Board of Directors. The Board of
Directors elects the president, elects the chairman, and
other general officers, fixes their pay, and decides all
questions of policy which it does not choose to delegate
to either chairman or president. The Board of Directors
also will approve large acquisitions and transfers of
property, although usually the chief executive has the
power to complete these transactions if they are urgent
or if he wishes to do so. The Board of Directors declares
the dividends that are paid to stockholders, approves the
terms of any borrowing other than for temporary pur-
poses, and decides if, when, and how to issue any un-
issued stock.

Where does the Board of Directors get its powers?
They come from the laws of the state in which the com-

THE STRUCTURE OF A BUSINESS 73

pany gets its charter to do business. These laws specify
what things the Board of Directors may do and what
things are reserved even from them to the stockholders.
And of course, under the laws of the state, there are
other limitations on the powers of directors. They must
carry out the contracts the company enters into, and
they cannot override laws having to do with the regula-
tion of business, the conditions of employment, and the
like.

The stockholders ordinarily have no powers except
at a stockholders' meeting. Regular meetings are infre-
quent and special meetings are hard to call without the
consent of the directors. So, for practically all purposes,
the Board of Directors is supreme.

This description of where the power in a company
is located is reasonably realistic with one exception,
and here the situation differs greatly from company to
company. The president or chairman of a company gen-
erally recommends to the Board of Directors what he
thinks the Board should do even in the field of the
Board's own powers. In some companies, such a recom-
mendation is tantamount to a decision, and although the
recommendation may be discussed and the president may
change his mind, the directors never reverse him. A re-
versal would be taken as a vote of no confidence, and his
resignation would be on the table forthwith. In other
companies the executive officer encourages the Board of
Directors to come to its own decision on the matters that
are its proper concern, for example, on the declaration
of a dividend. The officer may advise the Board what he,
as an individual, would do, but he has no feeling of

74 TOMORROW'S BUSINESS

chagrin or embarrassment if the Board, after talking it
over, feels differently.

The Directors of a company are persons of consider-
able importance in rule-making powers of a business.
Consequently, it is a matter of some interest how the
members of a Board of Directors are chosen and how
they are continued in office. At this point the form and
the substance of the location of power in business are far
apart.

The form for the election of directors is familiar
the directors are elected for fixed periods or until their
successors are elected by the stockholders, each stock-
holder having voting strength in proportion to his share
in the aggregate voting stock of the company. When a di-
rector's term of office expires, he is re-elected or his suc-
cessor is chosen on the same basis.

The form of election of directors is a quasi-demo-
cratic procedure for the affirmation of the delegation of
power to candidates for election and re-election. The
procedure accepts on principle the assumption that the
final power over business rule-making resides in the own-
ers of the property, and that the larger the relative
ownership the larger the right to express 'preference for
the individuals to whom delegated powers should be
assigned.

Without raising questions as to these assumptions, it
is fair to note that in substance the selection of directors
does not conform to the intention that the election pro-
cedure implies.

The fact is that the stockholders elect the directors
but they do not choose them. They are chosen by the

THE STRUCTURE OF A BUSINESS 75

Board of Directors itself, which makes the nomina-
tions.

The reason for this lack of correspondence of form
and substance rests on two practical considerations: (i)
The stockholders cannot choose directors because they
are not organized as a political body in a way to make
their franchise effective. (2) Real choice of directors by
stockholders would be an extremely costly and disruptive
procedure, damaging to efficient management, to busi-
ness profits, and to the interests of the stockholders them-
selves.

The stockholders have invested their savings in a
business to make profits and income, not to assert rights
in the delegation of power. They do not want to be or-
ganized politically as stockholders; they want to be let
alone. In this the management agrees with them. The
occasional crisis situation can be ignored, since the po-
litical organization of stockholders to oust a management
is generally so crude as a technique of obtaining stock-
holder consensus that it is a travesty on the "democratic"
procedure it purports to be.

What name shall we give to this private government
of business? Certainly it is neither a democracy nor a
dictatorship. If it is an oligarchy, the oligarchs must
stand for election, since they do not rule by right of
status. The governed may escape from any particular
business rule; they are not bound to any particular busi-
ness rule-makers. No traditional name applied to govern-
mental forms seems to fit the business pattern with its
peculiar amorphous quality. Perhaps the best name of all
for business government is "business," if we understand

76 TOMORROWS BUSINESS

and remember that business is government, that it is
rule-making, and that it is not a depersonalized, mechan-
ical, and materialistic economic activity.

2. Directors and Officers

We have not been able to put our finger on the exact
point of final power in a company, but we have narrowed
its location down to the Board of Directors and the two
principal officers, the chairman and the president. Under
extraordinary circumstances, power can be exercised by
the stockholders, but this is difficult and rarely happens.
The directors are elected by the stockholders, but as we
have said, they are not chosen by the stockholders, since
the stockholders are not organized to nominate candi-
dates or to inform themselves on the merits of individ-
uals or of issues. Not only is the residual power of a com-
pany which legally belongs to the stockholders not
exercised by them, but it would cause indescribable con-
fusion if they attempted to do so.

As a matter of fact, the interests of the stockholders
as property owners entitled to efficient management and
to a proportionate share of the profits, are reasonably
well-protected in the case of most companies. They are
protected, since in most cases one or more of the larger
stockholding groups are represented on the directing
Board. Through them, all stockholders, large and small,
,may be present at the seat of authority. In practice, this

THE STRUCTURE OF A BUSINESS 77

representation is adequate although it may be inefficient
and ineffective. Occasionally there is a conflict when the
personal interests of large stockholders differ from those
of small, or when the interest of the large stockholders is
greater in their role as managers than it is in their rights
as owners. When such conflicts of interest occur, anything
may happen; it is impossible to generalize. Sometimes,
even when there is conflict of interest, the larger inves-
tors assume the responsibility of trusteeship for all stock-
holding interests; sometimes they do not.

Within the circle of directors and principal officers,
the locus of power differs in different companies and in
the same company from time to time. Sometimes it
changes even in the same meeting on different issues.
If the chairman or president is an extremely strong or
self-willed individual, he holds the reins in a firm hand.
He may use the members of his Board of Directors as a
sounding board, as a source of advice, as a means of access
to influence in quarters outside his own company. But
the most dominating governor is likely to pause if three
or more directors differ audibly with his decision. The
next time it may be three other directors who differ, and
the time after that another three. Minorities are helpless
alone, but several minorities may mean a revolt. When-
ever ownership and management are held by different
people, it can never be said that the Board of Directors
does not matter.

The locus of power may, for a moment or on a
particular issue, be held by a single director. Generally
this occurs when a strong will holds a negative opinion.
It is rare that a single individual on a Board of Directors

78 TOMORROW'S BUSINESS

can get positive action taken contrary to the wishes of
the officers.

Sometimes a single director is able to have his way
time after time as a matter of practice. When this hap-
pens the situation in the company is definitely patho-
logical. Either the chairman is weak or timid in policy
leadership or the president is weak or unimaginative in
administration. Here the director has stepped out of his
proper place as director and has assumed powers that, for
the good of the company, should be continuously exer-
cised by the officers.

The decisions that must be made by a company re-
quire that a final source of authority be instantly avail-
able. Accordingly, an Executive Committee, with power
to act for the Board of Directors between meetings is set
up; and in this committee, the details of questions of
policy and operations are examined. Many decisions are
made by the Executive Committee that need only be re-
ferred to the Board for information and ratification.
Included in the membership of the Executive Commit-
tee, there will be one or more of the executive officers of
the company.

Because of its frequent meetings and knowledge of
what is going on, the Executive Committee of a company
comes to have great power. Frequently, in smaller
Boards, the Executive Committee will include a voting
majority of the Board, and so, in a formal sense, the
Board is powerless against a unanimous Executive Com-
mittee.

The power element in a company is more nearly an
area than a point, a pattern within the Executive Com-

THE STRUCTURE OF A BUSINESS 79

mittee. It shifts within the boundaries of the Board of
Directors, the Executive Committee, and senior officers.
Sometimes the focus is sharp, sometimes it is blurred. It
may include one combination of personalities at one
time, another at another. Power in a company, within
this area, seems to go to him who wants it and is able to
exercise it. For the effectiveness of the company in doing
the things that a company is supposed to do, this shifting
character of the locus of power is desirable. It keeps an
administration from becoming too brittle. It creates a
narrow circle where there is a normal and healthy com-
petition for internal status and recognition. Carried too
far, such competition can be destructive to united efforts,
but ordinarily the influence of the Board as a whole
moderates the intensity of personal ambitions and divi-
sive tendencies. When the Board itself divides, and con-
tinues a division over a period of time, again a patholog-
ical condition exists that is harmful to the business.

We have already seen how directors are elected, but
we must carry our questioning a point farther. How does
a particular person happen to be a member of a Board
of Directors? In the first instance, as we know, the direc-
tors are chosen by the owners who start the company. If
the owners have already decided who is to be the first
chief executive, he will usually be one of the directors,
and will be consulted about the rest. In order to expedite
decisions, one or more officers in addition to the chief
executive will be placed on the Board of Directors.

The directors who are not operating officers may
be classified as either stockholder-representatives or
"others." The stockholder interests may be a single in-

80 TOMORROWS BUSINESS

terest, but usually several recognizable ownership inter-
ests sit at the table. "Others" includes many kinds of
directors, frequently legal counsel, sometimes financial
and engineering counsel, occasionally public relations or
political counsel. Not infrequently a director will be
chosen who acts to tie together the interests of one com-
pany with those of another. Often one director will serve
several companies in such an "interlocking" capacity.
And, of course, there are other miscellaneous reasons of
a personal or prudential character why particular people
are asked to serve on particular Boards.

The effect of the manner of nominating directors is
to perpetuate the type of company control and to
strengthen the elements of power in a company that are
already dominant. This makes for continuity of policy
and administration. It also makes for inertia and narrow-
ness in point of view and experience.

Why are men willing to accept directorships? These
positions require time and attention, they are subject to
serious risks of suit and scandal, to the reporting of per-
sonal ownership of stock and of changes in stock owner-
ship. Occasionally, they involve exceedingly embarrass-
ing personal conflicts and relationships with other people.

If a man accepts the risks and burdens of a director-
ship of a company, there must be reasons which to him
are good and sufficient. In this, as in other things, the
result must have a cause sufficient to produce the effect.

First of all, the officers of a company accept places on
their Board of Directors for obvious reasons. They want
to participate on an equal basis in making the general
rules which they must administer and interpret. They

THE STRUCTURE OF A BUSINESS 81

want to be present and to express their views as a matter
of right when the rules are made and they want access as
a matter of right to the formal meetings and to the rec-
ords of the Board. The officers have both a personal in-
terest and a management interest in Board membership.
The stockholders who have a large investment in a
company also have an obvious desire to be represented
on the directing Board. It is their property that is being
managed, and they not only want close and frequent con-
tact with the management, but they want to have some-
thing to say about the rules under which the business is
carried on. The principal stockholders may join a Board
of Directors personally or they may be represented by a
deputy or agent. In either case, the interests and the
motives of the director are clear.

The members of a Board who are elected because
of a technical or professional competence, lawyers, en-
gineers, public relations specialists and the like, are
usually present because they or their firms are on re-
tainer from the company. Service on the Board of Direc-
tors is part of the work for which they are being paid.

As we pass beyond these three classes of directors
officers, owners, and consultants the motives become
less clear and they are frequently mixed. One set of mo-
tives may be called "personal," that is, the director finds
in his directorship a satisfaction of some personal wish
which to him is important. These motives may be largely
unselfish, as, for example, a desire to accede to the wishes
of a friend who may be an officer or another director. Or
it may be a real sense of public responsibility as an invi-
tation to serve as a director of an insurance company, a

82 TOMORROW'S BUSINESS

savings bank, or a great industrial empire. The narrower
personal motives we are all aware of vanity, sociability,
occupation as an antidote to idleness and boredom, or a
gossip's curiosity as to what is being discussed on the
inside. Some men accept directorships because they wish
to participate in the active business life of their nation or
community.

A few men may serve for the nominal director's fee
which is part of the ritual of a Board of Directors meet-
ing. Even if service on a Board is not given because of
the fee, it is generally believed that better attendance at
meetings is the consequence of giving one. When direc-
tors' fees were paid in gold coin, they made a pretty
souvenir of the meeting. Now directors' fees are paid in
paper or by check and are subject to income tax in the
director's highest bracket; and if they are in fact an in-
ducement for the Board membership, they probably re-
sult in keeping the wrong kind of men on the Board.
There is no denying that even the right kind of men,
serving on Boards of Directors for other good reasons,
get pleasure out of the director's fee which is for them a
little extra cash.

There are few men who are directors of a sufficient
number of companies so that the directors' fees in the
aggregate become a significant part of their income.

Another group of directors are those who are there
to serve some interest external to the company. These
directors are not necessarily parasitic on the company,
but they are likely to be so. In exchange for their contri-
bution as a director, they expect from the operating
officers of the company special consideration for their

THE STRUCTURE OF A BUSINESS 83

bank, insurance company, coal mine, railroad, or other
primary interests of their own. Not always, but fre-
quently, this special consideration can be given only at
the expense of what the judgment of the officers would
otherwise cause them to do. In this way special interest
representation is parasitic, thriving by eliminating com-
petitive pressures and at a cost to the company.

Special interest representation on a Board need
never be parasitic, if officers and Board resist it. Special
interests may be represented by men whose personal tal-
ents are desired for the company. The only adequate
payment that can be made to such a director to secure his
services is the willingness of the company to use the di-
rector's own service and product, but there is no reason
why this service or product should not be supplied at or
below prevailing market and still be advantageous for
the director-supplier.

Considering the central position of the Board of
Directors as an institution, not only in the government
of a single business, but in the government of business
generally, it is in its present form an inadequate in-
strument of power. It is a vestigial remain of a time
when investors paid attention to their businesses and
when offensive and defensive alliances in business were
the order of the day. The most that can be said for
the Board of Directors as it exists today is that it provides
an arena in which the ablest, most powerful, and most
persistent members of the Board can generally have their
way. Such men have the traits that make businesses suc-
cessful, and their survival in the shifting locus of power
in a company means that they survive not only for their

84 TOMORROWS BUSINESS

own good but for the good of the company too. The
Board of Directors tends to screen the fit from the unfit,
and to that extent to provide the rule of the fit for the
conduct of the business.

3. Transformation

Need anything be done? If the Board of Directors is
a vestigial and obsolete institution, sooner or later it will
disappear in its present form. This disappearance may
come by transformation or it may come by collapse. Col-
lapse is a clumsy and uncertain way of moving from yes-
terday into tomorrow. Transformation gives an oppor-
tunity to consider the question of what is wanted and to
choose a preferred method of getting from here to there.

What is it that we want in a Board of Directors?
First, we want a rule-making body superior to the execu-
tive officers that will contribute to the efficiency of the
business. Second, we want a rule-making body that is
sensitive to the interests of all who are affected by the
company as a private government.

When we examine these interests, a curious fact ap-
pears. The interests of the four parties are in part iden-
tical in that each of them benefits by an efficient, well-
managed, growing business. For the stockholders this
means the possibility of larger dividends and a higher
market price for their stock. For the vendors it means a
better outlet and prompt payment for the things they

THE STRUCTURE OF A BUSINESS 85

supply. For the customer it means better service, better
quality, and a wider range of products from which to
choose. For the employee it means steadier employment,
higher pay, and better conditions of work.

But at any given level of activity and efficiency of a
business, the interests of the four groups of the governed
are in conflict. At a given level of activity, higher divi-
dends can come only from lower prices to vendors, higher
prices to customers, or lower labor costs. Vendors can
get better consideration only at the expense of stockhold-
ers, customers, or employees. Customers must pay higher
prices if the desires of stockholders, vendors, and em-
ployees are to be met, and the employees can improve
their earnings only at the expense of the other three
parties at interest. A Board of Directors, therefore, has a
double task, first, to provide the company with an effi-
cient, aggressive management, and second, to make sure
that at any given level of activity and efficiency, the
groups at interest whose interests are necessarily in con-
flict get a fair deal.

There have been two suggestions as to how the sev-
eral parties at interest in the operations of a company
might be effectively heard. One suggestion is that each
of these groups should be represented by directors of
their own choosing. The other is that there should be a
"public" director on the Directing Board, an appointee
of the Securities and Exchange Commission or of some
other public agency. Neither suggestion meets the re-
quirements of the situation in more than a formal way,
and both should be rejected as unrealistic and undesir-
able.

86 TOMORROW'S BUSINESS

The idea of representation of parties at interest
other than stockholders appeals to those who are at-
tracted by the machinery of republican democracy, and
who would extend it to all fields where discipline and
order make it necessary to have rule-makers and rulers.
The 'fact is that no group can be represented by an
elected agent unless it has been organized to express itself
politically. It must have a sense of common interest and
a willingness to take the trouble at an appointed time
and place to assert the privileges of an electorate. There
must be understanding, not only of issues, but of the
capacity of the person who stands for election. Sound
choice requires elaborate procedural arrangements, op-
portunities for discussion and information, candidates,
nominations, and campaigns. The necessary conditions
cannot be established in practice for stockholders; nor
can they be established for employees if we include em-
ployees of every rank and skill; nor can they be made to
function for customers or vendors. A scheme of repre-
sentation of these interests would be a travesty on
democratic procedures. It would result in business po-
litical gangsterism that would destroy the efficiency of
business management. It would inject, into circles re-
quiring the most intimate confidence, individuals whose
reliability was uncertain and whose motives and ambi-
tions would be in doubt. A Board elected in such a man-
ner would be injurious to the true welfare of the four
groups who have an interest in the success of the business.

The second idea, that of "public" directors, ap-
pointed by some designated public agency, appeals to
some who distinguish only two parties at interest in a

THE STRUCTURE OF A BUSINESS 87

business: one, the owners; the other, the general public.
But in reality there are four parties at interest, not two.
In some matters these four interests are the same and in
other matters they are in conflict. No "public" repre-
sentation on a Directing Board could meet the essential
requirements of this rule-making situation. The special
and specific interests of a company's stockholders, its
vendors, its customers, and its employees justify the crea-
tion of an opportunity for expression, but it is they, not
an undifferentiated public, that should be heard by the
company's rule-making authority.

In so far as there is a true general public interest in
the company's management, it is expressed in the laws of
the state, of the city, and of the nation. Conformity to
these laws is the public obligation of the business and
the administration and enforcement of these laws is the
responsibility of public bodies, including the courts and
the legal profession as an instrumentality of the court.

If we reject these two suggestions for broadening the
composition of a corporate Board of Directors, what sug-
gestion can be proposed? No drastic nor universally ap-
plied scheme of altering the composition of Boards of Di-
rectors should be contemplated. The situations in differ-
ent companies call for different measures, or perhaps in
some companies for none at all. Further, in modifying an
agency like a Board of Directors, it is a good thing to take
a step at a time, to let adjustment and habit build
familiarity with the new, and then move forward with
knowledge and conviction that the direction is the
right one.

Accordingly, my suggestion is this: as a first step,

88 TOMORROW'S BUSINESS

one director be elected or re-elected and he be asked to
act as " trustee" for one of the three parties at interest,
other than the stockholders. Such a director-trustee
might be assigned the interests of either the customers,
or the vendors, or the employees, depending on the na-
ture of the company's business. He would be the nom-
inee of the management and of the existing Board of
Directors and would be elected in the usual way by the
owners of the company, the stockholders. During the ex-
perimental period of whatever length, no public an-
nouncement would need to be made that such a policy
had been adopted.

In a formal sense little is changed, but an important
difference would occur in the deliberations of the Board.
Let us suppose that this first director-trustee has been
asked to act for the customers of the company. Although
he owes his nomination to his fellow directors, and his
election to the stockholders, nevertheless he has accepted
a trusteeship a trusteeship which has been created
voluntarily by those choosing him so to act as trustee.
Now as he sits on the Board, the interests of the cus-
tomers of the company are his single interest. It is his
duty to know what these interests are and to see to it
that they are considered when matters affecting them are
decided upon. Such a director-trustee should be chosen
for his ability to make another's case his own. The one
limitation that should be observed is that there should be
no conflict of interest in the individual director himself,
for example, a stockholder should not be chosen as trus-
tee for the interests of customers.

The director-trustee should have time to work on

THE STRUCTURE OF A BUSINESS 89

his job and to think about it. His duties would not re-
quire his full time, but they would involve more appli-
cation of effort than does the conventional directorship.
Such a director should be properly compensated for the
service he performs.

If the first director-trustee works out usefully, the
next step would be a director-trustee for each of the
other interests all depending on the nature of the com-
pany and whether the groups are important enough in
the particular case to warrant specialized consideration.
In this way, three of the four parties at interest will have
someone designated to speak for them. Presumably the
stockholders, the fourth party, will be the concern of the
remaining directors. But to make sure that equally
thoughtful attention will be given to all the stockholders,
one director should be explicitly charged with responsi-
bility for all ownership interests and be paid for taking
the time required in doing so.

The Board of Directors would then consist of four
paid director-trustees, the chairman and the president,
and such other officers and Directors as the needs and
traditions of the company dictated. Under such a Direct-
ing Board, the interests of the governed will be at
least represented and the actions of the company's
administrative officers will take place in a frame of
reference where the interests of all will have been
heard.

The scale payment of the director-trustee is an im-
portant point of detail. The money paid for the service
should be sufficient to be a real incentive for serving. We
should eliminate any necessity to appeal to motives of

90 TOMORROW'S BUSINESS

public service, vanity, or any external, irrelevant in-
terests.

What should a director-trustee be paid? There will
be a wide range according to the size of the company and
to the time, attention, and talent required. A rough ap-
proximation can be reached by making certain assump-
tions as to how much work a man could do as a director-
trustee of several companies if he spent all of his time
on these appointments. About the most a man could do
and do well would be to serve as a director and member
of the Executive Committee of three companies, and a
member of the Board of four more. If we assume that to
be a member of an Executive Committee is twice the job
of being only a director, we have a full-time responsi-
bility ten units of time, six for Executive Committees
and four for simple Board membership. On this basis,
a man should be paid one-tenth of his full-time earning
power for a simple directorship and one-fifth, or twice as
much for membership on an Executive Committee.

The essential point is that the director-trustee
should be paid for his time at a rate that will give the
company the service it must have if it is to do more than
mere shadow boxing in extending the area of consent in
the rule-making of private business.

The question will arise, need anything be done at
all? Granted that the customers, the vendors, and the em-
ployees do have an interest in the kind of business rules
to which they are asked to conform, they have no present
rights in the matter. The stockholders have the rights;
if they do not choose to exercise them, that is their right
as well. Meanwhile, the business goes on, meeting on

THE STRUCTURE OF A BUSINESS 91

every side the test of competition, and preserving its
authority as long as the governed consent to the rules
that are imposed. A policy of doing nothing usually
seems to be the prudent policy at any particular time for
any particular group of people. Yet, after something has
gone wrong, in retrospect it is possible to see that adjust-
ment to the times and circumstances would have pre-
served a continuity of experience and tradition which,
though modified, would not have been dissipated.

In considering whether business should do anything
to give a voice to interests other than those who have
rights to express themselves, we must remember that
each business derives its power and its form from public
government in which all these "interests" do have
"rights." If these interests someday want new rights in
the government of business, they can be acquired through
orderly public legislative processes.

Today the obvious interests of the several parties
subject to business government are not properly safe-
guarded under the present form of control of business
power. Since they are not, someone will someday, per-
haps at a most inconvenient time, make it his crusade to
turn these interests into rights. If, before this happens,
the interests of all parties are protected by business itself,
it is unlikely that formal intervention would occur on
grounds of abstract political theory.

Quite apart from reasons of prudence and justice,
an arrangement that would effectively present in the
meetings of directors at the moment of decision the in-
terests of vendors, customers, and employees, would
improve the operations of the business. Bringing these

92 TOMORROW'S BUSINESS

points of view authoritatively into the Board meeting
would make certain that they are fully expressed and that
they would not be brushed aside. Take, as an example,
the most important decision that the Board of Directors
has to make, the choice of a new president. The candi-
dates under consideration for that office will be evalu-
ated by a small Committee of the Board on their likely
ability in managing the affairs of the company. The di-
rectors will collect evidence as to ability, energy, in-
tegrity, and experience. Information as to the sensitivity
of the several candidates to management relations with
employees, vendors, and customers will be considered in
a general way. But it would be far better if in this com-
pany there were directors who had made themselves
informed on these matters and who could contribute
judgment of more than a casual kind to the whole Board
of Directors when it makes its final choice.

A Board of Directors should represent a balance of
"inside," or officer, directors and "outside," nonofficial,
directors. If a Board consists of too large a proportion of
officers, it loses its supervisory quality and the members
become self-protective in deferring to the wishes and ex-
planations of their colleagues. On the other hand, if a
Board is composed too largely of outsiders, outside inter-
ests tend to distract from the attainment of corporate
unity, and the absence of strong, informed, and fre-
quently diverse officer opinion limits the insight of the
Board as a whole into the more complex problems facing
the company.

A troublesome problem arises when a director
turns out to be unsuited for his responsibilities. His fel-

THE STRUCTURE OF A BUSINESS 93

low directors hesitate to ask for his resignation unless the
situation is really acute, and flagrant unsuitability rarely
occurs. The result is that Boards of Directors are fre-
quently cluttered up with members who are "feebly
good" and who continue in their post only because no
one wants to take on the awkward job of speaking a few
homely truths. The harm that is done is both affirmative
and negative, and the responsibility for a sound Board of
Directors is one which the chairman cannot properly
p vade. The cleansing of a Board will be much easier if
directors are fully compensated for their responsibilities.
It is easier to terminate paid services than it is to bring
an end to honorific appointments. If directors who them-
selves know that they are not pulling a full oar would re-
sign without waiting to be asked, they would spare their
colleagues much embarrassment.

The reasons for taking steps to modernize the
Boards of Directors of companies are reasons of efficiency,
prudence, and justice. Fortunately, there is no critical
situation that presses for action, but unfortunately there
is, under such circumstances, an understandable hesi-
tancy about altering existing and known power relation-
ships. However, the mere passing of time brings with it
the necessity for change in the personnel of a Board of
Directors. These occasions, if used to a purpose, may
lead to the transformation of the central agency of cor-
porate power so that it represents more nearly the inter-
ests of those whom business governs.

V

Profits and Compensation

1. Energizers

THE locus of supreme power in a company lies within
the circle of the Board of Directors, including the two
principal officers, the Chairman and the President. From
this source come the rules, the instructions, and the dele-
gation of specific responsibility, the provision of means
and the outlines of ways. Here is found the co-ordination
of the parts and of partial efforts. Within this circle, the
character of the company takes form. Into this circle
come experience, inspiration, and criticism from the or-
ganization as a whole, and from this circle flow judgments
which give back to the organization direction and disci-
pline.

But, although we have located the seat of power and
have learned how the power is applied, we still lack an
essential bit of knowledge for our understanding of the
working of business. We still need to know why the
power is applied at all, what energizes the business
machine. What is the impulse to action?

By all odds the most important energizer of cor-

94

PROFITS AND COMPENSATION 95

porate power is profit, the experience of profit, and the
prospect of profit.

Profit is not the only motive which brings corporate
power into action. Corporate power is released and di-
rected by all the forces that cause men to act: loyalty,
vanity, restlessness, love of achievement, and the tend-
ency of motion to perpetuate itself in habit. Within the
circle of authority in a business, these personal drives be-
come of great significance in understanding the reasons
for any particular decision. But, so far as corporate power
is concerned, they are ordinarily secondary, since, al-
though they are motives to the individual, they may or
may not be relevant to the business of business. The un-
derlying and unifying force, releasing all others and giv-
ing meaning to all else, is profit. It is not merely the spark
plug, it is the spark within the plug.

Our point of view toward profit is strictly pragmatic.
We are interested in how it works, whether it works well,
whether it could be made to work better. We are inter-
ested in the efficiency of profits as a directive energizer.

The compensations of the principal officers of a
company also are energizers. Over a period they de-
termine the kind of people in whose hands power of a
business shall be held. They usually determine in whose
particular hands particular authority is exercised. The
officers' compensation is both payment for talent at work
and is the means of access to the needed talent.

As with profit, our point of view toward officers
compensation also is strictly pragmatic. We are inter-
ested in how compensation works as an energizer of busi-
ness. The question is, what kind of people are brought

96 TOMORROW'S BUSINESS

into positions of business power by what kind of compen-
sation, and how does compensation affect the way these
people act?

Compensation and profits are more than mere ener-
gizers, they are directive energizers. They set the test of
success in the application of power. They are both stim-
ulus and response. They are not what business is for,
they are not the justification of business activity; but
they are so important in getting business properly done
that they are sometimes mistakenly taken to be the end
and the purpose of business. We can properly deny to
profits and compensation the exalted position of being
the end and purpose of business, and at the same time
recognize the crucial importance of these directive ener-
gizers in releasing and guiding the powers residing in the
business company.

2. Profits

Profit is the excess of selling price over cost. If a
thing cannot be sold, there can be no profit. Nor will
there be a profit unless the selling price is greater than
the total cost of getting the article into the purchaser's
hands.

This familiar relationship between selling price and
costs, which results in profit, causes profit to serve two
exceedingly important purposes. In the first place, profits
are a test of whether the thing that is made is wanted,

PROFITS AND COMPENSATION 97

and whether enough people want it at the price at which
it is offered more than they want something else at some
other price. If they do not, there will be insufficient sales,
and insufficient profits or none at all.

In the second place, profits serve as a check on costs,
and hence as a means of reducing wastes of all kinds. The
costs must be brought below the price at which the thing
will sell in adequate quantities, and the lower the cost
the greater the profit and the greater the possibility of
wider use.

The first purpose that profits serve is to make sure
that the thing made is wanted by the people. The neces-
sity of making things which must sell directs the energies
of a company into the channels of making things which
people want more than they want something else. It stops
companies from trying to do things that get no public re-
sponse and that meet no public need. And since most
things compete with other things as objects of human
desire, and since they compete both in desirability and
in price, the managers of business are forced to seek a
right price for the things they have to sell.

The fact that the thing made must be sold if there
is to be a profit makes the managers of business attend
to other matters than merely making things. They must
give much attention to the pricing of the things they
have made and to the selling of them. The selling activ-
ities of a business are informative services which help im-
prove the standard of living, and the pricing process is
a delicate and admirable device for letting people decide
how much they want one thing as compared with some-
thing else.

98 TOMORROW'S BUSINESS

The selling and pricing of things made by business
for the use of people sometimes leads to business conduct
of a character that the people, through their public gov-
ernment, have made illegal. Misrepresentation in adver-
tising and false branding have been outlawed as a method
of getting sales that will yield a profit. So also, most forms
of collusion in the setting of prices are considered con-
trary to public interest and are made illegal as "con-
spiracy in restraint of trade/' The beneficial influences
of profit-making in the production and distribution of
things for use must be protected by outlawing misrepre-
sentation of the goods sold and collusion in fixing their
price.

The second purpose which profits serve is to reduce
the costs of production and distribution and, thereby, to
eliminate waste of human effort and of natural resources
and to make more things available to more people. The
beneficial pressure of profit on cost reduction comes
from giving an impulse to efficiency and ingenuity; it
provides an incentive for the discovery of new processes
and new machines for the elimination of waste motion
and unneeded services. This kind of cost reduction re-
sults in the use of less human effort and less material in
the producing and selling of a given article. Economy in
the use of our resources of men and materials, while at
the same time maintaining the same or a higher stand-
ard of living, serves a valuable social purpose, and the
pressure for profits is the principal influence to this
end.

Just as prices can be fixed and maintained in ways
that are unwholesome, so also can the cost of things be cut

PROFITS AND COMPENSATION 99

in ways that are considered unfair and sometimes illegal.
The setting of wage rates below minimum standards,
pressure for output beyond the limits of health and san-
ity, adulteration and deterioration of product these and
other methods of cost reduction are at least on the shady
side. Profit-making by such means must be checked by
public regulation.

Profits, therefore, serve a double purpose: first, they
direct the activities of business into channels which meet
a public response; second, they provide a pressure for in-
genuity and efficiency. Profits are needed for these two
purposes, whether the profits, after they are made, are
privately owned or not. The ownership of profits is a sep-
arate question from that of the usefulness of profits as a
directive energizer of business power. An enterprise of
the business type, producing goods and services for use,
whether it be publicly, privately, or co-operatively
owned, requires the profit motive and profit statement
to make it work and work soundly.

How high can profits properly be? If the goods are
sold squarely and priced competitively, if the costs of
producing them are governed by intelligence and by the
use of fair and legal methods, if there is no direct or in-
direct public subsidy that makes prices higher or costs
lower than the managers of the business themselves could
make them, then the higher the profits the better the
interests of all are served. A special case exists in the
exploitation of privately owned natural resources where
the need of conservation for the benefit of future genera-
tions should be a reasonable limiting factor on present
profits. But, even in this special case, given a public pol-

100 TOMORROW'S BUSINESS

icy and law as regards conservation, the higher the profits
the better.

Unfortunately, public opinion today is skeptical of
accepting the highest obtainable profit as a desirable
social standard. This skepticism is the result of the prac-
tices we have described, which have undermined the
prestige of business.

These practices are: improper representation and
misbranding in selling; controlled and noncompetitive
pricing; exploitation of labor; adulteration of quality;
the receipt of subsidies in the form of franchises, tariffs,
tax exemptions, and grants of the public domain; and,
finally, undue monopoly privileges in the use of patents,
trademarks, and copyrights. When profits are made (i)
within the law, (2) under competitive enterprise, (3)
without public subsidy, or (4) without public protection
of exclusivity, the higher the profits the greater the
honor to the profit-maker. Under these circumstances
there should be no limitation on the amount of profits
which a business can make, because the greater the
profits the greater the service.

In many cases, business receives direct or indirect
public subsidy or public protection of exclusivity. These
privileges are neither unusual nor are they undesirable.
The American tradition of public co-operation with pri-
vate enterprise is one of long standing and it takes many
forms adapted to many special situations. These subsi-
dies, protections, and immunities, although they have
been legally granted, have been excessive in some cases,
and they may have been continued over an unnecessarily
long period of time. But such errors are errors in the

PROFITS AND COMPENSATION 101

application of principles that need have only pragmatic
justification. We need only recognize that where there
is public assistance and special privilege there is also
the duty of public regulation and the right of public
participation in the final resulting profit.

In addition to the two broad social purposes just
discussed, profits serve in three necessary ways to safe-
guard and to promote the safety and welfare of any
particular business. In the first place, they are a safe-
guard against errors in pricing; in the second place,
they are the foundation on which additional capital can
be raised as it is needed; and finally, they are the meas-
uring standard against which the efficiency of the man-
agement is tested.

The first reason why profits are necessary for a busi-
ness is to give a margin of protection against errors in
pricing. Goods and services are offered for future de-
livery at an agreed price which is binding on the seller.
The company making the sale estimates what its costs
are likely to be. In the case of manufacturing, the selling
price can be settled and the uncertainties will occur in
the costs of the goods to be sold. In the retail business,
commitments for the acquiring of merchandise to sell
must be made far in advance of the time of sale, and
an estimate must be made as to whether at this future
date the merchandise will be desirable and whether it
will be salable at a predetermined price. In distribu-
tion, the costs of goods and expenses can be estimated
with fair accuracy, but the selling price and the quanti-
ties that can be sold are problematical. In any case,
errors in judgment will occasionally be made and the

102 TOMORROW'S BUSINESS

margin of profit must be sufficient so that over a large
number of transactions there is a plus and not a minus
resulting from subtracting total costs from total sales.

It follows that the greater the uncertainty of the
cost of goods, or of the price at which they can be sold,
the larger the margin of profit which must be projected.
Efficient management and shrewd forecasting of demand
will make profits for some, and under the same circum-
stances losses will have to be taken by others. But unless
the profit differential for the industry as a whole is wide
enough to give to the industry as a whole a margin to
cover normal human errors in estimating future selling
prices and future costs, the position of the industry is
untenable. Profits must be large enough to bring risk-
taking in pricing and costing within the limits of ordi-
nary business judgment.

The second reason why profits are necessary for a
business is to provide a foundation for the raising of
additional capital. As a justification for the investment of
new capital, profits must be looked at differently, de-
pending on whether the business is an old one with long
operating history or whether it is a new one with its
record yet to be made.

Let us consider first an old and established busi-
ness. Such a business must have profits in order to have
access to new capital; it must be able to attract the sav-
ings of the people to its operations, when additional cap-
ital funds are required. These savings can be brought
into the company in any of three ways: (i) as the ap-
plication of the earnings of the company not distributed
to the stockholders; (2) as a loan to the company evi-

PROFITS AND COMPENSATION

denced by bonds, mortgages, or other classes of indebt-
edness; or (3) by sale by the company of the company's
preferred or common stock. In each case, a record of
profits is necessary if the company is to get the capital
it requires.

In the case of raising capital by the investment of
undistributed earnings, the profits must have been made
before they can be withheld. Further, no management is
justified in withholding earnings which belong to the
stockholders unless it believes that the withheld earn-
ings can be used to make increased or surer profits.

If the company decides to raise its new capital by
borrowing, the higher the profits have been and the
longer and steadier the history of the earnings the lower
will be the cost of capital. Unless a reasonable and satis-
factory record of profit-making has been shown, new
capital will not be available on any terms. And even
when capital is available, the differences in the costs of
capital will be significant, depending on the profit-mak-
ing record of the company. These differences in the
costs of new capital are matters of consequence to all
parties at interest in the business.

The obtaining of new capital by the sale of stock
to old stockholders or to the public nearly always means
pricing the new stock somewhat below the existing market
price of the stock already outstanding. This market price
may be above or it may be below the book value of the
stock; that is, of the historic investment which has already
been made in the company. Unless the new stock can be
sold at or above its book value, the existing stockholders
are paying a premium for the new capital. So, unless the

104 TOMORROW'S BUSINESS

profits of a company are sufficient to support a market
price that permits the sale of new stock at or above book
value, the profits are insufficient to support equal treat-
ment of old stockholders with new ones, and again the
position of the company is untenable.

Profits are not the only factor which determines the
market value of stock, and, therefore, the cost of new
capital; but, over the long run, profits are the principal
consideration. As a generalization, subject to exceptions
in special cases, it may be said that for business as a
whole profits as a whole must be considered insufficient
unless common stocks as a whole are selling in the
market at a price sufficiently above their book value to
permit the sale of new stock at book value. If common
stocks are selling at a price too low to permit the sale of
new stock at book value, access to new capital is too re-
stricted for the health of private business enterprise.

To induce new capital into new business or into an
unseasoned business, the expectation of profit must be
large indeed. How much return would have to be antici-
pated to induce the average person to take five thousand
dollars out of his savings bank or out of government
bonds for risk investment in a new and untested busi-
ness? Would it be 6%, or 8%, or io%? Obviously, such
returns are much too low. Common stocks of standard
companies should yield as much as this. Would it be
20%, or 25%? These rates of profit also are on the lean
side. Even at 25% after corporate taxes, the business
would have to go on earning at this rate for four years
in order to return the investment, and at that, the return
would be subject to income tax payable by the investor

PROFITS AND COMPENSATION 105

at the rate of his highest bracket. The plain fact is that
new equity capital is ordinarily unavailable to new busi-
ness on a business basis under present conditions.* By
and large, the possibilities of profits are too low, the tax
rate is too high, the period for getting the stake back
is too long, and the future is too uncertain. Under pres-
ent conditions, therefore, new business cannot be started
on a business basis. A going concern with a good profit
record will find abundant capital at reasonable rates, but
at reasonable rates it will be loan capital, not capital
for the purchase of its common stock.

This is not only a problem for business, it is a prob-
lem for statesmanship. If we want new equity capital for
new businesses and even for most old businesses profit
must be higher, tax rates must be lower, and the future
must be clearer than it has been in the recent past.

Finally, profits serve a necessary business purpose
in providing the yardstick of management efficiency. The
management of one company is compared with that of
another company in terms of the profits it is able to earn
in relation to its capital; the management of a company
is compared with itself in terms of what it earned a year
ago, or with its predecessor management in terms of the
earnings of a previous decade; the several divisions and
departments of a company are compared each with the
other and with standard profit performances within the
industry.

Profit as an evaluation of management efficiency is

* There are many reasons, other than business reasons, for putting capital
into business to get a relative on to a pay roll, to get a job without getting
a boss, to marry off a daughter, to establish a loss or to obtain trade dis-
counts. The inside history of why new business is able to get capital would
be good reading.

106 TOMORROW'S BUSINESS

much more significant than mere money or purchasing
power. Profit becomes numbers on a score board, the
pay-off entry in a competitive game. The incentive to
management is not the profit as profit, but the prestige
that attaches to having made a good record, to being rec-
ognized as being more successful than the management
of a competing firm in the same industry, or to having
earned more than last year or more than a previous man-
agement was able to earn.

For management the profit motive is essentially a
competitive motive, which drives where mere love of
gain would never drive. The reward to the managers is
not primarily the profit, but the prestige symbolized by
the profit success in a competitive game and status
among friends and rivals who understand how the score
is kept.

Profit as a directive energizer of business deserves
more respect than it is sometimes accorded. It would be
difficult indeed to find a substitute that would serve the
public welfare so well.

3. Compensation

Profits keep the wheels of a business machine turn-
ing, and, if the machine is right, keep them turning in
the right direction. As with profits, the compensation of
the principal officers of a company also helps determine
the character of forces within the area of top power in a

PROFITS AND COMPENSATION 107

company. Compensation has an important effect on what
kind of persons will occupy the important points at the
source of authority, and on how those persons will dis-
charge their responsibility. The chief officers decide what
rules of policy and operations they desire. They issue
their rules through subordinates of their own selection
and delegate to these agents such of their own powers
as they see fit. In addition, the chairman and the presi-
dent of a company have much to say as to who shall be
elected to the Board of Directors itself.

It is easier to take a strictly impersonal attitude
toward profits than it is toward officers' compensation.
Profits seem to come from nobody in particular and to
go to nobody in particular. They can be regarded coldly
as one influence among several which are needed to
make a business work. But there is nothing impersonal
about the compensation of the officers of a company.
Their names are put on the payroll by appropriate au-
thority, and the payments go to them as individuals.
Furthermore, like other incomes well above the average,
these incomes too are subject to comment in public dis-
cussion about inequalities of access to the material things
of life.

However, as toward profits, our point of view here
toward officers' compensation must be pragmatic. We
want to know what makes a business work the way it
does. Accordingly, we want to know what the influence
of compensation is on the management that runs a busi-
ness.

Compensation of the principal officers of a company
may be partly salary and partly other material benefits

108 TOMORROW'S BUSINESS

and privileges, such as discounts, expense allowances, re-
tirement provisions, and the like. One other form of
compensation deserves particular notice, profit-sharing
or participation in ownership.

It is desirable that top management should share
in the profits of a company. With the growth and ma-
turing of business companies there has been an in-
evitable separation between management and owner-
ship; and, as time goes by, this separation will produce
in business a private bureaucracy whose interest will be
more in its own security than in the profit-making ad-
venture of the business enterprise. For this reason, a
business should hold or recapture the attitude of owner-
ship by the form of compensation it provides for its top
management. Profit-sharing will maintain this owner-
ship attitude in part, but it is a feeble substitute for the
substantial fact of authentic ownership.

It has not been easy to devise methods whereby a
second or third generation of management can be placed
in the possession of substantial ownership interest in an
established company. But there are many signs that
Boards of Directors and large stockholding interests are
aware of the hazards in the trend toward the separation
of owners and managers. Efforts to solve this problem
should be supported by an enlightened public opinion,
and they should not be embarrassed by hostile expres-
sions of those who are jealous or suspicious or who do
not understand the dangers to all of having the rule-
making of American business fall into the hands of a self-
protecting private bureaucracy.

It stands to reason that the higher the compensation

PROFITS AND COMPENSATION 109

a Board of Directors is able to pay its officers the wider
the group from which selection can be made. This does
not mean that paying a high compensation will neces-
sarily result in the choice of the best available man for
the office, nor does it mean that price alone will secure
the services of whomever the directors decide they want.
But, given the best operating conditions that the direc-
tors can provide, the higher the compensation the more
extensive the area of choice.

What difference does a difference in quality in the
chief executive officers make in the dollars of profit a
business will be able to earn? In a company, what is
talent at the top worth?

There are some points about talent which are
worth remembering. First of all, for problem-solving,
for the arts, and for leadership, you cannot add talents.
If a problem in arithmetic is too hard for one boy to
solve, it cannot be solved by two boys or ten boys or a
hundred boys of ability equal only to the first. If a note
in an opera is too high for one soprano to reach, it can-
not be reached by two sopranos with the same vocal
range singing together. If leadership inspiration is re-
quired for a team or a squadron and the leader on the
job cannot provide it, two leaders of equal ability with
the first also will fail to do the job in fact, they are
more likely than not to produce confusion.

Talents of different people can, of course, be organ-
ized to supplement one another if there is a complicated
task to be done, a task involving several specialized
problems or requiring several special abilities. But for
the drawing of all the parts together, for the creative

110 TOMORROW'S BUSINESS

idea, for the symbol and substance of leadership, the
unity of the person cannot be divided, nor can inferior
talents be added together to attain a level higher than
the highest there is at hand.

Another fact about talent is that small differences in
quality make enormous differences in the product. In
problem-solving a slight difference in ability may deter-
mine whether there is a solution at all. In the arts, there
are only small analyzable differences in talent between
the superb artist and high mediocrity. In sports, little
differences make champions.

Statisticians know this about talent: the higher the
talent the fewer persons who hold it. As we move up
from average ability, the number of individuals posses-
sing higher grades of talent drops off sharply. This is
illustrated by the rays on a common salt-water shell.
The average number of rays is eight, with many shells
having seven and nine rays. Ten-ray shells occur only
infrequently and eleven rays only once in a million ex-
amples.

And on top of all this, modern science and inven-
tion comes along to multiply the differential productiv-
ity of talent manyfold. The scarcity of talent at the high-
est level becomes much more important because today
its productivity can be so much more widely extended.

This change is clearly observed in the popular arts.
Today a motion-picture star will be seen by millions,
whereas yesterday on the stage he would perform to
thousands. Yesterday there was room for high medi-
ocrity, today top talent must be obtained. Furthermore,
with the approval of millions at stake, the difference lit

PROFITS AND COMPENSATION 111

profit between great success and good success is out of all
proportion to observable differences in the qualities of
the offering itself.

The high incomes paid to the stars in movie, radio,
and literature are well-justified on pragmatic grounds.
The scarcity of high talent, the great differences in pro-
ductiveness with higher talent, the enormous extension
of the application of talent as a result of technical meth-
ods of popular distribution, all work together to put a
high cash value on people with unusual and wanted qual-
ities.

I am not arguing that these fortunates deserve their
greatly unequal returns, nor that these large returns are
wholesome for them as individuals, nor for their com-
munity, nor for the nation. I am merely stating that to-
day, as perhaps always, talent that is wanted can com-
mand a high price because it can earn a high return.

Even if these high salaries can be earned by high
talent, is business justified in paying them? Still limiting
our discussion for the moment to the popular arts where
the evidence is clearest, would it be good business for
business to draw the line somewhere as a ceiling for com-
pensation for talent? It is obvious that no single concern
could impose such a limitation. The talent would go
to a competitor. If the talent is worth its price, failure
to use it at that price would be harmful to the interests,
of stockholders, customers, vendors, and to all the em-
ployees. Business must pay talent whatever it must if it
needs the talent to increase its profits. Of course, if the
business has something to offer to talent other than pay >
it will need to pay the talent less.

112 TOMORROW'S BUSINESS

An industry is benefited by being able to pay high
prices for unusual talent, and it is benefited by doing
so. In an industry-wide sense, top compensation for spe-
cial qualifications is really being paid not only to the
particular individual, but to all who aspire to compara-
ble positions. All these aspirants those of the last gen-
eration and of the present who could not make the grade,
those of the oncoming generation of employees who see
before them tangibly an example of what can be done,
all the boys and girls who are dreaming about the things
they want to do are the people who are influenced by
the top compensation paid for talent in an industry, in-
fluenced to the extent that compensation counts. In this
way, an industry has available to it the thousands from
which the one may be selected. It has thousands and tens
of thousands of people spending time and effort and
money perfecting natural talents which the industry may
someday be able to put to profitable use. And profitable
use by the industry means products acceptable to a pub-
lic which purchases what it wants, better jobs for the
rank and file, better outlets for suppliers, and larger divi-
dends for holders of the stock.

High pay for high talent serves a good purpose for
all. But the talent must be high. The dangers of losses
from wrong and false judgment in selecting talent are
large. The responsibility for the use of talent, wisely,
boldly, and honestly, is clearly that of the directors and
officers who organize the work and who make the rules.

Suppose a ceiling were to be imposed by law on the
level of compensation. Since there would be no compe-
tition between companies as to level, high talent would

PROFITS AND COMPENSATION 113

have to be satisfied at the ceiling price, since it would
rather work than starve. Yes, but high talent can work
part time, and that is exactly what would happen if the
rate of pay per month, per year, or per lifetime were
to be limited by law. The laws of nature have prece-
dence over the laws of man. The productivity and
scarcity of high talent are stubborn facts. The profit of
movie and radio companies will be higher with a
$200,000 artist half time at $100,000 net compensation
than it will with a $100,000 artist full time at $100,000.
At the levels where salary limitations would be imposed,
the final result would be to deprive the generation of a
substantial and irreplaceable portion of the productive-
ness of its highest genius.

The same logic of high compensation for high tal-
ent applies to the positions of the principal officers of a
company. The opportunities and responsibilities of these
strategic positions call for the talents of problem-solver,
artist, and leader, all rolled into one. Even a rather
small company can afford to pay high for such qualities;
and if it does, it is not likely to be a small company for
long. If the field of the company has been a limited one,
it is likely soon to find its limitations vanishing.

In paying high salaries for its principal officers, the
Board of Directors should accomplish several things.
First of all, it should extend the range of possible choice
so that the talent it needs may become available. It
should be able to canvass not only its own personnel and
its own industry, but the entire range of business states-
manship and business management to find the most
promising individuals for high command. A Board

114 TOMORROW'S BUSINESS

should remember that compensation and conditions of
work are both important, and that what it cannot give
in one it will have to make up for in the other.

In the second place, high compensation at the top
improves the quality of personnel that later will be avail-
able to the company and to the industry. All this tal-
ent does its preparatory work at its own expense. The
inadequate levels of pay in the universities and in the
civil service have already made themselves felt in the
choices of lifework made by students in the colleges, and
the results are paid for at great social cost.

In the third place, the payment of high salaries to
the principal officers makes it possible to eliminate them
without compunction if they do not work out or if a
man turns up who could better fill the place. As things
are today, there is a tendency to go along with a general
officer who is "good enough." The reasons are not hard
to find. In the first place, good officers are scarce, and
it takes two or three years to know true capacity. In the
second place, the present officer is not doing a bad job.
His qualifications and character were thoroughly studied
before his appointment, and it would be most excep-
tional if a general officer who had been appointed on
grounds of ability were not able to carry on with at least
a passable showing. Finally, a general officer who is re-
moved from his office, except by politics or change of
ownership, is probably broken as far as his career is con-
cerned. No subordinate executive or employee suffers
the complete liquidation which is the lot of a discharged
president.

But "good enough" should not be enough to satisfy

PROFITS AND COMPENSATION 115

a Board of Directors when it comes to high executive
talent. The hands of the Board should be entirely free to
replace chairman or president. Too much is at stake for
too many people to justify continuing with an obvious
mistake at these points of authority. The position of
president is probably more critical than that of chair-
man, since, in a sense, he can make more positive and
irremediable mistakes. The weakness of a chairman is
more likely to be shown in lack of imagination or in un-
due caution. These sins of omission are difficult to de-
tect, since at the time they occur they have all the ear-
marks of prudence and solid common sense. It is also
more likely that the members of a Board can bolster up
a "good enough" chairman than that they can make up
for the inadequacies of an inadequate president.

In realistic terms, the hands of the Board will never
be entirely free when it comes to discontinuing the em-
ployment of the general officers. But the inhibitions
should not be increased because the compensation or
retirement arrangements for the officers are inadequate.
The salary of the president should be based on a pos-
sible term of service of not more than three years and
his retirement provision should be arranged the day he
is employed. If it then turns out that the president, on
his merits, does serve a longer term, we can be sure that
he is earning his salary and a good deal more besides.

There is no guarantee that by paying a high salary
to a president the company will get its money's worth.
Errors of judgment, urgency, business politics, these and
other circumstances may produce an officer unworthy of
his job. A man cannot be made presidential quality by

116 TOMORROW'S BUSINESS

calling him president and paying him a president's high
salary. Accidents in the selection of top officers are in-
evitable and the Board of Directors should be able and
prepared to correct an error if it makes one. Such in-
security may appear to make the job of president less at-
tractive. It makes it less attractive only to the man who
is not willing to go along with the Board of Directors
in the belief that his appointment is a sound one and
that he will be able to justify it by good works. The pen-
alty of error may be high to both parties, but it cannot
be as high as the failure to provide the best available
talent at the center of administrative decision. The com-
pensation of the chairman may well be less than that of
the president, both because of the greater security and
because the chairman can use members of the Board to
help him in assuming his responsibilities for broad com-
pany policy.

The compensation of the principal officers, particu-
larly of the Chairman and of the president, is of im-
mense strategic significance for the company and of
minor consequence as an element of over-all cost. It
should never be mere payment for applied time, nor a
reward for honor earned. The compensation of principal
officers is, in a concrete sense, formative with respect to
the company's policies and its operations. Like the
profits of the company, compensation is a directive en-
ergizer in what it brings to the source of rule-making
power and in the influence it has on all those whose lives
are influenced by the company. Top compensation
should be set realistically by the Board of Directors, with
no thought in mind other than the good of the company.

VI

Labor

1. People at Work

THE employees of a business, all of them, live under the
rules of business. Within these rules they find an area of
certainty in which they can exercise responsible choice.
In their work, they find the greater part of their oppor-
tunity for constructive expression. In the setting of busi-
ness, they find many of their contemporaries. If they
remain long in the same business, the business becomes
for them a second home, a place where people and things
and the ordering of events afford familiarity, confidence,
and the warmth of friendly recognition. In this medium,
people grow into what they will become.

Business is, to be sure, only one of the many rule-
makers that define the range of choice for the employees
of business. Yet, for its employees, business is ever-pres-
ent and will provide a poor or a rich reward, depending
on how the decisions of management affect the common
events of day-to-day experience and on the way the
problems of management are solved.

What are these decisions of management? First of

117

118 TOMORROW'S BUSINESS

all, someone must guess what customers will someday
want and how much they will be able 'and willing to
buy at a price; someone must estimate what it will cost to
make and to distribute these things; someone must set
the first and subsequent asking price; and someone must
take the risks of the inevitable errors in these estimates
and guesses. These things having been done, the oppor-
tunity for employing people begins.

Second, the work of production must be laid out
and the work of distribution must be planned. This plan-
ning must be done by people who can relate things to
processes in a time series, who are informed as to the
relevant arts and techniques, and who are able to apply
their know-how to the job in hand.

Finally, the plans having been made, they must be
executed. The results must be inspected and the ade-
quacy of plant and personnel must be preserved.

All these things must be done by and through in-
dividual men and women who are the employees. These
employees must be associated in an orderly structure in
which each must do his part. Each employee must have
the ability to do his job; he must have the will to do it;
and, in doing it, he must have the opportunity to grow
and to achieve. These considerations define the perma-
nent problems in the management of people at work.
These problems are: (i) the organization of individual-
ized talent applied to a purpose, (2) the evoking of effort,
and (3) the preservation of personal dignity and freedom
within a frame of order.

As long as we go on wanting things we cannot make
for ourselves, as long as we want these things with econ-

LABOR 119

omy in the use of labor and materials, as long as we
shall continue to exercise personal choice in selecting
the things and services we want to use, just so long the
present problems of managing people at work will con-
tinue regardless of what emerges in terms of balance
of power and spheres of influence of our many govern-
ments, public and private. The controls of the state may
be increased or diminished, the voice of labor unions in
fixing the conditions of work may become stronger or
weaker, the business managers may make their rules with
greater or less autonomy, ownership may reside at one
point or another no matter how these forces of author-
ity combine, change, and recombine, the old problems
and the same problems of managing people at work will
persist.

2. Talent and Effort

Skill and will are separable aspects in the manage-
ment of people. The distinction between talent and ef-
fort is the distinction between skill and will. This dis-
tinction can be made on a practical basis. Some people
cannot do the things they would like to do, and others
will not do the things they can.

The first task in the management of people is the
search for skill and the proper assignment of skill to
Work. This first task involves all the techniques of vo-
cational guidance, vocational selection, and vocational

120 TOMORROW'S BUSINESS

training. The schools and business, each has its own
work to do and it will be better done as it is done in
co-operation. At some point the period of formal insti-
tutional schooling must end, but it need not end as
abruptly as it does today, nor as late.

So, too, the period of vocational training in business
might well begin sooner and extend much longer, as
much longer as there remain things to be learned and
the capacity for learning them. Properly organized, this
vocational training can be given by business in its own
profit-making self-interest and not as an expensive ges-
ture for the sale of public goodwill. Curiously, voca-
tional training is something which labor unions rarely
ask for, and provision for vocational training has seldom
been made a part of a union contract.

One interesting example of provision for technical
education is to be found in the agreement between Lo-
cal #2, U.A.W., C.I.O., and the Murray Corporation of
America, in which it was agreed to educate the Union's
Time Study Stewards through the services of Stevenson,
Jordan & Harrison, Inc., management engineers.

What could be more important for individual free-
dom than vocational guidance, vocational selection, and
vocational training the discovery of what an individual
is likely to do well, the provision of his chance to do it,
and the improvement of his skill through supervised ex-
perience? The command of the individual himself and
of his world his capacity for freedom is extended or
limited at this crucial point. It is a point that business
can do something about in its own interest. Our loss of
perspective is vividly illustrated by the present neglect

LABOR 121

by business of the search for skill, its development, and
its precise application.

The second task in the management of people is
the evoking of effort in work. The will to do depends on
many things. In creating that will to do, the proper as-
signment of skill is important, since people like to do
the things they can do well.

Beyond the skillful assignment of skill, there are
the problems of compensation. How much shall tne pay
be, and how shall the payment be made? Shall payment
be made for the time put in or for the amount of pro-
duction turned out, or shall it be based partially on
each? Shall payment be made to an employee as a de-
personalized member of a working group, or shall it be
based on individualized talent and output? Shall the
payments for work be made in money or in privileges, or
shall they be made partly in each? Decisions on these
points require basic judgments in the management of
people. They fix the amount and manner of return for
effort. They fix for each employee his share of the pro-
duction that is being achieved by division of labor
throughout the world. The amount and manner of pay-
ment, its adequacy and fairness, is at the heart of get-
ting people to do the best they can. What has been said
in the previous chapters about the compensation of offi-
cers is true also about wages; wages should be as high
as they can be in terms of obtaining the most desirable
talent and the optimum application of effort. It is the
problem of management so to organize the work that
high wages can be paid profitably.

The giving of effort by people depends on their re-

122 TOMORROW'S BUSINESS

lation to those in authority, principally to the immediate
source of command. It depends in part, also, on all who
stand above and who give to the business its character
and its reputation. Inadequate and clumsy supervision
has caused gross waste in business through reduced ap-
plication of effort. There have also been tensions and
imposed restraints on management authority that come
from revolt against unfairness, insensitivity, and bad
manners.

But the great test of the will to do comes in time of
crisis. It comes with the need for special effort, which
must ever be unplanned. The requirements for this ex-
treme motivation are habit the habit of discipline, of
unconscious response to the direction of others and loy-
alty the impulse to find self-realization in purposes not
one's own. Habit and loyalty are the common gifts of
human nature to all government and, therefore, to the
management of business as well. They are gifts to be won
by an understanding supervision that has pride and in-
sight in its responsibility for protecting human values.

Finally, the act of will is most effective when it is
freely given; when, to the instructions or to the given
plan of work and reward, there is added the consent of
the man who works. This consent cannot be imposed, it
must be won. It may be won in many ways by attention
to the amount and manner of pay, to the conditions of
work, and of supervision; by the establishment of good
habits and of goodwill.

Consent to the conditions of work sometimes comes
because of knowledge that in the fixing of these condi-
tions someone, a union perhaps, has had the workers'

LABOR 123

special interest in mind especially when other interests
are in conflict. One great potential value of the labor
union to production is thrown away unless collective
bargaining can be harnessed to yield its return in the
consent of people to the day-to-day requirements for
effort in the application of skill to production.

Beyond its basic interest in skill and will, a man-
agement must have concern for its employees as persons,
as individuals who have accepted, for the time being, the
authority and the setting of the business that employs
them. The preservation of the dignity and freedom of
the individual in a frame of order is a third permanent
problem of management in a democratic country. It is a
trust which business in the United States assumes when
it accepts subordinate powers of rule-making under our
democratic state. The proper application of skill and
will to production is necessary to the full growth of in-
dividual personality. Business takes long steps toward
this objective as it is successful in the organizing of tal-
ent and in the evoking of effort.

The authority of business has as its first purpose the
production of things for use. But collaterally and in-
escapably the rules of business, which are aimed at pro-
duction, also establish the frame of order for those who
clo the work. Accordingly, the rules of business serve
two purposes and must be judged by two standards, the
standard of efficient production and of personal freedom.
The rules of business must meet the test of both.

124 TOMORROW'SBUSINESS

3. Distortion

Today, as a result of the unsettled balance of power
and undetermined spheres of influence between business
government and trade-union government, there is con-
fusion in handling the persisting and inescapable prob-
lems of managing people at work. The essential goals in
the relations between employees and the business that
employs them have been distorted in the hurly-burly of
conflict. Private business government and private labor-
union government have been playing for position as rule-
makers. Public government federal, state, and local;
legislative, executive, and judicial has been used and
abused by these two contestants for power over the con-
ditions of work. New laws, new decisions of the courts,
new administrative rulings, have brought with them
their inevitable quota of uncertainty, confusion, and
disorder.

Within the shifting frame of public law, these two
rival private governments have traded, threatened, ca-
joled, and used sheer force when it seemed advantageous
to do so. An old balance of power was being defended,
a new balance of power was being fought for, and the
end of the struggle is by no means near. During war-
time, public government has, for the moment, asserted
its supreme authority. But with the coming of peace
among nations, the strife between private governments,
between unions and business, for power over the work-

LABOR 125

ing life of working people will be resumed. The old
weapons have only been laid aside. Meanwhile, new
weapons are being forged, and ground mines are being
skillfully planted beneath the highways and bridges to
production.

Under conflict, perspective and emphasis changed.
Attention of management has been forcibly drawn to
contracts, negotiations, demands, decisions, picketing,
boycotts, arbitration, jurisdictions, and elections. Gone
is an earlier preoccupation with vocational guidance and
vocational training; with fitting the job to the man and
the man to the job; with health, nutrition, and fatigue;
with loyalty and friendliness; with building up a busi-
ness family and a business home. Psychologists, psychia-
trists, physicians, hygienists, and dietitians are subordi-
nated; and their places have been taken by economists,
statisticians, lawyers, and politicians. Under the pres-
sures of the changed emphasis and perspective, the hu-
maneness and the kindliness and the shortcomings too
of the feudal, paternal business regime are passing
away.

But change of emphasis and of perspective does not
change the nature of Adam, of the man who does the
work. He still has his individual and personal qualities
of mind and body, things he can do and things he can
learn to do. He still likes to help make things, and he
likes to loaf. He wants companionship and a good boss.

He, too, now finds that he must take into account
a new rule-maker, the union. He finds that he has be-
come a member of a new order; that a new government
has taken him over; that in addition to family, church,

126 TOMORROW'S BUSINESS

and employer, in addition to policeman and tax col-
lector, a labor leader can tell him what to do. He finds
that in some strange way the leader is said to be of his
own choosing. He finds that labor government is in con-
flict with business government, and that because of the
conflict he gets benefits he could not get for himself:
better pay, shorter hours, more job security, and a chance
to complain about his boss. These things are all good
all but the conflict, the conflict which has distorted the
perspective of management and worker alike in their
understanding of the essential part that business plays
in the lives of all who work in business.

4. Conflict

It would not be realistic to hope that we can move
into a future of orderly relations between business and
labor unions without a period of serious conflict. The
basic issues of power and responsibility over the condi-
tions of work in business have not been settled. Many
leaders of business are unwilling to share with any other
government public or private, state or labor union
power over decisions that affect the operations of busi-
ness, if they can avoid it. These decisions affect profits
and, in affecting profits, they affect the value of the
property that is being managed. It is the contention of
these managers that, since the property they administer is
private property, its use in production is the exclusive

LABOR 127

prerogative of the owners; and that the owners have del-
egated to them, the managers, authority over its use.
These managers would like to hold to the position that
it is neither right nor wise to share this responsibility
with agents not of their own choosing.

But at this point the public laws of the state and
the nation interpose limitations on the powers of the
managers by placing restrictions on the use of private
property. For example, private property cannot be used
lawfully to injure the health or morals of the community.
And recently, under the Wagner Labor Relations Act,
public law requires that under specified circumstances
private business must be administered under collective
bargaining by representatives of the workers' own choos-
ing.

Some managers of business, acknowledging the au-
thority of the existing law, do not admit its wisdom as
a solid basis for the administration of private business
property. They hope and expect that the law will be
changed, and they are prepared to spend time and ef-
fort to re-establish an exclusive jurisdiction over the op-
erating rules of business affecting their employees.

Other managers hope to move, not back, but on.
They, too, believe that the present laws are temporary.
After the war they expect a change in present legal re-
quirements, which will give them some relaxation of the
restraints on their own actions and some increase in the
accountability of labor leadership.

On the side of the labor unions, there is also evi-
dence that the war in the world has forced a truce and
has not brought a peace. As with the managers of busi-

128 TOMORROW'S BUSINESS

ness, so, too, within the leadership of unions, there are
differences of opinion as to the changes that must be
made. Issues of security and seniority, of the balance be-
tween wages and leisure, of participation with manage-
ment in supervision, these issues remain relatively qui-
escent but for the time being only.

The thorniest question of all as between manage-
ment and unions is the question of the union shop.*
Most unions urge the necessity and propriety of the
union shop. They contend that in any company, all
classifications of employees who are represented in ne-
gotiations by labor unions with management must in-
clude only employees who are members of the union.
The argument is that, since it is through the union that
benefits and privileges to the employees have been ob-
tained, and since these advantages become equally avail-
able to all employees of the same class, it is only fair that
all should share the costs and discipline by which the
benefits and privileges are made possible. If a worker is
going to receive the good things that private labor-
union government can win, he must associate himself
with that government and must abide by its rules. Even
if an employee chooses to forgo the benefits that the
union makes available to him, nevertheless, he must join
the union if his employment brings him within the area
of labor-union jurisdiction. Otherwise, the clarity and
certainty of negotiations will be diminished, since non-
members, who are in fact aliens to the union's govern-

* The conflict with reference to the "union shop" applies also to the
closed shop" and to a greater degree. The "union shop" requires that all
persons employed by the employer must become members of the union; the
closed shop" requires that only members of the union may be employed.

LABOR 129

ment, may not recognize, and cannot be forced to recog-
nize, the labor union's rules and rule-makers.

It is, therefore, easy to understand why the unions
insist that a fundamental of trade-union rule-making is
the union shop. In entering collective bargaining with
a company, a union usually attempts to obtain an agree-
ment that any worker the company may employ shall
become a member of the union. Its purpose in doing this
is, as we have said, to prevent non-union members from
employment in the company on terms which may preju-
dice the agreement or the union. It feels secure and ef-
fective only when, without exception, all employees of
any classification organized in the company are on the
union's membership rolls and under its jurisdiction.

There are today about 39,000,000 jobs in the
United States subject to unionization. About a third of
these more than 13,000,000 are now covered by col-
lective agreements. For 6,000,000 of these jobs there is
a union shop. These jobs cannot be held by any worker
unless he is a member of the union which made the agree-
ment. In many industries, few jobs are available to the
employee who is unable or unwilling to join the union.

Ordinarily, union membership is open to every
worker who is employed, or who may be employed,
within the trade covered by a given union. The union's
national constitution defines the type of worker who is
eligible to membership. The employee applies for mem-
bership in a local union. His application is taken up by
a membership or examining committee. Often the mem-
bers of the local vote on the application at regular mem-
bership meetings, but they usually accept the commit-

130 TOMORROW'S BUSINESS

tee's recommendation. Sometimes the local is dominated
by a leader who may be the business agent, the secre-
tary, or the president. In that case, his decision is final.
Once accepted, the new member must pay an initiation
fee. This is seldom high enough to keep out members,
and usually arrangements are made for installment pay-
ments.

These are important rules. They work well as long
as the trade-union is open to all workers in its jurisdic-
tion. But many unions are not open to all workers. A
number of them keep out Negroes, aliens, and women.
Some unions also exclude workers whose political be-
liefs they do not like. To keep out people because of
their race, color, sex, citizenship, or political beliefs,
where there is a union shop, means to deprive them of
the chance to earn a living at their occupation. This is
great power badly used.

In addition, there are "closed unions'' which limit
the number of full-fledged members. They make it hard
for outsiders to join or to gain full membership rights
by undue regulation of apprenticeship, by charging ini-
tiation fees deliberately designed to keep out new mem-
bers, and by issuing permit cards to nonmembers to work
on union jobs without giving them membership. Here,
again, the union exercises an economic monopoly to the
detriment of workers in its jurisdiction.

Another difficulty which has arisen in union rule-
making has to do with the locus of power. In many
unions, the rank and file has a say as to the rules that
are made and the executives chosen to enforce them. In
others, the executive board, and often a single leader,

LABOR 131

accumulates absolute power which deprives the mem-
bers of direct or indirect participation in decisions vi-
tally affecting their interests.

Opposition to the union shop by business is the
rule and not the exception. Such opposition is taken on
several grounds. The first and most common objection
to the union shop raises deep questions as to the position
of the individual in organized society. It is insisted that
any man should be able to take any job he can get with-
out paying some outsider for the privilege of working.
Fundamentally, this reason springs from an objection to
having more than one private government in a position
of responsible jurisdiction over the rules of business as
they affect business. If it is admitted, as I think it must
be, that the labor union has a proper and necessary func-
tion in the establishment and enforcement of the rules
of pay and work, then it seems inescapable that those
who benefit may fairly be required to share the burden.
The privileges and burdens of citizenship in nation and
state are not optional; and if we understand the clear
analogies between public and private governments, we
must acknowledge the propriety of labor-union efforts
to eliminate "aliens and outlaws" by persuasion if pos-
sible, by contract if necessary.

A second objection to the union shop has more
force. This objection is that the time is not yet ripe. It
is true that much insincerity hides behind the cloak
of postponement; nevertheless, the reasons for this sec-
ond objection are sufficiently compelling so that they
must be examined in some detail.

The reasons for contending that the time for the

132 TOMORROW'S BUSINESS

union shop has not yet come are three: first, that the
rule-makers of the labor union do not rule by consent of
the employees; second, that, as of today, the leaders of
labor unions are in general not competent to use wisely
the power of the union shop in rule-making; and third,
that labor-union government under the monopoly con-
ditions of a union shop has not been adequately ar-
ticulated with the public government from which it
derives its authority.

The first reason for saying that we are not ready for
a union shop is that the government of labor unions does
not truly represent the choice of the governed employees.
The circumstances under which collective bargaining
has been established by labor unions in many companies
are well-known. Threats, intimidation, misrepresenta-
tion, forgery, humiliation, and even physical force, all
have been used from time to time. These alternatives to
argument have been used more frequently than the ex-
cusable exception that is bound to occur when conflict
and rivalry run high. The law requires that a union
must show a membership of 5 1 % of the employees of a
legally recognized classification of employee if it is to
have the authority for collective bargaining. And this re-
quirement has caused union organizers to use measures
for getting members far stronger than those of example
and persuasion. This is not government by consent.

Even when 5 1 % of the employees were proved to be
union members, the employer was impressed by his re-
sponsibility for the 49% who were not. This minority
was made up of many of the most "loyal" employees; the
old-timers; the strong-willed, stubborn element who

LABOR 13S

would not be driven where they did not choose to go;
the snob faction who looked with contempt on unions
and union leaders and felt that to join a union would
be socially degrading. The manager of a company re-
belled, often with sincerity, at the thought of "selling
down the river'' the large or small minority of employees
whose outlook and behavior he found highly congenial.
It was bad enough to have this minority represented by
the union leadership which they had refused, but to
force them into the union subjecting them to the pay-
ment of union dues and to the exigencies of union dis-
cipline seemed incompatible with his views as to the
rights of men under the Republic. The union shop, ac-
cordingly, violated both the personal wishes of the man-
ager as a company executive and also deep moral prin-
ciples which have their roots in a general belief in
government by consent.

The absence of government by consent under union
organization may go beyond the initial organization and
establishment of the union in a company. The manage-
ment may observe that the union, even after it has come
into existence, does not represent the membership; that
the basic provisions for the selection of members and
the election of officers that would help assure consent to
the union's rule-making powers do not exist; and that
when these provisions do exist, they are frequently
brushed aside. The labor leader in these cases is, there-
fore, not a leader in a psychological or moral sense, but
maintains his position by force or misrepresentation;
promising benefits such as advances in pay, shorter hours,
less work, more security although these benefits may be

134 TOMORROW'S BUSINESS

known by him to be not in the best interests of the com-
pany, and even not in the interests of the employees
themselves.

A manager, therefore, hesitates to agree in negotia-
tions to a union shop when he believes that such an
agreement would increase the hold of a leader whose
power is already irresponsibly held. In spite of the fact
that there are examples of authentic leadership in labor
unions, the conditions of forced membership which have
been associated with the recent growth of unions in this
country cause managers to resist the union shop. Even
when these managers accept the principle of collective
bargaining as a desirable check on the unlimited discre-
tion of management, they feel that more time and more
ripening is desirable before the union shop is imposed
on all workers of a class, either by contract or by force
of law.

The second argument that is given against the early
establishment of the union shop on a more general basis
is that labor leadership is not competent to use this great
power wisely. It is argued that the talents that make a
good organizer do not necessarily qualify a man as econ-
omist, statesman, and negotiator; and that, for better or
worse, the present generation of labor leadership is heav-
ily loaded with men whose principal talent is to get their
unions organized and then to remain on top of them.
When it comes to responsible negotiations for the basic
conditions of work in a company or in an industry, these
leaders may turn out to be ignorant or corrupt, or both.
Even when the leaders themselves are competent, they
may be forced for the time being to work through sub-

LABOR 135

ordinate or local leadership that is both stupid and
vicious.

Does this argument rest on an unfair double moral
standard, one code for labor leadership and another code
for business? Certainly, the record shows business lead-
ership as corrupt as that found in labor leadership as
unsavory, if not always so dramatic. Certainly, too, the
records of the bankruptcy courts show much ignorance
of economic conditions on the part of businessmen.

The answer is that we do not impose a double stand-
ard. The question is addressed to the competence of la-
bor leadership to use the great monopoly powers of the
union shop wisely. If we are asked to give a business or
an industry broad monopoly powers, we should look
carefully at the records of the men to whom these powers
are given. We should expect in these individuals intel-
ligence, energy, and honor. If it were true that the in-
adequacies of labor leadership expressed the necessary
consequences of the beginning of a democratic process,
we could bear with the situation while it lasted as part of
the hard way to responsible freedom. But since it is con-
tended that the rulers do not rule by consent, and that
they are inadequate to use monopoly powers wisely, man-
agement prefers to withhold its approval of the too-rapid
extension of the authority of the union shop.

The union shop as a monopoly raises a third set of
considerations which argue for caution against its too-
rapid extension. These considerations relate to the posi-
tion of labor-union private government in the scheme
of government generally.

The union shop establishes for a union a monopoly

136 TOMORROW'S BUSINESS

which has two aspects: (i) a man cannot work unless he
is a union member in good standing, and (2) an em-
ployer cannot employ a man who will not become a
union member. As a result of these prohibitions, the
rules of the union rule-makers can be enforced abso-
lutely as long as the rule-makers can hold their positions,
and as long as the union shop can be kept closed. The
rules can be enforced absolutely, because violation by a
member would cause him to lose his membership and
therefore his chance to work, and violation by an em-
ployer would cause withdrawal of all labor and extinc-
tion of the company by bankruptcy or merger.

The rules enforceable by the union under the union
shop may include all circumstances and conditions of
work as they apply in general to a group of employees.
These rules may include wages paid, hours worked, vaca-
tions and leaves allowed, seniority privileges, output per-
mitted, machines to be used or not used. Going beyond
the conditions of work, which are the true concern of a
labor union, the rules may be improperly extended to
cover the sources from which the employer buys and
the prices he charges for his output.

The extension of the union shop and, with it, of the
unregulated monopoly position of the labor union creates
an absolutism that is incompatible with government of
the democratic type, where rule by consent and not rule
by force is fundamental law. Since it is improbable that
in a conflict between the government and labor unions
the unions will finally be able to hold on to the absolut-
ism inherent in the union shop, it seems inevitable that
the labor unions, in winning the union shop, will win

LABOR 137

government regulation of unions at the same time. The
tolerance with which monopolistic practices by laboi
unions is viewed today is a passing phase. It is already
evident that union members themselves resent the high
prices they are forced to pay as a result of imposed and
restrictive rules of other unions.

The public regulation of unions will cover at least
three matters:

(1) Membership in unions. Membership restric-
tions will not be permitted on grounds of race, creed, sex,
or politics.

(2) Costs of production. Excessive costs of pro-
duction will be prohibited by public supervision over
wages, hours, and conditions of work, guarding against
agreements that impose needless and wasteful restraints
on management discretion, feather-bedding, and other
devices designed to spread work by enforcing ineffi-
ciency.

(3) Reporting and auditing of funds. The funds of
unions will be required to be reported and audited in
such form and detail as some public agency will deter-
mine.

Such regulation is the inevitable concomitant of the
general extension of the union shop. Until the majority
of labor leaders understand that this is true, and are
willing to accept such regulation as the price of a union
shop, it seems unwise to rush too rapidly into this type
of private government. The result of too much haste, off
creating the power in advance of understanding, would
be bitter, wasteful, and unnecessary strife between the
unions and the state. In such a battle much might be lost

138 TOMORROW'S BUSINESS

that now contributes helpfully to the promotion of order
and freedom.

And so, in the unsettled and ambiguous pluralism
of union, business, and state the expectation is for a
period of conflict and disorder. Business will attempt to
protect its present powers against union interference; the
union will attempt to exact from the state the right of
exclusivity which the church has already lost. In this
struggle for power there is no natural law, and there can
be no judge. The new arrangements of power will emerge
as a product of the design and accident of conflict.

. Perspective

Someday conflict will be superseded by order. The
accommodation of business government to trade-union
government will have largely taken place. The labor
unions will have achieved accepted status and defined re-
sponsibility. Some of the present rules of the business
rule-makers will be modified and restrained by agree-
ment with the union rule-makers. The union will help
police the agreements. At appointed times and under or-
derly procedures the union and the business will draw
up new treaties for their governance.

The labor unions and their leaders will perform
their functions like any other recognized government,
quietly and acceptably. Their jurisdiction will be what it
will become. From time to time, dispute and even strife

LABOR 139

will flare up as cultural and technological changes blur
the sharp definition of a hitherto established boundary.
Just as today there are occasional sharp struggles be-
tween public government and business government as
to field of authority, or even rare clashes between church
and state, so also in an established scheme of broad un-
derstanding there will be points and periods of conflict
between labor unions and business and between labor
unions and government.

Except for these occasional points and periods of
conflict, the labor union, like any other established gov-
ernment, will not enter vividly into the consciousness
of the governed. Like these other governments, it will
use symbolism and ritual to keep fresh in the common
mind an awareness of its essential and continuing pur-
pose, and to obtain consent to its rule-making and its
disciplines.

In relation to the management of business, the labor
unions will take a place not unlike that of its auditors.
Like the auditors, they will participate with authority
in the making of some of the rules. But the problems
of management caused by labor unions will be neither
more frequent nor more troublesome than those raised
by the auditors today.

The area of labor union government will then have
taken form. A new pluralism will have been established.
The rules of the labor union will stand along with those
of business, family, church, and state, providing quietly
and acceptably their part in the structure of order within
which individual freedom may be sought and found.

Conflict will no longer distort the perspective with

140 TOMORROW'S BUSINESS

which a business looks at its own influence on the lives
and work of its employees. Once again the human ele-
ment in business will assume its rightful place. The cen-
ter of attention will not be twisted by disputes as to who
should make what rules. Instead, the operations of the
business and the part taken by each individual employee
will stand out in clear detail. The attention of manage-
ment will then return to the deeper and more intimate
problems necessarily associated with the organization
and administration of human beings in a collective task
of production.

VII

Business International

1. Trade in the World

WE have seen that in the relations of private business
government and private labor government, unresolved
issues and confused jurisdiction over the governed have
caused conflict and loss of perspective. In yet another
area, unsettled relationships among the rule-makers re-
sult in distortion in the application of business effort
in the realization of its humane possibilities. This other
area is the field of business international, and problems
here yet to be resolved are those which arise when a
business carries its activities beyond the borders of the
national state from which it derives its own rule-making
powers.

For our purposes, in studying the place of business
as an instrument of human freedom, it is desirable to
observe the international activities of business in the
broadest terms. These activities fall into three types:
first, the extension of the powers of a particular business
beyond the frontiers of its own country; second, export
and import of the products and services of business

141

142 TOMORROW'S BUSINESS

between national states; and third, the association of
private business governments for the regulation of pro-
duction and distribution in the various countries of the
world.

The essential circumstances that dictate the high de-
sirability of world-wide commerce and healthy interna-
tional business are well-understood, and need be men-
tioned only briefly. The world was not created with its
lands divided by political boundary lines, nor is its
wealth distributed evenly among the national states. The
surface resources of soil, water, and climate have changed
greatly over the centuries. The subsoil minerals which
are indispensable for our industrial revolution of the last
two hundred years may or may not be close to these sur-
face resources. The advances of science and industry cre-
ate new needs for raw materials which may be produced
in areas far removed from their final use. The automo-
bile, for example, finds its greatest use in mass consump-
tion on the temperate plains, and suddenly an agricul-
tural product of the tropics rubber must be produced
in enormous quantities and transported thousands of
miles to meet the new demand.

The people of the earth also are unevenly distrib-
uted among the nations. Natural barriers such as oceans,
mountains, desert, and jungle confine the movements of
people and divide them from one another. Cultural bar-
riers such as language, custom, and law create groups
that bind themselves together from within. The talents
and capacities of men differ widely, and special knowl-
edge and skills in the making of things for use arise in
special places. These talents and skills, being passed on

BUSINESS INTERNATIONAL 14S

and perfected from generation to generation, come to
be the genius of particular nations and peoples. Yet what
each can do well is useful to all.

From earliest history the commercial trader has
wandered over the face of the earth. He brought to peo-
ple things greatly wanted and took from them in ex-
change other things which could be spared. In doing this
he gave what was scarce to some and took from them
what was abundant, in the expectation that what he took
would be wanted by other people elsewhere. He served
to make the resources of the world and the special tal-
ents of people available where otherwise they would
have been lacking, or perhaps even unknown. The re-
ward for his effort was obtained in the margins he could
exact in completing the exchange.

The earliest commercial trader may have been an
individual, a society, or a group of friends in partnership
together. Later, to facilitate and to regularize the multi-
tude of transactions which had become indispensable for
the people's needs, great corporations such as the East
India Company and the Hudson's Bay Company were
chartered to carry on foreign commerce and were given
broad powers of decision. Today the commercial trader
is ordinarily an incorporated business or legalized part-
nership with its managers and its rule-making authority.
Thus it happens that the vital wealth-creating task of
exchanging resources, products, and skills among the na-
tional states of the world is undertaken by private gov-
ernments which are chartered by one or another public
government.

The political and economic rivalries of recent gen-

144 TOMORROW'S BUSINESS

erations have imposed uneconomic barriers to interna-
tional trade. The moral and political reconstruction of
the world must include progress toward the fullest in-
ternational exchange of goods and services. We want to
restore the useful services provided by the commercial
trader who wandered over the face of the earth, ex-
changing what was scarce for what was abundant. But
when the trader international comes again it will not be
in a world of mysterious places and creatures, but in a
known world organized to give freedom, security, and
well-being to all.

2. Power Beyond the Borders

When a business goes beyond the borders of its own
country to carry on its own business activities it inevi-
tably creates a special set of power relationships. We
must remember that the private business company is a
nationalized institution, and that as a private rule-mak-
ing agent, its decisions are validated by the authority it
receives from the national state. In consequence, it turns
naturally to its own national state for protection and
assistance, and the national state turns to it for help in
the carrying out of national policy economic and po-
litical.

As long as business stays at home it usually recog-
nizes the superior position of public government on
issues of a purely domestic character or affected by a na-

BUSINESS INTERNATIONAL 145

tional interest. This superior position is accepted as a
matter of right and not merely as a matter of force; al-
though it must be conceded that the superior power po-
sition of the national state, as compared to that of private
business, keeps many conflicts from arising because the
outcome is evident in advance. Business may not like
the laws passed in its own country regulating conditions
of labor, control of prices, and restraints of trade, but
business does not question the propriety of regulation
within the law. Even in those cases where business
groups have taken over control of public government
by the influence they have acquired over public officials
as seems to have been the case in Germany, and as
sometimes happens to us in local government even in
these cases private business operates through the form
of public government, and, in its own country, does not
usurp the dignity and status of the state.

Under the stress of war, revolution, and depression,
the offensive and defensive alliance between private busi-
ness and public government has become closer and
closer. In the Soviet Union business and government
became one. In Germany tendencies already well ad-
vanced were accelerated after 1933, and business and
government functioned as one certainly as far as inter-
national commerce and political propaganda were con-
cerned. In the United States the depression brought busi-
ness to the government, asking for increased protection
against foreign competition, and resulting in the Smoot-
Hawley Tariff Act of 1930. Business asked for protection
against domestic competition in 1933, and got the NRA.
The threat of war, and war, caused the government to

146 TOMORROW'S BUSINESS

draw private businesses in the aviation and communi-
cation industries into the orbit of national foreign policy.
In business international, the private and public
rule-makers businesses and governments develop con-
flicting patterns of power relationships. In foreign trade,
a single business, chartered in its own country, must
issue and enforce its rules to conform to the public laws
of one or more foreign national states. If a business does
not like the compulsions of an external and alien na-
tional power, it may seek to associate its own national
government with it in securing justice or in imposing its
own will.

Deep moral and psychological transformations take
place when business crosses its own national borders to
do business. When operations are extended abroad, the
attitude of the business management toward a foreign
public government and toward alien people is different
from the attitude it takes toward its own. In relation to
the foreign state, the business manager is less inclined
to acknowledge any moral right of government to a su-
perior power position; the foreign state must have suf-
ficient power to enforce its own laws. The manager of
a business may also feel that his own country has an
obligation to get for him from the foreign state, by ne-
gotiation or by force, the powers and immunities he feels
he needs to compete successfully with local businesses
and with those of the nationals of other countries.

If the workers, suppliers, customers, and stockhold-
ers of a company are citizens of another country, the at-
titude of the management of a business toward these
people is different from what it would have been had

BUSINESS INTERNATIONAL 147

they been citizens of his own. The degree of change in
any particular case will depend on the particular man-
ager. When a business manager's respect for the dignity
and welfare of foreign peoples and foreign governments
is weak, his business, when it operates abroad, tends to
loosen conventional restraints on predatory action and
to magnify the relative power position of his private
business as against that of the foreign public govern-
ment. With this change comes an increasing growth in
the feeling of prestige and authority of the business man-
ager. He no longer feels, as he does at home, that he is
subordinate to the national state; but he may feel that
his status is equal or superior to that of the public au-
thorities of the foreign state in which he carries on his
business. As a result, the established and orderly rela-
tions of business and government, taken for granted at
home, tend to break down. Conflict and rivalry between
public governments and private business arise, and nei-
ther government nor business is willing to yield status
to the other.

Over the centuries the record of private business op-
erating abroad is filled with instances of ruthless, in-
humane, and corrupt pressure on native authorities and
native institutions. It is true that business international
has taken with it, to these foreign lands, lasting material
benefits but at a fearful cost to the people of the world.
The destruction of primitive cultures and of the orderly
processes of primitive social arrangements are poorly
compensated for by a more protracted and disorderly
life adorned by gadgets.

In recent decades there has been a change for the

148 TOMORROW'S BUSINESS

better, in recent years at an accelerating rate. Sheer bar-
barity has been practically eliminated as defensible pol-
icy. But it may come as a shock to some to know that
conferences of national states devoting efforts to the sup-
pression of trade in African slaves were held as recently
as 1885 at Berlin, 1890 at Brussels, and 1919 at Saint-
Germain. Substantial correction of the traffic in opium
awaited the emergence of an international government,
the League of Nations. The conditions tolerated as late
as J 939 * n ^e colonies of some of our best people illus-
trate the dangers of irresponsible and unregulated busi-
ness international to human freedom.

These evils of business international are the result
of an understandable tendency to moral insensitivity
when business is done in a foreign state that does not
command respect, and when the persons who are injured
are thought of as "foreigners" and not identified as part
of the manager's own human family.

The picture is by no means entirely dark. Business
operating abroad contributes good as well as evil. Be-
tween countries that have attained high standards of po-
litical order and a fair equality of living standards and
productivity, between countries in which there is respect
for each other's citizens as persons, beneficial interna-
tional trade goes on without harmful cultural disturb-
ance. This condition existed in Western Europe prior
to 1914.

And even between countries with different standards
and cultures, experience shows that international busi-
ness may be a helpful influence in improving the welfare
of a foreign people. Obviously, when an industry has a

BUSINESS INTERNATIONAL 149

profit interest in raising the standard of living in an-
other country, the companies in that industry will go a
long way in establishing high standards of operations
and working conditions. This has been true of United
States- and Canadian-owned public utility companies
serving Latin America. On the other hand, when an in-
dustry has a profit interest in maintaining low costs, as
in the case of the extractive and raw material industries,
the companies may be negligent or obstructive in insti-
tuting standards of business practices which they would
take for granted at home. But even here we have ex-
amples of strong companies, such as the oil companies in
Venezuela, which have been solicitous for the long-time
development of the foreign country in which they are
operating. These companies have respected the political
integrity of the country and have contributed sincerely
to measures for the welfare of the people.

The good examples provide clues to the methods
and conditions under which business abroad can be car-
ried on both profitably and humanely. If we are opti-
mistic, we can take the good examples as a sign of the
way business international is likely to evolve. If we are
cynical, we can discount these evidences of private states-
manship as the self-conscious welfarism of companies that
can afford to be good. If we are realistic, we will recog-
nize that the investment of a company operating abroad
is affected by the growth of popular political groups and
movements, the opening up of horizons by radio and
motion pictures, the vulnerability of foreign commercial
operations to domestic political attack, and the unwilling-
ness of the home country to intervene with armed force.

150 TOMORROWSBUSINESS

However, in the end, the only secure foundation for
the building of international business is the voluntary
subordination of the rule-making of private business to
a moral code. Unless there is some standard of value that
cuts deeper than mere greed, who can say when a par-
ticular business manager will value the short run higher
than the long or whose benefit will be taken as the prac-
tical test of policy? Such a code may be imposed on
business operations abroad by the superior power of a
foreign state, or these principles may emerge as a con-
sensus in a world community of national states, a frame
of order within which international business will find
a common law and a code of conduct. Or, more simply,
the moral code that sets the standards for the rule-mak-
ing of business when it goes abroad may be nothing more
than the extension to the world-wide activities of that
business of the humane practices which have been freely
accepted at home as a matter of right and justice.

3. Products Across the Borders

When the products of business go abroad, another
set of complications arises, among them the toughest and
the most irrational in the whole adolescent world. The
reason the products of business go abroad is because they
are wanted by the citizens of the country that receives
them. We in the United States want Irish linens, Scotch
woolens, French champagne, Chinese embroidery, Bo-
hemian glass, Argentine beef, and Italian wines. If these

BUSINESS INTERNATIONAL 151

products of other countries are wanted here in the
United States, why shouldn't our people have them at
the price for which they are available? Why should the
power of the national state be invoked to keep them out,
or to add to the price at which they would otherwise
be available a tariff duty that makes us pay more than
the businesses of other countries require in order to sell
these things to us at a profit?

The United States is not the only country that puts
up barriers to the exchange of the products and services
of other lands. Practically all countries impose tariff or
other barriers to prevent the people of their own coun-
try from benefiting from the skill and enterprise of peo-
ple not their own. Why should this be?

There are two compelling reasons why foreign prod-
ucts are excluded from a country, or why they are ad-
mitted in quantities less than the unrestrained flow of
trade would bring. The first reason is that these im-
ports absorb foreign exchange, which is available in lim-
ited quantities only and is needed for other products
more urgently required in the national interest. The
second reason is that they compete with similar products
made at home.

Taking the first point first, there is good reason why
a country with a limited amount of foreign exchange
should put up bars against the importation of certain
kinds of products. We in the United States are not sen-
sitive to the problem as it faces other countries.
Throughout our history, the demand for American agri-
cultural and manufactured products has been so great
that we could buy abroad everything we were willing to

152 TOMORROW'S BUSINESS

accept. Except in wartime, we have never had a foreign
exchange problem caused by our spending more dollars
abroad than the people of other countries wanted. We
can buy abroad all and more than has been our custom.
The world demand for our agricultural and manufac-
tured products makes others want all the dollars we pay
to foreigners for the things we buy from them.

But some countries are not in our fortunate posi-
tion. Take a country like Yugoslavia as a case in point.
Yugoslavia has a certain number of products which she
can export grains, copper, ceramics, and textiles but
the variety and quantity is limited at the present stage
of industrialization of the country. The foreign cur-
rencies coming to Yugoslavia for the purchase of these
exports are all that are available currently for the im-
ported goods which are required, and for payment of
interest and for providing a sinking fund on the coun-
try's external debt. If Yugoslavia can and wishes to bor-
row abroad, additional foreign currencies may be made
available to her, but in the end these loans, too, will
have to be paid off from the proceeds of exported -prod-
ucts. Tourist expenditures ar^d remittances from na-
tionals working abroad will help some; and for many
countries they may be made important.

But, finally, a .balance will have to be struck and
the government of Yugoslavia will have to decide
whether, everything taken into account, the people in
the country can be permitted to import all the things
they want. The people of the country may have all .the
local currency they need. They may have plenty of
dinars, and yet the country may not be able to exchange

BUSINESS INTERNATIONAL

these dinars in the desired quantity for dollars or pounds
sterling. This would necessarily happen if the sales of
products of Yugoslavia abroad were insufficient to pro-
vide the needed amount of foreign currency.

When a government finds that there is a shortage
of foreign exchange to cover all the importing its people
want to do, it is proper that a decision should be made
that some imports are more in the national interest than
others, and that such foreign exchange as is available
should be allocated to the essential imports. It might be
decided, for example, that cosmetics, and consumers'
durable goods, such as automobiles, radios, and vacuum
cleaners, were less necessary than dynamos, railroad
equipment, agricultural equipment, and citrus fruits. If
so, tariffs and embargoes might be placed on the less nec-
essary imports, both to reduce the quantity of such goods
coming into the country and also to stimulate their pro-
duction at home. Such measures are taken in order to
protect a country's capacity to pay, and to accelerate its
capacity to attain higher levels of production before the
people enjoy the use of international products serving
little or no constructive national purpose.

The United States must be prepared to see a con-
siderable amount of such restriction on imports by for-
eign countries in the postwar period, and must accept
these restrictions as necessary in the process of world
restoration, not as punitive measures against our prod-
ucts. The United States will be particularly affected by
these measures, since it is possible that the whole range
of consumers' durable goods, in which we excel, will be
subject to restriction as items of secondary necessity. It

154 TOMORROW'S BUSINESS

is also possible that much heavy industrial equipment
will be bought elsewhere, also because of foreign ex-
change problems of both buyer and seller.

Of course, we should like to see American goods
moving to all quarters of the globe. We should like to
sell them wherever they are wanted and wherever they
compete favorably with other products in terms of de-
sign, quality, and price. But we must realize that every
country must protect its own foreign exchange position
if it wishes to maintain exchange stability and be able
to pay its bills owing to foreigners when they become
due.

If we wish to speed up the time when our exports
can move freely in the world's markets, there are a num-
ber of measures which will help us to obtain this de-
sirable objective. First, we should get a high level of em-
ployment in the United States so that large imports of
raw materials would be required which we would pay
for with American dollars. Second, we should install
long-term loans and make capital investments abroad so
that essential productive machinery and equipment can
be acquired. Third, we should reduce tariffs and remove
the barriers to imports into the United States of the 'agri-
cultural and manufactured goods of other countries. In
the meantime, we should not press foreign countries to
take American products which serve no sufficient useful
purpose to them and which make excessive demands on
their limited supply of foreign exchange.

The impulse to tariffs, quotas, and embargoes, and
other devices to keep wanted goods from coming in
across the borders does not spring exclusively from the

BUSINESS INTERNATIONAL 155

laudable desire to protect a currency from depreciation,
or to allocate scarce foreign exchange to imported prod-
ucts which the country most needs. In fact, until after
World War I, the two principal purposes of tariffs were
(i) revenue and (2) the shielding of a domestic industry
from foreign competition.

Here in the United States the need of tariffs for
revenue purposes has long since passed. Some of our
tariffs are so high that they produce no revenue at all.
Some are applied to the elementary necessities of life,
such as sugar, which, being in fact a sales tax on food,
would be rejected out of hand if the true impact of the
tariff were generally understood. In a country like the
United States, which has no fear of the depreciation of
its currency in world exchange and has other means of
paying its bills, the tariff and associated protective de-
vices in restraint of import trade are nothing more than
means of raising prices to the consumer in our home
market above the level that would prevail if the home
market were free to all who want to sell to us.

The difference between the world competitive price
of an article and the actual price caused by a tariff is
therefore nothing more or less than a sales tax, a tax on
home consumption. It is a sales tax that is paid by the
consumer through the retailer, directly to the producer,
without the intervention of any public agency.

This tariff-sales tax, paid by the consumer, provides
a subsidy to particular industries. For this subsidy no
accounting is required, and no specific performance.

The purpose of the tariff in keeping goods out of
the country, and in increasing the price to consumers for

156 TOMORROW'S BUSINESS

the goods which do come in, is to subsidize manufac-
turers who believe they could not make a satisfactory
profit if the foreign goods were imported. To put it
bluntly, in a free market without tariff protection, the
preferences of the American consumer would shift to the
foreign article because of its quality, design, or price.
The American tariff tradition raises two questions of
public policy which are as important to the consumer as
they are to the producer: first, should some industries be
subsidized, and, if so, which; and second, how should the
expense of the subsidy be borne?

It is certainly true that we want to subsidize many
of our industries. We want to preserve in this country
the art and technical skill in doing many things which
the people of other countries can do cheaper and better
than we can do them today. We want to preserve these
talents and to develop them, both for national defense
and to have a well-rounded economy, with as great va-
riety of productive opportunity as our natural ability and
resources permit.

But we will never get value received in terms of true
protection of an industrial or agricultural art, or in terms
of the advancement of our national talents, through the
use of these unregulated tariff subsidies financed by a
blind sales tax.

This is not to say that for some products a tariff-
sales tax may not be appropriate, assessing the cost of
subsidizing the industry on the user of its products. But
this method of sharing the cost should be examined in
each particular case to make sure that direct subsidy
from general revenues would not be cheaper and more

BUSINESS INTERNATIONAL 157

equitable. If we are going to continue to subsidize the
science and art of sugar growing and "refining, of .wine
production, and of the making of men's shirts, we should
probably proceed by a different method than by the
price-raising tariff-sales tax.

Not only is the present method of subsidy and cost-
sharing inefficient and inequitable, but it is an important
obstacle to the restoration of world order. Our import
restrictions prevent the peoples of other nations from
doing for us the things they can do better and cheaper
than we can do them for ourselves; and, as a result, they
cannot buy from us the things we can make better and
cheaper than they themselves can make them. The.net
result is that our working force must carry an unneces-
sary burden of toil and sweat, and the peoples of other
countries are deprived of the higher standard of living
which the world's prevailing technology and art could
make available.

Change from an indirect, unregulated tariff-sales
tax subsidy to direct subsidy of needed industries can-
not be made overnight. The present system has gone on
for so long and is so deeply ingrained in our commercial
and industrial life that it cannot be torn out with one
pull. Vested interests of property and employment have
gone into these sheltered industries in good faith, and if
policy is to be changed, it should be changed in detail
and with proper compensation for injury to capital and
to labor.

What is needed is a change of direction and the tak-
ing of obvious first steps. Such a change would be ac-
claimed at home and abroad as a contribution of para-

158 TOMORROW'S BUSINESS

mount importance to the peace and prosperity of the
world. The example of the United States in moving
toward a policy of discarding protective tariffs and toward
forthright subsidies for the industries we want to sub-
sidize in our own national -interest would clear the air
on the question of the true value of trade across the
borders. If particular industries should be subsidized in
the national interest, let them be subsidized; but, at the
same time, let the movement of world commerce be free.

There is one type of protection a national state can
give to its producers -which increases rather than de-
creases the standard of living at home. Protection is neces-
sary against arbitrary and irregular pricing by foreign
producers. Episodic dumping, and short-range pricing on
the basis of temporary expediency, political or economic,
may be destructive to a particular industry with no net
long-time gain to the nation. The propriety of such pro-
tection will be used to justify safeguards in circumstances
where authentic competition presses with unwelcome
severity, but we should not for that reason blind our
eyes to the fact that the national state should protect its
producers when to do so is in the long-run national
interest.

4. Cartels

Cartels began when, for the first time, two traders
decided to stop competing, to divide the market, to fix
prices, and to exchange information. Cartels had their

BUSINESS INTERNATIONAL 159

first trouble when a third trader, an outsider, undersold
them and got the business.

The word "cartel" is an elegant name for a simple
idea. The idea is that there is more profit to be made in
monopolizing a small market than in competing for a
large one, or that it is desirable to make sure that the
total production of an industry is controlled so that ex-
cess production will not force a break in prices and
reduce the profits of the producers. Through the cartel,
prices will be .maintained and there will be profits for
all, or nearly all; and such price concessions as are made
can be reserved to make friends for the cartel.

The cartel idea is, therefore, neither in origin nor in
application related .exclusively to 'business international.
Here in the United States the term is, to be sure, asso-
ciated with world commerce because cartellike agree-
ments, when they are arranged in interstate business, are
illegal acts in restraint of trade. Naturally, these agree-
ments are not matters of public information.

We must understand clearly that collusive agree-
ments in restraint of trade, even though they may be
illegal in the United States, are entirely legal and the
order of the .day in world commerce outside the United
States between foreign countries and within many coun-
tries of the world. Business international *in general re-
gards the commercial policy of the United States under
the Sherman Act, a policy favorable to competition and
unfavorable to restraint of trade, as both unintelligible
and unintelligent. Such a policy frequently prevents an
"orderly" market and an assured profit. It permits "out-
siders" to compete for the available business on the basis

160 TOMORROW'S BUSINESS

of lower prices and better service to the consumer with-
out giving too much attention to the so-called "long
pull." Even the laws of the United States, as in the Webb-
Pomerene Act, recognize that in international trade
American companies may find it difficult to carry on their
business unless they are permitted to conform in some
measure to the practices of cartels and to the customs of
foreign countries. But the special considerations afforded
under the Webb-Pomerene Act have been little used and,
under present conditions, the act has little practical
effect.

The agreements made between companies in two or
more countries concerning their methods of doing busi-
ness are the foundation of international cartels. These
cartels may exist in raw material production, manufac-
turing, or in any branch of commerce where it is desired
to limit .competition in a way favorable to the members
of the cartel. Sometimes the limitations will come
through agreements to restrict and divide production,
as in the case of tin, or they may come through restraint
on the introduction of new technical improvements,
processes, or patents. The limitation to competition may
occur by a division of markets, the producing companies
of the world agreeing among themselves as to what coun-
tries they will stay out of and what countries they will
take as their own.

In many instances for example, in electrical manu-
facturing and in chemicals an important aspect of the
international cartel is the exchange of information on
new products, processes, and patents. Information of this
kind would ordinarily not be available for use through-

BUSINESS INTERNATIONAL 161

out the world until much later, if at all, unless the orig-
inating company was confident that its creative skill
would not be used by others against it in competition.
On the other hand, these agreements may injure the
customer, since they create a situation whereby a new
product may be suppressed for years if, by causing un-
wanted obsolescence of existing capital investment, it is
harmful to the members of the cartel.

The international cartel is not always the smooth-
running machine that a description of its methods and
purposes might imply. The individual members of the
cartel have their own interests to protect, and they have
little loyalty to the cartel as such. After a certain length
of time the strong members of a cartel become tired of
supporting the weak, and the weak retaliate with what-
ever weapons come to hand. The exchange of informa-
tion is fine in theory, but in practice many secret proc-
esses may be withheld, as has been dramatically shown
by the German members of the chemical cartel. Then,
too, there is always the problem of "outsiders," com-
panies which refuse to come into the cartel in the first
place or which develop their businesses outside the cartel
and grow strong enough to become annoying competi-
tion to the cartel.

The international cartel is an association of national
private business governments, and, to the extent that the
cartel makes rules and enforces them, it is itself an
international private government. The agreements be-
tween the companies are treaties binding them together.
The cartel, an international private government, thus
finds itself with no international public government to

162 TOMORROWS BUSINESS

which it can look for authority, protection, or regula-
tion.

Although each national company is subject to the
laws of its own nation, the cartel itself, in its actions, may
not be subject to the laws of nations affected by its de-
cisions. For example, the division of markets throughout
the world outside the United States for exclusive exploi-
tation by particular members of a cartel is not subject to
public regulation. If American drug companies agree
within the cartel that they will not sell in Argentina,
there is no power in Argentina which can compel them
to do so.

The absence of any public international authority
empowered to regulate cartels, and the injection of the
national state into the picture to protect the alleged in-
terests of its private national companies in private inter-
national agreements in restraint of trade, produces
confusion and conflict at the level of international public
order. The regulation of business international by inter-
national public agencies will someday be an element in
the world organization for peace. Such regulation will
not be easy to arrange or to administer, but until the
rule-making and rule-enforcement of the cartel an
international private government is brought under the
jurisdiction of international public law, there will be a
constant threat to all who are governed by its decisions,
a threat to public order and to freedom.

3

FISCAL POLICY AND PRIVATE BUSINESS

VIII

Profits and Purchasing Power

7. Health in Business

A SICK business serves the cause of freedom badly. In a
sick business, stockholders, employees, vendors, and cus-
tomers, all are governed by rule-makers whose objective
is survival and whose motivation is fear. In such a busi-
ness there is no "long pull/' and short-run policies dic-
tate the decisions of the manager. The sick business has
no freedom and it can give no freedom. It can be vic-
timized in every business transaction, and it protects
itself as best it can.

There are many kinds of sickness in business. Some
of these sicknesses affect particular businesses, and some,
like an epidemic, affect business generally at about the
same time. The two most common and dangerous epi-
demic diseases of business are paranoia and pernicious
anemia. Paranoia is a psychotic condition in which de-
lusions of persecution evolve into delusions of grandeur.
Frequently the two forms of delusion alternate, and it is
hard to tell which is the cause of which. In any case,
paranoia is characterized by an essential dissociation

165

166 TOMORROW'S BUSINESS

from reality. Treatment is uncertain and prognosis is
obscure. In the individual, paranoia is considered incur-
able. Whether epidemic paranoia in business will yield
to the will to live and the passage of time remains to be
seen.

Unlike paranoia, the epidemic anemia of business
can be cured by adequate nourishment, fresh air, and
vigorous exercise. There are some who believe that the
paranoia of business was caused by the anemia, and that,
once normal conditions are restored, the psychotic dis-
turbances will pass away. Others have doubts. But, in
any case, there can be no question that for the individual
person adequate nourishment is a favorable foundation
for a sound mind, or that thriving business is a necessary
prerequisite to sound business statesmanship.

The undernourishment of business comes from in-
sufficient profits and prospects of profits. When this con-
dition applies only to a particular business, we can
regretfully charge the disorder to the requirements of
survival in a competitive universe. But when business
generally is undernourished for lack of profits, we must
look to the environment generally. The presumption is
that the environment is not favorable to business sur-
vival.

An environment unfavorable to business survival
may result from two causes: first, from public repudia-
tion of the policies of private business government;
second, from the absence of a sufficient. flow of purchasing
demand to keep the wheels of business turning. The
first of these causes results in revolution, the second in
depression. In the United States we have so far suffered

PROFITS AND PURCHASING POWER 167

only from the second cause, depression. There is, with
us, no substantial desire that some new way, other than
private business, should be found to get ready for use
the things that the people want and need.

But sick business serves the cause of freedom badly,
and people are more interested in freedom than they are
in business. Accordingly, our American disorder of busi-
ness depression must be cured if private business is to
survive. An adequate flow of purchasing demand must
be maintained as a necessary condition for business
health, and business health is necessary if we expect
private business government to be effective as an instru-
ment for human freedom.

2. Profits from Transactions

Our interest in freedom, and in the part that private
business government plays in the attainment of freedom,
therefore, requires that we be concerned with business
health and with the conditions that favor business health.
And, as we have seen, business health is nourished by
business profits.

In an earlier chapter we have seen the way profits
act as a directive energizer for the individual business,
getting the things produced that people want and im-
posing pressure for efficiency in the use of human effort
and materials. Now, as we consider profits for business as
a whole, we come to a new set of problems, problems

168 TOMORROW'S BUSINESS

which relate to the adequacy of purchasing demand as a
whole. These problems center in the nature of purchas-
ing power and of its movement in the national com-
munity, since it is only through the flow of purchasing
power that the nourishment of business by business
profits can be accomplished.

A business can be rich and still be sick profitless.
So also, business as a whole can be rich and still be un-
healthy. The balance sheet of business may show enor-
mous assets and modest liabilities, and -still it may not
be doing the work that it is the business of business to
do. The activities of business consist of business transac-
tions, not of assets and liabilities on a balance sheet. The
balance sheet is only a cross section at a moment of time,
showing how, at that moment, the business stands;*what,
at that moment, the business has to work with. The work
itself consists of the business transactions that preceded
and will follow the balance sheet cross-section picture.

If there are no transactions, there will be no profits.
If there are insufficient transactions, there will be in-
sufficient profits. Large numbers of transactions do not,
of course, guarantee profits, but they are a necessary first
condition in providing a situation in which profits can be
made.

In a business transaction, the transaction is always
associated with the transfer of purchasing power. Usu-
ally this purchasing power is lawful money, or an equiv-
alent expressed in lawful money. Sometimes, to be sure,
business transactions are direct exchanges of property or
services barter arrangements but barter is the excep-
tion in a money economy such as ours.

PROFITS AND PURCHASING POWER 169

Since business transactions ordinarily are associated
with the transfer of money purchasing power, the aggre-
gate value of the transactions will depend on two things;
first, how much of this purchasing power is outstanding;
second, how rapidly it flows, how frequently it passes
from hand to hand. The problem of purchasing demand
is, therefore, a problem in two dimensions, the quantity
of purchasing power and its rate of flow in time.

3. Power in Motion

Purchasing demand is purchasing power in motion.
It is dollars of circulating medium circulating. The level
of purchasing demand depends on how much purchasing
power is moving, and how fast. Most of the job-creating
stream of purchasing demand arises from the day-to-day
needs of a hundred million people and millions of busi-
nesses, carrying on their private economic lives with the
purchasing power at their disposal. At times, this stream
of purchasing demand is augmented by the lending activ-
ities of tens of thousands of commercial banks, savings
banks, and insurance companies. Sometimes this increase
occurs because these financial institutions have taken
slow-moving purchasing power, represented by the sav-
ings of individuals, and have speeded it up by making it
available to business. Sometimes, by their transactions,
they actually increase the amount of purchasing power in
the stream.

The sum total of all these private transactions

170 TOMORROW'S BUSINESS

creates a mighty river of purchasing demand which rises
and falls as a result of a hundred million private, free
decisions. These acts are based on the particular cir-
cumstances as they appear in the moment of decision to
him who has the power to spend, to invest, or to wait. In
their private dealings, these individuals have no public
responsibility for trying to increase or to decrease the
general stream of demand. In attending efficiently to
their own business, they do their own part.

Although the adequacy of the stream of purchasing
demand affects the welfare of each individual, there is
nothing, as individuals, that they can do about it. But,
by working together through their government, they
can weaken or strengthen the flow to compensate for the
aggregate decisions of private enterprise as a whole. In
this way they can increase the stream if it falls too low,
and they can hold it in check if it rises toward an in-
flationary flood.

The regulation of the flow of purchasing power, the
control of the level of purchasing demand, and at the
same time, the preservation of the freedom of the indi-
vidual to spend, save, or invest his money as he pleases,
has become the central economic problem of democratic
governments in the safeguarding of human liberty.

4. The Private Banks

The banking system adds to the stream of purchas-
ing power when it makes a loan, and it takes away from

PROFITS AND PURCHASING POWER 171

the stream when a loan is repaid. The banking system
responds to the body economic with the varied decisions
of tens of thousands of separate banks, all working within
a common basic tradition and within the framework of
governmental rules as sanctioned by law. One loan is
made, another is refused; a loan* is refused, by one bank,
and it is made by another. Sometimes loans are hard to
make, and the rate of interest is high. Sometimes, when
the .rate of interest is high, loans are easy to make; some-
times, when the rate of interest is low, borrowing from
the banks is difficult indeed. The banking system is many
and it is one. Because of banking tradition and because
of public law and regulation, there is in banking policy
a definite predictability and a definite tendency. Yet, for
the borrower, there is always a certain range of choice as
between particular banks; and every bank knows that its
good customers would be welcomed by its competitors.

The banking system, being tens of thousands of
separate and autonomous banks, responds variously to
the needs of hundreds of thousands of separate busi-
nesses. The needs of businesses for the purchasing power
created by the banking system arise in the ordinary
processes of production and distribution. Money must
be spent for raw materials, for labor, for freight, for
advertising all in advance of the final sale to the final
customer. In the meantime, as goods move from producer
to wholesaler and from wholesaler to retailer, the bank-
ing system stands by, ready to pump out the purchasing
power to make the loans that will enable the producer
or distributor to pay his bills, if he hasn't money enough
of his own to take care of them. When the final payment

172 TOMORROW'S BUSINESS

is made out of the pocket of the consumer, the loans
made by the banking system are paid off; and, in this
way, the purchasing power that has been pumped out is
drawn back in again.

The loan made to a business by a bank is made on
the initiative of the business, and at the bank's discre-
tion; but there are several points where national and
state governmental bodies come in to make sure that the
stream of purchasing power put out by the banks has a
healthy flow. Bank examinations, deposit insurance, limi-
tations on loans on securities and for consumer credit
all affect the general operating policies of the banks.
Then, too, the Federal Reserve System has its special
powers to adapt the supply and the cost of credit to the
needs of the business community, as they are reflected
through the banks.

The banking system and the myriad businesses
working with it each and all of them are making sep-
arate and independent decisions based on their separate
and independent judgments of what a particular busi-
ness needs. But the needs of business as a whole for an
adequate flow of purchasing power are not the same as
the needs of individual businesses for the specific pur-
chasing power required by them in order to pay their
bills. It is true that the money which businesses borrow
from the banks gets into the stream of purchasing power
and stays there until the loans are paid off, but the rate
of flow of the stream the pulse may not be rapid
enough to absorb the high production of industry that
would come with high employment of men and machines
and factories. Or the pulse may be too rapid, displaying a

PROFITS AND PURCHASING POWER 173

feverish demand that would overburden the capacity of
business and would result in excessive labor require-
ments and, soon after, in an inflationary rise in prices.

Government can influence the banking system by
regulatory methods, particularly by those which we in-
clude within the area of monetary policy. Government
can manage its tax and expenditure budget in terms of
explicit and internally consistent fiscal policies. It is
obvious that fiscal policies and monetary policies should
be associated in an over-all conception of the relation of
fiscal and monetary policies to private business activities,
to the demands of high production and high employ-
ment.

5. Intervention

Why should it be necessary for the government to
intervene to make sure that purchasing demand is pres-
ent in sufficient amounts to give us a healthy business
condition? Why isn't this something that the banks can
handle, working alone? There are two reasons why such
intervention is needed: first, to meet seasonal, episodic,
and long-time ups and downs of business activity; second,
to meet a persistent tendency of purchasing power to
come to rest.

The seasonal and episodic ups and downs in the re-
quirements of business for purchasing power in the form
of loans have resulted in the establishment of the Federal

174 TOMORROW'S BUSINESS

Reserve System and in the modifications of the System
after the banking crisis of 1933. Before the System was
created, the country suffered periodical disturbances due
to the inability of the banks to provide for the needs of
business out of their ordinary resources. Occasionally,
during such a crisis, the withdrawal of deposits would
add fuel to the fire, and a conspicuous bank failure might
even touch off panic conditions. The normal processes
of production and distribution would be deeply affected,
and needless unemployment and losses of homes, farms,
and businesses would result, not from operating losses,
but from an inability to meet the maturities of loans or to
find ways of refunding them. In 1933, the crisis became
so acute that thousands of banks which later were proved
to be entirely solvent were embarrassed by the wave of
demand by their depositors to claim deposits.

Corrective measures have now been taken: first, to
make sure that solvent banks will be able to go to one
of the twelve Federal Reserve banks and get money lent
to them on the loans and investments they themselves
have made; second, to make sure that homeowners, farm-
ers, and businessmen can meet the maturity of loans by
getting new loans if they are needed; and third, to make
sure that the depositors of an insured bank can always
get out their deposits in cash, up to at least $5,000.

These corrective measures are administered by the
government, and they protect the country against many
acute situations which have been so disastrous in our his-
tory. To a limited extent, these measures of banking and
monetary regulation also help us deal with the longer-
time ups and downs which we have come to call the

PROFITS AND PURCHASING POWER 175

"business cycles." But, helpful as these measures are>
they are not enough to restore business activity if a real
slump occurs. It is now generally recognized that the
national budget must be called on to support purchasing
power on the down side of a business cycle. The national
budget could be used to hold a boom in check, but since
immediately after World War I we have not seen a peace-
time employment boom only real estate and stock
market booms, which are, at best, indirect and uncertain
stimulants to employment.

These ups and downs of business activity seasonal,,
episodic, and cyclical could probably be compensated
for by monetary and budget policy to a considerable de-
gree, and without too much trouble, if it were not for
another difficulty about purchasing power. This diffi-
culty arises from the fact that purchasing power tends to
cool off, to come to rest. This tendency results from the
inevitable passage of purchasing power from the hands of
the economically weak, from people who must spend all
they receive, into the hands of the strong, to people who
may retain some portion of it, however small, for longer
or shorter periods of time. The quantity of purchasing
power, the amount of circulating medium bank de-
posits, currency, and coin existing at a certain point of
time, will tend to diminish as effective purchasing de-
mand in the day, or month, or year following. It will tend
to diminish as a consequence of the internal necessities
of its movement from weak hands to strong.

This tendency has been obscured by counterinflu-
ences, such as, for example, of banks to .lend, of entre-
preneurs to borrow, of the rate of commercial turnover

176 TOMORROW'S BUSINESS

at times to increase, of kings to clip coins, of gold to be
discovered, of thieves to steal, of bankruptcies and panics
to dissipate assets, of unemployment to force the spend-
ing of savings, of foreign loans and foreign conquest to
reverse for a time the inevitable slackening of demand.
Underneath all these superficial and temporary excita-
tions, the rate of movement of purchasing power persist-
ently falls.

To maintain a level of purchasing demand over the
years, either the quantity of circulating medium must
be constantly increased, or the natural flow of purchasing
power from the weak to the strong must be countered by
an equivalent flow from strong to weak, or there must be
a combination of the two.

Unless purchasing demand is maintained, prices
will fall, debtors will lose their farms and homes, unem-
ployment and miserable poverty will be the lot of
millions, and a few will find that compound interest and
falling prices have miraculously augmented their com-
mand over all the things that money can buy. "The
strong grow stronger and the weak grow weaker/' Soon
the economic problem becomes a social and political
problem, and the unstable equilibrium must be sup-
ported by force or it will be destroyed by revolution.

We want to leave private business and private bank-
ing free to follow their independent business judgments
as to the profitability of .particular business transactions.
At the same time, adequate over-all purchasing demand
must be maintained. If we are to have both freedom of
private enterprise and an adequate purchasing demand,
we must use fiscal and monetary policy to compensate for

PROFITS AND PURCHASING POWDER 177

the major changes in the level of private business activity.
We must also use fiscal and monetary measures to offset
the normal persistent tendency of purchasing power to
come to rest.

It was once generally believed that the flow of
purchasing power would be best protected by allowing
changes in the price level to restore the balance between
purchasing demand and our capacity to produce. Thus,
if purchasing demand fell off, the level of prices was
supposed to fall off too, so that at the new price level
the full output of our productive capacity would be used
to make the things that people need. Under this theory,
the national budget should always be in balance so that
no influence other than supply and demand would de-
termine the level of prices at which high productivity
would occur.

This theory had two difficulties. First, it meant that
we had to have mass unemployment until savings had
been exhausted and wages driven to a subsistence level;
second, it meant that we had to expect wholesale insol-
vency in order to squeeze the marginal equities in farms,
homes, and businesses out of the national balance sheet
that is, to destroy the savings of tens of millions of
citizens. Bondholders, professors, government employees,
and landlords, all whose income had been fixed by con-
tract, were made able to serve the nation by consuming
more of the national product than their original contract
intended.

Today the theory of a balanced budget to maintain
high production and high employment by deflation of
prices and wages is almost everywhere rejected. A log-

178 TOMORROW'S BUSINESS

ical case can be made to show that, if wages were forced
low enough and bankruptcy general enough, the pur-
chasing power remaining with the strong would be
enough to command the labor of all. However, it is im-
probable that we shall redistribute wealth and income
that way. It is more likely that we shall attempt to use
the national budget to maintain purchasing demand as
the more conservative and less dangerous alternative,
recognizing that our first efforts will be experimental,
clumsy, and imperfect.

Efforts to use the national budget as a means of
maintaining purchasing demand will not be entirely
successful unless, at the same time, we succeed in getting
the savings of the people invested in new private enter-
prise. Fiscal and monetary policy alone cannot accom-
plish full investment of savings. Government stability;
satisfactory cost-price relationships; the outlook gen-
erally for business volume and profits; clarity and
simplicity in laws and regulations; protection against
illegal aggression; access to markets, to labor, to proc-
esses, to raw materials; the terms on which loan and
equity capital is available these and other considera-
tions determine in detail whether or not an investment
will be made. But fiscal and monetary policy can aid
strongly in achieving a healthy condition in private busi-
ness by sustaining an adequate level of effective demand.

IX

Fiscal Policy: Tools and Objectives

1. The Budget

LET us retrace the logic that compels us to look to fiscal
policy as a necessary element in our search for freedom.
We have recognized that private business government,
in its rule-making, provides the frame of order and cer-
tainty for a significant portion of our important every-
day decisions. We have recognized that only when busi-
ness is healthy can this rule-making be expected to result
in a healthy frame of order. And we have seen that
healthy business requires an adequate volume of busi-
ness transactions, transactions which can occur only in
response to an equally adequate effective purchasing de-
mand. The maintenance of adequate effective demand is
thus indispensable if we are to look to private business
as an instrument for freedom. Choice of employment,
choice of markets, choice of investment, choice of the
goods and services we want to use all depend on a high
and sustained level of business activity.

The maintenance of a high sustained level of busi-
ness activity is conditioned absolutely on fiscal policy. A
sound fiscal policy will not, of itself, produce a satisfac-

179

180 TOMORROW'S BUSINESS

tory level of business activity, but an unsound policy
will destroy the possibility of its attainment. And so,
for this reason, we must examine fiscal policy in some
detail.

Fiscal policy is expressed through the financial
budget of the national state. Among other things, the
national budget should reflect a unified policy of govern-
ment with respect to the activity needs of business and of
the nation as a whole. Being the instrument of a single
government, it is possible for the budget to show, in this
respect, singleness of purpose and internal coherence.
Indeed, it will, of necessity, show purpose and coherence
if the government itself knows the level of activity that
is needed, and how it intends to get there. But, if the
government is divided against itself, its fiscal policy, ex-
pressed in the budget, will reveal this internal conflict.
If the government is confused, its fiscal policy will be
confused and capricious.

The national budget can be so arranged, as a unity,
to complement and to supplement the aggregate activi-
ties of business in the maintenance of adequate effective
demand. A national government adds to the stream of
purchasing power when it lends or spends money, and it
takes away from the stream when it borrows from private
individuals or when it collects a tax. The fiscal policy of
the government, therefore, has a decisive effect upon the
level of demand, both by influencing the quantity of
purchasing power available and by causing changes in
its rate of flow upon the rate at which purchasing power
becomes purchasing demand. Accordingly, national fiscal
policy, through the budget, can be used to contribute

FISCAL POLICY: TOOLS AND OBJECTIVES 181

importantly to the general adequacy of pin chasing de-
mand needed for a healthy business system.

But, before we can proceed further, we must make
clear what is here meant by the term "federal budget."
For purposes of policy consideration, we must take the
federal budget to include all the financial transactions of
the federal government, whether they fall under the
jurisdiction of the Bureau of the Budget or not. The fed-
eral budget would include social security and other trust
accounts, and the several federal corporations and lend-
ing agencies. We must take this inclusive view because,
since the federal government has the power to asso-
ciate the totality of its financial transactions in a single
schema, judging one item against another item and
each item against the whole, the federal government
may have a policy with respect to this comprehensive
budget.

Let us see how the budget can be used to bring
about (i) changes in the quantity of purchasing power
available and (2) changes in the rate of flow of purchas-
ing power. The quantity of purchasing power is affected
by whether the budget shows a deficit or a surplus, 'by
how the deficit is financed, and by what disposition is
made of the surplus. In general, if there is a deficit, the
quantity of purchasing power in the hands of the public
is increased; and if there is a surplus, the quantity is re-
duced. The method of financing the deficit must be taken
into account in judging the effect of the deficit in creat-
ing purchasing power in the hands of the public. If the
deficit is financed by loans from commercial banks or
from the Federal Reserve banks, purchasing power will

182 TOMORROW'S BUSINESS

be increased. But if the borrowing comes in the form of
the sale of governmtnt bonds to private investors, the
federal deficit will take away from purchasing power in
the hands of the public an amount equal to the quantity
that the deficit has created. A surplus in the budget will
take away from purchasing power if the surplus is used
to retire government debt held by commercial 'banks or
by the Federal Reserve banks; but, if it is used to retire
government debt held by the public, the retirement of
this kind of debt adds as much purchasing power to the
amount in the hands of the public as the creation of a
surplus in the budget had taken away.

The rate of flow of purchasing power is affected by
the character of the taxation, expenditure, and borrow-
ing program. Some taxes have a greater impact on the
rate of flow than other taxes; and there are differences
among expenditures, too, in their influence on the speed
with which purchasing power flows from hand to hand.
Sales taxes and excise taxes reduce the rate of flow dras-
tically, since these taxes are taken from the purchasing
power of the great body of citizens who otherwise would
have spent most of them for things they need. Corpora-
tion taxes, in keeping prices up and wages down, and
limiting the return on new investment, are a heavy load
for purchasing power to carry. The progressive income
tax has a lesser influence on demand, although, if the
rates of taxation on income are too high, there will be
little inducement for risk-taking investment in private
business; and this, in itself, will have an unfavorable
effect on the level of purchasing demand. The estate tax
has the least effect of all taxes on the rate of flow of pur-

FISCAL POLICY: TOOLS AND OBJECTIVES 185

chasing power, since the amounts collected in this way
probably would have remained invested and would not
have been spent by those who are the beneficiaries of the
estate.

On the expenditure side, those disbursements which
are quickly and fully spent by the people who receive
them, or which become the foundation for a much larger
expansion of credit, are the most effective in stepping up
the rate of movement of purchasing power. Some ex-
penditures, if they are too unconventional or if they
affect unfavorably the outlook for private risk-taking,
will weaken because of the impaired confidence the
stream indirectly by more than they can add to it directly.
The administration of the national budget does not
occur in an arithmetical vacuum.

One item on the expenditure side of the budget is
likely to prove troublesome for postwar fiscal policy.
This item is "interest on the public debt." Current esti-
mates indicate that, after the war, interest on the public
debt may amount to as much as five or six billion dollars
nearly a third of the ordinary federal budget. When
we examine the use that is likely to be made of the
interest on the national debt by those who receive it, we
find that these large sums will go in substantial amounts
to recipients not likely to spend or to invest them
promptly. As a result, if this expenditure is covered by
taxation, it is likely that the total effect will be to lower
the average rate at which available purchasing power is
turned into purchasing demand. One of the great prob-
lems of postwar fiscal policy will be so to manage the
national debt that interest payments and amortization do

184 TOMORROW'S BUSINESS

not have a depressing influence on the level of business
activity.

Both the direct and the indirect consequences of
taxation and expenditure must be appraised in relation
to what the maintenance of the stream of purchasing de-
mand seems to require. Such appraisal cannot be made
with precision, but it is not too difficult to estimate gen-
eral tendencies and gross quantities. As a matter of com-
mon knowledge, for example, the national budget for
the fiscal year 1938 was sharply deflationary in compar-
ison with that of fiscal 1937.

The methods of taxation and expenditure which
have been mentioned illustrate how the national budget
can be used to influence the level of purchasing demand.
The budget can be used either to affect the quantity of
purchasing power in the hands of the public or to influ-
ence the rate of its flow, or it can be used to do both
in varying proportions. But, to do these things, we must
have a national government that is understanding and
responsible, that is organized and equipped for a new
kind of human undertaking. National fiscal policy and
progress in the postwar world must be devised, ap-
proved, and carried out in ways that will interrupt the
blind forces of atomistic private economic activity. These
national fiscal policies and programs must seek deliber-
ately to reverse the tendency of purchasing power to come
to rest, they must intervene to maintain purchasing
power in motion on a high and stable level, and they
must ensure an effective demand for the goods and serv-
ices that the labor and resources of the country stand
ready to produce.

FISCAL POLICY: TOOLS AND OBJECTIVES 185

2. First Things First

Much as we want a fiscal policy that will help us to
get and hold a high level of prosperity, much as we want
high production and high employment, we do not want
a fiscal policy that would depreciate the value of the
dollar. We do not want any funny money, rubber checks,
or trillion-mark notes. We want a sound currency, a
stable dollar, a unit of value that we can count on, money
that will be worth tomorrow what it is today a medium
of exchange that we can put our savings in, make con-
tracts and leases in, do business in. We want to be sure
that our money is good, that we can buy things with it at
something like today's prices, today, tomorrow, and in
the years to come. We also want an efficient system of
financial institutions through which money transfers
can be made, in which money balances can be safely
stored, and by which loans and advances to businesses
and to individuals can be promptly and justly arranged.

Two objectives of fiscal policy come first: the main-
tenance of a reliable currency and an efficient system of
financial institutions. A fiscal policy directed toward the
maintaining of an adequate level of purchasing demand
must, in any case, hold firm these two basic purposes*

One of the two primary objectives of fiscal policy is
to keep the value of the dollar stable. How can this be
done? We all know that we can no longer turn our money
into gold. We wonder, sometimes, what makes our

186 TOMORROW'S BUSINESS

money good. Look at a twenty-dollar bill, a Federal Re-
serve note. What does it say on it? "The United States
of America will pay to the bearer on demand twenty
dollars/' What are these twenty dollars? Twenty dollars
is what the United States of America will pay on demand
to the bearer of a twenty-dollar bill. This does not get
us far.

Printed in small type on the twenty-dollar bill is
other language, other significant language, as follows:
"This note is legal tender for all debts, public and
private . . ." In other words, as long as there are debts,
bonds, money obligations of any kind, these notes can
be used to pay them off. Furthermore, as long as there
are taxes, import duties, fines, and other payments due
the government, these notes can be used to discharge
them. In an essential and final sense, the value of the
notes lies, not in their convertibility into gold and other
commodities, but in the fact that they can be used to
discharge obligations which are enforceable under the
law. Any person who holds these Federal Reserve notes
in amounts equal to his debts may give them to his public
and private creditors and be freed of any further obliga-
tions for payment.

As long as the money of the United States can be
used to pay off debts and taxes, and as long as there are
any debts and taxes that must be paid, the money of the
United States will have a certain value. Money needs
only to be "legal tender for the payment of debts, public
and private" to make it sought after by all who must pay
taxes or who owe a debt.

The fact that paper dollars are legal tender gives

FISCAL POLICY: TOOLS AND OBJECTIVES 187

them a certain value; what this value will be depends on
how scarce or how plentiful these dollars in use for the
purchasing of things are as compared with the quantity
of goods and services offered for sale. Or, to put it an-
other way, apart from paying debts and taxes, the dollar
is worth what it can buy in the market. If the dollar can
command much the same amount of goods and services
day after day and year after year, the dollar will not only
have a value it will have a stable value.

In order to achieve this stability, the stream of
purchasing demand must be kept in line with the stream
of available goods. To keep a stable dollar, the budget
must be planned to stabilize the stream of purchasing de-
mand, to compensate for the ups and downs of private
enterprise in creating a demand for the things we are
able to make. The necessity for a stable dollar requires
that the expenditure program of the federal government
and the tax program must be closely associated. The
necessity for a stable dollar means that, if we are going
to spend greatly, we must tax greatly. It does not mean
that we must necessarily balance the national budget.
What it does require is that the effect of the expendi-
ture and the tax programs, taken together, on the stream
of purchasing demand, should be such as to give a fair
balance between purchasing demand and the available
supply of goods and services. The stable dollar is to be
found, not in the convertibility of the currency into gold
and silver in a balanced budget, but in an adequate flow
of purchasing demand which will absorb the goods a
constantly increasing level of productivity can make
available.

188 TOMORROW'S BUSINESS

Competition and technological improvements will
bring a wholesome pressure to lower costs and, corre-
spondingly, to lower prices. From an over-all point of
view, these changes will be gradual. Lower prices as a
result of efficiency are desirable, since they increase the
real income of the people, but they do not, fortunately,
increase the value of the dollar because of the deflation-
ary pressures associated with an insufficient effective de-
mand.

The second of the basic objectives of fiscal policy is
the maintenance of an efficient system of financial insti-
tutions. The achievement of this objective has been
found to require a considerable amount of regulation of
private banking by governmental bodies. In adminis-
tering this regulation we want to preserve competition
in private banking. We want this competition not only to
improve the services of the banks, but also to give to the
borrower alternative sources of credit. The granting of
credit is not an automatic matter of attaching an interest
rate to a risk, but there is wide scope for intuition and
ingenuity in the making of loans adapted to a borrower's
needs. In preserving competition in the banking system,
we must at the same time protect the resources of the de-
positors and give to the banking system flexibility to meet
seasonable and episodic requirements, both for loans and
for withdrawals. The present regulation of banks aims
to preserve competition with safety.

The thought is sometimes expressed that we could
reach our fiscal and monetary objectives more easily if
the banking system were taken over by the government
and nationalized. The feeling seems to be that, with com-

FISCAL POLICY; TOOLS AND OBJECTIVES 189

plete control of the financial system, we could more easily
make our money system work the way we want it to. In
my opinion, this feeling is unjustified. When sincere, it
probably springs from an idea that the banking system
itself ought to be able to keep the stream of purchasing
demand at the right level. As we have seen, this job is
not one of which the banking system is capable. Main-
taining purchasing demand is the job of national fiscal
policy, operating through the budget and with the co-
operation of the regulatory agencies. It will continue to
be a problem of national budget administration, no mat-
ter who owns the banks. And if the banks should be
nationalized, we would lose the competitive flexibility
in costs and in credit judgment that alone can give the
clue to the true economic situation within which na-
tional fiscal policy must work*

It is true that the banking system must be associated
co-operatively with the national fiscal policy. This co-
operative association is expressed through several
national agencies, the Federal Reserve System, the Fed-
eral Deposit Insurance Corporation, and the Comp-
troller of the Currency, of which the Reserve System is
the most important. These agencies set the broad frame-
work of the banking pattern, and it is helpful when it
can be set so as to support a national policy in which fiscal
and monetary objectives are widely co-ordinated. This
has not been possible in recent peacetime years because
there has been no co-ordinated national policy in the
fiscal and monetary field.

X

Business Is Taxed

1. Fiscal Policy, Taxation, and Public Works

NATIONAL fiscal policy, so important to business
health, is administered principally through the federal
budget. In appraising the economic consequences of the
budget as an aggregate, fiscal policy must take into ac-
count the significance of every particular item, because
every item of the budget every receipt and every dis-
bursement has some effect, large or small, on the flow
of purchasing power. The items of the budget must,
therefore, be judged from two points of view: first, from
the point of view of public policy; and second, from the
point of view of fiscal policy. Public policy is concerned
with the objective which a budget item is directed to
accomplish, and fiscal policy is interested in the financial
and economic impact of the budget item on the level of
demand. Although the public policy reflected in the
character of budget items is necessarily the paramount
consideration in deciding what should or should not be
approved, considerations of public policy can never be di-
vorced from the concurrent fiscal effect of the execution
of that policy on the economic welfare of the nation.

190

BUSINESS IS TAXED 191

Although every item of the budget, both disburse-
ments and receipts, has its particular importance for
fiscal policy, there are two classes of items of particular
interest to business. These items are: (i) those concerned
with taxation; and (2) those providing for public works.
Not only do these items loom large in the administration
of a sound fiscal policy, but they also affect directly the
character of business operations which can and will be
undertaken.

The taxation of business obviously enters into every
business judgment. The importance of public works
may not be so obvious. The reason is that public works
can be so organized and administered as to help stabilize
the construction industry. Such stabilization would give
great benefits to this important industry directly, and
indirectly to all business through the reduction of costs
in construction. Reduction of costs may be confidently
expected after the construction industry is freed of the
expense of idle men, idle plant, and idle capital which
historic irregularity of production in construction has
imposed upon the industry.

For these reasons, we shall discuss in some detail, in
this chapter and the next, the subject of taxation, with
particular reference to the taxation of business; and the
subject of public works, with particular reference to the
possible relations between public works and the construc-
tion industry. We shall pass over other aspects of fiscal
policy, important as they are for a comprehensive pic-
ture of that subject, as having less immediate bearing on
the character of the rule-making of private business.

192 TOMORROW'S BUSINESS

2. Tribute

The superior position of public government over
private business is nowhere more clearly evident than in
government's power to tax business. Business as private
government gets its many rule-making powers from pub-
lic government. Public government sets the limits to the
exercise of these rule-making powers of business, and
protects the freedom of business operations within this
area of authority. Public government can limit business,
but business cannot legally limit public government
except by invoking public law. Taxation is one of the
limitations placed by government on the power of busi-
ness to do what it pleases.

Some taxes are nothing more than methods of shar-
ing the cost of a common benefit. Illustrations of such
common benefits are: police and fire protection, the
assurance of a healthful and abundant water supply, the
maintenance of good roads and clean streets, and the
regulation of business monopoly. All taxes have some-
thing of the justification of shared benefit in them in the
sense that public funds wisely spent improve the well-
being of the people and safeguard them from enemies at
home and abroad.

But these shared benefits are often of a general char-
acter and extremely indirect, and business is given little
to say as to what it wants and how much it is prepared
to pay. To be sure, business may express its views on tax-

BUSINESS IS TAXED 193

ation before various committees and in the pfress; how-
ever, the fact remains that the business which is taxed
does not vote, nor is it represented as business in the
legislative halls at the time a tax is levied.

Taxes on business, particularly on business income,
are a tribute paid by one rule-maker to its superior as
the price of its subordinate authority. The price is im-
posed, not negotiated; and private business must do the
best it can with its delegated powers in order to make
good.

There is nothing reprehensible about this pro-
cedure. The business that is taxed is not a creature of
flesh and blood, it is not a citizen. It has no voice in how
it shall be governed nor should it. The issues in the
taxation of business are not moral issues, but are ques-
tions of practical effect: What will get the best results?
How should business be taxed so that business will make
its greatest contribution to the common good?

3 Why Tax?

If we are to understand the problems involved in
the taxation of business, we must first ask the question,
"Why does the government need to tax at all?" This
seems to be a simple question, but, as is the case with
simple questions, the obvious answer is likely to be a
superficial one. The obvious answer is, of course, that
taxes provide the revenue needed by the government in
order to pay its bills.

194 TOMORROW'S BUSINESS

If we look at the financial history of the past ten
years it is apparent that nations have been able to pay
their bills even though their tax revenues fell short of
expenses. Those countries whose expenses were greater
than their receipts from taxes paid their bills by borrow-
ing the necessary money.* The borrowing of money,
therefore, is an alternative which governments use to
supplement the revenues from taxation in order to ob-
tain the necessary means for the payment of their bills.

To be sure, the borrowings of a country must be
paid in money at some future date when the loans fall
due, and, in the meantime, interest must be paid on the
principal of the loan. Since, when a government bor-
rows, it must provide the money for both principal and
interest, its need for taxes seems greater than ever the
only difference being that the time of taxation is post-
poned.

However, when these loans fall due, the government
may decide to borrow again and, with the proceeds of
the new loan, pay off the principal of the old. Such a re-
funding operation again provides the money which the
government needs and, again, the need for present
taxes is avoided.

A government which depends on loans and on the
refunding of its loans to get the money it requires for
its operations is, necessarily, dependent on the sources
from which the money can be obtained. In the past, if a
government persisted in borrowing heavily to cover its
expenditures, interest rates would get higher and higher

* Sometimes these governments borrowed from the people in foreign coun-
tries and when they did, they generally got into trouble. Sometimes these
governments borrowed from sources at home. When they borrowed at home,
everything seemed to go along smoothly.

BUSINESS IS TAXED 195

and greater and greater inducements would have to be
offered by the government to the lenders! As a conse-
quence, power over the government would gradually
shift, in some measure, to the money market, and it
could dictate the terms on which the necessary loans
would be made. Governments then found that the only
way they could maintain their sovereign independence
and their solvency without resorting to the printing press
was to tax heavily enough to meet a substantial part of
their financial needs, and to be prepared if placed
under undue pressure to tax to meet them all.

The necessity for a government to tax in order to
maintain both its independence and its solvency still
holds true for state and local governments, but it is no
longer true for the national government. Two changes
of the greatest consequence have occurred in the last
twenty-five years which have completely altered the posi-
tion of the national state with respect to the financing of
its current requirements. The first of these changes is the
gaining of vast new experience in the management of
central banks. The second change is the elimination, for
domestic purposes, of the convertibility of the currency
into gold or any other commodity. No longer do private
lenders have the final word on the fiscal policies of a
national government which does not tax.

The unsound practices of a reckless, taxless gov-
ernment can be controlled by the citizens of a demo-
cratic country; but they must exercise this control as
citizens, and not as lenders. This final freedom from the
imposition of unwanted control by the private lenders
holds true for every sovereign national state where there

196 TOMORROW'S BUSINESS

exists an institution which functions in the manner of a
modern central bank, and whose currency is not con-
vertible into gold or into some other commodity.

The United States is a national state which has a
central banking system, the Federal Reserve System, and
whose currency, for domestic purposes, is not convert-
ible into.gold. It follows that our federal government has
final freedom from the money market in meeting its
financial requirements. Accordingly, the inevitable social
and economic consequences of any and all taxes become
the prime consideration in the imposition of taxes. In
general, it may be said that since all taxes have conse-
quences of a social and economic character, the govern-
ment should look to these consequences in formulating
its tax policy. All federal taxes must meet the test of
public policy and practical effect. The public purpose
that is served should never be obscured in a tax program
under the mask of raising revenue.

Federal taxes can be made to serve four principal
purposes of a social and economic character. These pur-
poses are:

1. As an instrument of fiscal policy to help stabilize
the purchasing power of the dollar.

2. To express public policy in the distribution of
wealth and of income, as in the case of the pro-
gressive income and estate taxes.

3. To express public policy in subsidizing or in
penalizing various industries and economic
groups.

4. To isolate and assess directly the costs of certain
national benefits, such as highways and social
security.

BUSINESS IS TAXED 197

In the recent past, we have used our federal tax
program consciously for each of these purposes. In serv-
ing these purposes, the tax program is a means to and
end. The purposes themselves are matters of basic
national policy which should be established, in the first
instance, independently of any national tax program.

Among the policy questions with which we have to
deal are these: Do we want a dollar with reasonably
stable purchasing power over the years? Do we want
greater equality of wealth and of income than would re-
sult from economic forces working alone? Do we want to
subsidize certain industries and certain economic groups?
Do we want the beneficiaries of certain federal activities
to be aware of what they cost? These questions are not
tax questions, they are questions as to the kind of coun-
try we want and the kind of life we want to lead. The
tax program should be a means to an agreed end. The
tax program should be devised as an instrument, and it
should be judged by how well it serves its purpose.

By all odds, the most important single purpose to be
served by the imposition of federal taxes is the main-
tenance of a dollar that has stable purchasing power over
the years. Sometimes this purpose is stated as "the avoid-
ance of inflation"; and without the use of federal taxa-
tion, all other means of stabilization, such as monetary
policy and price controls and subsidies, are unavailing.
All other means, in any case, must be integrated with
federal tax policy if we are to have tomorrow a dollar
that has a value near to what it has today.

The war has taught the government, and the gov-
ernment has taught the people, that federal taxation has

198 TOMORROW'S BUSINESS

much to do with inflation and deflation, with the prices
which have to be paid for the things bought and sold. If
federal taxes are insufficient or of the wrong kind, the
purchasing demands of the public are likely to be greater
than the output of goods and services with which this
purchasing demand can be satisfied. If the demand be-
comes too great, the result will be a rise in prices, and
there will be no proportionate increase in the quantity
of things for sale. This will mean that the dollar is worth
less than it was before that is inflation. On the other
hand, if federal taxes are too heavy or are of the wrong
kind, effective purchasing power in the hands of the pub-
lic will be insufficient to take from the producers of
goods and services all the things these producers would
like to make. This will mean widespread unemployment.
The dollars the government spends become pur-
chasing power in the hands of the people who have re-
ceived it. The dollars the government takes by taxes can-
not be spent by the people, and, therefore, these dollars
can no longer be used to acquire the things which are
available for sale. Taxation is, therefore, an instrument
of the first importance in the administration of any fiscal
policy.

The second principal purpose of federal taxes is to
attain more equality of wealth and of income than would
result from economic forces working alone. The taxes
effective for this purpose are the progressive individual
income tax, the progressive estate tax, and the gift tax.
What these taxes should be depends on public policy
regarding the distribution of wealth and of income. It is
important, here, to note that the estate and gift taxes have

BUSINESS IS TAXED 199

little or no significance, as tax measures, for stabilizing
the value of the dollar. Their purpose is the social pur-
pose of preventing what otherwise would be high con-
centration of wealth and income at a few points, as a
result of investment and reinvestment of income not ex-
pended in meeting day-to-day consumption require-
ments. These taxes should be defended and attacked in
terms of their effects on the character of American life,
not as revenue measures.

The third reason for federal taxes is to provide a
subsidy for some industrial or economic interest. The
most conspicuous example of these taxes is the tariffs on
imports. Originally, taxes of this type were imposed to
serve a double purpose, since, a century and a half ago,
the national government required revenues in order to
pay its bills. Today, tariffs on imports are no longer
needed for revenue. These taxes are nothing more than
devices to provide subsidies to selected industries; their
social purpose is to provide a price floor above which a
domestic industry can compete with goods produced
abroad and sold in this country more cheaply except for
the tariff protection. The subsidy is paid, not at the port
of entry where the imported goods are taxed, but in the
higher price level for all goods of the same type produced
and sold at home.

The fourth purpose served by federal taxes is to
assess, directly and visibly, the costs of certain benefits.
Such taxation is highly desirable in order to limit the
benefits to amounts which the people who benefit are
willing to pay. The most conspicuous examples of such
measures are the social security benefits and old-age and

200 TPMORROW'S BUSINESS

unemployment insurance. The social purposes of giving
such benefits and of assessing specific taxes to meet the
costs are obvious. Unfortunately and unnecessarily, in
both cases, the programs have involved staggering de-
flationary consequences as a result of the excess of cur-
rent receipts over current disbursements. When peace
comes, these programs must be corrected so that the sta-
bility of the dollar will not be impaired by the financial
consequences of excessive social security receipts or dis-
bursements.

4. Tax Consequences

The federal tax on corporation profits is the tax
that is most important in its effect on business opera-
tions. There are other taxes which are of great concern
to special classes of business. Many problems of state and
local taxation of business become extremely urgent, par-
ticularly when a corporation has no profits at all. How-
ever, we shall confine our discussion to the federal cor-
poration income tax, since it is in this way that business
is principally taxed. We shall also confine our considera-
tions to the problems of ordinary peacetime taxation,
since, during wartime, many tax measures, such as the
excess profits tax, have a special justification.

Taxes on corporation profits have three principal
consequences all of them bad. Briefly, the three bad
effects of the corporation income tax are:

BUSINESS IS TAXED 201

1. The money taken from the corporation in taxes must
come in one of three ways. It must come from the people, in
the higher prices they pay for the things they buy; from
the corporation's own employees, in wages that are lower
than they otherwise would be; or from the corporation's
stockholders, in lower rate of return on their investment. No
matter from which source it comes, or in what proportion,
this tax is harmful to production, to purchasing power, and
to investment.

2. The tax on corporation profits is a distorting factor
in managerial judgment, a factor prejudicial to clear en-
gineering and economic analysis of what will be best for
the production and distribution of things for use. And,
the larger the tax the greater the distortion.

3. The corporation income tax is the cause of double
taxation. The individual taxpayer is taxed once when his
profit is earned by the corporation, and once again when he
receives the profit as a dividend. This double taxation makes
it more difficult to get people to invest their savings in busi-
ness than if the profits of business were taxed only once.
Furthermore, stockholders with small incomes bear as heavy
a burden under the corporation income tax as do stock-
holders with large incomes.

Let us examine more closely these three bad effects
of the tax on corporation profits. The first effect we ob-
served was that the corporation income tax results in
either higher prices, lower wages, reduced return on in-
vestment, or all three in combination. When the cor-
poration income tax was first imposed it may have been
believed by some that an impersonal levy could be
placed on the profits of a soulless corporation, a levy
which would be neither a sales tax, a tax on wages, nor a

202 TOMORROW'S BUSINESS

double tax on the stockholder. Obviously, this is impos-
sible in any real sense. A corporation is nothing but a
method of doing business which is embodied in words
inscribed on a piece of paper. The tax must be paid by
one or more of the people who are parties at interest in
the business, either as customer, as employee, or as stock-
holder.

It is impossible to know exactly who pays how much
of the tax on corporation profits. The stockholder pays
some of it, to the extent that the return on his invest-
ment is less than it would be if there were no tax. But it
is equally certain that the stockholder does not pay all of
the tax on corporate income indeed, he may pay very
little of it. After a period of time, the corporation income
tax is figured as one of the costs of production and it
gets passed on in higher prices charged for the com-
pany's goods and services, and in lower wages, includ-
ing conditions of work inferior to what they otherwise
might be.

The reasons why the corporation income tax is
passed on, in some measure, must be clearly understood.
In the operations of a company, the management of the
business, directed by the profit motive, keeps its eyes on
what is left over as profit for the stockholders. Since the
corporation must pay its federal income taxes before it
can pay dividends, the taxes are thought of the same
as any other uncontrollable expense as an outlay to be
covered by higher prices or lower costs, of which the
principal cost is wages. Since all competition in the same
line of business is thinking the same way, prices and
costs will tend to stabilize at a point that will produce a

BUSINESS IS TAXED

goal-profit, after taxes, sufficient to give the
access to new capital at a reasonable price. \ .
finally happens, as it must if the industry isfi j* US
own, the federal income tax on corporatio-^ . C
been largely absorbed in higher prices / m er
wages. The effect of the corporation inco/ aX 1S) there "
fore, to raise prices blindly and to lo/ Wages . y an
undeterminable amount. Both tend/ are m the
wrong direction and are harmful to/ e P ubhc welfare -

Suppose the corporation incor tax Were removed
where would the money go that n W P aid in taxes?
That depends. If the industry ^^ com P etitive > as
is the case with retailing, a larj/ hare would % in lower
prices and a smaller share wo 1 S m hi S her wa & es and
in higher yield on savings Vested m the mdustr Y- If
labor in the industry is str/^ <*&**** as in the rai1 '
road, steel, and autorn/ 6 industries a lar g e share
would go in higher wagx I the industry is neither ap-
petitive nor organize^ 01 " "gulated-of which ipius-
tries there are a few- lar S e share would S to thf St Ck "
holders. In so far a.^ e P resent c r P oratlon lncome tax
tends to reduce w> es and dividends, the highet wages
and dividends thr would result from the elimination of
this tax would > subject to individual income tax for
each individual his highest bracket. In so far as the
elimination o&e present corporation income tax would
result in lov r P rices > k would raise the standard o hv "
ing for eve/ one -

The -cond bad effect of the corporation income tax
is that ifis a distorting factor in management judgment,
enterir^ into every decision and causing actions to be

204 TOMORROW'S BUSINESS

taken which would not have been taken on business
grounds alone, and the larger the tax the greater the dis-
tortion. The tax consequences of every important com-
mitment have to be appraised. Sometimes, some action
which ought to be taken cannot be taken because the
tax results make the transaction valueless, or worse.
Sometimes, apparently senseless actions are fully war-
ranted because of tax benefits. The result of this tax
thinking is to destroy the integrity of business judgment,
and to set up a business structure and tradition which
does not hang together in terms of the compulsions of
inner economic or engineering efficiency.

The most conspicuous illustration of the bad effect
of tax consideration on business judgment is seen in the
preferred position that deKt financing has over equity
financing. This preferred position is due to the fact that
interest and rents, paid on capital used in a business, are
deductible as expense; whereas dividends paid are not.
Th& result weights the scales always in favor of debt
financing, since no income tax is paid on the deductible
costs of this form of capital. This tendency goes on, al-
though it is universally agreed that business and the
country- generally would be in a stronger position if a
much larger proportion of all investment were in com-
mon stocks and equities, and a smaller proportion in
mort gages and bonds.

It must be conceded that, in many casea, a high cor-
poral ion income tax induces management to make ex-
penditures which prudent judgment would avoid. This
is particularly true if a long-term benefit may result, a
benefit which cannot or need not be capitalized. The

BUSINESS IS TAXED 205

long-term expense is shared involuntarily by govern-
ment with business, and, under these circumstances, a
long chance is often well worth taking. Scientific research
and institutional advertising are favorite vehicles for
the use of these cheap dollars. Since these expenses re-
duce profits, they reduce taxes at the same time; and the
cost to the business is only the margin of the expendi-
ture that would have remained after the taxes had been
paid the government pays the rest. Admitting that a
certain amount of venturesome expenditure does result
from this tax inducement, it is an unhealthy form of
unregulated subsidy which, in the end, will soften the
fiber of management and will result in excess timidity
when the risk must be carried by the business alone.

The third unfortunate consequence of the corpo-
ration income tax is that the same earnings are taxed
twice, once when they are earned and once when they
are distributed. This double taxation causes the original
profit margin to carry a tremendous burden of tax, mak-
ing it difficult to justify equity investment in a new and
growing business. It also works contrary to the prin-
ciples of the progressive income tax, since the small
stockholder, with a small income, pays the same rate of
corporation tax on his share of the earnings as does the
stockholder whose total income falls in the highest brack-
ets. This defect of double taxation is serious, both as it
affects equity in the total tax structure and as a handicap
to the investment of savings in business.

Any one of these three bad effects of the corpora-
tion income tax would be enough to put it severely on
the defensive. The three effects, taken together, make

206 TOMORROWS BUSINESS

an overwhelming case against this tax. The corporation
income tax is an evil tax and it should be abolished.

5. No Refuge

The corporation income tax cannot be abolished
until some method is found to keep the corporate form
from being used as a refuge from the individual income
tax, and as a means of accumulating unneeded, unin-
vested surpluses. Some way must be devised whereby the
corporation earnings which inure to the benefit of in-
dividual stockholders are fully taxed as income of these
individuals.

The weaknesses and dangers of the corporation in-
come tax have been known for years, and an ill-fated
attempt to abolish it was made in 1936 in a proposed un-
distributed profits tax. This tax, as it was imposed by
Congress, had four weaknesses which soon drove it from
the books: First, the income tax on corporations was not
eliminated in the final legislation, but the undistributed
profits tax was added on top of it. Second, it was never
made absolutely clear, by regulation or by statute, just
what form of distributed capitalization of withheld and
reinvested earnings would be taxable to the stockholders
and not to the corporation. Third, the Securities and
Exchange Commission did not set forth special and sim-
ple regulations covering securities issued to capitalize
withheld earnings. Fourth, the earnings of a corporation
were frozen to a particular fiscal year, with none of the

BUSINESS IS TAXED 207

flexibility of the carry-forward, carry-back provisions of
the present law.

Granted that the corporation income tax must go,
it will not be easy to devise a tax substitute which will
be entirely satisfactory. The difficulties are not merely
difficulties of technique and of avoiding the pitfalls of
a perfect solution impossible to administer, but are ques-
tions of principle that raise issues as to the proper locus
of power over new capital investment.

The suggestions which have been made follow three
patterns: First, a modification of the English scheme,
which allows the individual taxpayer credit, on his own
tax, for what has been paid by the corporation on his
share of the corporation's distributed earnings. Second, a
modification of the mandatory undistributed profits tax.
Third, the use of scrip or other evidence of withheld
earnings, which would be taxable to the stockholder and
could be used by him to pay his tax.

Without going too far into technical detail, the
basic points in these three classes of proposals are fairly
clear:

1. The English scheme would avoid double taxation on
distributed earnings. However, it would not free business
management of tax considerations in management decisions,
it would not get the corporation income tax out of prices
and wages, and it would not bring pressure for the distribu-
tion of corporate earnings. A variant of the English scheme
is vastly to be preferred to the present system. It is rela-
tively simple, but it solves only a small part of the total
problem, and it should not be accepted until efforts for a
more comprehensive solution have failed.

2. Modifications of the old undistributed profits tax are

208 TOMORROW'S BUSINESS

suggested by those who believe that the money market and
the stockholders of a company are better judges than the
management as to what should be done with current earn-
ings. These people say, ''Distribute the earnings! Let the
stockholders decide whether or not they should be rein-
vested." It is contended that management will always be
too close to its own operations to judge the relative desir-
ability of the reinvestment of current earnings as against
new investment in other companies, or, for the stockholder,
expenditure on current personal needs. Accordingly, the
suggestion is made that a large proportion of current earn-
ings, 70% or 80%, be distributed in cash. If the manage-
ment feels that new capital is needed, it should go to the
regular sources of capital and apply for it.

It seems improbable that any solution which turns the
managers of business to the money market, as a matter of
necessity, will be acceptable. There is some force in the argu-
ment that the stockholders should have the right to decide,
each year, what they want to do with their own earnings. But
it is doubtful that this privilege will be granted if the result
will be to place the management of business in the hands of
financial institutions and the money market, making them
its exclusive source of new capital.

3. A third group of suggestions is based on distributing
to the stockholders all, or nearly all, the earnings of a cor-
poration, permitting the distribution to be either in cash or
in some type of company security or scrip which would be
taxable as income to the stockholder, and which he could
cash or use to the extent needed to pay the income tax due
from him.

A plan of this kind differs from that in the second group
in one important respect: the decision as to whether earnings
should be reinvested in the company remains with the man-
agement, where it is today. The only important difference

BUSINESS IS TAXED 209

from present practice would be that the stockholder would
receive some sort of bond, stock, or scrip from the manage-
ment. It does not seem too much to ask the management of a
business to give its stockholders from time to time a receipt
for the undistributed earnings which have been plowed back
into the corporation.

A plan of this third type would meet most of the prob-
lems we want to solve: each taxapayer would be taxed for
his share of the corporation's earnings at his individual in-
come tax rate; the company could withhold as much of
the earnings as it deemed wise, provided they were capital-
ized; and the stockholder would have the means to pay his
tax. It only remains to invent a security, of the kind de-
scribed, that will be practical in operation.

In the report on fiscal and monetary policy which
Mr. H. C. Sonne and I made to the Business Committee
of the National Planning Association, we suggested a
5% tax on corporate profits, which would represent the
value of doing business in the corporate form; a 16%
tax on undistributed profits; and a continuation, for
the time being, of the present tax of 25% on long-term
capital gains. Although such a proposal lacks complete
logical justification, nevertheless, it has the advantage of
simplicity.

Other provisions, such as strengthening Section 102
of the present Revenue Act, restrictions on personal
holding companies, and other protective measures,
should be drawn to close loopholes for individual in-
come tax avoidance, and building up unneeded sur-
pluses.

It is my opinion that a 16% tax on undistributed
profits would tend to cause corporations having easy ac-

210 TOMORROW'S BUSINESS

cess to the capital markets to finance their capital re-
quirements rather than withhold earnings, and that a tax
o 16% will not be an undue burden on corporations
which otherwise would have to pay a selling commission
to raise additional capital funds.

The sum of the 16% tax on undistributed profits,
and the 25% tax on capital gains, seems to me to be a
sufficient tax on the individual who realizes his profits
from the operations of a corporation, not in income
distributed to him as dividends, but in the sale of his
securities at a price higher than his original invest-
ment.

Can the government afford to give up the corpora-
tion income tax? That really is not the question. The
question is this: Is the corporation income tax a favorable
way of assessing taxes on the people on the consumer,
the workers, and the investors who after all are the only
real taxpayers? It is clear from any point of view that
the effects of the corporation income tax are bad effects.
The public purposes to be served by taxation are not
thereby well-served. The tax is uncertain in its effect
on the stabilization of the dollar, and it is inequitable as
part of a progressive levy on individual income. It tends
to raise the prices of goods and services. It tends to keep
wages lower than they otherwise might be. It reduces the
yield on investment and obstructs the flow of savings into
business enterprise. The elimination of the corporation
income tax from the tax system will increase the effec-
tiveness of our fiscal and monetary policies and, by
broadening markets for goods and services, will
strengthen business for its task of producing goods, pro-

BUSINESS IS TAXED 211

viding employment, and giving the people a place where
their savings can be invested.

If we have no sales tax, no corporation income tax,
and eliminate most of the excises, will we not have to put
an intolerable burden on the individual income tax? The
answer is "no." Under the tax policy which we have
suggested, the individual income tax can be reduced by
an aggregate of 30% and still we can balance an 18
billion dollar budget at high employment. A 30% cut
from the present income tax is a substantial reduction.
But there are some people who want more. They feel
that a 66% top rate is too high and that a $500 exemp-
tion for dependents is too low. They would use the in-
visible and widespread burden of the corporation income
tax on the standard of living to enable them to give alter-
natively visible and specific benefits in higher exemptions
for dependents and lower surtax rates, benefits that will
not increase the purchasing power of the poor except
perhaps at second or third hand.

Personally, I agree that for the long pull and in an
orderly world, the high bracket rate of 66% is too high
and the $500 exemption is too low. But we are not yet
in an orderly world. Provision of five billion dollars in a
peacetime budget for armament is a symptom of this dis-
order. When peace is at last organized, and this item can
be cut in half, then we can reduce rates and increase
exemptions in the individual income tax to reasonable
levels that we might be willing to live with.

For the present, I think we should be satisfied with
a 30% cut in the individual income tax. We should avoid
the use of indirect regressive taxation such as the corpora-

212 TOMORROWS BUSINESS

tion income tax, although it can probably be made po-
litically acceptable. In this program, business and labor
have a common interest because of their common interest
in the achievement and maintenance of a high level of
employment.

XI

Fiscal Policy, Public Works, and the
Construction Industry

1. Fiscal Policy and Public Works

WE have seen that in a fiscal policy devised to help keep
private business healthy, two aspects of great concern to
business are taxation and public works. For that reason,
we have felt it appropriate to examine these subjects in
some detail. In this chapter we shall consider public
works as a part of fiscal policy, and shall look into its
possibilities as a means of strengthening the construction
industry.

When public governments build things, private
business is affected at three important points:

First, as we have said, business depends for its best
accomplishment on a high and relatively even flow of
purchasing demand; and public expenditure on public
works makes a contribution to the increase of purchas-
ing power.

Second, the character of the public works themselves
may decrease or increase the amount of private business

213

214 TOMORROW'S BUSINESS

activity. If the public works appear to offer subsidized
competition in an area in which private business has an
interest, new private investment will be held back. On
the other hand, if we improve the common facilities
such as the mails, water systems, and highways business
will be stimulated by these improvements to activity and
investment.

Third, public works have an immediate and direct
effect on a particular segment of business, the construc-
tion industry. Public works use the same kinds of ma-
terials and labor as are used by private businesses and
individuals when they build, and, in most cases, public
works are built on contracts let to private construction
businesses and contractors.

The great monuments of antiquity and of the Mid-
dle Ages have always had a peculiar fascination for eco-
nomic planners. The palaces of Assyria, the pyramids of
Egypt, the highways and aqueducts of Rome, the ca-
thedrals of Europe, all represent the ideal public project
for which it seems so difficult to invent the contempo-
rary parallel. These works seem to have been acceptable
by the community as worthy objects of effort, they were
vast in scale relative to their times, and they created no
awkward product that would have to be sold in the
market place. Being visible and tangible, they proved to
be contagious examples to other states and rulers. Work
on these monumental projects extended off and on over
hundreds of years of time, and required the application
of hundreds of millions of man-hours to complete if,
indeed, any of them were ever truly completed.

During the depression of the 1930*5 we came to have

FISCAL POLICY, PUBLIC WORKS 215

a profound disillusionment with respect to the use of
public works as a means of sustaining business activity.
For ten years previously the idea had been current in
government and business circles that the planning and
scheduling of public works would afford a practical off-
set to the ups and downs of the business cycle. When
the breakdown came in 1929, nothing of a practical na-
ture had been done to make it possible to put such an
idea into action. At last, after the depression had run
for two years and was growing deeper and deeper, the
Employment Stabilization Act of 1931 was passed, and
the Employment Stabilization Office was established in
the Department of Commerce. It was, of course, impos-
sible for this new agency, at this late day, to do much
to check the downward plunge and soon the Office was
allowed to dry up.

In the spring of 1933, in what was thought to be a
bold attempt to produce recovery, an appropriation of
$3,300,000,000 was made for public works as part of the
National Recovery Act of 1933. By the fall of 1933, it
became apparent that public works could not be started
by wishing, or even by appropriating money. Public
works require long and detailed planning, legal investi-
gations, and, in many cases, enabling legislation by state
and local governments. To meet the urgent need for em-
ployment, the Civil Works Administration was hastily
put together late in 1933, and this was followed by the
Works Progress Administration and later by the Work
Projects Administration. These emergency agencies pro-
vided enormous amounts of employment at federal ex-
pense, but, for the most part, they did not carry on "pub-

216 TOMORROW'S BUSINESS

lie works" of the sort that met the standards of efficiency
and necessity that public works officials like to be asso-
ciated with. Many projects, devised in desperate haste
to provide work of some kind for particular classi-
fications of unemployed talent at particular locations,
were subjected to public ridicule and abuse. The pro-
gram was admittedly "public work" rather than "public
works," and, although many of the undertakings could
meet the test of necessity and desirability, they broke
down on the test of efficiency and reasonable cost.

The idea of using standard public works as a way
of supporting purchasing power in time of depression
had failed. The record of federal public works as a
means of overcoming a depression during the 1930'$ was
a disappointing one. It was disappointing because we had
been led to expect too much, and because, during the
years preceding the depression, the necessary preparatory
work had not been done. Our disappointment should not
cause us to reject the use of public works as one of the
means of supporting the level of private business, but it
should make us revise our expectations and improve our
planning and scheduling.

The experience of the 1930*8 with public works
taught us many things. Above all, it taught us that the
scale on which public works must be pressed in order
to do any good in a period of unemployment is vastly
greater than we had been led to believe. Indeed, it is so
vast that the use of public works as a means of stabilizing
the whole economy through the phases of a business cycle
may well be abandoned. The most we should expect
and this is no small gain is that we may be able, with

FISCAL POLICY, PUBLIC WORKS 217

public works, to stabilize the construction industry itself
so that it would have a more even level of activity
throughout the year and over the years.

In addition to magnitude and administrative diffi-
culties, there is another reason for abandoning the idea
of using public works as a general cure-all for the busi-
ness cycle. This other reason is the human undesirability
of bringing hundreds of thousands of men into the con-
struction industry and forcing them out again as an
offset to the free play of economic forces elsewhere in
the business system. These men are not statistical units
which can be properly moved from one column of an
accounting sheet to another in order to preserve a bal-
anced level of employment. Nor can they be shifted long
distances from their homes to places and at times con-
venient to the business cycle.

The more limited ideal of using public works to
help stabilize the construction industry itself is, there-
fore, indicated both by the magnitude of the operation
and by the human considerations of regularized employ-
ment. These considerations lead us to the further con-
clusion that we should attempt this stabilization, not
only for the country as a whole, but also regionally. The
full requirements of stability will not have been met
unless the overwhelming majority of the workers in the
construction industry are able to spend at least two days
a week at home every week. This means that the plan-
ning and scheduling of public works must be done in
both financial and geographic terms.

What level of employment in the construction in-
dustry should we set as full-time normal for a long-time

218 TOMORROW'S BUSINESS

program? The suggestion has been made that we might
take as a rough standard the average rebuilding of our
physical plant once a generation, say once in thirty years.
This suggestion has the appeal of picturing each gen-
eration turning over to the next generation new, modern
structures instead of old, outmoded houses, schools, and
factories. Rough estimates indicate that such a program
would require about 8% of the annual national product
and would keep 6,500,000 men employed on and off site.
It is important to have some such standard, also to
indicate how far we ought to go in bringing forward
the scheduling of public works planned for construction
at times when private demand is extremely high. It is
likely that immediately following the war, and for some
years thereafter, we shall have a considerable boom in
private residential building. It may well be that this
boom, together with industrial demands and public
works which cannot be postponed, will be more than
sufficient to carry the construction industry to or beyond
the level that we may have agreed we would maintain
as a long-time standard normal. If this should happen,
and if at the same time there should be substantial un-
employment, there would be a temptation to accelerate
postponable public works, even though a full quota in
the construction industry had already been reached.
Barring local situations and public works actually
urgently needed for public safety and welfare, it would
be wiser to hold back public works, in spite of the pres-
ence of some unemployment. There are other effective
weapons which can be used to fight unemployment, and
it would only make the business outlook worse to create

FISCAL POLICY, PUBLIC WORKS 219

so high a level of employment in the construction in-
dustry that it could not be maintained, a level that would
say to all who could hear, "Crisis ahead! "

A second lesson which has been learned as a result
of the experience of the 1930*8 is that the public will not
tolerate expenditure by the government that it believes
to be wasteful. Leaf-raking and boondoggling are con-
demned by public opinion, and even the inefficiency
which results from the employment of the incompetent
unemployed or from the failure to use known labor-
saving equipment is frowned upon. The public rejects
the elaborate rationalization that some purchasing power
is better than none. The argument that public boon-
doggling is neither better nor worse than private boon-
doggling is to no avail. The people will not accept waste-
ful public expenditure as an element in fiscal policy, nor
will they approve the subsidy of projects which have not
been recognized as suitable for public governmental sup-
port.

The insight of the people in this respect is sound.
It is obvious that wasteful effort at public expense is done
at a social cost. The justification that, had the labor
been unemployed, nothing at all would have been pro-
duced is unconvincing. Even though the waste be less, it
is still undesirable. The people simply reply, "Why
should there be waste? When so much need exists, how
can we afford to fritter away these costs? Who bears the
cost but we-the-people?"

The governmental agencies in charge of public
works have always been sensitive to the public opposition
to wasteful expenditure. Projects conceived and adminis-

220 TOMORROW'S BUSINESS

tered primarily to provide work for particular groups
of the unemployed were segregated in special temporary
agencies such as the WPA, the CCC, and the NYA. This
segregation of what was known to be more or less waste-
ful work enabled the Public Works Agency to confine
its projects to items which would be justified on grounds
of merit and efficiency.

This public attitude toward wasteful expenditure,
toward spending for the sake of spending, justifies the
segregation of any necessary work relief activities from
public works proper. It also makes imperative the prepa-
ration of detailed plans and specifications on optional
public works projects in an adequate amount. The nec-
essary authorizations, appropriations, and legal consid-
erations should be taken care of. Necessary negotiations
between federal government, state, and local authorities
should be completed. Only after a substantial number
of projects so prepared are available can business feel
that an acceptable public works program is a practical
possibility.

The preparatory work so necessary for proper tim-
ing and for the avoidance of waste cannot be done unless
there is a national policy on the purpose, scope, and
scale of the federal public works program. Any program
which is geared to make a decisive contribution, even
to the stabilization of the construction industry, requires
a scale of advance planning far beyond anything now
being carried forward. It is true that today, at all levels
of government, active engineering and architectural
preparations are going on for postwar public works; but
these plans are not associated in any over-all view, nor

FISCAL POLICY, PUBLIC WORKS 221

are they projected against national or regional require-
ments for stabilization.

There is another reason why purpose, scope, and
scale of public works programing should be under pub-
lic discussion. It is desirable that the public should
appreciate the magnitude of the program and should
approve it well in advance of the time when detailed
operations will have to begin. Only in this way can true
economy of expenditure be attained. The magnitude of
any construction stabilization program, over a period of
twenty years, would permit dramatic changes in our na-
tional physical plant. Unless there is some comprehen-
sive concept of what is attainable, there will be great
waste through the undertaking of thousands of unre-
lated efficient details. This is not a justification for a
formalized, unified, and imposed national public works
straitjacket into which the future public construction of
the country will be tied. It is simply an observation
that the whole is greater than its parts, and that many a
poor cake has been made from worthy ingredients.

2. The Construction Industry

The construction industry is greatly involved in
public works expenditure, no matter what our policy on
public works may be. And the construction industry is
a costly and a wasteful industry.

The industry as a whole is well-pictured in the lyric

222 TOMORROWS BUSINESS

of a song favorite of the 1930*5: "I built a building to
the sun, finished ahead of time. I built a building, now
it's done. Brother, can you spare a dime?"

Every phase of the industry is subject to the feasts
and famines of seasonal and cyclical demand. The cir-
cumstances which cause one family to decide to build a
home cause thousands to decide the same way at the same
time. The circumstances which result in a profitable
outlook for the building of a factory by one company will
simultaneously affect thousands of companies. When
families and businesses cannot or do not wish to build,
broad general causative factors are at work which create
a generally unfavorable climate for construction.

The private construction industry has tried to adapt
its practices so that the elements of the industry could
survive under these adverse conditions. Architects,
building contractors, building supply companies, labor,
finance and mortgage companies, all found it necessary
each in its own way to establish and to hold a price
structure high enough so that the days and hours of
activity would pay for the time when there was far less
than enough to do.

This kind of pricing seems sensible enough, but in
practice it presents some difficulties. In the first place, it
takes the cost of idle time and adds it to the cost of active
time, so that the active time carries a heavy total ex-
pense. In the second place, no such price schedule can
be established and held unless outsiders are kept from
coming into the industry, and unless insiders understand
more or less specifically what the rules of the game are
and it is made "convenient" to follow them.

FISCAL POLICY, PUBLIC WORKS 223

The reasons why restrictive conditions spring up in
so volatile an industry as construction are easy to under-
stand. In periods of activity prices are well above actual
expenses at the moment, and an outside interest, con-
tractor, or worker might be satisfied to take a narrower
margin for a short run, or to deliver a full day's work,
or otherwise by competition to take income from an es-
tablished member of the industry. The days of famine
in the industry are supported by these days of feast, and
the banquet when it comes must be reserved for the
hungry home folks, not for the minstrel who will sing
for his supper and then wander on.

In periods of dullness, there is always some small
amount of construction which has to be done, and now
the insiders must be held in line. Every element in the
industry would prefer some little income to none at all,
and active bidding for the business at lower prices might
be expected. But this cannot be permitted. The price
schedule must be kept up in order to make sure that
when the activity comes again the income then received
will be sufficient to provide a little more than a break-
even for busy and idle time taken as a whole.

It is not necessary to recite in specific detail the
restrictive practices for which the construction industry
is notorious. All these practices spring from a common
need, to make sure that the scale of prices obtained at
times when there is work to do is sufficient to pay for the
idle time too. Special instances of price maintenance are
illustrated in the high costs which come from dragging
out the work, or from limitation of output, or from un-
necessarily short working days and weeks.

224 TOMORROW'S BUSINESS

The high schedule of prices is forced higher still by
the uncertainty of how long will be the periods of idle-
ness which must be covered. A retailer knows that spring
and winter comes every year and he can, therefore, figure
his annual costs. In construction, who knows how long
a boom may last, or when it may come again?

The organization of the industry to maintain a price
structure provides an organization which can do other
things as well, which can hold down "unfair" competi-
tion in matters other than price, which can see to it that
available work is obtained by the right contractor, which
can co-operate with municipal authorities to make sure
that building codes give the industry the protection it
feels it deserves. Co-operation between management and
labor results in understandings of far-reaching import-
ance in the elimination of competition all around.

The restrictive measures in the industry are in many
cases ingenious, in some cases illegal, in all cases for the
purpose of price maintenance and the control of com-
petition. Similar restrictive practices in other countries
are not illegal at all; in fact, in some instances the gov-
ernment co-operates in enforcement of agreements which
in the United States are a penal offense.

In spite of extenuating circumstances, it is unwhole-
some to go along indefinitely with an industry which,
for its own survival, has to have a considerable element
of the outlaw in it. As long as illegal practices are con-
doned on the front of restrictive and collusive rules, they
will be excused wherever they can be exploited to make
a profit or to fortify a power position. Then, too, toler-
ance of illegal practices leads to a special kind of co-

FISCAL POLICY, PUBLIC WORKS 225

operation between government, labor, and business the
cost of which is paid for by the consumer-citizen, both
in high prices and in the corruption of his govern-
ment.

Therefore, for many reasons, the stabilization of the
construction industry through the planned timing of
public works can be confidently expected to yield im-
portant benefits. First of all, construction costs should
fall sharply and earnings of workers and profits of con-
tractors should increase. Second, stability of employment
should eliminate the uncertainties and fear which make
the industry irresponsible, always fighting for its life.
Third, the total public construction program could be
well-planned. Certainly a stabilized industry would pro-
duce a vastly greater quantity of construction output
and, over a period of time, would change in a funda-
mental way the structural American environment. Ob-
solete buildings could not stand before the march of an
efficient construction industry.

At this point we meet a real difficulty. It would be
impossible to justify large public expenditures today to
support the construction industry at a high stabilized
level operating under existing practices. Nor is it likely
that the construction industry will change on its own
initiative. In fact, a commitment on the part of the fed-
eral government to see that a high level of construction
is held year after year would tempt into the industry a
new following which would leave the industry on a sta-
bilized level, to be sure, but with all elements only par-
tially employed and with costs as high as ever. The gov-
ernment and the public would still not be getting their

226 TOMORROW'S BUSINESS

money's worth, and the industry would still be pricing
for idle time.

A program for stabilizing the construction industry
through the use of public works should be accompanied
by a Congressional investigation of the industry with
recommendations that would result in its reorganization.
Such an investigation should be of the same dignity and
competence as that of the National Monetary Commis-
sion following which the Federal Reserve System was
established. If it should be found that the industry re-
quires certain immunities under the Sherman Act and
state antitrust laws, it should be subject to corresponding
regulation. If some of the restrictive practices of the in-
dustry should be continued, even under high stabilized
production, these should be sanctioned by law and super-
vised by an appropriate regulatory body. Take, as an
example, the situation in construction employment, once
a regular year-around job is assured for the worker who
makes good. Every trade school in the country would
start turning out boys and girls competent to take jobs
in this easy-to-learn industry. It is obvious that entry
into the industry by workers would have to be limited,
but the authority for the administration of these limi-
tations could not be given over to the unions, nor could
it be given to management and unions working together.
The government would have to set the basic ground
rules, covering the qualifications and the numbers which
might gain admission to a given trade at a given time.

It is also possible that, after the industry is stabil-
ized, entry into the industry as a contractor would be
subject to public control. The number of contractors in

FISCAL POLICY, PUBLIC WORKS 227

a given community might be limited to a number which
would provide healthy competition and, at the same
time, guarantee full-time employment to a minimum
working force. The number of radio broadcasting sta-
tions in a community is limited by government licensing
to the number that can serve the community without
wave-band interference and other disorders which would
come with irresponsible opening of broadcasting facili-
ties.

The construction industry stabilized by public
works expenditures, and regulated by a government
agency, would be a different industry from what it is
today. It would still be competitive, just as the radio
or the banks or the airlines are competitive; it is pos-
sible that the industry would be even more competitive
than it is today. Certainly the dominant factors in the
industry would turn to innovations and economies as
their way of bidding for a larger section of the con-
struction pie. And, since the size of the pie is assured,
who will complain if the quality is improved?

An industry that is looked to for 8% of the national
product is certainly a matter of national concern, par-
ticularly when the industry cannot stabilize itself with-
out resorting to inefficient restrictive practices which
increase costs, postpone innovations, and introduce ele-
ments of lawlessness into the industry. When, added to
these considerations, the industry is indispensable as a
source of essential public works, of housing and trans-
portation, and as an outlet for the investment of the
people's savings; when it is to be the beneficiary of bil-
lions of dollars of planned oublic expenditure over the

228 TOMORROW'S BUSINESS

years, it is certainly discussable that the industry should
have quasi-public utility status. In any case, the indus-
try should be given a chance under the law to reorganize
for the most efficient service to the community as a pri-
vate, competitive construction industry.

Now is a particularly good time for a Congres-
sional inquiry into the needs of the construction indus-
try. There is no nation-wide scandal to obscure real
problems and result in distorted legislation. .Further, the
period immediately following the war will probably see
the industry in a fairly healthy condition as far as demand
is concerned. During this period the investigation could
go on without the presence of crisis in the industry, forc-
ing premature judgments.

It might well be that the 1940*8 will be the decade
of the construction industry, the period when it grew
out of unregulated anarchy into an orderly pattern of
effective competition. Just as the railroads in the i88o's,
the banks in the 1900*5, and the security exchanges in
the 1930*8 were recognized and regulated in the public
interest, so the pattern of the construction industry may
be redrawn in the years immediately ahead a pattern
that will give stability and order to the industry, effi-
ciency and lowered cost construction to the public, and
sound public works programing to the federal govern-
ment.

XII

Fiscal Program

BUSINESS wants a fiscal program which will help it
create good products, good jobs, and good investments.
Business does not expect fiscal policy to do the work of
business for it. Business only asks for a flow of purchas-
ing demand which will have some general correspond-
ence to what business is able to produce and distribute.
There will be much difference of opinion on details,
but the main outlines of a program seem to be fairly
clear.

First, let us have a national expenditure budget that
fairly represents the national purposes we want to ac-
complish. Let us base our estimates on the efficient carry-
ing out of these worth-while activities. We want no
spending for its own sake, and no projects merely be-
cause they support purchasing power in general.

Second, let us set our rates of taxation so that they
will produce enough revenue to balance the budget at
some agreed level of high employment. We do not want
a deflationary tax program at times of mass unemploy-
ment.

Third, having set our tax rates to balance the bud-

229

230 TOMORROW'S BUSINESS

get at high employment, let us let them alone. When
employment goes beyond this level, or if there is a boom
in prices, let us use the surplus to reduce the national
debt, not as an excuse for further tax reduction.

Fourth, let us hold on to our progressive income
taxes and estate taxes as the best way of reversing the
tendency of purchasing power to come to rest. Let us
reduce the rates on the individual income tax to stimu-
late consumption and to make possible investment in
new enterprise on a business basis.

Fifth, let us plan our public works, not to balance
the whole economy, but to stabilize the construction in-
dustry. Our objective should be to provide in this basic
industry continuous activity on an agreed level through-
out the year and over the years. This would require ad-
vance planning of public works federal, state, and lo-
cal scheduling, and the holding back of a large reserve
of optional projects.

Sixth, let us reform the social security programs as
far as their fiscal influences are concerned. Since their
beginning they have been highly deflationary. For old-
age security, let us set our rates and benefits so that they
come somewhere near balancing; and for unemployment
insurance, let us set our rates so that intake and outgo
balance at high levels of employment as it may be de-
fined.

Seventh, let us keep the important excise taxes for
the time being, and get rid of the rest, except when they
serve some social purpose. If employment and produc-
tion lag overmuch, let us get rid of these too, since they
are deflationary. We need no general sales tax for fiscal

FISCAL PROGRAM 231

policy purposes now that the individual income tax is
on a current basis.

Eighth, let us plan our lending abroad, whether for
stabilization, relief, or long-time reconstruction, so that
it will support rather than contradict fiscal policies
adopted to strengthen our domestic economy.

Ninth, and indispensably, let us press for a reorgani-
zation of the parts of the federal government which have
to do with fiscal policy and administration. We want
clarity in policy, unity in administration, and co-opera-
tion between the executive and legislative branches. Hav-
ing arrived this far, we then want an adequate degree of
co-ordination between federal, state, and local govern-
ments as their tax and expenditure policies affect na-
tional fiscal policy itself. We shall expect that unity of
fiscal and monetary policy will be attained along the way.

This nine-point program raises some questions, but
if the program makes sense, there are no constitutional
or technical reasons why it could not be adopted to be
ready once peace is declared and we are able to begin to
resume our peacetime way of life. During the transition
period, the nine-point program itself cannot be expected
to eliminate the need for public expenditure for relief
and rehabilitation; but it will provide a flow of pur-
chasing demand which springs authentically from the
tens of millions whose tax burdens will have been re-
duced. It expresses in the mosaic aggregate the popular
interpretation of the American way of life as pictured
in consumer preferences. Against this background, the
readjustments of employment and the reconversion of
business and industry can readily occur. I have remarked

232 TOMORROW'S BUSINESS

elsewhere, "Why not leave at home, for expenditure by
the individual, money that would have to be pumped
out again in order to sustain employment?" The nine-
point program is a way of carrying out the policy im-
plied in this simple question.

FINALE

BUSINESS AND FREEDOM

Finale

THIS book has been concerned with business as an in-
strument of authority and power, as a source of direction
and decision. We have found that the business of busi-
ness in getting things ready for use at the same time gives
people something useful to do and provides a place
where the savings of people can be put to work.

Business gets these things done by making rules,
enforcing them when it can, and compromising with
them when it must, all with the sanction of public law.
Business, therefore, is private government, since it is
empowered by the state to organize and to make rules for
the conduct of its affairs.

Business is but one government among many. Yet
through it, as through others, we derive certainty and
order; and in it, as in others, we must achieve personal
dignity and freedom.

In this book we have studied the purpose and the
structure of business rule-making power, and the rela-
tions of business to other rule-makers. We have identi-
fied the governed.

235

236 TOMORROW'S BUSINESS

We have examined a number of critical points which
determine the capacity of business to make its unique
contribution to the freedom of those who are ordered
by its rules, among these points, national fiscal policy,
including taxation and public works.

Now, in our own time, although a common moral
objective has not yet been generally accepted, the moral
issues of freedom have been drawn again, and World
War II has divided the world so that these issues no
longer can be evaded. The issues are old ones, centuries
old. Are human beings, all human beings, human? Are
they created equal in their rights to life, liberty, and the
pursuit of happiness? Are they entitled to achieve free-
dom? Do they stand, as persons, above race, sex, creed,
and nationality? Are the governments which are insti-
tuted among men governments public and private
ends for themselves alone? Or are they the means of pro-
viding a frame of order within which the dignity and
worth of each human personality may be actualized
through responsible freedom of choice?

Today, the issue is drawn between coalitions of na-
tional states in a war of survival. The victory of the
United Nations will set as a world objective the achieve-
ment of human individuality through the exercise of re-
sponsible freedom. Tomorrow, all governments must
conform to this standard, and private business, among
other governments, must find its way.

Without a conception of freedom, the direction of
business in the future will be at best tentative and un-
certain. The cliches of freedom may become the mask
behind which the love of power will organize its new

FINALE 237

exploitations. Not "freedom for business," but "busi-
ness for freedom" must be the objective of business lead-
ership as the operations of business are administered to
attain its appropriate ends.

Business, like other private governments, will be ex-
pected to organize and to administer its rule-making in
a way that is consistent with prevailing ideas as to what
the impulse to freedom demands. The business of busi-
ness will continue to be the getting ready of things for
use, the giving to people something useful to do, and the
providing of a place where the savings of people can be
put to work. But the rules of business, whereby business
gets these things done, must set a frame of order within
which freedom is the more attainable. Those who are
governed by business customers and suppliers, em-
ployees and stockholders will expect to find in the op-
erations of business a measure of the freedom for which
"governments have been instituted among men."

It is true that most businessmen look on their busi-
nesses as profit-making, productive enterprises, and ordi-
narily do not think of themselves as rule-makers or of
their businesses as rule-making agencies. But, since these
businesses are both producers and rule-makers and must
be run as both, they must be understood as both. The
business manager who correctly appraises his role as gov-
ernor of a private state, who knows the range of those
affected by his rules, who appreciates the vitality in the
impulse to freedom, and who understands what is needed
to attain it, will make the detailed application of prin-
ciple that conditions require and circumstances permit.
The rate of progress will depend on insight and in-

258 TOMORROW'S BUSINESS

genuity, pressure from within and without, examples of
success and failure. Stubborn conservatism will be offset
by reckless experimentation. In the meantime, the cli-
mate of world political opinion will hasten or retard
the shifts in private business rule-making.

The resurgence of doctrines of human freedom dur-
ing World War II will have its inescapable impact on
business, particularly in the United States where the tra-
dition of the American Revolution has high prestige.
Fortunately, business in the United States is in a good
position to move into the future harmoniously with the
renewed impulse to freedom. After all, private enterprise
is the twin of responsible individuality.